This FAQ is based on our understanding of the information released to date by the Internal Revenue Service (IRS).
1. What is FATCA ?
FATCA stands for the Foreign Account Tax Compliance Act. It was introduced in October 2009 but ultimately enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act on 18 March 2010.
It adds a new chapter to the Internal Revenue Code (Chapter 4) aimed at addressing perceived tax abuse by U.S. persons through the use of offshore accounts. The new rules require foreign financial institutions (FFI’s) to provide the IRS with information on certain U.S. persons invested in accounts outside of the U.S. and for certain non-U.S. entities to provide information about any U.S. owners.
2. What is the intent of FATCA ?
FATCA is intended to increase transparency for the Internal Revenue Service (IRS) with respect to U.S. persons that may be investing and earning income through non-U.S. institutions. While the primary goal of FATCA is to gain information about U.S. persons, FATCA imposes a punitive tax withholding where the applicable documentation and reporting requirements are not met.
3. Who will be impacted by FATCA ?
FATCA is far reaching and can impact any person, U.S. or foreign, to the extent that such person is involved in making or receiving payments that fall within the scope of FATCA. While FATCA certainly affects U.S. withholding agents and U.S. multinational companies, the greatest impact is on foreign financial institutions (FFIs).
4. What are the withholding requirements under FATCA?
In general, a withholding agent is required to withhold 30% on a withholdable payment made to a foreign financial institution (FFI) or to a non-financial foreign entity (NFFE), unless the FFI or NFFE meets certain requirements. In addition, an FFI must withhold 30% on any passthru payment it makes to a recalcitrant account holder, as well as any passthru payment it makes to another FFI unless that FFI meets certain requirements.
5. Will FATCA regulations replace the NRA and QI program?
No. It adds a new dimension to the current Qualified Intermediary (QI) regime as it will operate in parallel to the existing withholding tax system (NRA and QI program).
As a consequence of these additional requirements and complexity to the existing regimes, the IRS has aimed at eliminating duplicative reporting and withholding where possible.
Practically, FATCA regime will be the first layer of rules to apply; should they be met or not be relevant, then, as a second layer, the rules of the QI regime will be applicable.
6. What type of payment is subject to FATCA?
FATCA provisions generally apply to two defined payment types:
- Withholdable payments; and
- Foreign passthru payments (currently reserved under Regulations).
However, FATCA withholding is not required with respect to any payment under, or gross proceeds from the disposition of, a grandfathered obligation.
7. When will pass-through payment be subject to withholding?
It is foreseen that Participating FFIs will be required to withhold 30% when a passthru payment is made to a recalcitrant account holder or non-participating FFI.
The Final Treasury Regulations reserved guidance on passthru payments for a later date. It is foreseen that Participating FFIs will be required as of 1 January 2017, to withhold 30% when a passthru payment is made to a recalcitrant account holder or non-participating FFI.
Meanwhile for years 2015 and 2016, an FFI must report the aggregate amount of certain payments to each non-participating FFI as a mean to reduce the incentive for non-participating FFIs to use participating FFIs to block the application of the FATCA rules.
8. What is "U.S. payee pooling"?
In order to avoid duplicate reporting between the FATCA “U.S. accounts” reporting (Form 8966 or equivalent sent to local tax authorities of IGA countries) and the Chapter 61 reporting (Form 1099) to U.S. non-exempt recipients, the IRS allows Participating FFIs or Registered Deemed Compliant FFIs to include under certain conditions, documented U.S. non-exempt recipients in a “U.S. payee pool”. As a consequence, such FFI that does not endorse backup withholding and 1099 reporting responsibilities no longer has to provide payee specific information to the upstream withholding agent. Such an election must be certified within the IRS Form W-8IMY provided to certify the account.
9. What are the different scenarios for an FFI to become FATCA-compliant?
If the FFI is incorporated in a country that has signed an Intergovernmental Agreement (IGA) with the U.S.A., it will be considered as Partner Jurisdiction Financial Institution being FATCA compliant. It will be either a Reporting Financial Institution (FI) complying with due diligence requirements as described in Annex I of the IGA, or a Non-Reporting FI, deemed-compliant or exempted, as per Annex II of the Agreement. Under Model I, the Reporting FI will report the requested information to its Local Tax Authorities; under Model II, the Reporting FI will have to report directly to the IRS.
If the FFI is incorporated in a country that did not enter into an IGA, the FFI will have to enter into an FFI Agreement with the IRS directly and comply with the Final Treasury Regulations.