Tax & Assurance Guidance

Top 5 Questions about the Foreign Tax Compliance Act (FATCA)

Posted on September 29, 2015 by

Sarah Russell

Sarah Russell

Rob Cheyne

Nina Wang

Share This

Share on facebook
Share on twitter
Share on linkedin
Share on email

In our first article, we discussed the basics of FATCA, considerations for non-financial domestic entities, and foreign entities. We subsequently published another article that discussed the key elements of FATCA, including the types of payments subject to FATCA, compliance requirements, steps, the cost of noncompliance, and the reporting of the 1042 series. It has been about a year since the implementation of FATCA withholding, and we wanted to share the top five practical questions most commonly asked by our clients.

1. What are the due diligence standards for validating Form W-8BEN-E received?

Step 1: It’s important to review the information on Form W-8BEN-E for accuracy and completeness. Review the documentation line by line to ensure the form is complete and consistent. A failure on any singular line item does not necessarily fail the form and all claims made therein. However, a withholding agent should be cautious in the case of fatal errors that would fail the form.

For example, a company in Argentina checks the box that it is a reporting Model 1 Foreign Financial Institution. However, Argentina is not a country that has Intergovernmental Agreement (IGA) with the U.S, This would be a fatal error that would fail the form.

Note: A list of IGA countries could be found on the US Department of the Treasury website.

Step 2: Ensure the information provided on Form W-8BEN-E is consistent with other tax information. Contradictions in information may invalidate the form. The withholding agent should review for indication of U.S. status (e.g., U.S. mailing address) or information that would indicate residence in a country other than that claimed on the form for a payee making a treaty based claim. A Form W-8-BEN-E that contains indicia of U.S. status is not valid unless documentation supports non-U.S. status. Additional documentation must be obtained to support the claim of residence in the treaty country that does not contain an address outside the treaty country.

Step 3: If a payee claims it is a participating foreign financial institution (FFI), registered deemed-compliant FFI, Reporting Model 1 FFI, Reporting Model 2 FFI, Direct Reporting Nonfinancial Foreign Entity, or Sponsored entity, it must provide the Global Intermediary Identification Number (GIIN) on Form W-8. The withholding agent must validate the GIIN against the IRS list within 90 days of receipt. This check must be repeated annually.

2. If tax under FATCA is required to be withheld, will Nonresident Alien Tax (Chapter 3) be applicable?

No, FATCA is a filter on top of Chapter 3. If FATCA withholding applies, there will be no Chapter 3 withholding. However, if FATCA withholding does not apply, a withholding agent will look to see if Chapter 3 withholding applies. Even though both rates are 30%, the withholding agent must be able to distinguish which type of withholding applies as this will determine the account funds are deposited to and how the amounts are presented on From 1042.

Example 1: ABC Russian Bank fails to provide a Form W-8 to the U.S. withholding agent and is treated as a non-participating FFI. ABC Russian Bank receives $200,000 in U.S. source interest on January 31, 2015.

ABC Russian Bank is subject to 30% FATCA withholding. There is no Chapter 3 withholding. 

Example 2: Assume ABC Russian Bank provides a Form W-8 with a valid GIIN prior to receiving the interest payment. However, it does not make a valid treaty claim.

ABC Russian Bank is NOT subject to FATCA but is subject to Chapter 3 withholding at a rate of 30% (no reduced rate since no treaty claim is made to reduce the rate of withholding).

3. How long is Form W-8BEN-E valid to claim treaty benefits and FATCA exemption?

Form W-8BEN-E will remain valid until the last day of the third calendar year following the year in which the form is signed, unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8BEN-E signed on June 30, 2015, remains valid through December 31, 2018.

4. Can we use Form W-8BEN-E after the date of payment to avoid liability on underwithholding for the period there was no documentation?

A withholding agent may prove that withholding under FATCA was not required on the basis of a valid Form W-8BEN-E furnished after the payment date but effective as of the payment date. A signed affidavit (either at the bottom of the form or on an attached page) must state the information and representations contained on the form were accurate as of the time of the payment.

If it is beyond a year after the date of payment, the withholding agent will be required to obtain documentary evidence that supports the Chapter 4 status claimed in addition to Form W-8BEN-E and the affidavit

mentioned above. Acceptable documentary evidence includes, but is not limited to, the organizational documents (e.g., articles of incorporation), financial statements, a letter from a government agency, etc.

5. When is the withholding agent required to deposit the tax withheld?

  • Annual deposits (due on March 15 of the following calendar year) – when the aggregate amount of withholding tax is less than $200.
  • Monthly deposits (due within 15 days after the close of such month) – when the withholding tax is greater than $200 but less than $2000.
  • Quarter-monthly deposits (due within 3 banking days after the close of such quarter-monthly period, i.e. 7, 15, 22, and last day of the month) – when the withholding tax is greater than $2000.

All deposits must be made by electronic funds transfer.

The application of FATCA rules to a particular individual or entity is highly fact-dependent. For more information on FATCA compliance and implementation, speak with your tax advisor or visit www.irs.gov.

Sarah Russell

Shareholder

Sarah leads the firm’s domestic and international tax practice and is known for the practical & passionate way she advocates for clients.

Nina Wang

Senior Manager

Nina brings the highest levels of integrity & dedication to her work on behalf of domestic and international clients.

Related Insights

Tax & Assurance Guidance

Foreign Tax Withholding: What You Need to Know

Posted on April 26, 2022 by

Rob Cheyne
Making service payments to a foreign person is a common cross-border transaction. U.S. taxpayers need to be aware of the applicability of withholding tax and related reporting requirements to ensure they comply and avoid unintended consequences. A U.S. payor must collect withholding tax and remit it to the IRS in the case it is applicable.

Tax & Assurance Guidance

SALT Relief for Partners and S Corps

Posted on February 23, 2022 by

Miroslav Georgiev
With small businesses supporting nearly 47% of U.S. employees, states have been advocating for pass-through entities, operating partnerships and S corporations that have been harshly impacted by the Tax Cuts and Job Act ‘s state and local taxes deduction limit. Recent legislative activity is finally providing relief for many of these businesses. 

Tax & Assurance Guidance

IRS Provides Relief on K-2 and K-3

Posted on February 17, 2022 by

Margaret Amsden
In an attempt to provide more transparency with regard to reporting of foreign activity and/or information to foreign owners, the IRS came out with two new forms: Schedule K-2 (an addendum to the Schedule K) and Schedule K-3 (an addendum to the Schedule K-1). Learn about the latest K-2 and K-3 reporting requirements issued by the IRS.

Sign up for our newsletters

Get general business and industry-specific news and knowledge straight from our accounting specialists.

The Sound of Automation Podcast

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Insights & Perspectives

The Sound of Automation: Looking ahead to CSIA 2022

In this episode we talk with Lisa Richter, Director of Industry Outreach and Growth at Control System Integrators Association (CSIA) . Lisa and Bryan look ahead to the CSIA Executive conference taking place in Denver, CO on June 27-30, 2022 and share with listeners what to expect, who will be there, and the discussion panel topics focusing on this years’ theme “The Future of Work”. 

Read More

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Skip to content