As 2015 FATCA deadlines approach, some questions to consider
TAX ALERT |
Under the Foreign Account Tax Compliance Act (Chapter 4 or FATCA), certain foreign financial institutions (FFIs) must report information on U.S. account holders to the IRS. Noncompliant taxpayers are subject to a 30 percent withholding on any "withholdable" payments made to the foreign payee. U.S. withholding agents must collect this tax and are liable for any failure to withhold and deposit the correct amount with the IRS in a timely fashion. In addition, U.S. withholding agents must report all payments subject to FATCA to the IRS.
FATCA information reporting is based on pre-FATCA withholding rules (Chapter 3 withholding) and, as such, utilizes many of the same forms. Forms W-9, W-8BEN, W-8IMY, W-8ECI, W-8EXP and 1042-S have all been updated to include FATCA-related classifications and representations. In addition, the IRS has put forth a new Form W-8BEN-E, which will be required for many foreign entities to represent their FATCA status to U.S. withholding agents.
The following frequently asked questions have arisen in practice, and the questions and answers are intended to provide general guidance regarding preparation and use of the new forms.
Q1: Who needs to complete a Form W-8?
A1: As a best practice, any U.S. taxpayer that has transactions with a foreign entity should receive a completed Form W-8 from that foreign party, even if the payment is not a "withholdable payment" under FATCA. The Form W-8 serves to identify a payee as foreign, which is also relevant for Form 1099 reporting (i.e., if the payee is foreign, the payee generally does not receive a Form 1099).
Q2: What is the purpose of Form W-8BEN-E, and how is it different from Form W-8BEN?
A2: Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities):
- Is for entities only and contains significant FATCA-related information and a number of representations (Form W-8BEN is still used for foreign individuals)
- Is a certificate which is retained by the withholding agent until requested by the IRS
- Is prepared by the foreign beneficial owner of the payment (note that because entities may be viewed differently for tax than for legal purposes, the legal recipient of the payment may not be the beneficial owner of the income)
Q3: What parts of Form W-8BEN-E must always be completed?
A3: Form W-8BEN-E contains 30 parts, which can seem overwhelming. However, very few of the sections for any particular entity will need to be completed. All foreign beneficial owners must complete Parts I (Identification of Beneficial Owner) and XXIX (Certification).
- Part I requires information related to:
- Entity name
- Country of incorporation or organization
- Chapter 3 status–this section must be completed to identify the tax status of an entity claiming treaty benefits. Entities requesting treaty benefits must also complete Part III (Claim of Tax Treaty Benefits).
Q4: How do the FATCA reporting rules coordinate with the existing Chapter 3 reporting rules (Form 1042)?
A4: The IRS has issued revised Forms 1042 and 1042-S to accommodate both Chapter 3 and Chapter 4 reporting requirements. If a payment is subject to both Chapter 3 and 4 reporting, the payment only needs to be reported once on Forms 1042 and 1042-S. As with Chapter 3, FATCA reporting may be required on Forms 1042 and 1042-S even if no withholding was performed.
Q5: How do Chapter 4 FATCA withholding tax rules coordinate with the existing chapter 3 withholding tax rules?
A5: If a payment is subject to FATCA withholding, that tax is credited against any Chapter 3 withholding tax. Likewise, it is possible for a payment to be subject to Chapter 3 withholding and be exempt from FATCA withholding or vice versa. The Chapter 3 and 4 rules are coordinated to avoid doubling the tax withheld on payees.
Q6: Can the Chapter 4 withholding tax be reduced or eliminated under an income tax treaty?
A6: No. The 30 percent Chapter 4 withholding tax cannot be reduced or eliminated at source under an income tax treaty. However, an FFI may claim a refund for the tax if it is the beneficial owner of the income subject to tax and it is entitled to claim benefits under a treaty that reduces the tax on that item of income.
Q7: How do Chapter 4 FATCA payee documentation rules coordinate with the Chapter 3 documentation rules?
A7: The IRS has issued revised Forms W-8BEN, W-8ECI, W-8EXP, W-8IMY and W-9, as well as a new Form W-8BEN-E, to satisfy both Chapter 3 and Chapter 4 documentation requirements. The revised Form W-8BEN is for nonresident alien individuals, while Form W-8BEN-E is for foreign entities and is meant to capture the FATCA status of the payees.