Four Week FATCA Triage: 15 Urgent Steps for Compliance

Employee Benefits Alert
06.02.14

With just four weeks before the Foreign Account Tax Compliance Act (FATCA) takes effect, companies are scrambling to assess how the law impacts them. Although FATCA is intended to prevent tax evasion by wealthy individuals by forcing foreign financial institutions (FFIs) to report their U.S. account holders to the Internal Revenue Service (IRS), nonfinancial companies -- particularly multinational corporations -- are also impacted by the Act. This guide provides 15 steps that nonfinancial companies should undertake to comply with the law as soon as possible and avoid potentially severe penalties1.

  1. Determine which affiliates are included in the expanded affiliated group (EAG). The EAG is a key concept in FATCA, as noncompliant FFIs within the EAG have negative repercussions on FFIs within the same group. Generally, the EAG includes corporations, partnerships, and trusts, with shared ownership of 50 percent or more.
     
  2. Identify any potential FFIs in the EAG and determine whether they are excepted FFIs for the rules applicable to nonfinancial groups. FATCA defines financial institution broadly to include depository institutions, custodial institutions, investment entities, certain insurance companies, and certain treasury centers and holding companies. Companies should identify the FATCA status of each entity within the EAG to determine whether any of them might be an FFI. Entities that may be FFIs include customer financing operations, treasury centers, captive offshore insurers, and certain foreign pension plans, among others. 
     
  3. Determine whether the EAG satisfies the quantitative tests for nonfinancial group status. FATCA exempts many entities that might otherwise qualify as FFIs from its requirements if they are part of an EAG that is a nonfinancial group. To qualify as a nonfinancial group, the group must satisfy certain quantitative tests relating to passive income, proportion of group income from FFIs, and passive assets. In addition, any FFIs within the group must be complaint with FATCA. Importantly, a group may fail to qualify as a nonfinancial group even if it has no FFIs or passive nonfinancial foreign entities within the group. FFIs that are holding companies, treasury centers, or captive finance companies and that are part of a nonfinancial group may be treated as nonfinancial foreign entities (NFFEs) avoiding the compliance obligations that would otherwise apply. If an EAG is not a nonfinancial group, these exceptions are unavailable. 
     
  4. Determine whether any remaining FFIs must register with the IRS and complete the registration if required. If any FFIs remain in the EAG after application of the exceptions for nonfinancial group entities, companies must determine whether those entities qualify for certified-deemed compliant status or whether they must be registered with the IRS as either a participating FFI or registered deemed-complaint FFI. In determining whether registration is required, companies must consider not only the relevant U.S. Treasury Regulations, but also the language of any applicable intergovernmental agreements that the United States has entered into with the jurisdiction in which the entity is resident and any local laws implementing FATCA in that jurisdiction. FFIs that are required to register with the IRS should do so before June 30, 2014.
     
  5. Identify all foreign retirement arrangements sponsored or maintained by members of the EAG. Because FATCA defines financial institution broadly, many foreign retirement arrangements will be treated as FFIs unless they meet certain requirements. To determine whether any retirement arrangements are FFIs, companies should reach out to the members of their EAG to identify all of the arrangements that are sponsored or maintained by members of the group. 
     
  6. Determine which retirement arrangements qualify as exempt beneficial owners. FATCA contains several helpful exemptions for foreign retirement arrangements. Those arrangements that qualify for an exemption are considered exempt beneficial owners and are not subject to FATCA withholding or its due diligence and reporting requirements. The various exemptions include treaty-qualified retirement funds, broad participation retirement funds, narrow participation retirement funds, and others. In addition to the exemptions in the U.S. Treasury Regulations, an applicable intergovernmental agreement may provide additional exclusions. 
     
  7. For retirement arrangements that do not qualify as exempt beneficial owners, determine if they are FFIs and whether FATCA registration is required. If a retirement arrangement cannot satisfy the requirements for any of the available exempt beneficial owner categories, companies must determine whether the plan must be registered with the IRS as an FFI. Plans that are required to register will generally be subject to annual reporting requirements, due diligence requirements for identify U.S. account holders, and other compliance obligations. 
     
  8. Reach out to each domestic payee receiving potential FATCA withholdable payments to request a Form W-9 to avoid the new presumption that such payees are foreign. Historically, a Form W-9 was not required to avoid reporting when making payments to a payee that was a bank or financial institution or that included terms such as "corporation," "incorporated," or "insurance company" in its name. New rules under FATCA make the collection of such forms (or other documentary evidence) necessary, however, if the payee is receiving a FATCA withholdable payment, because the payee will otherwise be considered foreign and noncompliant. Withholdable payments generally include payments of fixed or determinable annual or periodic (FDAP) income such as interest, dividends, insurance premiums on U.S. risks, and bank and brokerage fees. 
     
  9. Reach out to each recurring foreign payees to request a Form W-8 to establish its FATCA status. Companies should collect Forms W-8 from foreign payees to whom they make FATCA withholdable payments. The new Form W-8 series (Form W-8BEN-E, Form W-8IMY, etc.) includes the payee's Chapter 4 (FATCA) status. Companies will need this information to determine whether withholding on the payment is required and to report the payment on Forms1042 and 1042-S. 
     
  10. Train Accounts Payable (AP), Treasury, and other groups making payments to identify potentially withholdable and reportable payments. Employees making payments will need to be trained on the new reporting and withholding regime so that they can determine whether FATCA applies to a payment. In addition, employees responsible for establishing vendor and bank relationships will need to be trained to review the new Form W-8BEN-E to determine whether it has been properly completed and verify a payee's global intermediary identification number (GIIN) and status on the IRS list of foreign financial institutions, if applicable. 
     
  11. Implement procedures to obtain and review an appropriate Form W-8, Form W-9, or alternative withholding certificate or documentation before making potentially withholdable payments. Companies should consider what changes are necessary to their current payment procedures to avoid FATCA withholding and reporting failures. Historically, AP and Treasury have been focused on the making of payments and not necessarily on tax compliance, particularly for payments to foreign payees. Companies should consider empowering the staff responsible for making such payments to stop the process before such payments are made if the payee's status has not been properly documented.
     
  12. Review and revise systems for tracking payments to foreign payees for purposes of Chapter 3 and Chapter 4 reporting. Companies will need to update their current systems to capture information needed for Chapter 4 (FATCA) reporting, including the new Chapter 4 statuses of payees and GIINs provided by FFI payees.
     
  13. Educate foreign affiliates about FATCA's documentation requirements. Foreign affiliates, such as treasury centers, that make payments of U.S. source income to affiliates and third parties alike should be educated on FATCA's documentation requirements. Although it is uncommon for foreign affiliates to make U.S. source payments, when they do so, they are withholding agents subject to the same requirements as U.S. entities. Accordingly, those making such payments must identify the FATCA status of each payee and withhold, if required.
     
  14. Instruct foreign affiliates to provide appropriate Forms W-8 to payors of U.S. source FDAP income and banks with which they have accounts. Foreign affiliates may find themselves being erroneously withheld upon if they fail to certify their FATCA status to payors of U.S. source interest and dividends. FFIs and U.S. banks with which foreign affiliates may have accounts may request documentation, including Forms W-8 or other documentation, to satisfy their due diligence requirements under FATCA. Foreign affiliates should be instructed to cooperate with these requests and may need assistance to complete the U.S. tax forms correctly. 
     
  15. Educate any FFIs in the EAG regarding their FATCA compliance obligations. FATCA imposes substantial compliance obligations on FFIs, including due diligence requirements, reporting requirements, and withholding requirements. Because noncompliance by a single FFI may taint the entire EAG, it is important that companies educate any affiliated FFIs regarding FATCA's requirements and to ensure the requirements are satisfied.

1. Although the IRS recently announced that 2014 and 2015 will be treated as a "transition period," companies should endeavor to become FATCA-compliant as soon as possible. The transition relief described by the IRS in Notice 2014-33 provides a vague and subjective standard for determining whether the IRS will impose penalties on taxpayers for noncompliance. The IRS was clear in emphasizing, however, that transition relief is not a postponement of FATCA's effective date, and that penalties and strict liability for withholding failures may be imposed if the IRS deems it appropriate. Moreover, withholding agents must withhold on the U.S. source interest and dividend income paid to foreign affiliates as of July 1 if the affiliate fails to properly certify an acceptable Chapter 4 status, unless an exception applies.
 

For more information, please contact:

Michael Lloyd, mlloyd@milchev.com, 202-626-1589

Michael Chittenden, mchittenden@milchev.com, 202-626-5814

Related Files
Related Links

The information contained in this newsletter is not intended as legal advice or as an opinion on specific facts. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. For more information about these issues, please contact the author(s) of this newsletter or your existing Miller & Chevalier lawyer contact. The invitation to contact the firm and its lawyers is not to be construed as a solicitation for legal work. Any new lawyer-client relationship will be confirmed in writing.

This newsletter is protected by copyright laws and treaties. You may make a single copy for personal use. You may make copies for others, but not for commercial purposes. If you give a copy to anyone else, it must be in its original, unmodified form, and must include all attributions of authorship, copyright notices and republication notices. Except as described above, it is unlawful to copy, republish, redistribute, and/or alter this newsletter without prior written consent of the copyright holder.