The 2010 Foreign Account Tax Compliance Act (FATCA) contains a number of provisions that are intended to make it more difficult for U.S. taxpayers to use foreign accounts to shelter income from U.S. tax. These provisions are designed to prevent U.S persons from evading U.S Tax by holding income producing assets through accounts at foreign financial institutions (FFI’s) or through other foreign entities (non-financial foreign entities or “NFFEs”).
Mandatory Withholding on Foreign Accounts
Foreign Financial Institutions (FFI’s) – Effective July 1, 2014, a U.S. entity that makes virtually any type of payment to a foreign financial institution (FFI) will be required to withhold and remit 30% of the payment to the IRS, unless the status of the FFI has been documented as exempt from the requirement and certain reporting requirements are met. The types of payments subject to withholding include, for example, interest, dividends, royalties, premiums, annuities, and wages.
Additionally, this withholding obligation will also, effective January 1, 2017, extend to payments of proceeds from the sale of property that can produce interest or dividends.
The recipient FFI may avoid this 30% withholding by entering into an agreement with the IRS to identify all its account holders who are U.S. taxpayers and providing such identifying information to the IRS. The IRS is accepting online registration applications, http://www.irs.gov/Businesses/Corporations/FATCA-Registration.
You should begin to familiarize your accounts payable group and any other department of your business that administers payments. With these rules, what documentation they will need to gather to determine whether FFIs that you pay have entered into an agreement with the IRS, are covered by an alternative exemption, or if it will be necessary for you to withhold on payments made to them.
Non-Financial Foreign Entities (NFFEs) are subject to much lower levels of certification and information reporting to avoid withholding than FFIs are, although there is still a documentation exercise to be done when an NFFE is a vendor or other payee. NFFEs avoid withholding if:
- they are the beneficial owners of the income paid to them;
- they either certify that they have no “substantial” U.S. owners, or provide the name, address, and TIN of each substantial U.S. owner that they do have; and
- the withholding agent has no reason to know that the owner identifying information provided to it is incorrect.
Finally, you will need to assume that your systems can track payments that must be reported to the IRS under FATCA. Reporting, although not required until March 31, 2015, will cover payments made in 2014 when it begins.
Disclosure of Foreign Financial Accounts
The Bank Secrecy Act requires that U.S. taxpayers file an annual report with the U.S. Treasury of any foreign financial accounts with an aggregate value of more than $10,000 at any time during the year. This is commonly known as the “FBAR” requirement. FATCA, for the first time, makes a similar requirement part of the Internal Revenue Code, thereby transferring to the IRS the authority to both interpret and enforce reporting. The FATCA provision differs from the Bank Secrecy Act in that it applies the reporting requirements only if the value of specified assets (including financial accounts) exceeds $50,000 (threshold varies with filing status); so far, the IRS has not integrated this with the FBAR requirement, which continues to have a $10,000 threshold, so duplicate reporting is required.
Penalties for Failure to Disclose Foreign Accounts
In addition to the new reporting requirements, FATCA imposes new penalties for both the failure to disclose a foreign financial account and for any understatement of tax that results from an undisclosed foreign financial account. These penalties will make it very costly for taxpayers who conceal income generated by foreign accounts.
Extended Statute of Limitations for Undisclosed Foreign Accounts
The IRS normally has three years in which to audit a tax return after it has been filed. FATCA extends that period to six years in the case of certain unreported income from a foreign financial account.
In conclusion, you can see that this legislation is an attempt by Congress to make it more difficult for U.S. taxpayers to avoid tax on overseas accounts. You should begin a review of your transactions with your foreign contractors, vendors, and suppliers to ensure that you are in compliance as the provisions of FATCA come into effect. We will be glad to assist you in that effort.