The Foreign Account Tax Compliance Act (FATCA) has been in the news for years, but the effective date of July 1, 2014 is fast approaching.
Any U.S. business that makes a payment to a foreign vendor or investor will need to determine whether or not the payment is subject to FATCA.
The act’s new disclosure requirements cast a pretty broad net — especially with business becoming more and more international, says Chris Paris, regional tax leader in the Greater Bay area at Moss Adams LLP.
“It’s either going to be a big demand on businesses’ internal resources, or they will outsource it to a third-party provider to ensure that they are FATCA compliant,” Paris says. “I believe it will be a pretty extensive list of internal policies and procedures that they are going to need to come up with.”
Smart Business spoke with Paris about what you need to know about FATCA.
What’s the purpose of FATCA?
Part of the Hiring Incentives to Restore Employment Act of 2010, FATCA requires disclosure of information related to payments made to organizations located outside the United States. It seeks to detect and discourage offshore tax evasion by making payments to overseas accounts more transparent.
Ultimately, the U.S. government wants other countries to sign agreements about sharing more information on payments across borders. The idea is slowly gaining traction, although those FATCA provisions are phasing in over 2015 and 2016.
The act’s first step, which starts July 1, is identification — understanding where funds are going and to whom. Step two will be deciding what to do with this information.
The act’s implementation was extended because the new reporting requirements are complex, and the resource-constrained IRS and Department of Treasury took awhile to issue regulations and guidance.
So, who needs to pay attention to FATCA compliance this summer? Is it just banks?
Beyond banks, non-U.S. foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs) are subject to FATCA. There are a number of different investment funds that are going to be identified as FFIs, such as U.S. management companies and investment funds — private equity, venture capital, hedge funds, real estate funds, etc. — with foreign owners. And, of course, U.S. businesses that make payments to foreign entities may become subject to FATCA.
What do business owners need to know?
If you make payments to foreign vendors or investors, you have two options:
- Choose to be FATCA compliant — meaning you must obtain information on the foreign parties that you’re paying, and disclose it to the IRS by filing additional forms, such as Form 8966 and 1042-S.
- Decide you don’t want to become FATCA compliant, and then become subject to the 30 percent withholding penalty on payments to any foreign payees.
However, there are a number of exceptions. Just because your company makes a payment to a foreign payee doesn’t mean FATCA will be an issue. For example, paying rent to a foreign entity is exempt.
If you are subject to FATCA, you’ll need to discuss it with your foreign investors or vendors, who may value their privacy. Many of these, such as a high net worth family entity or sovereign European or Middle Eastern wealth funds, don’t necessarily want the U.S. government to know they are receiving payments. That’s why they are organized in the Cayman Islands or Switzerland. Certain foreign partners may opt to pay the 30 percent withholding tax, as a cost of doing business.
How time consuming will it be to set up a FATCA compliance process?
Really large companies are already hiring third parties to come in and FATCA test to ensure they will be compliant. Most business won’t have adequate internal resources, so they’ll outsource this compliance function.
Basically, an organization needs to assess what it’s doing now — identify its current processes and procedures related to payments overseas, determine if exemptions apply and then decide what needs to be done differently, including training staff.
It will be pretty time consuming, but the penalties are so significant that most organizations will likely make the effort. ●
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