Foreign Account Tax Compliance Act (FATCA) Effective as of July 1, 2014
Certain aspects of FATCA, including the obligation to withhold on certain withholdable payments made to undocumented payees, became effective July 1, 2014. Although transition rules will apply through December 31, 2015, now is the time to address FATCA compliance for those financial firms (e.g. investment funds) and non-financial businesses that have only partially addressed FATCA compliance or have not done so at all.
FATCA generally requires all persons (including corporations and partnerships) making payments of U.S. source FDAP income (FDAP income includes dividends, interest, rents royalties, certain services, insurance premiums, swap payments and various other types of payments) to withhold at a 30% rate on payments made to foreign financial institutions that are not registered with the IRS and certain other payees whose FATCA status has not been properly documented. FATCA covers two types of U.S. source income:
- U.S. source FDAP income that could be subject to U.S. withholding tax, such as U.S. source dividends, interest, rents, royalties (however many other types of payments could also constitute withholdable payments).
- Proceeds from the disposition of U.S. stocks and debt instruments
Collectively, these types of U.S. source income are deemed “withholdable payments.” Taxpayers who make these payments must withhold at the 30% rate unless they obtain documentation from the payee that exempts them from this requirement.
Many financial firms (including investment funds) as well as non-financial businesses are aware of the requirements of FATCA and the impact it may have on their businesses but have not fully implemented a FATCA compliance plan. A significant reason for the lack of compliance has been the late issuance by the IRS of the relevant forms and/or instructions that would have allowed these entities to adequately address their FATCA compliance.
In the two weeks before the July 1 effective date, the IRS released instructions to IRS Forms W-8BEN-E, W-8IMY, 1042-S and 8966. The most critical of these instructions were the W-8BEN-E and W-8IMY. Many entities have been waiting for these instructions before addressing FATCA compliance. Unfortunately, the instructions to both forms contain multiple cross-references to regulations, which will make following the instructions challenging even for tax professionals.
In addition to the instructions noted above, in the two weeks prior to the July 1 effective date, the IRS released two Revenue Procedures addressing FATCA issues for qualified intermediaries, an updated list of foreign financial institutions (FFIs) that have received identification numbers, new FAQs, additional regulations and more news about additional countries that have (or will be considered to have) entered into intergovernmental agreements with the IRS. In the days following the July 1st effective date, there have been almost daily FATCA developments.
It should be noted that, in Notice 2014-33, the IRS announced that calendar years 2014 and 2015 will be a transition period for purposes of the enforcement of the reporting and withholding provisions of FATCA. The IRS will take into account the extent to which entities have made a good faith effort to comply with FATCA.
What Does CohnReznick Think?
Now that the instructions to IRS Forms W-8BEN-E and W-8IMY have been issued, it is time for both financial and non-financial businesses to demonstrate their good faith efforts to comply with FATCA by putting in place a well-documented FATCA compliance plan.
The information contained herein (or in any attachment) is not intended to be used by any taxpayer for the purpose of avoiding any penalties that a taxing authority might impose on the taxpayer or for the promoting, marketing or recommending to another party any tax related matters.
The information in this transmission is privileged and confidential and intended only for the recipient listed above. If you are not the intended recipient, please advise the sender immediately by reply e-mail and delete this message and any attachments without retaining a copy. If you are not the intended recipient, you are hereby notified that any disclosure, copying or distribution of this message, or the taking of any action based upon it, is strictly prohibited.
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.