fatca-foreign accounts tax compliance act

8/11/2019 FATCA-Foreign Accounts Tax Compliance Act

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August 2013

How will it affect your business?

The widespreadreach of FATCA

www.pwc.com/us/fatca


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Contents

The widespread reach of FATCA How will it affect your business?


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The short answer 1Now is the right time to learn more and take action 2

What are some speci c compliance obligations?

What exemptions apply?

What are some actions to think about?

More details 3

FATCAs broad application 3 A birds-eye view of how it works

Three ways FATCA may apply to your business 5

You have FFIs in your group

Your company is making US source cross-border payments(youre the payor)

Your company is receiving US source payments(youre the payee)

The cost of noncompliance 8

Fast approaching deadlines 8 Assessing the inevitable impact and building 9a tailored action plan

Categorize foreign entities

Scrutinize global payment ows

Educate business stakeholders

Determine who is involved and who should be trained

Examine related processes

Lets talk 10



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FATCA, the Foreign Account TaxCompliance Act, was enactedin 2010 to prevent and detectoffshore tax evasion. Based onthe name and a quick readingof the rules, FATCA seems to bedirected at nancial institutions.So, many global companiesoutside the nancial servicesindustry mistakenly believe thatthey are not affected. However,upon closer review, many realizethe surprising fact that theyhave entities in their worldwidenetwork falling under the purviewof FATCA, or have operationalareas that make or receivepayments subject to FATCA.

Multinational enterprises thatare withholding agents arealready currently obligated toreport, withhold on payments,and document payees, butFATCA requires changes to theseactivities. FATCA mandates thatmultinational businesses evaluateentity payees differently, engagein withholding on certain grossproceeds transactions (a changefrom historic processes), as wellas report different informationto the Internal Revenue Service(IRS).

So, the important analysis isto determine how FATCAscomplex regime will affect yourorganization and what changesand new steps are required. Thisdemands understanding the typesof entities in your companysorganizational structure and which payment types create newor different obligations.

The short answer

The widespread reach of FATCA How will it affect your business?1


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The withholding provisions ofFATCA are scheduled to beginin July 2014. Multinationalbusinesses that have not alreadybegun to assess the FATCArequirements, determine theirspeci c impact, and create acustomized plan to comply maybe falling behind. Compliance with FATCA may require changesto existing systems and processesacross business units and regions,

the renewal of policies and day-to-day practices, and new tasks suchas registering with the IRS. A variety of adverse consequences,both nancial and resourcerelated, may arise if action is nottaken soon enough.

What are some specifccompliance obligations?

Beginning on July 1, 2014, FATCAimposes new registration, duediligence reviews, informationreporting, and tax withholdingobligations on entities that qualifyas foreign nancial institutions(FFIs).

Multinational corporations shouldexamine their treasury centers,retirement funds, and holdingcompanies, just to name a fewexamples, to ensure that theydo not meet the de nition of

an FFI. Properly identifying theFATCA status of each entity in alarge organization is expected totake signi cant time and effort,e.g., the nal FATCA regulationsimpose several different incomeand asset tests.

Obligations also are imposedon payors of US source xed ordeterminable, annual or periodical(FDAP) income, which includemany multinational corporations.They must have processes andprocedures in place to identifyand categorize non-US payeesfor FATCA purposes, report, andpotentially apply 30% withholdingtax to avoid being liable for the withholding tax and potential

penalties. Even if a foreign entity isnot an FFI, FATCA still requires therecipient of a US source paymentto establish its FATCA status withappropriate documentation.

The regulations also extendexisting reporting and withholdingrequirements and impose anew withholding tax on FFIentities that do not reportcertain information regarding

their US accounts to the IRS.This new withholding tax also isimposed on certain non nancialforeign entities (NFFEs) thatdo not provide information ontheir substantial US owners to a withholding agent.

What exemptions apply?

FATCA contains several importantexemptions. Although theyare incredibly useful, they add

complexity. As an example, FATCA withholding should not apply where the payee provides to the withholding agent the appropriatedocumentation that demonstratesthat the payee is not subjectto withholding. Even though

withholding under FATCA willnot apply, reporting is required.The withholding agent must alsoevaluate whether reporting and withholding apply under currentinformation reporting rules.

NFFEs that either have nosubstantial US owners or who identify these owners to withholding agents should notsuffer withholding. Nor shouldNFFEs that are deemed torepresent a low risk of US taxevasion, such as publically tradedcompanies and their af liates,and those engaged in active tradesor businesses. A withholdablepayment to a documented USentity is not subject to the 30% tax,but reporting will apply.

What are some actions tothink about?

Multinational corporations needa FATCA compliance program toensure that all necessary FATCAclassi cations, documentation,monitoring and reporting areundertaken. This process oughtto be documented in a series ofpolicies and procedures ensuringthat the process has controls thatcan be replicated and tested.Further, the program shouldhighlight changes in business

practices that may be necessary forFATCA compliance and is intendedto provide comfort to seniormanagement that all areas of theorganization have been reviewedaccording to requirements.


Now is the right time to learn moreand take action


6/16The widespread reach of FATCA How will it affect your business?3

A birds-eye view of how it works

The US Congress enacted FATCA to ensurethat income earned and assets held by USpersons in offshore accounts or indirectlythrough ownership of foreign entities isreported to the IRS. But how does FATCAachieve this?

A core element of its design requires abroad group of US and foreign personsto identify and document payees differently and ultimately disclose new

and different information to the IRS.The FATCA legislation (new Chapter 4 of theInternal Revenue Code) describes the broadrequirements and policy, but delegates to theUS Department of the Treasury (Treasury) andIRS the obligation to narrow FATCAs scopeand promulgate the exact path to compliance.The Treasury and IRS have done so througha series of notices, proposed regulations, andnal regulations which were issued in Januaryof this year.

More details

FATCAs broad application


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In order to mitigate certain foreignlegal impediments to FATCAcompliance, intergovernmentalagreements (IGAs) also have beennegotiated (with more to come)between the Treasury and foreigngovernments. Under certainIGAs, including most of the IGAssigned thus far, information willbe exchanged directly between

the IRS and local governments.This obligates entities in IGA jurisdictions to report informationto their government that may nothave been required or permitted inthe past.

FATCA compels complianceby imposing withholdingobligations that offer asigni cant nancial incentiveto stakeholders to do their partto comply. Speci cally, FATCAgenerally requires multinationalbusinesses and FFIs to withhold30% on payments that meet thede nition of a withholdable

payment when made to non-compliant payees. The termwithholdable payment generallyrefers to the gross amount ofmost types of US source income,such as interest or dividendson US securities, as well asgross proceeds from the sale orredemption of US securities.

However, the Treasury and IRShave narrowed the scope of FATCA withholding to apply to speci ctypes of entities identi ed in thelegislation and those personsthat pose a signi cant risk oftax evasion. As an example, withholding does not apply tocertain payments made in theordinary course of a trade or

business, such as most servicecharges. To utilize any FATCAexception, documentation of thecharacter and source of paymentis required. Additionally, reporting will be required despite the withholding exceptions.


Key takeaway: Assessing FATCAs impact will require identifying whether an IGA mayapply to the entity or payment stream at issue. Provisions in the nalregulations or any other IGA that provide more favorable results may beutilized. This will likely increase the complexity of the process, due in partto the multiple paths to compliance (e.g., regulations or an IGA). Theregulators have focused on having consistent requirements in each IGAhowever, there are noticeable differences in the agreements signed to date.



1. You have FFIs within your group

FATCA imposes the most signi cant obligations onFFIs. Companies engaged in non nancial businessesmay think that few or none of their foreign entitiesconstitute an FFI. However, the de nition of an FFIis broad and includes more types of entities than onemight expect an unwelcomed result for companies

that are not prepared. Although the rules provide various exceptions, the following are types of entitiesthat may qualify:

non-US retirement funds and foundations .Non-US retirement funds whose gross income isprimarily attributable to investing, reinvesting, ortrading in nancial assets and are professionallymanaged by another entity are classi ed asinvestment entities. However, certain retirementfunds entitled to receive bene ts under a tax treatyare examples of retirement funds that are not FFIs

under FATCA. treasury centers, holding companies, and

captive fnance companies . These types ofentities are speci cally identi ed in the de nitionof an FFI. Among the activities relevant in assessing whether a legal entity is treated as an FFI are:

cash pooling

securitization and factoring activities

hedging activities (including whether hedges areentered into with af liates or with customers)

customer nancing operations

offshore cash deployment and investmentstrategies

in-house bank and external credit or banking-

type operations. special purpose entities and banking-type

subsidiaries . Although frequently utilized toaccess lower cost sources of funding for operationsor acquisitions, the mix of activities in which theyare engaged and how income is derived may causethem to fall within the FFI de nition.

captive insurance companies . Generally,captive insurance companies may not be FFIs forFATCA purposes because they do not have any cash value or annuity contracts. However, such captives

should still evaluate their business operations todetermine if they qualify as another category ofFFI. These other categories may include:(1) depository institutions, (2) custodialinstitutions, (3) investment entities, and (4) certainholding companies and treasury centers.

As such, many factors and exemptions need to beanalyzed to determine if these entities fall under thede nition of an FFI.

Three ways FATCA may apply to your business

FATCA requirements are not limited to the nancial services industry.

Many activities of non nancial businesses will trigger these new complianceobligations. Below is a high-level, but clearly nonexhaustive explanation of situations in which FATCA may apply to your company.

Key takeaway: If an entity quali es as an FFI, the FATCA rules impose the same types ofobligations as the current rules under Chapters 3, 24, and 61. But they areexpanded, for example, with new due diligence procedures to identify USaccount holders or investors. Other FFI requirements include, but are notlimited to, registering with the IRS and certifying FATCA compliance.


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2. Your company is makingUS source cross borderpayments (youre the payor)

FATCA generally applies when amultinational business (regardlessof whether the entity is a USor foreign person) makes a withholdable payment. Froma practical perspective, a largerange of payors can be impacted just about any multinationalbusiness that makes paymentsfalling within this de nition willexperience the impact of FATCA. As a result, global organizationsshould focus their efforts onpayment details such as:

which legal entity ordepartment is authorizing thepayment

which legal entity or departmentis making the payment

the recipient of the payment

source (and US federal incometax sourcing) of the payment

the character of the payment.

Expansive de nition of awithholdable payment

The term withholdable paymentgenerally refers to the grossamount of US source FDAPincome, and can include othertypes of US source income nototherwise subject to withholding

under Chapter 3. For example,gross proceeds from the sale ofcertain property are included inthe de nition.

Treasury functions, accountspayable departments, and otherareas of a global organizationmay make many withholdablepayments. The following are a fewcommon examples of third-partyor intercompany payments thatmay be included in the de nition:

interest and dividends

bank and custodial fees

advisory and broker fees

associated with merger andacquisition activity

insurance or reinsurancepremiums paid for insuring USrisk

gross proceeds from derivatives,swaps, and other hedgingarrangements, typicallyperformed by the treasuryfunction.

Certain payments made in theordinary course of business arenot treated as withholdablepayments under FATCA. However,some of these payments (suchas payments for services, rents,and royalties) remain subject toexisting information reportingand withholding requirements.Certain obligations in existence

on July 1, 2014 are consideredgrandfathered and are not subjectto FATCA withholding. One of thechallenges for businesses will beupdating systems and processes

to distinguish between all of thesetypes of payments.

Obligation to identify payees andremit tax

As a core concept, payors of a withholdable payment mustask, Who is the payee? andAre they FATCA compliant?Government forms currently reliedupon to document payees arebeing modi ed to accommodate

FATCA. Importantly, the FATCAregime also requires withholdingagents to commence 30% FATCA withholding on withholdablepayments beginning on July 1,2014 (with withholding on grossproceeds beginning in 2017).

Payors will need to use thenew documents to ensure thattheir counterparties are FATCAcompliant or exempt from

withholding. For example, ifthe withholding agent receivessuf cient documentation,such as a global intermediaryidenti cation number (GIIN)from an FFI or a valid Form W-8, withholding is not required(although reporting must still becompleted).


Key takeaway:The nal regulations mandate that beginning on July 1, 2014, payors ofwithholdable payments must have processes and procedures in place toidentify and categorize non-US payees under these new rules and report such payments for FATCA purposes. Will your internal resources be readyto implement these new obligations along with the expanded withholdingrequirements?



Key takeaway:The bottom line is that all foreign entities receiving withholdable payments must substantiate their status for FATCA purposes. As theybegin to receive payments from withholding agents and FFIs around the

globe, they will be asked to provide documentation about their non-US status and certify their FATCA classi cation.

3. Your company is receivingUS source payments (yourethe payee)

Those entities within your groupreceiving withholdable paymentsmay be subject to 30% FATCA withholding. You may be surprisedthat various types of entities maybe at risk. These may include anon nancial entity located outsideof the United States, which maybe treated as an NFFE and subjectto FATCA withholding if it fails totimely and properly identify itselfto its withholding agent.

Moreover, an entity that quali esas an FFI will also be subject toFATCA withholding if it fails toprovide valid documentation orpresent a GIIN to prove that it is

compliant (participating) withthe FATCA rules. As an example,treasury centers must evaluate whether they are classi ed asFFIs to ensure that appropriatedocuments can be provided torequesting banks and other payors.


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Assessing the inevitable impact and building atailored action plan

So, what are some practical stepsthat multinational businesses cantake in order to establish FATCAcompliance and avoid unnecessary withholding and other adverseconsequences? A simple approachis rst to assess its impact to theorganization pinpoint whereFATCA withholding may occur, as well as processes that should be inplace to achieve compliance andminimize costs. This approach mayinvolve the following actions:

Categorize foreign entities

Although inventorying andcategorizing FFIs appears to bea task targeted at the nancialservices industry, non nancialbusinesses will nd themselveshaving to identify their legalentities correctly. Given the broad

de nition of an FFI, companiesshould think about the speci ctypes of entities described abovethat generally trigger a concern.Multinational corporations shouldstill examine their remainingentities to ensure that they do notmeet the de nition of an FFI.

Scrutinize global paymentows

Companies rst should examinetheir payee and counterpartybase with a focus on foreignparties. Because of FATCA, globalorganizations need to know where they make and receivepayments around the world.What are the payments for and

who are they received by? Whatpayment ows within the UnitedStates and globally may involve withholdable payments? Howare these payments sourced forUS federal income tax purposes?What legal entities or departmentsare authorizing and making thepayments?

Educate businessstakeholders

How will resulting processes affectbusiness ows and contracts?Testing the new processes beforethey go live may be an importantstep to identifying problemsupfront, helping to increaseef ciency. Do existing and futurebusiness contracts need to bemodi ed?

Determine who is involved inthe process and who shouldbe trained

Given the liability around withholding and in some casesneeding to certify compliance,having the appropriate input fromleadership is critical. Moreover,many of the processes relatingto FATCA occur throughout the

organization and therefore havinga robust training and educationstrategy is an important task.

Examine related processes

Multinational businesses shouldexamine existing processes used toidentify payees and documentationcurrently collected on certainpayments to foreign persons underChapters 3 and 61, as comparedto the rules under FATCA. What

procedures need to change or beadded? How will documentationbe stored and shared among allparties within the organizationthat may need it? New revisedForms W-8 and the introductionof GIINs will also need to be takeninto account.


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Lets talk

10The widespread reach of FATCA How will it affect your business?


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For more information, please contact:Stuart Finkel+1 646 471 0616stuart. [email protected]

Bob Alperin+1 617 530 [email protected]

Elizabeth Askey+1 202 414 [email protected]

Alexandre Blanc+1 213 217 [email protected]

Brian Daily+ 312 298 [email protected]

Dyan Decker+1 646 313 [email protected]

Dominick DellImperio+1 646 471 [email protected]

Scott Dillman+1 646 471 [email protected]

Rebecca E. Lee+1 415 498 [email protected]

John Mattos+1 213 356 6727 [email protected]

Kevin Levingston+1 678 419 [email protected]

Bernard Moens+1 202 414 [email protected]

Tamara Moravia-Israel+1 305 375 [email protected]

Gail Vennitti+1 646 471 [email protected]

Iris Goldman +1 646 471 [email protected]

Erica Gut+1 415 498 [email protected]

David Balaban+1 305 375 [email protected]

John Ernest+1 614 227 3217 [email protected]

Candace Ewell+1 202 312 [email protected]

Kristen Gaebel+1 860 241 [email protected]

The widespread reach of FATCA How will it affect your business?11

For a list of FATCA specialists by country , click here .
http://www.pwc.com/us/en/financial-services/fatca-contacts.jhtmlhttp://www.pwc.com/us/en/financial-services/fatca-contacts.jhtmlhttp://www.pwc.com/us/en/financial-services/fatca-contacts.jhtmlhttp://www.pwc.com/us/en/financial-services/fatca-contacts.jhtml


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Additional backgroundFor additional information regarding FATCA guidance andimplementation, please click here f or the Global IRW Newsbrief archive.

How do you plan to keep up-to-date with the release of theFATCA IGAs and some of their unique differences? Access our

FATCA IGA Monitor website that includes:

a high-level overview of signed IGAs

the latest IGA developments

potential actions to think about as you look at the impact of the IGAsto your FATCA program

For a link to the US Treasury FATCA Resource Center, click here .

For a link to the US Treasury FATCA IGA page, click here .

For a link to the IRS FATCA page, click here .

12The widespread reach of FATCA How will it affect your business?
http://www.pwc.com/us/en/tax-accounting-services/newsletters/global-information-reporting-withholding/index.jhtmlhttp://www.pwc.com/us/en/tax-accounting-services/newsletters/global-information-reporting-withholding/index.jhtmlhttp://www.pwc.com/us/fatcaigamonitorhttp://www.pwc.com/us/fatcaigamonitorhttp://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspxhttp://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspxhttp://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspxhttp://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspxhttp://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA)http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA)http://www.pwc.com/us/en/tax-accounting-services/newsletters/global-information-reporting-withholding/index.jhtmlhttp://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-(FATCA)http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspxhttp://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA.aspxhttp://www.pwc.com/us/fatcaigamonitor


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