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FATCA: Transitional Relief and What You Need To Do!

Rödl & Partner Tax Matters Vol 2014-8, republished in July 2024

Enacted in March 2010, FATCA was designed to detect, deter, and discourage offshore tax evasion. The provisions of FATCA are generally effective July 1, 2014, but with various phased in effective dates. FATCA requires U.S. persons to disclose foreign financial assets with their U.S. tax return while foreign financial institutions must disclose the identities of U.S. persons holding accounts with the institutions. An FFI includes banks, investment entities, holding companies, and treasury centers, among others. In addition, certain non-financial foreign entities must disclose the identities of their substantial U.S. owners. FATCA imposes 30% withholding on any withholdable payment made to an undocumented account holder/payee or a non-compliant foreign entity even though a treaty may provide a lower rate under the normal U.S. withholding regime.

Many nonfinancial companies mistakenly believe that FATCA only applies to financial institutions. Although much of the registration and reporting burden of FATCA will be felt by FFIs, many nonfinancial companies will also be affected by FATCA depending on whether the entity is a payor, payee or both.

Key Issues for Payors

The key issues payors must consider are as follows:

What payments are in scope for FATCA and other withholding purposes?
Do I have to withhold on an in-scope payment based on the documentation received?
What do I need to report to the IRS?

The issues for a payor are not unlike those that are required under the existing withholding regimes. Under FATCA, however, additional documentation may need to be collected from non-U.S. entities for payments made by the Treasury and Accounts Payable function. In addition, payors will need to verify that their foreign banking partner or other entity with whom they have a financial relationship, including, for example, internal financing companies, are FATCA compliant. Finally, new withholding forms will likely need to be obtained from payees.

Key Issues for Payees

The key issues payees must consider are as follows:

Does my entity need to register with the IRS?
How do I avoid withholding?
What do I need to report to the IRS?
How does an intergovernmental agreement affect my obligations?

To comply with FATCA, all foreign entities must perform some due diligence and certify their FATCA status and compliance with FATCA. FFIs must register with the IRS while non-financial foreign entities (“NFFEs”) are not required to register. FFIs must also identify their substantial U.S. account holders, obtain and track U.S. account holders’ tax information, and report the information to the IRS every year through one of several means. Certain non-financial foreign entities (“NFFEs”) must identify and disclose their substantial U.S. owners. Finally, avoiding withholding requires certifying an entity’s status as an FFI or NFFE on a withholding form provided to the payor. Therefore, the determination as to whether an entity is an FFI or NFFE is critical to addressing the issues identified above.

What Do You Need To Do Now?

The following is a high level assessment workplan payors and payees should consider undertaking now if they have not already begun:

Payors:

Build a high level profile of the company’s existing exposure to withholding
Identify all functions involved in the payment process
Review a sample of existing payments and documentation
Understand current processes, documentation and reporting, including payee on-boarding and processing, with respect to current withholding and reporting requirements
Identify all payment streams and payees
Classify payments for FATCA purposes as withholdable and/or reportable
Identify necessary improvements or modifications to incorporate FATCA requirements

Payees:

Identify all foreign entities (e.g., any entity that receives U.S. payments or that holds an account with a foreign financial institution) and test each expanded affiliated group
Classify all entities as FFIs (in-house banks, investment centers, treasury and hedging groups) or NFFEs (excepted, passive, entities foregoing exceptions that will disclose ownership)
Document classification rationale
Determine registration requirements for each entity
Identify and understand documentation to be provided to avoid withholding (i.e. W-8 BEN-E)

Form W-8 BEN-E

One issue that is pervasive for all payees receiving U.S. source payments is the requirement to provide Form W-8BEN-E to certify their status as beneficial owners or payees of a payment for withholding tax purposes, and to also certify their status under FATCA. As a practical matter, most non-financial companies simply want to know which box they should check on Form W-8BEN-E to indicate their FATCA status. While in a simple legal structure this may a relatively straightforward analysis, some version of the assessment identified above will be required nevertheless.

Please refer to Tax Matters 2014-15 and 2014-16 for more information on how to request and prepare Form W-8-BEN-E.

It should be noted that the provision of a W-8BEN-E will generally require the company to obtain a U.S. identification number. In addition, depending on the activities of the company in the U.S, a U.S. income tax return is often required. At a minimum, a protective return should be filed in the U.S. when there is no permanent establishment in order to avoid penalties and preserve deductions.

How We Can Help

Rödl & Partner understands the myriad of details underlying FATCA and has experience in assisting companies to ensure they are in compliance with the provisions of FATCA. We can assist your company in analyzing the FATCA requirements applicable to your organization and implementing changes necessary to ensure compliance going forward. Please contact us with any questions you may have.

This publication contains general information and is not intended to be comprehensive or to provide legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Consult your advisor.

We have made reasonable efforts to ensure the accuracy of the information contained in this publication, however this cannot be guaranteed. Neither Rödl Langford de Kock LP nor any of its subsidiaries nor any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at user's risk.

Any tax and/or accounting advice contained herein is based on our understanding of the facts, assumptions we have been asked to make, and on the tax laws and/or accounting principles in effect as of the date of this advice. No assurance is given that the conclusions would be the same if the facts or assumptions change, or are not as we understand them, or that the tax laws and/or accounting principles will not change subsequent to the issuance of these conclusions. In addition, we do not undertake any continuing obligation to advise on future changes in the tax laws and/or accounting principles, or of the impact on the conclusions herein.

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Elisa Fay

CPA

Managing Partner Rödl National Tax

+1 404 525 2600

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