Foreign Account Tax Compliance Act ( FATCA )

Transcription

1 Foreign Account Tax Compliance Act (FATCA) What Is It & Why Should I Care? Presented by: Cynthia J. Hoffman, CPA, J.D. Director of International Tax Advisory Services Schneider Downs & Co., Inc. April 29, 2014 What is FATCA? Foreign Account Tax Compliance Act ( FATCA ) Part of HIRE Act enacted March 18, 2010 Adds new Chapter 4 to Internal Revenue Code Effective July 1, 2014 Purpose to gather information on U.S. tax evaders with offshore assets earning income not reported Increase transparency for the IRS with respect to U.S. persons that are investing and earning income through non US institutions Requires foreign payees to disclose significant U.S. investors & accountholders Foreign payees who fail to comply suffer penalty of 30% U.S. tax withholding on payments made to them from U.S. persons Final regulations package issued February 20,

2 Why Should I Care About FATCA? U.S. and Foreign withholding agents are required to administer the new rules This creates an additional set of withholding and reporting rules for U.S. persons who make payments to foreign persons July 1, 2014 for NEW vendors and new obligations o Transitional rules on preexisting obligations New information reporting by U.S. persons of specified foreign financial accounts Form 8938 (beginning with 2011 tax year) This casts a WIDE NET, since it applies to any U.S. person Penalties Withholding agent secondary liable Failure to report on Form 1042 Failure to file Form 8938 (if applicable) Up to $10,000, plus criminal prosecution 3 Not for Profit Entities Common Transactions Common items of concern for NFP s: Payments for funding of off shore investments (hedge funds, private equity, foreign partnerships, etc.) Management fees to off shore investment managers Payments for services to foreign persons (where services are performed in the U.S.) Payments to foreign pensioners Royalty, interest and other FDAP payments What about distributions from foreign sources? 4 2

3 How Does FATCA Work? Foreign Financial Institutions ( FFI s ) Required to register and enter an agreement with the U.S. Department of Treasury Register on line & obtain a global intermediary identification number ( GIIN ) Deadline now May 5, 2014 IRS will begin publishing monthly FFI List beginning June 2, 2014 Determine which accounts are U.S. accounts, comply with verification and due diligence procedures, annually report the U.S. accounts to the U.S. Treasury, withhold 30% on recalcitrant account holder and nonparticipating FFI s Certain Non Financial Foreign Entities ( NFFE s ) Provide information regarding U.S. owners, or Certify eligibility for exempted low risk status 5 What is a Foreign Financial Institution? What is a Foreign Financial Institution? Any foreign entity that: Accepts deposits in the ordinary course of banking or similar business; Holds financial assets for the account of others as a substantial portion of its business; OR Is engaged in primarily in the business of investing, reinvesting, or trading in securities, partnership interests, or commodities This may include investment vehicles such as hedge funds and private equity funds 6 3

4 Types of FFIs Not all FFIs classifications are the same Classification depends on a variety of factors including: Local government s participation and compliance Reporting restrictions in local country Type of IGA signed by local government Individual actions taken by FFI Four primary types Model 1 or Model 2 participating FFI treated as complying under an IGA in force Non IGA FFI not covered under an existing IGA but independently complies with IRS regulations Limited entities unable to comply with FATCA due to local law restrictions Registered Deemed Compliant FFI certain other limited classes of FFIs Non participating FFI that does not enter into an agreement with the IRS 7 What is a Non Financial Foreign Entity? What is a Non Financial Foreign Entities? Any foreign entity that is not a financial institution Exempted Status: Publicly traded corporations and members of an expanded affiliated group that includes a publicly traded corporation Certain nonfinancial holding companies and captive finance companies Entity organized under the laws of a US possession and wholly owned by bona fide resident(s) of the possession Foreign government or any political subdivision thereof International organization Active NFFE s o Derives less than 50% of gross income from passive sources, and less than 50% of its assets are passive assets 8 4

5 Types of NFFEs Three primary types Direct reporting an NFFE that elects to directly report information on substantial U.S. owners on Form 8966 instead of reporting to the W/H agent Sponsored Direct NFFE sponsored by another entity, which will report directly to the IRS information about each NFFE s direct or indirect substantial U.S. owners Excepted NFFEs receiving exempt status under the Code and regulations 9 Intergovernmental Agreements (IGAs) What is an IGA? Agreements signed between the U.S. and foreign partner governments to cooperate in the identification and reporting of U.S. account holders Two basic types: Model 1 standard agreement for FFIs to report directly to local country government FFI register separately with the IRS Local country gov t exchange information with the U.S. Model 2 modified agreement to address local country legal conflicts FFI reports directly to the IRS about information on U.S. account holders Currently the U.S. has Model 1 IGAs in effect with 46 countries (24 pending) and Model 2 IGAs in effect with 5 countries (1 pending) center/tax policy/treaties/pages/fatca.aspx) 10 5

6 Existing Withholding Rules Chapter 3 IRC 1441 under Chapter 3 U.S. Withholding Tax on payment of: U.S. sourced; Fixed, determinable, periodic income Does not apply to Effectively Connected Income ( ECI ) Does not apply to Portfolio Interest Rate is currently 30%, unless reduced by income tax treaty Reduction (or exemption) on withholding must be requested by receiving: Form W 8BEN, Form W 8BEN E, Form W 8ECI, Form W 8IMY, Form 8233 (compensation) Note there are some New & Revised Forms as of April 2014 what happens with existing forms? Form 1042 & Form 1042 S Reporting Report Gross Income of US Sourced Payment & Tax Withholding (if applicable) Annually report to foreign recipient 11 Existing Withholding Rules Examples USCo makes a monthly management fee payment to its foreign parent, ForCo. The services provided by ForCo are performed in Japan. Are these services subject to withholding tax under Section 1441? Are the services subject to reporting on Form 1042? USCo makes a quarterly payment of interest to a bank located in the Cayman Islands. There is no income tax treaty with the Cayman Islands. Is this interest subject to withholding tax under Section 1441? Is the interest subject to reporting on Form 1042? USCo makes a dividend payment to its foreign parent located in Germany. The U.S. German income tax treaty exempts dividends from tax. Is the dividend subject to withholding tax under Section 1441? Subject to reporting on Form 1042? 12 6

7 FATCA Withholding Rules Chapter 4 IRC of Chapter 4 Starts with Section 1441 (existing rules), adds gross proceeds (from sale of U.S. securities), then subtracts non financial payments and grandfathered payment. Note that all payments are reportable, just not withholdable. U.S. Withholding Tax on payment of: U.S. sourced; Fixed, determinable, periodic income AND Gross proceeds from sale of U.S. securities Rate is currently 30%; CANNOT be reduced by income tax treaty Grandfathered debt: Payments under obligations outstanding on July 1, 2014 No material modification of underlying obligation 13 FATCA Withholding Rules Chapter 4 (cont.) Revised Form W 8BEN (Individuals) New Form W 8BEN E Now 6 pages long including over 20 entity classification types List of registered FFI s and GIIN published by June 2, 2014 Form W 8BEN IMY (pass through payments) Certificate of Foreign Intermediary, Foreign Flow through Entity, or Certain U.S. Branches for US tax Withholding Intermediary /agent payments have expanded to include financial institutions under the Chapter 4 definition, thereby including investment entities and specified insurance companies Form 1042 & Form 1042 S Reporting REVISED FORMS Reporting may include additional information your systems are not currently capturing 14 7

8 FATCA (Chapter 4) Withholding Timelines July 1, 2014 Withholding starts on all U.S. source FDAP payments to new vendors and on new obligations January 1, 2015 Withholding starts on U.S. source FDAP payments under preexisting obligations to nonparticipating FFI s March 15, 2015 Forms 1042 and 1042 S due for 2014 reportable payments on or after July 1, 2014 July 1, 2016 Withholding and reporting starts on U.S. source FDAP payments under preexisting obligations to remaining FFI s 15 FATCA Implementation Timeline 1) IRS begins monthly publishing of FFI List 2) 30% w/h applies to payments of certain U.S. source income made to non U.S. FFIs and other entities Annual reporting begins for certain FFIs in non IGA and Model 2 jurisdictions Certain FFIs in non IGA and Model 2 jurisdictions required to begin reporting income paid (except gross proceeds from sale of property) July 1 Mar. 31 Mar. 31 Jan. 1 May 2 Mar. 15 Sept. 30 Sept. 30 Ability to register as an FFI opens Initial FATCA Registration application due to the IRS Withholding agents required to file Form 1042 and 1042 S Reporting begins for certain FFIs in Model 1 jurisdictions Certain FFIs in Model 1 jurisdictions required to begin reporting income paid (except gross proceeds from sale of property) 16 8

9 Documentation Forms W 8BEN, et. al. New Form W 8BEN E Released on March 29, 2014 To be used by entities to certify beneficial owner status of income Should be collected by payor prior to making payment Individuals will continue to use Form W 8BEN (finalized as of March 4, 2014) Validity of existing forms General rule Form W 8BEN will remain valid for a period starting from date it is signed and ending on last day of 3 rd succeeding calendar year Prior W 8 Forms that were valid until December 31, 2013 will now be treated as valid until December 31, 2014 (extended from June 30, 2014) 3 year validity rule & exceptions Chapter 3 changed to agree with Chapter 4 Advise clients to begin collecting new forms from foreign payees ASAP 17 New Withholding Rules under FATCA Examples USCo makes a monthly management fee payment to its foreign parent, ForCo. The services provided by ForCo are performed in Japan. Are these services subject to withholding tax under: FATCA (Chapter 4)? Section 1441 of Chapter 3? Subject to reporting on Form 1042? USCo makes a quarterly payment of interest to a bank located in the Cayman Islands. There is no income tax treaty with the Cayman Islands. Is this interest subject to withholding tax under: FATCA (Chapter 4)? Section 1441 of Chapter 3? Subject to reporting on Form 1042? USCo makes a dividend payment to its foreign parent located in Germany. The U.S. German income tax treaty exempts dividends from tax. Is the dividend subject to withholding tax under: FATCA (Chapter 4)? Section 1441 of Chapter 3? Subject to reporting on Form 1042? 18 9

10 Action Steps Identify who is going to take responsibility for FATCA compliance Undertake an assessment to identify the relative impact of FATCA on the organization and budget needed to address steps necessary to comply Due diligence procedures need to be in place to assess whether payments to foreign persons have been properly classified and documented Determine if a withholdable payment exists Determine a course of action regarding FORMS to be obtained Determine if any exceptions for relief apply to either the type of payment or the type of entity receiving the payment Procedures for withholding, paying withheld tax and reporting Written policies and procedures IRS will ask for this upon audit Be prepared for questions from foreign payees about forms W 8BEN 19 FATCA Help Websites IRS Tax Map for FATCA materials (Complete list IRS resources currently available through website) IRS FAQ List Asked Questions FAQs FATCA Compliance Legal#Financial Model Intergovernmental Agreements policy/treaties/pages/fatca.aspx#modelagreements 20 10

11 Q&A 21 11