The Foreign Account Tax Compliance Act (FATCA) was enacted into law for a few years ago but only now is its presence beginning to be felt. FATCA made several changes impacting the international reporting and compliance process for U.S. taxpayers. However, the withholding tax rules portion of the legislation is just now taking effect after several delays due to draft guidance pending on the implementation and reissuance of certain reporting and compliance forms. Beginning on July 1, 2014, U.S. withholding agents will be required to withhold at a rate of 30% on certain payments made to foreign financial institutions (FFIs) and non-foreign financial entities (NFFEs) unless reporting and documentation requirements are met. FFIs that register by May 5 will be included on the first IRS monthly published FFI list on July 1, 2014.
Foreign Account Transparency
As a brief background, FATCA created Chapter 4 under the Internal Revenue Code to enforce the withholding of tax on certain withholdable payments made to foreign payees for the benefit of U.S. account holders. The legislation is primarily aimed at enhancing transparency over U.S.-owned foreign financial accounts and other foreign interests in order to increase enforcement over the compliance and reporting process for the collection of tax on U.S.-sourced income. The Chapter 4 rules under FATCA take precedence over other Code provisions (such as the Chapter 3 withholding rules) and U.S. income tax treaties in force with other countries. This means that counterparties receiving certain U.S.-sourced payments cannot claim treaty benefits or favorable reduced withholding rates unless they meet the certification requirements under the new Chapter 4 rules.
As taxpayers and the IRS gear up for a new regime of reporting and compliance, the IRS recently updated its FAQ List to assist with the transition. The FAQs address the most common concerns and questions from taxpayers and professionals. The recent updates further clarify various terms used from earlier guidance issued and provide registration-related information for specific types of entities.
Furthermore, the IRS has also posted various other FATCA-related resources to assist taxpayers. These links contain very useful information and resources, ranging from general background to procedural requirements to register and comply with the Chapter 4 rules. The links to these sites can be found below with a brief description of each:
IRS FAQ List – Frequently asked questions addressing issues ranging from definitions to compliance and reporting matters.
Intergovernmental Model Agreements – A current list of Model 1 and Model 2 agreements signed by the U.S. and other countries agreeing on the exchange of information of account holders for their respective countries.
IRS Tax Map – A site map providing links to various FATCA-related specific topics and guidance issued by the Treasury Department.
For more information about the new rules under FATCA, check out our other SD Insights publications or contact a member of the SD Global team for assistance.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.