FATCA: Where Things Stand in December 2013December 2013 – Tax and Personal Planning Alert
As we spin toward the end of 2013, it may be a good time to plan ahead and make sure that your business is ready for tax compliance changes taking place come 2014. One such change, the "FATCA" implementation, is particularly relevant to financial institutions and investors.
What is FATCA? 1
The Foreign Account Tax Compliance Act ("FATCA") is one of several tax law provisions enacted in 2010, in response to high profile tax avoidance schemes involving overseas financial accounts of U.S. taxpayers. U.S. taxpayers have avoided paying U.S. income tax by hiding assets in offshore financial accounts, out of reach of the U.S. Internal Revenue Service (the "IRS") jurisdiction.
What does it do?
FATCA does three things: First, it imposes on foreign financial institutions ("FFIs") that do business with the U.S., a level of U.S. tax compliance responsibility similar to that imposed on U.S. financial institutions. FFIs' historical refusal to share U.S. taxpayers' information with the IRS was one reason U.S. taxpayers used foreign financial accounts to evade U.S. tax system.
Under FATCA, FFIs will have to implement a "know-your-customer" ("KYC") procedure to identify investors that are U.S. taxpayers and file annually with the IRS. FFI's will first have to register with the IRS and receive a tracking number called "Global Intermediary Identification Number" ("GIIN"). The U.S. government has been negotiating intergovernmental agreements ("IGAs") with governments around the world to allow FFIs in their jurisdictions to have the legal basis to report the U.S. tax information either directly to the IRS or to the government of their home countries which then will pass it to the IRS.
Second, most privately-held foreign entities (so-called "non-financial foreign entity" or "NFFE") have to disclose tax information of their significant U.S. owners to the withholding agents, including an FFI, who in turn have to report the same to the IRS. This will deter U.S. taxpayers from using privately-held companies to hide assets from the U.S. tax system.
Third, if an FFI does not comply with the KYC and reporting rules above, the FFI, as a whole, will be subject to a 30% withholding tax on U.S.-sourced fixed or determinable annual or periodical income, such as interest, dividend, rents, salaries, wages, premiums, annuities, compensation, etc. ("FDAP Income"), and on the gain from sale of assets producing U.S.-sourced interest and dividend.
If an investor (including an NFFE) does not cooperate with an FFI's KYC procedure, the FFI has to withhold tax with respect to the recalcitrant investor. If an NFFE does not comply with the significant U.S. owner disclosure requirement, whether as part of an FFI's KYC procedure or otherwise, it itself will be subject to the 30% withholding tax.
What's the timing?
FATCA is being implemented gradually now through 2017, although the actual implementation target dates have been moving to the right. The major milestones for the period between now and the end of 2014 include the following:
- Now through end of 2013, the internet FATCA registration portal is open for uploading FFI registration information;
- January 1, 2014, online registrations can be submitted for acceptance;
- June 2014, the first list of accepted FFI's will be issued and updated monthly afterward. For inclusion in this list, the application needs to be completed by April 25, 2014;
- June 30, 2014, (a) all existing U.S. withholding certificates (e.g., Form W-8BEN) expire and need to be replaced with new IRS withholding certificates with a new FATCA provision, and (b) all existing withholding agreements (relating to the qualified withholding agent rule under Section 1441 of the Internal Revenue Code) between the FFIs and the IRS expire and need to be replace with new ones with a FATCA provision;
- July 1, 2014, (a) the FATCA withholding begins on the FDAP Income of non-participating FFIs and newly opened financial accounts of FFIs (if recalcitrant), (b) new customer KYC procedures must be in place for accounts opened after this date, and (c) FATCA withholding applies to obligations issued after this date;
- December 31, 2014, KYC due diligence on pre-existing accounts have to be completed;
- January 1, 2015, (a) FATCA withholding begins on the FDAP Income of pre-existing entity account holders that are "prima facie" FFIs, and (b) GIIN is required for FATCA withholding and reporting;
- March 15, 2015, first FATCA reporting is due on Form 1042s for the FDAP Income of 2014; and
- March 31, 2015, first FATCA reporting on Form 8966 for 2014 is due.
What to do?
- Determine (i) if you are a withholding agent, (ii) if you are an FFI or an NFFE, and (ii) if your clients and customers are FFIs or NFFEs.
- If you are an FFI, you want to begin the IRS registration process. You also want to review the existing information reporting relationship with the IRS (e.g., qualified intermediary?).
- If you are a withholding agent, FFI or NFFE, you want to review IRS forms and KYC information on file for your clients and customers to identify and begin the FATCA KYC documentation process, including updating the existing IRS forms, and work on updating the KYC system so that you are compliant with FATCA before the target dates.
- Seek assistance from outside advisors. Your current outside auditors and administrators may be able to assist you with this effort.
1 FATCA is extremely complex and its rules and regulations are currently in the process of being finalized. This discussion is for informational purposes only, and does not address each and every specific point that forms part of FATCA.
For more information on this and other tax matters, please contact:
Louis Tuchman at +1 212 592 1490 or l[email protected]
To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax related matter(s) addressed herein.
Copyright © 2013 Herrick, Feinstein LLP. Corporate Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.