By: Hari K. Sharma (MSA/CPA)
What is FATCA:
USA Congress enacted the FATCA legislation in 2010 to mitigate tax evasion by US taxpayers directly owning unreported offshore accounts in non-US financial institutions or indirectly owning such accounts through foreign entities owned by them. FATCA is unique because it uses a withholding mechanism to motivate foreign financial institutions (FFI) and nonfinancial foreign entities (NFFE) to disclose information about US account holders or owners. FATCA requires FFI to identify their US accounts and provide information about those accounts to the IRS. FATCA requires certain NFFE to provide information to withholding agents about their substantial US owners. To the extent that an FFI does not comply with FATCA or prove that it is otherwise exempt from those rules, a withholding agent must withhold 30.00% of certain US source payments made to the FFI. Similarly, to the extent that an NFFE does not provide the required information about its substantial US owners or prove that it does not have such owners or is otherwise exempt from FATCA, a withholding agent must also withhold 30.00% of certain US source payments made to the NFFE.
In 2010 Congress passed the Hiring Incentives to Restore Employment act of 2010, PL 111-147 (the hire act) which added chapter 4 of Subtitle A to the code, consisting of section 1471 through 1474 of the Code and commonly referred to as FATCA or Chapter 4. Under this chapter 4 foreign financial institutions (FFIs) that are participating FFIs and certain registered deemed-compliant FFIs are generally required to identify their US account holders, regardless of whether a payment subject to withholding is made to their accounts. In January 2013, final regulations were published that provide due diligence, withholding, and reporting rules for both US withholding agents and FFIs under chapter 4. Additionally, temporary and proposed regulations were released in February 2014 providing updated rules under chapter 4 as well as guidance coordinating chapters 3 and 61 (Income) with the requirements of chapter 4. US withholding on withholdable payments for chapter 4 purposes beginning on July 1, 2014.
Reportable and Reporting Forms:
IRS designed and developed a form W-8BEN-E to be used by foreign entities to documents their status for purposes of chapter 3 and chapter 4, as well as for certain other code provisions.
Foreign persons are subject to U.S. tax at a 30.00% rate (the foreign-person withholding rate) on income they receive from US source that consist of:
-Interest (including certain original issue discount)
-Dividends, Rents, Royalties, Premiums, Annuities, Compensation for or in expectation of services performed, Substitute payments ina securities lending transaction and other fixed or determinable annual or periodical gains, profits, or income.
The form W-8BEN-E along with W-8ECI, W-8EXP and W-8IMY has been updated to reflect the documentation requirements of chapter 4. In particular W-8BEN-E is now used exclusively by entities to document their status both as a payee under chapter 4 and beneficial owner under chapter 3 of the code when required including an entity eligible to claim treaty benefits for reduced withholding rate and under certain other sections of the code to establish their status for withholding or reporting purposes. Individuals documenting their foreign status or making a claim of treaty benefits for reduced withholding should use form W-8BEN instead of W-8BEN-E.
An entity account holder holding accounts with certain FFIs that does not document its applicable chapter 4 status when required may be treated as a recalcitrant account holder or nonparticipating FFI and will be subject to 30.00% withholding on withhold able payments it receives from the FFI. A foreign entity account holder can avoid being classified as a recalcitrant account holder or nonparticipating FFI by using this form to documents its applicable chapter 4 status. Chapter 4 also requires withholding agents to withhold on certain payments made to a foreign entity that does not document its chapter 4 status and in some cases, disclose its substantial US owners. In general, a foreign entity receiving a withholdable payment should provide this form when requested to avoid withholding consequences.
This tax is imposed on the gross amount paid and is generally collected by withholding under section 1441 or 1442 on the amount. A payment is considered to have been made whether it is made directly to the beneficial owner or to another person, such as an intermediary, agent, or partnership, for the benefit of the beneficial owner. It also requires per section 1446 a partnership conducting a trade or business in the United States to withhold tax on a foreign partner’s distributive shares of the partnership’s effectively connected taxable income.
Reportable Payment Card Transactions:
Section 6050W was added by section 3091 of Housing Assistance Tax Act of 2008 and requires information returns to be made by certain payers with respect to payments made to participating payees (as defined in Regulation section 1.6050W-1(a)(5) in settlement of payment card transactions and third party payment network transactions. Information returns are not required with respect to payments made to payees that are foreign persons.
A payer of a reportable payment for chapter 61 purposes (i.e.) form 1099 reporting purposes may treat a payee as foreign if the payer receives an applicable form W-8 from the payee. Provide this form w-8BEN-E to the requestor if you are a foreign entity that is a participating payee receiving payments in settlement of payment card or third party network transactions that are not effectively connected with a US trade or business of the participating payee.
Who Must Provide form W-8BEN-E:
You must give form W-8BEN-E if you are described as: a US person including us citizens, resident aliens and entities treated as US persons, such as a corporation organized under the law of the state. Instead use form W-9, Request for Taxpayer Identification Number and Certifications, You are a foreign insurance company that has made an election under section 953 (d) to be treated as a US person. Instead provide a withholding agent with Form W-9 to certify to your US status even if you are considered an FFI for purposes of chapter 4. You are nonresident alien individual, instead use form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individual). If you are a disregarded entity with a single owner that is US person and you are not a hybrid entity claiming treaty benefits, Instead the single owner should provide Form W-9.
If you are a disregarded entity with a single owner that is not a US person or a branch of an FFI claiming its status for chapter 4 purposes and you are not a hybrid entity claiming treaty benefits. Instead, the single owner should provide form W-8BEN or FORM W-8BEN-E (as appropriate). If you are acting as an intermediary a qualified intermediary or a qualified securities lender (QSL) with regard to a payment of US source substitute dividends. Instead, provide Form W-8IMY. If you are receiving income that is effectively connected with the conduct of a trade or business in the US, unless it is allocable to you through a partnership. Also you are filing for a foreign government international organization foreign central bank of issue foreign tax exempt organization , foreign private foundation or government of a US possession claiming the applicability of section 115(2), 501©, 892, 895, or 1443(b). You are foreign flow-through entity, or hybrid entity and foreign partnership comply per 1441 and 1442 and accompanying reg.
When and How to send Form:
Do not send form W-8BEN-E to the IRS. You need to give it to the person who is requesting it from you. Generally this will be the person from whom you receive the payment, who credits your account, or a partnership that allocates income to you. An FFI may also request this form from you to document the status of your account. You need to give it before the payment is made, allocated or transferred to you.
Intergovernmental Agreement (IGA):
Department of Treasury has already signed an Intergovernmental agreement (IGA) model 1 or Model 2 IGA with more than 62 countries around the world. Different Countries FATCA agreement has different scope, limitations and characteristics. Agreement is fairly cumbersome matter and also opportunity for two countries to negotiate for the best of their country’s interest. France signed IGA model 1, Nepal and India has not signed FATCA IGA yet.
This article is for basic general information purpose only. Please consult your CPA or IRS for FATCA implication and any specific question.
About the Author: Mr. Sharma is the Tax Manager of Orange Business Services US Inc. with experience of USA tax of about 20 years including but not limited to public accounting and private practice.