FATCA Could Snarl Many Non-Financials in Its Nets Too

The July 1 deadline for FATCA compliance is drawing near, but many banks aren't ready to comply with the new tax law.

U.S. Treasury and the Internal Revenue Service say they have given companies all the important guidance and tools they need to be ready for the massive reporting and withholding requirements of the Foreign Account Tax Compliance Act when it takes effect this summer. Yet some tax experts say the latest guidance is insufficient for banks to comply with the law.

FATCA, which was enacted in 2010, is aimed at foreign financial firms to prevent tax evasion by U.S. residents through use of offshore accounts. It requires banks to report information to the IRS on funds held by U.S. taxpayers in accounts at banks outside the United States.

In mid-February, the U.S. Treasury and IRS released more than 500 new pages of guidance in two separate documents; one is meant to clean up a long list of problems with earlier FATCA regulations issued in January 2013, and the second addresses conflicts between known withholding obligations already contained in the Internal Revenue Code and the new obligations that will roll in with FATCA. “What they're doing here is bridging the gap,” says Susan Grbic, a partner with audit firm WeiserMazars.

“We don't have any final forms,” says Laurie Hatten-Boyd, a principal focused on international tax at KPMG. “And we don't have instructions to the forms. That's a key piece of guidance.” In fact, the latest guidance itself even forewarns there's more guidance to come, says Candace Ewell, a partner with PwC. “It may be the last batch of guidance before we actually get started, but it's certainly not the last batch of guidance.”

July 1, 2014, marks the first date in a long series of implementation milestones that stretch well into 2018, says Gerald Francese, a partner with law firm DLA Piper. As FATCA is focused on using a “carrot and stick” approach to encourage overseas entities to report to the United States, he says, it doesn't explicitly impose new obligations on U.S. public companies outside the financial sector.

Yet no public company can wave it off and assume it is immune, says Carol Tello, a partner with the tax practice group at law firm Sutherland. “Non-financial institutions are withholding agents,” she says. “If they're paying U.S. source income to foreign entities, then the general rules that apply to cross-border payments will apply.”

David Moldenhauer, a partner with law firm Clifford Chance, says companies might hastily assume they are not subject to FACTA if there are no foreign financial institutions within their consolidated entity. “Public companies might be surprised to learn that certain types of non-U.S. affiliates, including holding companies and treasury centers, can be treated as financial institutions,” he says. “The rules are drafted broadly and can include a range of plans, including pension plans, that might come as a surprise to a U.S. public company.”

Ewell says it's common for U.S. operating companies, such as manufacturers, to have their own banks for their own financial purposes. “If it happens to be organized outside the United States, that's a foreign financial institution, and it needs to have the life of FATCA placed around it,” she says. Every multinational company should look through its organizational chart and consider FATCA's extensive guidance on entity classifications and exceptions to determine how each entity will be treated under FATCA, she advises.

Not Just Financial Firms

Companies also need to look at the nature of the payments they make to determine if they could be nicked by FATCA requirements, says Moldenhauer. Withholding requirements under FATCA are complex, but withholding could be required for “any passive type of payment that can't be directly linked to normal non-financial business operations,” he says. That could include things like interest payments to bond holders, dividend payments to stock holders, certain types of royalty payments or rent payments, some insurance premiums, and possibly even derivative payments, he says. “Those are a few examples.”

FATCA'S INFLUENCE ON NON-FINANCIAL COS.

Below is a Q&A with Laurie Hatten-Boyd, a principal in the Inernational Tax Group of the Washington National Tax practice of KPMG.

Question:

To what extent are non-financial companies affected by FATCA?

Answer:

Non-financial U.S. companies with no foreign subsidiaries are impacted by FATCA to the extent they make a payment subject to withholding. This would generally be interest on public or private debt or dividends if they pay them.

If they issue the debt through U.S. brokers, they will need to obtain Forms W-9 from the brokers, something they have not had to do in the past. If they have private debt with a U.S. bank, they will also need to obtain Forms W-9. No reporting will be required if they obtain the W-9. They will need a Form W-9 from any U.S. financial institution to whom they pay banking fees.

If they have debt with a foreign bank, they will need to obtain a Form W-8BEN-E, and this must include the foreign financial institution's Global Intermediary Identification Number, which the U.S. withholding agent will need to verify on the IRS published list of "good" FFIs.

For the dividends, if any, this is likely going to be the responsibility of the company's transfer agent. They will need to assure that their transfer agent is sufficiently qualified to handle the FATCA documentation, withholding and reporting. They also must update the transfer agent agreements to document the specific requirements and include the appropriate indemnification clauses since the company remains liable to the IRS.

They would also need to review the types of intercompany payments that are made, namely, for interest on loans.

Non-financial payments have been excluded from the definition of a withholdable payment. Thus, for payments for income such as fees for services, rents, royalties, etc., to non-U.S. persons, they will just need to add a FATCA exemption code on the Form 1042-S.

Most non-financial companies are beginning to look at the impact of FATCA. For many, they are seeing that the types of payments they make that are withholdable payments are generated from their corporate or treasury centers.

Some are deciding to address these in a silo, meaning handling them on a manual basis as opposed to sending through the accounts payable function. That way, they don't need to train accounts payable clerks to identify them. The recent regulations make clear that some of the issues of concern have been addressed.

Grbic says companies would be wise to review all of their payments of U.S. source funds to any foreign vendors and counterparties around the world, including those handled through their treasury centers, to search out payment types that might be subject to FATCA. Companies also would be wise to inventory and review all of their vendor contracts and service agreements with counterparties, as well as policies and procedures related to procurement, to see how they stack up against FATCA requirements.

Companies may already have withholding systems in place for payments made to non-U.S. residents, and those might serve as a good foundation for FATCA compliance, says Moldenhauer. “I wouldn't call them slight tweaks,” he says. “Although they can be implemented on the foundation of an existing system, it's definitely another story to the building, and a fairly elaborate addition.”

Where a company has policies and procedures in place around anti-money laundering, those might also prove helpful for FATCA compliance, says Ewell. But the purposes for anti-money laundering initiatives vs. FATCA compliance are different. AML and “know your customer” provisions certainly give you a starting point to understand the status of parties who are being paid, but FATCA goes further to focus on identifying specific payments that are subject to withholding, and then performing and remitting the withholdings.

Grbic points out that the latest guidance on FATCA gives companies some room to exercise judgment over how to treat a non-resident payee when perhaps the documentation is not perfect but the companies have confidence about the payee's status because of its AML “know your customer” initiatives. “So they're giving you some credit for knowing your customer,” she says.

As for any further guidance yet to come, the Treasury Department and IRS say in their latest guidance they will have more to say in the future about verification requirements for sponsoring entities, or U.S. entities that choose to vouch for a foreign entity and handle its reporting requirements. They also will address any inconsistencies that have been created between agreements with foreign financial institution and the recent guidance.

Tello says she sees a good number of companies taking steps to prepare for FATCA. “I'm sure there are some companies that have not yet looked into this,” she says. “But it's coming July 1, so it's time to get started at the minimum.”