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