New Withholding Requirements Under FATCA
The Foreign Account Tax Compliance Act (“FATCA”) will go into effect on July 1, 2014. Although the principal focus of FATCA is on foreign financial institutions and funds, the new withholding rules will have implications for most U.S. companies.
Broadly speaking, FATCA requires all persons (including corporations and partnerships) who make payments of U.S. source income to withhold at a 30% rate. FATCA covers two types of U.S. source income:
- Income that could be subject to U.S. withholding tax, such as U.S. source dividends, interest, rents, royalties, or payment for services where any part of the services was performed in the U.S.
- Proceeds from the disposition of U.S. stocks and debt instruments
Collectively, these types of U.S. source income are deemed “withholdable payments.” A person who makes these payments must withhold at the 30% rate unless they obtain documentation from the payee that exempts them from this requirement. Acceptable documentation for exemption includes:
- IRS Forms W-9 (for U.S. payees)
- IRS Forms W-8BEN (for foreign individuals)
- IRS Form W-8BEN-E (for foreign entities)
- Forms W-8IMY and W-8EXP (to document foreign pass-through entities and foreign tax exempt entities)
Each of these forms has been updated from prior versions. Form W-8BEN-E is an entirely new form.
If there is no exception or proper documentation, the payor will be liable for the 30% withholding. Given this potential liability, it is anticipated that many payors of amounts that are withholdable payments, or amounts that could be withholdable payments (e.g. payments for services or royalties where it is not known whether some portion of the payment could be from U.S. sources), will refuse to make these payments unless they have received the completed forms W-9 or W-8BEN or W-8BEN-E.
A U.S. non-financial entity should immediately do the following to become FATCA-compliant:
- Identify the FATCA status of all the entities in the group, which may be more complex for groups with foreign entities
- Identify any existing withholdable payments or amounts that could be withholdable payments made or received by companies
- Obtain new forms W-9 or W-8s to report withholdable payments and comply with existing withholding obligations.
What Does CohnReznick Think?
Many U.S. companies have not yet addressed FATCA compliance. Doing so should minimize tax and business interruption risks. If you are unsure how this development might impact you, please contact James Wall or your client service partner.
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