To any individual who has a foreign bank account and to any person with tax reporting responsibilities for a multinational business, this post is for you! If you work in taxation, you’ve probably seen the abbreviation FATCA, which stands for Foreign Account Tax Compliance Act. You may also know that it is a tax act that has something to do with international banking. FATCA is so broad that we are limiting this discussion to how it may affect a typical US individual and entity taxpayers, rather than providing a thorough overview of the Act itself.
FATCA has been around since 2010 – so why has it been making more noise lately? After a few delays, some of the provisions of FATCA will be effective as of July 1, 2014. The biggest highlights of such provisions include the introduction of the new withholdable payments definition under IRC Section 1473. The general concept of US tax withholding has been around forever but the new withholdable payments are primarily applicable to:
- 1) Any non-US financial institution (foreign financial institution, or “FFI”) which does not enter into a compliance agreement with the IRS; and
- 2) Any nonfinancial non-US entity (non-financial foreign entity, or “NFFE”) which does not identify any substantial US owners or certify that it has no substantial US owners.
How could this possibly affect a typical US taxpayer? Well, it may not affect any US taxpayer who has no dealings with any FFI or NFFE. But, in case you have any financial accounts located outside of the US or you work for a multinational entity in the area of tax compliance, we are providing some examples below of situations where a US person may need to be aware of the new provisions.
Dealing with an FFI
Because of FATCA, the FFIs which enter into an agreement with the IRS to provide certain information are now required to identify any US account holders. For example, you may have one or more bank accounts located outside of the US from days past when your employer sent you to a foreign country for an overseas project. Chances are your bank will ask you to identify whether you are a US citizen or not if the bank is the one that has entered into the compliance agreement with the IRS. If you certify that you are a US citizen in your response to them, then that is the end. If you refuse to disclose your identity, the bank will start withholding 30% of their gross interest payment pursuant to the new provisions under FATCA so that the 30% of the interest payment would go to the IRS. If that happens to you, you might discover a sudden, unexpected interest in FATCA.
Dealing with an NFFE
If you work for an entity that is part of a multinational group, your entity may make certain payments such as interest, dividends, royalties, etc. to other entities within the same group. It’s entirely possible that you have been making these payments without withholding any US tax because of the applicable income tax treaties. But under the new withholdable payment rules, you may have to re-think whether to withhold. The question is, “Do I know whether the payee entity does not have any substantial US owners?” In many cases, the answer may be obvious. However, even if it is, you still need to have proper documentation to exclude the payment from the new withholdable payment rules. The IRS issued a new iteration of Form W-8BEN-E, which the foreign payee entity will fill out and which you must retain in case the IRS requests it. The new form may look intimidating as it is now eight-pages long (the previous version was only one page; see, we warned you), but this increase is due largely to the expansion of the IRS classifications of foreign payee entities under the new FACTA provisions. Once you determine the proper classification of the foreign payee entity, the rest of the way should be a breeze. You’re in luck! As we were working on this blog post, the IRS published the instructions for the new Form W-8BEN-E just in time for the July 1 effective date..
If the payee entity refuses to identify any substantial US owners or to certify that it has no substantial US owners, under certain circumstances, you would need to withhold 30% of the gross payments you are making.
Lastly, an obligation outstanding on July 1, 2014 is generally considered to be a transaction to which the new withholdable payment rules do not apply. Thus, if your entity keeps paying interest after July 1st, 2014 on intercompany loans that first arose on dates prior to July 1, 2014 none of your interest payments would be subject to the new withholdable payment rules. Pretty sweet, right?
The new withholding regime under FATCA is intended to bring forward US taxpayers who do not report income derived from their financial accounts located outside the US. For more information about FATCA, you can visit the FATCA page of the IRS website, or review Thomson-Reuters’ FATCA resources.
You’re also welcome to contact us with questions at any time!
Author: Masataka “Masa” Yamaguchi, CPA, International Tax Manager
This blog post is a summary and is not intended as tax or legal advice. You should consult with your tax advisor to obtain specific advice with respect to your fact pattern. Based on the most recent “best practice” standards for tax advisors issued by the Treasury Department, commonly referred to as Circular 230, we wish to advise you that this blog post has not been prepared to be used, and cannot be used, to provide assurance that penalties which may be assessed by the IRS or other taxing authority (including specifically section 6662 understatement penalties) will not be upheld.