Attention U.S. and Foreign Multinationals: Approaching Registration Deadline Under FATCA for Your Non-U.S. Retirement Plans

Published: Mar 26, 2014
Topics: Tax
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Alwardt_Peter Multinational employers, regardless of their size, that sponsor non-U.S. retirement plans need to be aware that they may be required to register with the Internal Revenue Service (“IRS”) by April 25, 2014 as a Foreign Financial Institution (“FFI”) and, if they are required to register, that there are Foreign Account Tax Compliance Act (“FATCA”) withholding and reporting deadlines with which they must comply. Separately, even if their non-U.S. retirement plan is exempt from registration as an FFI, the plan sponsor will be required to file an IRS Form W-8BEN-E with all withholding agents that hold U.S. investments for the plan. Of course, any failure to comply with these requirements may trigger substantial withholding requirements as well as penalties.

BACKGROUND

Under U.S. law, U.S. tax payers, which includes citizens and resident aliens (green card holders), are subject to U.S. income tax on all their income regardless of whether it is earned in the U.S. or in another country and without regard to their country of residence. Consequently, any U.S. taxpayer who works in another country and is covered under a foreign retirement plan may be subject to U.S. income tax on the income generated by the plan.

As noted in a recent article by Buck Consultants (SeeFYI In-depth “Foreign Account Tax Compliance Act for non-US retirement plans” March 4, 2014), and as outlined below, FATCA established a broad and complicated set of rules related to information reporting and withholding requirements for FFIs as a way to identify U.S. taxpayers with assets and accounts abroad. FATCA broadly defines an FFI to include non-U.S. retirement plans. Unless it is otherwise exempted from registration under one of the exemptions created by the final regulations, FATCA requires an FFI to enter into an agreement with the IRS to collect and report information concerning financial accounts held by U.S. taxpayers or face 30% tax withholding on U.S. source investment income paid to the FFI.

DETERMINING RETIREMENT PLAN REGISTRATION REQUIREMENTS UNDER FATCA

If a U.S. or foreign multinational sponsors a non-U.S. retirement plan, the analysis below needs to be done to determine if registration as a FFI is required by April 25, 2014.

If the non-U.S. retirement plan does not hold any U.S. investments (stock, bonds, mutual funds, etc.) then neither a registration filing nor an IRS Form W-8 BEN-E filing (since there is no custodian of U.S. assets to file with) are required.
If the non-U.S. retirement plan holds U.S. investments, then the plan sponsor must determine if the plan is covered by an exemption under the FATCA regulations (see ‘Exemptions for Non-U.S. Based Retirement Plans under FATCA’ below) and file IRS Form W-8BEN-E with the all U.S. withholding agents of its U.S. investments to notify them of its exemption. Please note that the Form W-8BEN-E is still in draft form at the IRS and cannot be filed currently.
If the non-U.S. retirement plan has U.S. investments and is not covered by an exemption under the regulations, then it must determine if it is covered by an intergovernmental agreement (“IGA”) between the U.S. and the plan’s home country (see ‘Intergovernmental Agreements’ below).

If the non-U.S. retirement plan is covered by an IGA, the plan must register with IRS on Form 8957 by April 25, 2014 and report U.S. taxpayer participant information either to its home country tax authority (a Model 1 IGA) or to the IRS ( a Model 2 IGA). Additionally, the plan will need to file a W-8BEN-E with each U.S. withholding agent for its U.S. investments.
If the non-U.S. retirement plan is not covered by an IGA, it must register with the IRS as a Foreign Financial Institution by April 25, 2014 using Form 8957 and file Form W-8BEN-E with each U.S. withholding agent.

Further, the plan must identify each U.S. taxpayer participant and obtain authorization from each participant to disclose their personally identifiable information, as well as account values, etc. to IRS. This information must be provided to IRS by March 31, 2015.

Finally, if the plan sponsor does not obtain (or is refused; i.e., a recalcitrant taxpayer) authorization from a U.S. taxpayer participant, it must report these individuals to the IRS if their account value is at least $50,000 and must withhold the 30% tax on certain payments from U.S. investments to the participant.

There is no question that FATCA compliance is now an essential part of providing employee benefits outside of the U.S. The approaching registration deadline makes it important for sponsors of funded non-U.S. retirement plans to assess whether they are required to register or whether they qualify for one of the exemptions under FATCA as failure to comply may trigger withholding taxes and penalties.

EXEMPTIONS FOR NON-U.S. RETIREMENT PLANS UNDER FATCA

Since non-U.S. retirement plans have not been considered a major source of tax evasion, the IRS provided exemptions for certain types of retirement plans under the final regulations. The final regulations exempt from FATCA’s registration, reporting, and withholding requirements certain non-U.S. funds established to provide retirement, disability, or death benefits and treat these plans as certified deemed compliant. Accordingly, exempt plans are not required to report information on U.S. participants or withhold income tax on payments and are not subject to 30% withholding on U.S.-source income earned by the plan. Described below are the types of plans that are exempt from FATCA.

According to the recent Buck Consultants article, "it is important to note that these exemptions do not apply automatically, nor do they apply to the reporting obligations of individual U.S. plan participants (see ‘Individual Taxpayer Compliance’ below). To claim an exemption, a non-U.S. retirement plan must file a Form W-8BEN-E, which as noted previously is currently available in draft form only, with the U.S. withholding agent for each of its U.S.-based investments to notify the agent of its exempt status."

FATCA’s exemptions for retirement plans include:

A “Broad” participation retirement fund, which is a plan consisting of participants who are current or former employees (and designated beneficiaries) and where the following conditions are satisfied:
- No single participant has the right to more than 5% of the fund’s assets.
- The fund is subject to government regulation and provides annual information reporting about its participants to the tax authorities in its home country.
- The fund satisfies at least one of the following requirements:
  - Its investment income is tax-exempt in its home country due to its status as a retirement or pension plan.
  - It receives at least 50% of its contributions from sponsoring employers.
  - Distributions or withdrawals are only allowed upon the occurrence of specified events related to retirement, disability, or death, or penalties apply to distributions made before such specified events.
  - Employee contributions are limited by reference to earned income or may not exceed $50,000 annually.
A “Narrow” participation retirement fund, which is a plan consisting of participants who are current or former employees (and designated beneficiaries), where the following conditions are met:
- The fund has fewer than 50 participants.
- The fund is sponsored by one or more employers that are not investment entities or passive non-financial foreign entities.
- The fund is subject to government regulation and provides annual information reporting about its beneficiaries to the relevant tax authorities in its home country.
- Participants not residing in the fund’s home country are not entitled to more than 20% of the fund’s assets.
- Generally, employee and employer contributions are limited by reference to earned income and compensation, respectively.
A treaty-qualified retirement fund, which is a plan established in a country that has an in-force income tax treaty with the U.S., is entitled to benefits under that treaty on certain income it derives from U.S. sources, and is operated principally to administer or provide pension or retirement benefits. Note that this exemption does not require the plan to be tax qualified in the U.S. or in the treaty country in which it is organized.
A fund similar to a U.S. qualified plan, which is a plan formed to pay benefits for a pension plan that would meet relevant U.S. qualification requirements of Internal Revenue Code section 401(a) other than the requirement that it be held by a trust organized in the U.S.
Investment vehicles used exclusively for retirement funds, which is a vehicle that invests only in funds of one or more of the types plans described above or in certain types of retirement savings funds.
Pension funds of governmental and international organization employers, which is a plan sponsored by a foreign government, international organization, or one that is established or sponsored by a foreign government, an international organization, a non-U.S. government central bank, or a government of a U.S. territory for participants who are current or former employees (and designated beneficiaries) or if they are not current or former employees of the plan sponsor, the benefits are inconsideration of personal services performed for the sponsor.

INTERGOVERNMENTAL AGREEMENTS

A plan that does not qualify for one of the exemptions described above may still be treated as exempt from some or all of FATCA’s withholding requirements (but not the registration and reporting requirements) if its home country has entered into an IGA with the U.S. and the plan is of a type listed on Annex II to the IGA. There are two types of IGAs:

“Model 1” IGAs exempt FFIs from withholding, but require FFI registration with the IRS to obtain a global intermediary identification number (“GIIN”) and then direct reporting of participant information to the FFI’s own domestic tax authorities (not to the IRS) as specified in the IGA. The local tax authority then transmits this information to the IRS.
“Model 2” IGAs are also exempt from most of FATCA’s withholding requirements, but must register with the IRS to obtain a GIIN and report U.S. participant information directly to the IRS.

For both types of IGAs, a Form W-8BEN-E needs to be filed with the withholding agent for plans subject to an IGA to certify the plan’s exemption from the withholding requirements.

The U.S. Treasury Department maintains a list of all finalized IGAs. As of March 24, 2014, Treasury has signed IGAs with the following countries/territories:

Bermuda (Model 2)
Canada (Model 1)
Cayman Islands (Model 1)
Chile (Model 2)
Costa Rica (Model 1)
Denmark (Model 1)
Finland (Model 1)
France (Model 1)
Germany (Model 1)
Hungary (Model 1)
Ireland (Model 1)
Isle of Man (Model 1)
Italy (Model 1)
Japan (Model 2)
Jersey (Model 1)
Malta (Model 1)
Mauritius (Model 1)
Mexico (Model 1)
Netherlands (Model 1)
Norway (Model 1)
Spain (Model 1)
Switzerland (Model 2)
United Kingdom (Model 1)

Treasury has indicated that many more countries have either reached agreements in substance that are awaiting signature or are well along in the negotiation process. Multinational employers should check Treasury’s website frequently for updates on recently negotiated IGAs.

REGISTRATION AS AN FFI UNDER FATCA

As noted in the recent Buck Consultants article, if a non-U.S. retirement plan does not meet any of the exemptions under the regulations and it is not covered by an IGA, then the plan sponsor must take the following steps to comply with FATCA’s registration and reporting process to avoid the 30% tax withholding on U.S.-source income.

A plan representative must register with the IRS as an FFI using Form 8957 or utilize on-line registration on the IRS web site and enter into an agreement with the IRS to report specified information about U.S. taxpayer participants and their plan benefits. This registration must be completed by April 25, 2014 for the plan to appear on the first master list of registered FFIs as of the July 1, 2014 deadline. Unless terminated by either party, the agreement is effective through December 31, 2016 and it can be subsequently renewed.
The plan sponsor must carefully examine participant and beneficiary records to identify all covered U.S. taxpayers and then obtain authorization from each U.S. participant to provide the IRS with the U.S. taxpayer’s name, address, U.S. taxpayer identification number, account number, account balance or value, and information about account withdrawals. The plan must disclose this information for the period July 1, 2014 through December 31, 2014 to the IRS by March 31, 2015 and annually each March 31 thereafter.
The plan sponsor must identify for the IRS any “recalcitrant” U.S. taxpayer participants with accounts of at least $50,000 in value who fail or refuse to authorize the plan to disclose the required information to the IRS. FATCA then requires the plan to withhold 30% on certain payments to these participants and, in some circumstances, close these participants’ accounts. Unfortunately, it is not clear at this point from the regulations how these requirements apply to non-U.S. retirement plans. It is important to note that this withholding on payments to recalcitrant participants is separate from the withholding on payments to a plan that does not comply with FATCA’s requirements, as discussed below.

TAX WITHHOLDING ON PAYMENTS TO A NONCOMPLIANT PLAN

The penalty for a plan that does not comply with the FATCA requirements discussed above is a 30% withholding tax on “U.S.-source income” paid to the plan. “U.S.-source income” for these plans, generally, consists of income from the plans’ investment in U.S.-based stocks, bonds, mutual funds, etc. Accordingly, beginning July 1, 2014, a noncompliant non-U.S. plan will be subject to 30% withholding on any investment income or earnings paid from these U.S.-based investment vehicles. This means that the withholding agent for a U.S.-based investment vehicle (for example, a U.S.-based mutual fund, bond issuer, or company with publicly traded stock) will withhold the tax amount and send the non-U.S. plan only 70% of the plan’s rightful income or earnings regardless of whether or not any of the plan’s participants are U.S. taxpayers.

INDIVIDUAL TAXPAYER COMPLIANCE

As noted in the recent article by Buck Consultants, “the FATCA requirements also apply to U.S. citizens and residents who own specified foreign financial accounts or other offshore assets, including assets held in a non-U.S. retirement plan. U.S. taxpayers subject to FATCA’s individual reporting requirements must file a Form 8938 with their annual income tax returns to disclose these accounts. Penalties of up to $50,000 apply to individuals who fail to disclose this information. The exemptions applicable to non-U.S. retirement plans do not apply to FATCA’s individual compliance requirements," according to the Buck Consultants article. Thus, sponsors of non-U.S. retirement plans may want to notify U.S. plan participants that the retirement plan accounts may be subject to individual reporting. Whether the individual must file Form 8938 to report their foreign financial assets depends on their residence, filing status, and the total value of their foreign accounts. For those specific account value thresholds, interested readers should refer to the IRS filing instructions for Form 8938.

CONCLUSION

There is no question that FATCA compliance is now an essential part of providing employee benefits outside of the U.S. The approaching registration deadline makes it important for sponsors of funded non-U.S. retirement plans to assess whether they are required to register or whether they qualify for one of the exemptions under FATCA as failure to comply may trigger withholding taxes and penalties.