FATCA laws impose mandatory US federal withholding on payments of US source income to the following two types of non-complying entities:
- Foreign financial institutions (FFIs), including banks’ brokerage firms and private investment funds such as hedge, private equity (PE) and venture funds.
- Non-financial foreign entities
To avoid the mandatory 30% US withholding, FATCA requires each foreign entity listed above to fully disclose any US persons who are beneficial owners of US-sourced income or, alternatively, to certify that there are no US persons who are beneficial owners. Failure to do either will result in the entity being non-compliant and force the payer of the US-sourced income to withhold on behalf of the payee. Failure to withhold can subject the payer to substantial monetary penalties.
FATCA Implementation Timeline
FFIs receive more time to comply with FATCA. Certain withholding and due diligence deadlines are postponed for another six months – until 30 June 2014. The implementation of FATCA requirements will be held in phases and the FFIs should comply with the following requirements:
FFI Agreement and Registration:
To meet FATCA law, FFIs have to sign an agreement with the Internal Revenue Service (IRS). The registration process started in August 2013 and will continue until April 2014. FFIs who choose to enter into agreements with the IRS are known as participating FFIs (PFFIs).
FFIs can register via the IRS registration website or on paper, although the latter is not recommended. FFI who register on the website will receive a global intermediary identification number (GIIN) from the IRS upon approval. The IRS is to publish a list of registered and approved FFIs and their GIINs each month.
- The FFI will use its GIIN to identify that it is registered and approved to the withholding agents and to the IRS. Withholding agents may rely on the IRS’s published list, or FFI list search and download tool, to verify a FFI’s GIIN and not withhold on payments made to the FFI.
For withholdable payments made prior to 1 January 2015, verification of a GIIN is not required. As a result, reporting FFIs will have additional time beyond 1 July 2014 to register and obtain a GIIN in order to ensure that they are included on the IRS FFI list before 1 January 2015.
Identification and due diligence:
PFFIs are required to classify:
- All individual account holders, new and existing, as: non US person, US person or recalcitrant account holder.
- All new and existing entity account holders as either non-financial foreign entities (NFFEs), PFFIs or non-participating FFIs (NPFFIs).
PFFIs have withholding obligations under FATCA. PFFIs are required to withhold 30% on certain direct and indirect US sourced income in relation to payments made to accounts where the account holder is either recalcitrant or a NPFFI.
Recalcitrant account holders include account holders who either fail to comply with reasonable requests for information or fail to provide a waiver of privacy laws.
NPFFIs are FFIs who either choose not to, or are unable to enter into a FFI agreement with the IRS.
Withholding agents are required to implement withholding on payments made after 30 June 2014 to payees that are FFIs.
In addition to the identification and withholding obligations under FATCA, a FFI agreement also imposes annual reporting requirements on a PFFI. The actual report of information under FATCA will be due in 2015, reporting the 2014 activity.
There are different readings and opinions about FATCA’s impact worldwide. The following attempts to mention major impacts on the country Level, the FFIs level and the personal level.
- There is an indication that the complexities resulting from FATCA implementation will drive foreign investment funds to invest more of their capital outside the US; not a positive thing for an already slow-growing American economy.
- The US resident or citizen is taxable on his/her US and foreign source income. FATCA rules are designed to prevent US tax evasion on US source income. This might be a way out for tax evaders by simply shifting their portfolios from investments that produce US source income to investments that produce foreign source income to avoid FATCA. It impacts negatively on both the US economy and American citizens, who will be considering changing their businesses.
- The cost of implementing FATCA’s requirements is signifoicant. PFFIs have to revise and enhance their know your client (KYC) policies and procedure and systems, revise their anti-money laundering (AML) solutions, complete due diligence for existing and new clients, apply new monitoring scenarios on financial transactions, implement controls on the withholding process and create new personas, such responsible officer. PFFIs also have to get certified in relation to FATCA provisions and prove that they do not assist account holders in avoiding the application of FATCA.
- US Treasury and the IRS expect every FI on the planet to become their personal spies. Many FFIs have reacted negatively to the FATCA requirement, regarding it as an invasion of their client’s privacy, and in some cases have already made the decision to close all US accounts.
- Even non-US persons will be affected. All non-financial US operating companies are subject to rules regarding withholding on payments made to foreign individuals and/or entities. The latter are required to withhold a 30% tax on income paid to a non-US person unless they have proper documentation on file confirming that the non-US person is not subject to the withholding. In most cases, the documentation needed from the non-US person/entity is Form W-8BEN, and from the US person Form W-9. Without maintenance of proper documentation for non-US persons, the entity would be subject to backup withholding rules, and can incur interest and penalties.
Now is the time to plan out the implementation of FATCA. Treasurers and other finance professionals need to be in a position to answer the following questions and act swiftly where necessary:
- What would it cost me if I choose not to enter into agreements with the IRS?
- How feasible would it be to document all the investors that are US persons – both citizens and residents?
- How feasible would it be to document/prove that all the firm’s non-US investors are non-US persons?
- How long will the firm need to implement FATCA requirements?
- What is the estimated total cost of implementing and complying with FATCA?
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