Friday, June 14, 2013

FATCA Tax Compliance

FATCA compliance primer for U.S. multinationals 

The Foreign Account Tax Compliance Act (FATCA) rules, which impose significant reporting, documentation and withholding obligations, are not limited to financial institutions. These rules can also impose significant and burdensome requirements on U.S. multinationals. 

Below is a summary of the steps U.S. multinationals should take in order to ensure their compliance with FATCA. Background.  Generally effective for payments made after Dec. 31, 2012 (but delayed in IRS guidance; see below), the Hiring Incentives to Restore Employment Act of 2010 (HIRE Act, P.L. 111-147) established rules for withholdable payments to foreign financial institutions (FFIs; generally including non U.S. banks, broker-dealers and other custodians, investment vehicles, and certain insurance companies) and for withholdable payments to other foreign entities by adding a new Chapter 4 to the Code (Code Sec. 1471 through Code Sec. 1474). 

The new rules provide for withholding taxes to enforce new reporting requirements on specified foreign accounts owned by specified U.S. persons or by U.S.-owned foreign entities (“U.S. accounts”). Under Code Sec. 1471(d), a financial account is defined as any depository or custodial account maintained by the financial institution, or any equity or debt interest in the financial institution (other than interests regularly traded on an established securities market).

 Under Code Sec. 1471(a), a withholding agent must withhold 30% of certain payments to an FFI unless the FFI has entered into a “FFI agreement” with IRS to, among other things, report certain information with respect to U.S. accounts. Chapter 4 also imposes on withholding agents withholding, documentation, and reporting requirements with respect to certain payments made to certain other foreign entities. 

The registration, due diligence, information reporting and withholding obligations for U.S. source FDAP income under FATCA are generally effective as of Jan. 1, 2014. Entities will have to determine by October of 2013 whether they qualify as FFIs and, to the extent they do, register with IRS. The final FATCA regs were explained in a detailed six-part article published earlier this year 

. Application to U.S. multinationals.  U.S. multinationals may have group companies that could qualify as FFIs, such as treasury centers, captive financing or insurance companies, and retirement funds. Although most of the discussion related to FATCA's implications on U.S. payors of U.S. source withholdable payments has been focused on financial institutions, U.S. multinationals and, in certain scenarios, U.S. citizens and tax residents, may have withholding obligations. U.S. multinationals making withholdable payments to entities outside of the U.S. have to withhold 30% under the FATCA rules unless the entities make certain disclosures to IRS and to the U.S. withholding agent payor. For purposes of complying with the FATCA rules, U.S. multinational enterprises are expected to implement certain procedures that may require changes to previously used account payable systems and compliance processes. Roadmap to compliance.  U.S. multinationals should consider taking the following steps to ensure their compliance with FATCA:

 (1) The multinational has to make a determination as to which of the payments it makes qualify as a “withholdable payment” for purposes of FATCA. Withholdable payments generally include U.S. source fixed or determinable, annual or periodical (FDAP) income, such as interest, dividends, and most types of royalties and rents as well as gross proceeds from the sale of securities that could generate U.S. source income. Income effectively connected to a U.S. trade or business (e.g. fees for certain services), however, will not be subject to withholding under FATCA. 

(2) Next, the multinational should determine whether the non-U.S. recipient of the withholdable payment is an FFI or a non-financial foreign entity (“NFFE”). Generally, NFFEs that are publicly traded (including their subsidiaries) are not subject to FATCA. Non-publicly traded NFFEs and FFIs, however, must either comply with the disclosure rules or be subject to the 30% withholding tax. (3) To the extent the income recipient identified in Step 2 is an FFI, an inquiry must be made to determine whether the FFI is a participating FFI or a non-participating FFI. Non-participating FFIs will be subject to the 30% withholding. (4) For NFFE recipients, information should be requested and reported regarding any substantial U.S. owners. If such information is not provided, the payment should be subject to the 30% withholding tax. In order to meet the above requirements, MNEs would have to build out compliance processes to ensure that all necessary determinations, monitoring, documentation and reporting is in place for purposes of complying with the FATCA rules. References: For withholdable payments to FFIs and other foreign entities, (212) 588-1113

No comments: