AUGUST 7, 2014
On July 1, the FATCA Monster finally came to life. Time to hide under the bed?
Not really. FATCA isn't likely to harm you. In fact, some of the byproducts of FATCA's creation may make your life easier.
That's the conclusion of Jill Dymtrow of Compliance Technologies International, a consulting firm specializing in documentation, reporting, and withholding.
"FATCA is not directed toward the vendor payment audience," she says. "This is not a popular way to evade U.S. taxes."
Nonetheless, the shifts in how the Internal Revenue Service collects information about foreign companies and individuals will affect accounts payable departments, often in a beneficial way.
Confused? Let's back up and review what FATCA is all about and how it connects with other revenue-collection efforts.
- FATCA stands for Foreign Account Tax Compliance Act and is designed to capture hundreds of billions of taxes that have gone uncollected on revenue held in overseas accounts.
- The act is aimed at what are termed FFIs — foreign financial institutions — that receive U.S. income and hold U.S. investments. This includes certain banks, collective investment vehicles, custodians, hedge funds, investment banks, private equity companies, stockbrokers, and trusts/fiduciaries. Also affected are financial institutions that receive pass-through payments from those FFIs and non-financial foreign entities, or NFFEs, which receive U.S. income or hold U.S. investments.
- The IRS will impose a 30 percent rate of withholding tax on all withholdable payments received by an FFI unless the FFI completes an agreement with the IRS to disclose details about its U.S. investors.
- After several delays over the past few years, FATCA went into effect July 1, 2014.
As Dymtrow reminds us, FATCA is in part a follow-up to the 2005 effort by the IRS to address foreign revenue issues. Back then, the agency trotted out a voluntary compliance initiative so organizations could meet the obligations of Section 1441, which governs payments from U.S. sources to foreign persons. Over the past 10 years of its implementation, the IRS has listened to complaints about its forms and processes related to reporting those payments.
So here's the good news:
There's no more need for original W-8 forms. In the past, the IRS insisted that a foreign entity had to provide a payer an original Form W-8. That meant sending the form to the vendor to fill out, having the vendor complete and sign the form and return it, and then submitting the form to the IRS via mail or other delivery service – and possibly repeating the cycle if something was wrong or incomplete. Now the IRS says it will accept a scanned or faxed copy of the W-8.
Foreign tax identification numbers are fine for companies. If a foreign company wanted to take advantage of a reduced withholding rate under the terms of a treaty, it would have to provide a U.S. tax identification number. Not only was that an administrative headache, but it could also potentially cause the IRS to seek other filings from the company under the mistaken assumption that it was obligated to file a U.S. tax return. Now the IRS will accept the tax identification number that a company uses to identity itself in its home country to make a valid treaty claim.
The real deadline is Dec. 31, not July 1. The IRS typically provides a six-month window to start using new tax forms it issues. But because of the delays in finalizing FATCA guidelines and form instructions, all of the affected 2006 version forms received an extension through Dec. 31, 2014. While you may begin to use the new forms and other FATCA-related procedures now, you technically have until the end of the year to do so. The IRS also extended the validity of forms set to expire Dec. 31, 2013, (that is, forms signed by vendors in 2010) to the Dec. 31, 2014, date.
And now for the bad news:
Foreign TINSs for individuals aren't acceptable. While the IRS accepts a foreign tax identification for corporations, individuals providing services in the United States still need to use a U.S. taxpayer identification number if they want to claim the benefits of a treaty for withholding purposes.
You're going to have to work through some W-8 issues. The IRS has created a new eight-page W-8 to comply with FATCA."Nobody will ever fill it out right," Dymtrow warns. But most of that FATCA-related information will be irrelevant for virtually all of your vendors. Companies such as CTI will create free, simplified substitute forms that meet IRS requirements for such vendors.
The problem is that your company may have that one payee out of a thousand who really should complete the eight-page W-8. If you don't identify that company, you may find yourself in hot water with the IRS.
So you'll want to make sure that as you take on new vendor payees, you've vetted them to see if they need the eight-pager. You'll also want to review your existing group of payees to see if any of them should be considered in need of FATCA compliance — that is, they fall into the category of receiving payments for which the FATCA regulations were designed.
Who in your organization should oversee that review? Ideally, it would be your legal or accounting department. But they may not have the time or familiarity with the area to do the work. In that case, you'll want to find a checklist that helps you work through the FATCA-related issues or find a software solution that helps you do so.