Multinational corporations with foreign operations are facing new tax compliance headaches, thanks to the Internal Revenue Service and the Department of Treasury pursuing offshore accounts they suspect are hiding from U.S. taxes.
Last month the IRS issued preliminary guidance on how it plans to interpret and apply reporting obligations for payments made to certain foreign financial institutions. The 62-page document follows enactment of the Hiring Incentives to Restore Employment Act, passed by Congress in March. That law includes a provision titled the Foreign Account Tax Compliance Act (FATCA), aimed at finding offshore accounts used to shelter income from U.S. tax.
Notably, the IRS is seeking a “striking amount” of comment on the guidance, Mark Naretti, director of KPMG's information reporting practice, said during a recent Webcast on the topic. “It's clearly an opportunity for people to get their voices heard and to achieve a workable regime,” he said.
The biggest concern to multinational companies is a new 30 percent withholding tax on U.S. income and on gross proceeds from sales of assets that would generate U.S. income, in cases where a receiving foreign financial institution does not have an existing contract with the IRS.
Steven Musher, associate chief counsel for the IRS, contended that the goal of the tax isn't to generate revenue, but to provide information on foreign accounts held by those living in the United States.
Musher
The guidance also addressed an addition to the federal tax code that requires foreign financial institutions—banks, private equity and hedge funds, and qualified intermediaries, for example—to report information about their U.S. account holders to the IRS on an annual basis. The guidance defines a “U.S. account” as those maintained by U.S. individuals provided that the aggregate value of all accounts maintained by the individual exceed $50,000, or is held by certain foreign entities with “substantial” U.S. owners.
“[I]f, in doing an electronic search, you effectively document your account holders, we're not looking to have you do unnecessary and duplicative re-documentation.”
—Steven Musher,
Associate General Counsel,
Internal Revenue Service
The guidance provides foreign financial institutions with a number of due diligence procedures that must be followed to identify U.S. account holders. Foreign financial institutions will also be required to withhold any pass-through payment that's made to a “recalcitrant” account holder or non-participating foreign financial institutions.
The data that the foreign financial institutions must provide include:
Name, address, and tax identification Number (TIN) of the specified U.S. person or a substantial U.S. owner of a foreign entity;
Account number;
Account balance or value; and
Gross receipts to and withdrawals from the account.
Some think the requirements go too far. “With account balances and gross proceeds, that seems to add a huge additional burden on a foreign financial institution with potential little benefit to the government,” Naretti said.
FACTA BASICS
The following information regarding IRS Notice 2010-60 provides an overview of FATCA presented by the KPMG TaxWatch Webcast:
FATCA Overview
30 percent withholding on any withholdable payment made to a foreign financial institution (FFI) unless FFI enters into a Disclosure Agreement with the IRS
—FFIs that enter into this agreement become “Participating FFIs.”
The Agreement will require the FFI to identify U.S. accounts and to report these to the IRS on an annual basis.
Definition—Foreign Financial Institution
A foreign financial institution is defined as any foreign entity that:
—Accepts deposits in the ordinary course of business
—Is in the business of holding financial assets for others, or
—Is primarily engaged in the business of investing, reinvesting or trading in securities, partnership interests, commodities, or any interest in such instruments
Given this broad definition, an FFI includes hedge funds, private equity funds, and other collective investment vehicles
The Disclosure Agreement
The foreign financial institution must:
—Identify U.S. accounts
—Comply with due diligence procedures
—Report annually for U.S. accounts
—Provide further information upon request
—Withhold on any passthru payments to recalcitrant account holders or non-participating FFIs
A recalcitrant account holder is one that refuses to sign waiver
Passthru payment is a withholdable payment and any amount attributable to a withholdable payment (resourcing issue)
Can elect to have withhholding impose upstream but must waive right to treaty benefits
Required Reporting
Name, Address, and Tax Identification Number (TIN) of
specified U.S. person
Name, Address, and TIN of substantial U.S. owner of a
foreign entity
Account number
Account balance or value
Gross receipts to and withdrawals from the account
Other Foreign Entities
30 percent withholding also applies to withholdable
payments made to foreign non-financial entities
(NFFEs). An NFFE is any entity that is not an FFI.
Pursuant to the statute, to avoid this withholding, the
NFFE must:
—Provide a certification to the withholding agent that it
does not have any substantial U.S. owners, or
—Provide the name, address, and TIN of any substantial
U.S. owners to the withholding agent
The withholding agent will then report to the IRS
Source
KPMG: Foreign Account Tax Compliance Webcast (Sept. 13, 2010)
Payments made to foreign governments, international organizations, foreign central banks, and any other beneficial owners identified as posing a low risk of tax evasion will not be subject to withholding or reporting. For a non-financial company to avoid the withholding tax, it must provide certification to the withholding agent, stating that it doesn't have substantial U.S. owners. Other entities that would not be required to report and withhold under the statute include holding companies, financing centers of non-financial groups, entities that are liquidating or reorganizing, and insurance companies that do not issue cash value products (e.g., companies that issue property, casualty, and term life contracts).
The IRS is also reaching out to other tax jurisdictions for input on the new rules. “The problem about offshore non-compliance by U.S. resident taxpayers is a common challenge that we share with other tax administrations,” said Musher. The IRS will continue to have “important ongoing dialogue” not just with taxpayers, but also fellow tax administrations, he said.
New Forms
The IRS is also developing a new form for FATCA reporting purposes, which must be filed electronically. “That's a big push for the IRS right now in order to implement the system with ease,” said Quyen Huynh, an attorney-adviser in the IRS's Office of Associate Chief Counsel, (international). The IRS is also constructing the system to handle the forms and working with the Large and Mid-Size Business Division to prepare for the change.
The staff of the IRS also stressed its desire to avoid duplicative reporting. For instance, the IRS is currently examining how many of the forms used for Chapter 3 can be adapted to take into account Chapter 4 reporting, said Huynh.
“We've been especially sensitive to existing accounts that have had no notice of FATCA, and new accounts where the procedures for opening them can take FATCA into account,” said Musher. “[I]f, in doing an electronic search, you effectively document your account holders, we're not looking to have you do unnecessary and duplicative re-documentation.”
The effective date of the new requirements would be for payments made after Dec. 31, 2012, with obligations outstanding on March 18, 2012, grandfathered.
Don't hold your breath that the effective date will be pushed back. “IRS and taxpayer intermediaries are facing an extremely trying calendar, dictated by the statute,” said Musher. The next step will be notice of proposed rulemaking and eventually final regulations, he said.
The IRS is seeking comments until Nov. 1.
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