The Foreign Account Tax Compliance Act (FATCA) is intended to increase transparency for the IRS with respect to US persons that may be investing and earning US income through non-US institutions.
It is clear that the new FATCA reporting and withholding regime will impact not only processes and procedures designed to mitigate risk and ensure compliance, but also the technology used by foreign banks and multi-national corporations.
Proposed FATCA regulations, including a draft FFI agreement, are expected by the end of 2011.
Effective for payments made in 2014, new FATCA rules are designed to flush out US ownership or US beneficial interests in foreign entities and foreign financial accounts. It is more than likely that companies will need to modify their current systems, controls and processes to comply with these regulations.
The FATCA requirements for new documentation, reporting and tax withholding are generally divided between those affecting payments to foreign financial institutions (FFIs) covered in I.R.C. §1471 and those affecting payments to non-financial foreign entities (NFFEs) covered in I.R.C. §1472.
To meet the documentation requirement, a FFI is required to enter into an agreement with the IRS by June 30, 2013, in which the FFI agrees to undertake certain due diligence, reporting and withholding responsibilities for US account holders.
Three Types of FFIs
A broad definition of an FFI includes:
Any foreign entity that accepts deposits in the ordinary course of a banking or similar business,
Holds financial assets for the account of others as a substantial portion of its business, or
Is engaged (or holding themselves out to be) primarily in the business of investing, reinvesting or trading in securities, partnership interests or commodities (such as mutual funds or hedge funds).
So, for all foreign payees you will need to determine:
- Whether the payee is a FFI and, if so, whether it is a participating FFI (has entered into an agreement with the IRS), a deemed-compliant FFI, a FFI treated as a NFFE so subject to §1472 compliance, or a non-participating FFI requiring withholding.
- If not an FFI, whether the NFFE is to be treated as an excepted payee based on its beneficial owners or whether the payment itself is excepted to determine if the NFFE is subject to certification and withholding requirements.