IRS Updates and Clarifies FATCA Issues
posted Jun 9, 2014 by Paul Oliveira, CPA
With the July 1 deadline approaching, the IRS clarified terms in its FAQs for complying with the Foreign Account Tax Compliance Act (FATCA) and added information for certain organizations related to registration under the law.
Under FATCA, withholding agents must hold back 30% of certain payments to foreign financial institutions (FFIs) unless the FFIs have entered into an agreement with the IRS to, among other things, report certain information with respect to U.S. accounts. (The withholding rules are essentially a mechanism to enforce new reporting requirements.)
Those provisions also impose withholding, documentation and reporting requirements on withholding agents related to some payments made to certain nonfinancial foreign entities. The statutory provisions generally were scheduled to be effective for payments made after Dec. 31, 2012, but they have been delayed and are being phased in over several years.
An FFI agreement generally includes a qualified intermediary (QI) agreement and either a withholding foreign partnership (WFP) agreement or a withholding foreign trust (WFT) agreement entered into by an FFI with an effective date or renewal date on or after Dec. 31, 2013. QIs, WFPs and WFTs are parties that have entered into agreements to withhold tax on nonresident aliens and foreign corporations.
The information that the IRS revised is listed under the following nine categories:
- QIs/WFPs/WFTs. If an FFI has a QI/WFP/WFT agreement in place, the FFI’s responsible party for purposes of the agreement doesn’t have to be the responsible officer chosen by the FFI for purposes of certification under the regulations or for FATCA registration purposes. (FAQ 3)
- Intergovernmental agreement (IGA) registration. An FFI in a country that hasn’t signed an IGA, the local laws of which don’t allow reporting U.S. accounts or withholding tax, should register as a limited FFI, provided that certain requirements are met. (FAQ 7)
- Expanded affiliated groups (EAGs). For registration purposes, an EAG may organize itself into subgroups, so long as all entities with a registration requirement are registered. An FFI that acts as a compliance FFI for any members of the EAG is, however, required to register each such member, as would a lead FI for such members. (FAQ 8) A “lead FI” means a U.S. financial institution (USFI), FFI or compliance FI: 1) that will initiate the FATCA registration process for each of its member FIs that is a participating FFI, registered deemed-compliant FFI or limited FFI, and 2) that is authorized to carry out most aspects of its members’ FATCA registrations. (FAQ 9)
- Sponsoring/sponsored entities. The sponsoring entity that agrees to perform the due diligence, withholding and reporting obligations of one or more sponsored entities under Chapter 4 should register with the IRS through the FATCA registration website to be treated as a sponsoring entity. While a sponsoring entity is required to register its sponsored entities in order for those entities to obtain Global Intermediary Identification Numbers (GIINs), the temporary and proposed regulations provide a transitional rule that, for payments before Jan. 1, 2016, permits a sponsored entity to provide the GIIN of its sponsoring entity on withholding certificates if it hasn’t yet obtained a GIIN. (FAQ 10)
- Responsible officers (ROs) and points of contact (POCs). The RO listed on Line 10 of Form 8957 (or the online registration system) can authorize a POC to receive FATCA-related information regarding the FI and to take other FATCA-related actions on behalf of the FI. While the POC must be an individual, the POC doesn’t need to be an employee of the FI. (FAQ 11)
- FIs. A USFI is generally not required to register under FATCA, with a number of exceptions. (FAQ 12) An FFI that has a withholding obligation and will be filing Forms 1042 and 1042-S with the IRS will be required to have an employer identification number (EIN), which can be applied for using Form SS-4 or the online registration system. (FAQs 12, 14) An FFI is also required to obtain an EIN when it is a QI, WFP or WFT (through the application process to obtain any such status) or when the FFI is a participating FFI that elects to report its U.S. accounts on Forms 1099. (FAQ 13)
- Exempt beneficial owners. A foreign central bank of issue will generally be exempt from FATCA registration and withholding if it meets the requirements to be treated as an exempt beneficial owner (for example, as a foreign central bank of issue, a controlled entity of a foreign government, or an entity treated as either of the foregoing under an applicable IGA). A withholding agent doesn’t have to withhold to the extent that it can reliably associate the withholdable payment with documentation to determine the portion of the payment allocable to an exempt beneficial owner; however, an exempt beneficial owner may be subject to withholding on payments derived from certain types of commercial activity. (FAQ 14). A foreign pension plan will be exempt from FATCA registration and withholding if it meets the requirements to be treated as a retirement fund or under an applicable IGA. A withholding agent doesn’t have to withhold to the extent that it can reliably associate the withholdable payment with documentation to determine the portion of the payment allocable to an exempt beneficial owner (here, a retirement fund). (FAQ 15)
- Nonfinancial foreign entities (NFFEs). A direct reporting NFFE is eligible to register for status as such and, when registering, should complete an online registration (or submit a paper Form 8957), following detailed instructions set out in FAQ 16. A sponsor of a sponsored direct reporting NFFE should register online (or on Form 8957) as a sponsoring entity, following the detailed instructions set out in FAQ 17.
- Registration update. The IRS puts a registration into “Registration Incomplete” status when it has identified an issue with the registration. Affected taxpayers should review the registration for any of these errors:
- The FFI has identified itself as a QI with a QI-EIN of which the IRS has no record
- The RO has been identified with initials only and no specific name has been provided,
- The RO doesn’t appear to be a natural person, or
- The registration was submitted before Jan. 1, 2014.
The registration should then be updated and resubmitted. (FAQ 18)
Compliance can’t be ignored
The rules surrounding compliance with FATCA are complex. But with the withholding in some cases being required on payments made as soon as July 1, 2014, compliance can’t be ignored. If you’re unsure whether your company is affected or what you need to do to comply, please contact us.