The Foreign Account Tax Compliance Act (FATCA) introduced a new reporting and tax withholding regime, effective July 1, 2014, that is directed at both foreign financial institutions (FFIs) and nonfinancial foreign entities (NFFEs) to prevent tax evasion by U.S. citizens and residents through use of offshore accounts. The FATCA provisions were part of the HIRE Act, which was signed into law on March 18, 2010. 1
Withholding taxes for nonemployees and information reporting have become more critical to the IRS. They are also a significant consideration with mergers, acquisitions, and debt and equity transactions, not to mention many transactions arising in the normal course of everyday business.
The Internal Revenue Code imposes significant withholding tax liabilities on payments to nonemployees who fail to provide adequate tax documentation. Payments to non-U.S. recipients (entities and individuals) are governed by a complex set of rules, and the U.S. payer is often liable for 30% of the gross payment unless certain strict documentation rules are followed.
Chapter 61 and Sec. 3406
Chapter 61 of the Code encompasses backup withholding and related reporting obligations in the domestic context. U.S. persons are subject to U.S. income tax at graduated rates on their worldwide income, irrespective of the income's source and their place of residence. 2 Generally, under Chapter 61, a U.S. payer should report to the IRS certain payments to or transactions with U.S. persons who are not exempt recipients. Reporting obligations under Chapter 61 include payments to U.S. nonexempt recipients, generally U.S. individuals, partnerships, estates, and trusts, using, for example, Form W-2, Wage and Tax Statement, for employee wages or the appropriate form in the 1099 series for nonemployee compensation. 3
Generally, foreign persons are subject to tax at a 30% rate of the gross amount of certain payments of U.S.-source fixed or determinable annual or periodical (FDAP) income. Such income includes interest, dividends, and similar types of investment income unless the beneficial owner of the payment is entitled to a reduced rate of, or exemption from, withholding tax under domestic law or pursuant to an income tax treaty. 4
On March 18, 2010, the HIRE Act added to the Code Chapter 4, composed of Secs. 1471 through 1474 (referred to as FATCA). Chapter 4 generally requires withholding agents to withhold 30% on withholdable payments (defined later) made to certain FFIs and NFFEs (defined later). The Chapter 4 withholding regime is in addition to the Chapter 3 withholding regime, and Chapter 4 withholding may not be reduced by tax treaty at the source. It is important to note that if a withholdable payment is subject to Chapter 4 withholding, it is not subject to additional withholding under Chapter 3.Chapter 61 Backup Withholding Tax
A payer should withhold amounts described below on certain withholdable payments if:
- The payee has failed to furnish his or her taxpayer identification number (TIN) to the payer in the required manner;
- The IRS has notified the payer that the TIN furnished by the payee is incorrect;
- There has been a notified payee underreporting; or
- There has been a payee certification failure. 5
The withholding described above equals the reportable payment multiplied by the fourth lowest tax rate applicable under Sec. 1(c) (i.e., the fourth-lowest individual income tax rate, currently 28%, for single filers). 6
A reportable payment under the backup withholding rules includes:
- Interest payments that must be shown on an information return pursuant to Sec. 6049(a); 7
- Dividend payments that must be shown on an information return pursuant to Sec. 6042(a); 8
- Patronage dividend payments that must be shown on an information return pursuant to Sec. 6044; 9
- Payments that must be shown on an information return pursuant to Sec. 6041 relating to information at source; 10
- Payments that must be shown on an information return under the rules of Sec. 6041A(a) relating to payments of remuneration for services; 11
- Payments that must be shown on an information return pursuant to Sec. 6045 relating to returns of brokers; 12
- Payments that must be shown on an information return pursuant to Sec. 6050A relating to reporting requirements of certain fishing boat operators; 13
- Royalty payments required to be shown on an information return pursuant to Sec. 6050N; 14 and
- Payments that must be shown on an information return pursuant to Sec. 6050W relating to settlement of payment card transactions. 15
Generally, withholding agents are required to withhold U.S. tax at the source on certain payments made to nonresident aliens and foreign corporations. This withholding rate is usually a flat 30% on gross income from U.S. sources that are not effectively connected with a U.S. trade or business. 16 However, the withholding rate is 14% for certain amounts paid to a nonresident alien present in the United States as a nonimmigrant under certain provisions of the Immigration and Nationality Act. 17
A withholding agent for purposes of Chapter 3 means any person required to deduct and withhold any tax under Sec. 1441, 1442, 1443, or 1461. 18 It is important to note that withholding agents are liable for amounts they are required to deduct and withhold. 19 This means that the withholding agent is required to pay the tax when a withholdable payment is made and the withholding agent fails to withhold the tax.
Domestic partnerships and LLCs are required to withhold under two separate withholding requirements on a foreign partner's allocable share of partnership income and distributions. Under the first withholding requirement, a partnership or LLC must withhold at a flat 30% on the partner's distributive share of U.S.-source income (not effectively connected with a U.S. trade or business). 20 Under the second withholding requirement, a partnership or LLC must withhold at the highest applicable U.S. tax rate (39.6% for individuals and 35% for corporations for 2014) on a partner's share of income effectively connected with a U.S. trade or business. 21 These withholding requirements are imposed on amounts allocable to such a foreign partner or member rather than on any amount actually distributed.
A 10% withholding requirement also applies to sales of U.S. real property interests by foreign investors. 22 The withholding rules for direct and indirect sales of U.S. real property are complex, and a detailed discussion of these rules under the Foreign Investment in Real Property Tax Act (FIRPTA) 23 is outside the scope of this article.
Under the rules of Chapter 3, a flat rate of 30% is imposed on payments that constitute gross income from U.S. sources made to nonresident alien individuals and foreign corporations. This withholding rate may be reduced or eliminated under a tax treaty between the United States and the country in which the payee is eligible for benefits.
The income items referred to above include interest (other than original issue discount (OID) as defined in Sec. 1273); dividends; rent; salaries; wages; premiums; annuities; compensations; remunerations; emoluments; or other FDAP gains, profits, and income. They also include gains described in Sec. 631(b) or (c), amounts subject to tax under Sec. 871(a)(1)(C), gains subject to tax under Sec. 871(a)(1)(D), and gains on transfers described in Sec. 1235 made on or before Oct. 4, 1966. 24
Exceptions to Chapter 3 Withholding
Although the list of payments subject to Chapter 3 is lengthy, certain payments are specifically exempted. They include:
- Amounts exempt or subject to a reduced rate under an income tax treaty; 25
- Any item of income (other than compensation for personal services) that is effectively connected with the conduct of a trade or business within the United States and that is included in the gross income of the recipient under Sec. 871(b)(2) for the tax year; 26
- Per diem for subsistence paid by the U.S. government (directly or by contract) to any nonresident alien individual who is engaged in any program of training in the United States under the Mutual Security Act of 1954, as amended; 27
- An amount received as an annuity that is exempt under Sec. 871(f) from the tax imposed by Sec. 871(a); 28
- Interest income from portfolio investments; 29
- Interest income from bank accounts described in Sec. 861(a)(1)(B); 30
- Interest described in Sec. 871(i)(2); 31
- Income from gambling winnings of a nonresident alien individual that are exempt from tax under Sec. 871(j); 32
- Interest or OID from sources within the United States on short-term obligations described in Sec. 871(g)(1)(B) or Sec. 881(a)(3); 33
- Payments from interest-related dividends and short-term capital gain dividends paid by a regulated investment company to a nonresident alien and exempted under Sec. 871(k). 34
The first exception relates to benefits provided under a treaty. Once a withholding agent has determined that a payment subject to Chapter 3 withholding is to be made to a foreign person, then the withholding agent must determine whether the payment is subject to a zero or reduced withholding rate under an income tax treaty. Although, technically, treaty benefits are an exemption from Chapter 3, the reporting requirements are the same even if a payment is at a zero rate under a treaty. Chapter 3 reporting is made via Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons; Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding; and Form 1042-T, Annual Summary and Transmittal of Forms 1042-S.Chapter 4 Withholding
FATCA introduced Chapter 4, a documentation regime imposed in addition to the existing Chapter 3 for certain payments to foreign payees that include both FFIs and NFFEs. 35 Chapter 4 withholding can be considered a penalty tax imposed when certain withholdable payments are made and the U.S. payer does not have appropriate documentation regarding the foreign payee. If Chapter 4 withholding applies, the payer must withhold 30% of the payment. 36 Importantly, FATCA imposes secondary liability on the U.S. payer. There is no reduced rate of Chapter 4 withholding permitted under an income tax treaty. 37 Accordingly, the withholding rate under Chapter 4 is either 30% or zero. Excess amounts withheld under Chapter 4 may be credited and refunded against the withholding agent's Chapter 3 withholding requirement (provided appropriate documentation is obtained). 38
Chapter 4 withholding began on July 1, 2014, 39 for certain withholdable payments of FDAP and begins on Jan. 1, 2017, for offshore payments of U.S.-source income, 40 for payments of certain gross proceeds 41 from the sale or disposition of property that can produce U.S.-source FDAP income, as well as for foreign passthrough payments. 42 For this purpose, FDAP income is defined to include withholdable payments under Chapter 3 that are described under Regs. Sec. 1.1441-2(b)(1) or Regs. Sec. 1.1441-2(c). 43 It also includes:
- OID that is subject to withholding under Chapter 3; 44
- Real estate mortgage investment conduit (REMIC) residual interests; 45 and
- The withholding liability of a payee that is satisfied by a withholding agent. 46
Certain payments of U.S.-source income are excluded from withholdable payments under Chapter 4. Such payments include:
- Interest accrued on the date of a sale or exchange of an interest-bearing debt obligation if the sale occurs between two interest payment dates and is not part of a plan described in Regs. Sec. 1.1441-3(b)(2)(ii); 47 and
- Gains derived from the sale of certain property. 48
The following payments are excluded from the definition of a withholdable payment:
- Payments of OID or interest on certain short-term obligations; 49
- Payments of income effectively connected with a U.S. trade or business; 50
- Payments for most services, including wages, other employee compensation, and stock options; 51
- Other nonfinancial payments, including the use of property, office and equipment leases, software licenses, transportation, freight, gambling winnings, awards, prizes, scholarships, and interest on outstanding accounts payable arising from the acquisition of goods or services; 52
- Certain gross proceeds from the sale or other disposition of any property that can produce U.S.-source FDAP income if all such U.S.-source income would be excluded from the definition of withholdable payment; 53
- Payments from the sale of fractional shares of stock where information reporting is not otherwise required; 54
- Certain offshore payments on certain offshore obligations made by certain persons before Jan. 1, 2017; 55
- A payment made before Jan. 1, 2017, by a secured party, or to a secured party other than a nonparticipating FFI, with respect to collateral securing transactions pursuant to certain collateral arrangements; 56
- Payments subject to withholding under either Sec. 1445 or Sec. 1446 relating to U.S. real property interests or partnership-level withholding on effectively connected income allocated to foreign partners. 57
A withholding agent is not required to withhold on withholdable payments made to certain exempt payees, which include a foreign publicly traded entity or its affiliates, 58 any entity organized under the laws of a U.S. possession and that is wholly owned by one or more bona fide residents (as defined in Sec. 937(a)) of the possession, 59 any foreign government, any political subdivision of a foreign government, 60 or any wholly owned agency or instrumentality of any one or more of the foregoing, 61 any international organization or any wholly owned agency or instrumentality thereof, 62 any foreign central bank of issue, 63 excepted NFFEs, 64 active NFFEs, 65 territory NFFEs, 66 direct-reporting NFFEs, 67 and sponsored direct-reporting NFFEs. 68
An exempt payee must establish its exempt status with the withholding agent by providing a complete and accurate form of the Form W-8 series, discussed later in this article.Transition Relief
The IRS issued Notice 2014-33 providing that calendar years 2014 and 2015 are treated as a transition period for purposes of IRS enforcement and administration of the withholding provisions under Chapter 4 to the extent those rules were modified by the temporary coordination regulations. During the transition period, the IRS will take into account the extent to which taxpayers and withholding agents have made good-faith efforts to comply with the requirements of the new Chapter 4 regulations.
In Notice 2014-59, the IRS announced that it intends to amend the temporary regulations to provide that, with respect to an obligation held by an entity, a withholding agent was not required to treat the additional U.S. documentation specified in Regs. Sec. 1.1441-7(b) as a change in circumstances under certain rules (described below) prior to Jan. 1, 2015.
FATCA's Impact on FFIs
FATCA requires FFIs to take administrative measures for onboarding clients, reporting obligations to governments and clients, employee training, and internal risk management. FFIs have to address items for registration and reporting to governments and the IRS, specifically, model intergovernmental agreements (IGAs), registering with the IRS for a global intermediary identification number (GIIN), and reporting accounts to the IRS.
While most practitioners and taxpayers understand that a bank is an FFI, a few other entity types fall under the broad FATCA definition of FFI. Some would not at first blush be thought of as an FFI: trusts, investment partnerships, and treasury centers of international structures. 69 Any foreign entity that is a passive investment asset or holds investment assets on behalf of others should consider the definition of an FFI carefully to determine whether it applies.
IGA Models 1 and 2
Many FFIs were unable to comply with the reporting requirements under FATCA as first drafted because of the complexity of bank secrecy laws, sovereignty issues, and local country statutory limitations. To resolve this, Treasury has developed the IGAs to allow either FFIs themselves or the foreign government in which the FFI resides to share the requested data with the IRS without violating the country's laws. Two primary model IGAs have several variations to fit specific patterns for countries with or without a tax information exchange agreement (TIEA) or double-tax convention (DTC) with the United States:
- Model 1A—Reciprocal preexisting TIEA or DTC
- Model 1B—Nonreciprocal preexisting TIEA or DTC
- Model 1B—Nonreciprocal and no preexisting TIEA or DTC
- Model 2—Preexisting TIEA or DTC
- Model 2—No TIEA or DTC
The Model 1 IGA allows FFIs in the partner jurisdiction to report the required information to their government, which will then transmit that information to the IRS automatically. 70 The Model 2 IGA allows FFIs in the partner jurisdiction to report the required information directly to the IRS rather than through their government. 71
Both model IGAs contain several favorable provisions intended to make Chapter 4 compliance easier:
- "Most favored" clauses state that if more favorable terms are negotiated with other IGA partner jurisdictions, they will automatically apply upon notification of the more favorable terms by the United States. 72
- If the terms of an IGA are different from the regulations and the partner jurisdiction wants to use the definitions in the regulations instead of the IGA, the IGA partner is permitted to do so, as long as the regulatory definition does not frustrate the purposes of the IGA. 73
- Both models also allow a partner jurisdiction to use the regulations instead of the respective IGA rules to establish the status of (U.S. or non-U.S.) account holders and payees. 74
However, only Model 1 allows a partner's jurisdiction to avoid complying with the IGA until the IRS reports similar information back to it. 75 In addition, an IGA is treated as being in effect if the jurisdiction is listed on Treasury's website as having an IGA in effect. 76 The IRS has created an FFI list search tool that is updated on the first day of every month and can be used to search for approved institutions. 77 This list includes countries with a signed IGA, as well as those that have indicated a firm intent to have a signed IGA in effect. 78
IRS Registration and GIIN
To help FFIs and withholding agents comply with the new withholding rules under FATCA, the regulations require each FFI that wishes to avoid the 30% withholding tax, even if located in an IGA partner jurisdiction, to register with the IRS. 79 The registration provides each FFI with a GIIN that can be used by the FFI on its Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), or Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting, claiming an exemption from withholding under Secs. 1441–1446. Registrations can be submitted either online at the IRS website or by completing and filing Form 8957, Foreign Account Tax Compliance Act (FATCA) Registration, with the IRS.
The GIIN and corresponding database of FFIs serve as the official notification to withholding agents that the FFI is exempt from withholding under FATCA. The list of registered FFIs is updated monthly and is publicly available on the IRS website. 80 The withholding agent should look up the FFI and confirm the GIIN provided on the FFI's Form W-8BEN-E to determine the status of the FFI before making a payment. This registration is applicable to all FFIs and their branches wishing to be classified as a:
- Participating FFI (PFFI) group; 81
- Registered deemed-compliant FFI (RDCFFI); 82
- Limited FFI; 83
- Limited branch; 84 or
- Sponsoring entity. 85
Effective June 30, 2014, the registration will also replace the current agreements for qualified intermediary, withholding foreign partnership, and withholding foreign trust status. These agreements have automatically expired and must be renewed through the FFI registration process instead of the now-obsolete Chapter 3 withholding registration process. 86
FFI Reporting U.S. Accounts to the IRS
Once the FFI is properly registered and enters into the applicable agreement with the IRS, it will begin reporting, on Form 8966, FATCA Report, information about U.S. accounts and accounts held by owner-documented FFIs. Reporting on Form 8966 is based on the calendar year and must be filed annually by March 31 of the following year, unless the FFI requests a 90-day extension via Form 8809, Application for Extension of Time to File Information Returns. 87 The information reported includes the account values and balances as well as the amount and character of the payments (e.g., interest, dividends). The timing and method of reporting will differ depending on the type of FFI and will be phased in over time as discussed below.
Participating FFIs were required to report the following information for each U.S. account or owner-documented account held during 2014 by March 31, 2015: 88
- Name, address, and TIN;
- Account number; and
- Account balance or value.
For accounts held during 2015, the above information will be required, as well as:
- The payments made with respect to the account during the calendar year; and
- Any other information that must be reported under Chapter 3 or 4.
Alternatively, for 2014 the FFI may elect to report on Form 1099 as if it were a U.S. payer and report only the first two items on Form 8966. After 2014, the additional information is also required. 89
Under Chapter 4 the reporting for withholding agents is the same as that under Chapter 3. That is, the withholding agent uses the redesigned Forms 1042, 1042-S, and 1042-T to report withholdable payments made to a recipient FFI or NFFE. 90NFFE designations
As discussed previously, a withholding agent is not required to withhold on withholdable payments made to certain exempt payees. The withholding agent may treat several types of exempt payees, referred to as excepted NFFEs, as excepted payees. Excepted NFFEs include: 91
- A qualified intermediary, withholding partnership, or withholding trust;
- A publicly traded corporation: a foreign corporation whose stock is regularly traded on one or more established securities markets for the calendar year;
- An affiliate of a publicly traded corporation: a corporation that is a member of the same expanded affiliated group as a publicly traded corporation (note that this includes foreign affiliates of U.S. public corporations);
- A territory entity: an entity directly or indirectly wholly owned by one or more bona fide residents of the U.S. territory under the laws of which the entity is organized;
- An active NFFE: an NFFE for which less than 50% of its gross income for the preceding calendar year (i.e., calendar or fiscal) is passive income and less than 50% of the weighted average percentage of assets (tested quarterly) held by it are assets that produce or are held for the production of passive income—IGAs liberalize the testing by frequently allowing entities in the IGA partner country to use their regular fiscal year rather than the calendar year for the active NFFE testing required by the FATCA regulations;
- Excepted nonfinancial entity: an NFFE that is a holding company, treasury center, or captive finance company that is a member of a nonfinancial group; startup companies; entities that are liquidating or emerging from bankruptcy; and nonprofit organizations;
- Direct-reporting NFFE: an NFFE that elects to report information about its direct or indirect substantial U.S. owners to the IRS; 92 or
- Sponsored direct-reporting NFFE: an NFFE that is a direct-reporting NFFE with which another entity (other than a nonparticipating FFI) has agreed to act as its sponsoring entity. 93
Without proper documentation, the presumptive rules generally require the withholding agent to impose withholding.
It should be noted that a passive NFFE is not an excepted payee and that payment to any passive NFFE is subject to the FATCA reporting and withholding rules. A passive NFFE is a residual category and includes any foreign entity that is not an FFI or one of the NFFE designations described above. 94
Penalties for Noncompliance
For FFIs and NFFEs, the failure to comply with the registration and reporting requirements is fairly straightforward: Withholdable payments of U.S.-source income are subject to 30% withholding that is not refundable or eligible for reductions under a treaty. 95 A withholding agent, however, can face significant penalties for failing to comply with Form 1042 reporting requirements.
Coordination With FIRPTA and Passthrough Entity Withholding
While most of the withholdable payments under Chapter 4 cannot be reduced by treaty, a few provisions provide some relief from overlapping withholding obligations. Specifically, a withholding agent may credit amounts withheld under Chapter 4 toward any Chapter 3 liability. 96 Payments subject to withholding under Sec. 1445 for FIRPTA or Sec. 1446 for withholding on partners' share of effectively connected income are not subject to withholding under Chapter 4. 97Documentation and Reporting Requirements
Withholding agents and FFIs are required to obtain and file numerous forms under certain circumstances. Under Chapter 61, payers will typically request the payee to provide them with a Form W-9, Request for Taxpayer Identification Number and Certification, used to request the TIN of a U.S. person (including a resident alien) and certain certifications and claims for exemption. 98 Payers maintain Form W-9 in their vendor documentation files.
While documentation requirements involving payments made under both Chapters 3 and 4 to non-U.S. persons (hereafter referred to as foreign persons) may be fulfilled in numerous ways, this article explains the most common forms used by withholding agents.
Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), is used to document the requirements of Chapter 4. In particular, unlike under pre-FATCA law, Form W-8BEN is now used exclusively by individuals to document Chapter 3 and Chapter 4 status. It is provided to the withholding agent, not filed with the IRS, for payments made involving FDAP income. It is used to claim benefits under a tax treaty for Chapter 3 purposes only. Generally, a Form W-8BEN will remain in effect for purposes of establishing foreign status for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year after the year the form is signed, unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8BEN signed on Sept. 30, 2015, remains valid through Dec. 31, 2018. 99
Form W-8BEN-E is used by foreign entities to document their status for purposes of Chapters 3 and 4 for FDAP payments as well as for certain other Code provisions. The form has 30 parts. In most cases, Parts I and XXIX will be completed, along with one other part documenting Chapter 4 status. Part III is used to claim treaty benefits under Chapter 3, if applicable, for a specific type of income stream. A passive NFFE must either certify that it has no substantial U.S. owners or list all substantial U.S. owners on Part XXX. The form is provided to the withholding agent, not filed with the IRS, and remains valid (subject to certain exceptions) for Chapter 3 and Chapter 4 purposes, starting with the date signed and ending on the last day of the third succeeding calendar year after the year the form was signed, unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8BEN-E signed on Sept. 30, 2015, remains valid through Dec. 31, 2018. 100
Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States, is provided to the withholding agent by a foreign person or entity that is the beneficial owner of the income for which Form W-8ECI is being provided or an entity engaged in a U.S. trade or business submitting Form W-8ECI on behalf of its owners or partners, claiming that the income is effectively connected with the conduct of a trade or business in the United States. 101
Form W-8IMY is used when the recipient is receiving a reportable amount or withholdable payment on behalf of another person or is a flowthrough entity.
Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting, is used by a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U.S. possession receiving a withholdable payment or receiving a payment subject to Chapter 3 withholding, or is such an entity maintaining an account with an FFI requesting the form.
Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, is provided to a withholding agent by nonresident alien individuals for payments received as compensation for personal services. It is also used for certain payments of noncompensatory scholarship or fellowship income. 102
Form 8966 was filed for calendar year 2014 for the first time by March 31, 2015. The form is filed with the IRS to report information with respect to certain U.S. accounts, substantial U.S. owners of passive NFFEs, U.S. accounts held by owner-documented FFIs, and certain other accounts as applicable, based on the filer's Chapter 4 status. For calendar years 2015 and 2016, Form 8966 is filed by PFFIs, RDCFFIs, and reporting Model 2 FFIs to report certain amounts paid to their account holders that are nonparticipating FFIs, or for accounts held by recalcitrant account holders. Other reporting entities include direct-reporting NFFEs and PFFIs electing to report under Chapter 61 to satisfy their Chapter 4 reporting requirements. 103
Form 8957 is used by an FFI to register itself and its branches, if any, as a PFFI, RDCFFI, limited FFI, a limited branch, or a sponsoring entity. It is also used by an FFI to renew its qualified intermediary, withholding partnership, or withholding trust agreement, if applicable. 104
Practitioners should also be aware that Form W-8IMY and Form W-8ECI are also provided to withholding agents for certain payments by U.S. persons.
Form 1042 is used to report to the IRS certain reportable payments and tax withheld under Chapters 3 and 4. Taxes required to be shown on Form 1042 must be deposited electronically. The form is generally due on March 15 following the close of the calendar year in which the income subject to reporting was paid, regardless of the tax year of the payer or payee. Form 1042-S is filed with Form 1042,with appropriate copies provided to the payee. Form 1042-T is used to transmit paper copies of Form 1042-S (similar to Form 1096, Annual Summary and Transmittal of U.S. Information Returns). 105
Withholding agents should understand that they may be held liable by the IRS for any withholding taxes required to be withheld. 106Conclusion
This new regime under Chapter 4 is not just for banks and adds a layer of complexity to the current withholding regimes. It has far-reaching impact and applies to small taxpayers, including some individuals, as well as to multinational entities. Tax advisers and withholding agents must become familiar with this new regime and ensure that the documentation requirements are satisfied. Significant penalties as well as tax liabilities may be imposed if taxpayers and withholding agents do not adhere to the FATCA requirements.
1 Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147.
2 Sec. 1.
3 Secs. 6051 and 6041.
4 Secs. 871(a) and 881(a).
5 Sec. 3406(a)(1).
6 Sec. 3406(a)(1)(D).
7 Sec. 3406(b)(2)(A)(i).
8 Sec. 3406(b)(2)(A)(ii).
9 Sec. 3406(b)(2)(A)(iii).
10 Sec. 3406(b)(3)(A).
11 Sec. 3406(b)(3)(B).
12 Sec. 3406(b)(3)(C).
13 Sec. 3406(b)(3)(D).
14 Sec. 3406(b)(3)(E).
15 Sec. 3406(b)(3)(F).
16 Secs. 1441 and 1442.
17 Sec. 1441(b); Immigration and Nationality Act of 1965, P.L. 89-236.
18 Sec. 7701(a)(16).
19 Sec. 1461.
20 Secs. 1441(a) and (b).
21 Sec. 1446.
22 Sec. 1445.
23 Foreign Investment in Real Property Tax Act of 1980, P.L. 96-499.
24 Sec. 1441(b) and Regs. Sec. 1.871-7(c)(1)(iii).
25 Regs. Sec. 1.1441-1(b)(4)(xv).
26 Sec. 1441(c)(1).
27 Sec. 1441(c)(6).
28 Sec. 1441(c)(7).
29 Sec. 1441(c)(9).
30 Regs. Sec. 1.1441-1(b)(4)(iii).
31 Sec. 1441(c)(10).
32 Sec. 1441(c)(11).
33 Regs. Sec. 1.1441-1(b)(4)(iv).
34 Sec. 1441(c)(12).
35 The act added Secs. 1471 through 1474.
36 The regulations provide coordinating rules to prevent the imposition of both Chapter 3 and Chapter 4 withholding on the same payment.
37 Joint Committee on Taxation, Technical Explanation of the Revenue Provisions Contained in Senate Amendment 3310, the "Hiring Incentives to Restore Employment Act," Under Consideration by the Senate, p. 47 ( -10) (Feb. 23, 2010). The U.S. person may be entitled to a refund or credit under a treaty or the Code. See Carman, "International Exempt Organizations and FATCA," 23(2) Taxation of Exempts 32 (September/October 2010). See also Secs. 1471 and 1472. Sec. 1474(b)(2) indicates that a treaty may be relied on to claim a refund. See also preamble, T.D. 9610.
38 Regs. Sec. 1.1474-2(a)(4).
39 Temp. Regs. Sec. 1.1471-2T(a)(1).
40 Temp. Regs. Sec. 1.1473-1T(a)(4)(vi).
41 Regs. Sec. 1.1473-1(a)(1)(ii).
42 Regs. Sec. 1.1471-4(b)(4).
43 Regs. Sec. 1.1473-1(a)(2)(i)(A).
44 Regs. Sec. 1.1473-1(a)(2)(iii).
45 Regs. Sec. 1.1473-1(a)(2)(iv).
46 Regs. Sec. 1.1473-1(a)(2)(v).
47 Temp. Regs. Sec. 1.1473-1T(a)(2)(vi).
48 Regs. Sec. 1.1473-1(a)(2)(i)(A).
49 Regs. Sec. 1.1473-1(a)(4)(i).
50 Regs. Sec. 1.1473-1(a)(4)(ii).
51 Regs. Sec. 1.1473-1(a)(4)(iii).
53 Regs. Sec. 1.1473-1(a)(4)(iv).
54 Regs. Sec. 1.1473-1(a)(4)(v).
55 Temp. Regs. Sec. 1.1473-1T(a)(4)(vi).
56 Temp. Regs. Sec. 1.1473-1T(a)(4)(vii).
57 Regs. Sec. 1.1474-6(c) and (d).
58 Secs. 1472(c)(1)(A) and (B).
59 Sec. 1472(c)(1)(C).
60 Sec. 1472(c)(1)(D).
62 Sec. 1472(c)(1)(E).
63 Sec. 1472(c)(1)(F).
64 Temp. Regs. Sec. 1.1472-1T(c)(1).
65 Temp. Regs. Sec. 1.1472-1T(c)(1)(iv).
66 Regs. Sec. 1.1471-1(b)(132); Temp. Regs. Sec. 1.1472-1T(c)(1)(iii).
67 Temp. Regs. Sec. 1.1472-1T(c)(1)(vi).
68 Temp. Regs. Sec. 1.1472-1T(c)(1)(vii).
69 Regs. Sec. 1.1471-5(e).
70 Regs. Sec. 1.1471-1(b)(78); FATCA Model 1 IGA (reciprocal version), Art. 2.
71 Regs. Sec. 1.1471-1(b)(79); preamble to T.D. 9610; FATCA Model 2 IGA, Art. 2.
72 FATCA Model 1 IGA (reciprocal version), Art. 7(1); FATCA Model 2 IGA, Art. 6(1).
73 FATCA Model 1 IGA (reciprocal version), Art. 4(7); FATCA Model 2 IGA, Art. 3(6).
74 FATCA Model 1 Annex, I(C); FATCA Model 2 Annex, I(C).
75 FATCA Model 1 IGA (reciprocal version), Art. 4(6).
79 Preamble to T.D. 9610; Regs. Sec. 1.1471-5(f)(1)(ii)(A).
81 Regs. Sec. 1.1471-1(b)(92).
82 Regs. Sec. 1.1471-1(b)(111); Regs. Sec. 1.1471-5(f)(1).
83 Regs. Sec. 1.1471-4(e)(3)(i).
84 Regs. Sec. 1.1471-4(e)(2)(i)(A).
85 Regs. Sec. 1.1471-4(d)(2)(ii)(C).
86 Notice 2013-43.
87 Regs. Secs. 1.1471-4(d)(3)(vi) and (vii).
88 Regs. Sec. 1.1471-4(d)(7)(ii).
89 Temp. Regs. Sec. 1.1471-4T(d)(7)(iii).
90 Temp. Regs. Sec. 1.1474-1T(d)(1)(i).
91 Temp. Regs. Sec. 1.1472-1T(c)(1).
92 Temp. Regs. Sec. 1.1472-1T(c)(3).
93 Temp. Regs. Sec. 1.1472-1T(c)(5)(i).
94 Regs. Sec. 1.1471-1(b)(94).
95 Temp. Regs. Sec. 1.1471-2T(a)(1).
96 Temp. Regs. Sec. 1.1474-6T(b)(1).
97 Regs. Secs. 1.1474-6(c)(1) and (d)(1).
98 Form W-9 instructions; Regs. Sec. 31.3406(h)-3.
99 Form W-8BEN instructions and Temp. Regs. Secs. 1.1441-1T(e)(4)(ii) and 1.1471-3T(c)(6)(ii)(B)(7).
100 Form W-8BEN-E instructions and T.D. 9610.
101 The form remains in effect similarly to W-8BEN; see form instructions and Regs. Sec. 1.1471-3(b)(4).
102 Form 8233 instructions and Regs. Sec. 1.1441-4(c).
103 See Form 8966 instructions and Temp. Regs. Secs. 1.1472-1T and 1.1474-1T.
104 See Form 8957 instructions and Temp. Regs. Sec. 1.1472-1T.
105 See Form 1042 instructions and Temp. Regs. Secs. 1.1461-1T and 1.1474-1T.
106 Sec. 1461.
|The IRS has
established a summary of key FATCA dates
on its website available at
Taxpayers should also be aware of certain
key dates in 2015 and beyond:
|Philip Pasmanik is a senior tax manager for planning and compliance with Hunrath, Napolitano, Quigley and Taylor LLC in Clark, N.J. His experience includes work on international tax matters and with international and national CPA firms. He is co-chair of the AICPA International Tax Withholding Task Force and is a member of the AICPA PFIC Task Force, FBAR Task Force, and International Tax Resource Panel. Peter Stratos is president and CEO of Stratos Associates PLLC in Springfield, Va. For more information about this article, contact Mr. Pasmanik at email@example.com.|