FATCA: Understanding How It Affects You and Your Business
posted Jul 16, 2013 by Paul Oliveira, CPA
UPDATE 7/22/13: Foreign Financial Institutions (FFIs) receive more time to comply with FATCA. Certain withholding and due diligence deadlines are postponed for another six months – until June 30, 2014.
The final regulations originally provided for a phased-in implementation of the requirements, beginning on January 1, 2014, and continuing through 2017. But now, withholding agents will generally be required to implement withholding on payments made after June 30, 2014 to payees that are FFIs. The actual report of information under FATCA will be due in 2015, reporting the 2014 activity.
The Foreign Account Tax Compliance Act or “FATCA” as we will refer to it, was part of the Hiring Incentives to Restore Employment Act that was enacted in March 2010. While a good deal of FATCA is geared toward new reporting requirements of foreign financial institutions (FFI), there are also provisions that impact non-financial U.S. businesses who are doing business with foreign vendors. These new provisions have been added to the IRS Tax Code. This article will highlight some of the basics of FATCA, how FATCA affects you and/or your business, and if so, what steps you need to take.
FATCA addresses withholding on payments of U.S. source income. Therefore, any entity making a payment of U.S source income must consider whether it is subject to these rules. It applies both to financial and non-financial operating companies. Basically, FATCA impacts all non-U.S. entities receiving most types of U.S. source income.
As mentioned, these new rules address and require foreign financial institutions (FFI) to provide the IRS with information on certain US persons that invest in accounts outside of the US and/or if they are owners of certain non-U.S. entities. As a result, withholding on fixed or determinable annual or periodical payments (FDAP) will be required. In a nutshell, FFI’s will need to enter into agreements with the Department of Treasury to avoid FATCA withholding on payments it receives. (NOTE: the details as to what information will be required by the FFI to report on the US accounts is complex and we are always available to talk if you would like more information.)
It should also be noted that all non-financial U.S. operating companies are subject to rules regarding withholding on payments made to foreign individuals and/or entities. While this withholding requirement is not new, the informational requirements and some of the forms have been enhanced under FATCA. U.S. entities are required to withhold a 30% tax on income paid to a non-U.S. person unless you have proper documentation on file where the non-US person is not subject to the withholding. In most cases, the documentation needed from the non-US person/entity is a W-8BEN, and the U.S. persons’ W-9. Please note, without the maintenance of proper documentation of non-U.S. persons, the entity would be subject to backup withholding rules, and can incur interest and penalties. Please refer to our article titled “Reporting U.S. Business payments to Foreign Individuals for Services Performed Outside the U.S.” that addresses this in more detail.
As mentioned above, FATCA applies to payments of U.S. source income. These payments are defined as:
- Any gross proceeds from the sale of disposition of U.S. property of a type that can produce interest or dividends.
- Any payments of dividends, rents, royalties, salaries, wages, annuities, licensing fees and other FDAP income, gains, and profits, if it is a payment from sources within the U.S.
- Any payment of interest, including any portfolio interest and original issue discount which also includes interest paid by foreign branches of U.S. Banks.
FATCA IS HERE . . . ARE YOU READY?
So does FATCA apply to your specific business? If you are making payments to foreign vendors, it is advisable to at least review whether current payments made to foreign entities could be subject to withholding. From there, you can devise the necessary controls for gathering documentation from foreign vendors and capture the information necessary to comply with reporting required under FATCA.
For more information on FATCA or help complying with reporting requirements please contact Paul Oliveira, CPA, Director of International Tax, or call 888-KLR-8557 to contact one of our International Tax Advisors.
KLR is a premier provider of international tax services to middle market companies and works with both foreign-based companies moving to the U.S. market as well as domestic companies that do business around the world. The KLR International Tax group is available to assist clients with any tax issues pertaining to either inbound or outbound tax issues, both from corporate perspective as well as for multifunctional families. Those issues may include the IRS’ Voluntary Disclosure Program, planning for intellectual property transfers, transfer pricing, export incentives and global restructuring projects.