Act now to avoid 30 percent withholding
Many provisions of the Foreign Account Tax Compliance Act (FATCA) become effective July 1, 2014. FATCA primarily requires foreign financial institutions (FFIs) to implement certain due diligence and reporting procedures to identify US account holders. FATCA also requires FFIs to withhold on payments made by the FFIs of US source income if the FFIs are not FATCA compliant. Finally, FFIs that do not comply with FATCA will generally be subject to 30 percent withholding on payments the FFI expects to receive from US sources.
All FFIs will need to register with the Internal Revenue Service (IRS) to demonstrate they are a participating FFI and have received a Global Intermediary Identification Number (GIIN) to signify compliance. FFIs must register by May 5 to be included on the first FFI list released by the IRS or by June 3 to be part of the second FFI listing that will be published July 1, 2014. FFIs in Model 1 Intergovernmental Agreement (IGA) countries can register at a later date because they are not required to have a GIIN until Jan. 1, 2015, but for practical and business considerations, Baker Tilly recommends FFIs obtain a GIIN by June 3 in order to avoid FATCA withholding that begins July 1, 2014.
Which entities are subject to FATCA and what type of payments will be subject to withholding?
FFIs include but are not limited to non-US banks, private equity funds, pension plans, mutual funds, hedge funds, treasury centers, professionally managed trusts, and trust companies. Non-FATCA complaint FFIs will generally be subject to 30 percent withholding on US source payments of interest (including portfolio interest), dividends, rents, royalties, and gross proceeds from the sale of securities. Withholding on gross proceeds received from the sale of securities will begin Jan. 1, 2017; however, withholding on other payments will begin July 1, 2014. FATCA withholding is not eligible for tax treaty benefits and withholding assessed on FFIs operating in nontreaty countries will not be refunded even if the FFI subsequently becomes compliant.
Nonfinancial foreign entities (NFFEs) can also be subject to withholding on certain US source payments. Generally, NFFEs that have substantial US owners (i.e., ownership of 10 percent or more) must provide payors of US source income with information regarding their US owners or they will be subject to withholding. Also, operating companies with foreign pension plans, treasury centers, or investment holding companies in their organizational structures will be affected by FATCA. Accordingly, chief compliance officers overseeing foreign-based financial and nonfinancial entities in their organizational structures should be aware of how FATCA can impact their businesses.
What countries are listed as having an IGA in effect?
A number of jurisdictions have entered into Model 1 IGAs with the US government, including Australia, Belgium, Cayman Islands, France, Germany, Ireland, Mexico, the Netherlands, Spain, and the United Kingdom. Austria, Bermuda, Chile, Japan, and Switzerland have Model 2 IGAs with the US. A complete list of countries with IGAs can be found in the US Department of Treasury’s FATCA Resource Center.
Will the IRS provide transitional relief?
The IRS announced in Notice 2014-33 that they will provide transitional relief for calendar years 2014 and 2015 for FFIs and withholding agents that make a “good faith” effort to comply with the implementation of FATCA. The service will provide relief from IRS enforcement and administration for FFIs that will make a reasonable effort to comply with the withholding, documentation, and reporting aspects of FATCA. Accordingly, Baker Tilly recommends FFIs register with the IRS and start to assess their FATCA obligations.
If you suspect your organization will be affected by FATCA, steps to seek advice should be taken now.
The final FATCA treasury regulations are extensive and complicated, and the changes from the proposed regulations are substantial. This document provides a high level overview of how FATCA will affect financial and nonfinancial foreign entities. If you believe your organization will be directly or indirectly affected by FATCA compliance obligations, you should to take steps now with respect to FATCA compliance in order to avoid withholding.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.