One of the hottest topics of discussion among international tax practitioners and multinational business as we enter 2014 is the continued implementation of the Foreign Account Tax Compliance Act, or FATCA. We have already seen some of the aspects of FATCA with the introduction of Form 8938 for individuals, the issuance of new draft W-8’s and 1042’s, and the opening of the registration portal for foreign financial institutions.
For U.S. entities, one of the most significant components of FATCA that taxpayers should be aware of will be effective in 2014. This component is the additional 30 percent withholding tax on payments of U.S. source income and gross proceeds to non-U.S. entities that do not meet FATCA documentation requirements. This withholding is similar to the guidelines already in place under Sections 1441 and 1442, but has some key distinctions. Most significant of these is that withholding under FATCA cannot be reduced by tax treaties. Therefore, unless FATCA-specific documentation is obtained, a 30 percent withholding tax will apply regardless of any applicable tax treaty.
Beginning July 1, 2014, any payment of U.S. source income to a non-U.S. entity recipient will be subject to this withholding tax. On that date, any previously obtained forms W-8BEN will become invalid and must be replaced with the new form W-8BEN-E (note that the final W-8BEN-E has not yet been released but the draft form is eight pages long). Unlike relief that may have been available for failure to have a valid W-8BEN on file for reduced withholding under a tax treaty, no such relief is available under FATCA. Therefore, any documentation failures discovered by the IRS likely will result in assessment of withholding tax, interest, and penalties against the withholding agent.
So, with FATCA withholding almost upon us, a 4-step process should be undertaken by U.S. taxpayers, as follows:
- Identify all foreign payees, and develop process to identify any new payees as foreign or U.S.
- Analyze the nature of payments to foreign recipients as withholdable or non-withholdable payments
- Obtain proper documentation for all recipients receiving withholdable payments
- Properly withhold on relevant payments and report all payments and withholding on 1042/1042-S forms
This is probably a great time to review all payment processes to ensure FATCA compliance. What is your business doing to prepare for FATCA? Have you or any of your foreign subsidiaries received any FATCA related requests from third parties?