The IRS Forges Ahead With FATCA: Draft Forms And Registration Process In Preparation

Foreign Financial Institutions and those doing business with them should prepare now for revised Form W-8BEN and new Form W-8BEN-E, as well as for a new online Foreign Account Tax Compliance Act (FATCA) registration process.    

On June 6, the Internal Revenue Service (IRS) released draft versions of revised Form W-8BEN and new Form W-8BEN-E, which are designed to conform to both new Chapter 4 of the Internal Revenue Code and existing Chapter 3 covering withholding taxes on payments to foreign beneficial owners, effective January 1, 2013. FATCA adds new Chapter 4 to provide generally that Foreign Financial Institutions (FFIs) – including not only foreign banks but also foreign hedge funds, private equity funds and others – must register with the IRS in order to avoid a 30 percent withholding tax on their U.S. source passive income. 

The IRS is also working on its online registration process that will enable FFIs to become FATCA compliant. The IRS expects FFIs to register during the period between January 1 and June 30, 2013-in order to ensure that U.S. withholding agents making payments to them will treat them as properly registered by January 1, 2014 when FATCA withholding generally begins.

Form W-8BEN has been used by most foreign beneficial owners of U.S. source income to certify their status as foreign and, if applicable, claim a reduced rate of withholding under a treaty. Chapter 4 establishes many new withholding categories for foreign entities, prompting the IRS to create a new six-page Form W-8BEN-E for entities, while making some revisions to the one-page Form W-8BEN (which henceforth is to be used only by foreign individuals). The new forms are designed to address both Chapter 3 and Chapter 4 status so that withholding agents will not have to maintain two separate forms. The draft forms are expected to be finalized in December 2012, six months after which withholding agents will not be able to accept a prior version of the form. Draft instructions to the forms have not yet been released.

In commenting on the drafts, Jay Bakst, a partner in the EisnerAmper Tax Practice said, “One of the most significant changes is that a foreign tax identifying number is now required. This is especially significant, not only because foreign persons may be reluctant to provide it, but also because the withholding agent may have certain responsibilities to validate this information. The instructions are expected to address these requirements in detail.”

As of this date, the IRS is in the process of reviewing and considering over 200 comment letters it received on the proposed regulations. While the proposed regulations are expected to be finalized in the coming months, the IRS has started designing the registration process based on the proposed regulations so that it can be in a position to have the final online process in place by January 1, 2013.

On June 19, the importance of the new forms and registration process was further highlighted by comments from the IRS Deputy Commissioner (International) that a model agreement for government-to-government participation in enforcing FATCA could be completed “much sooner than the end of the summer.” The IRS continues negotiations with France, Germany, Italy, Spain and the United Kingdom, which announced in February that they were working on intergovernmental agreements to comply with FATCA.

Related information:
 FATCA: Draft Forms and Registration Process
Swiss & EU Countries Steps Encourage U.S. FBAR & Foreign Asset Reporting 
View information on the new IRS FATCA registration process

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