By Mary Vasilescu

The U.S. government has no shortage of acronyms, especially in the federal tax code, and there’s another one you should know if you have offshore financial interests or if you make payments to foreign entities: FATCA. The Foreign Account Tax Compliance Act takes the next step in removing the veil from foreign banks and other entities that enable U.S. citizens to evade taxes on assets accumulated in other countries. Foreign entities are required to satisfying payment documentation and reporting requirements. Lacking the cooperation of those entities, 30 percent of all applicable U.S. –sourced income payments will be withheld as a U.S tax. FATCA overrides the U.S tax treaties for purposes of reduced withholding.

According to the IRS, “The objective of FATCA is the reporting of foreign financial assets; withholding is the cost of not reporting.”

It’s new, and it’s cumbersome, but here is a quick overview of this new tax act and some next-step advice.

The facts

FATCA was passed by Congress in 2010, and the government began to seek compliance from foreign nations and their banking systems on the information reporting requirements of the new act.

For individuals this act will be vaguely familiar to U.S. citizens and residents who have a cumulative total of $10,000 or more in foreign banks. Those who do previously had to fill out forms to satisfy the requirements of another IRS reporting mechanism, the Foreign Bank Account Report (FBAR). But FATCA added as a new filing requirement in 2011, Form 8938, which is more comprehensive than FBAR in that it includes all forms of financial assets, not just cash sitting in offshore bank accounts. FATCA filing thresholds add to the complexity of the act in that they’re different for those holding foreign assets who are living in the U.S. versus Americans living and conducting business abroad.

For entities, now agreements are finally in place, and the law went into effect on July 1, 2014. The U.S. Treasury requires a withholding agent to withhold 30 percent of qualifying gross payments paid to any individual or legal entity deemed noncompliant under FATCA. FATCA imposes new registration and reporting requirements for foreign financial institutions (FFIs) and nonfinancial foreign entities (NFFEs). Entities that fail to disclose substantial U.S owners are deemed noncompliant. NFFEs that are not excepted under the IRS regulations must certify they have no substantial U.S. ownership; otherwise, they will be subject to 30 percent withholding. The IRS has issued a FATCA updated Form W-9 that withholding agents may demand from U.S. exempt recipients to overcome a presumption of foreign status.

It’s not all bad news, however. Certain foreign-based financial transactions do not have to be reported or withheld as part of FATCA. These include grandfathered obligations already in existence as of July 1, 2014, and payments for:

• Services, including wages and employee compensation
• Use of property (leases and licenses, etc.)
• Transportation and freight
• Interest on accounts payable arising from the acquisition of goods and services

To comply with FATCA requirements, the IRS has issued several updated forms that must be used to communicate between withholding agents, the recipients of income and the IRS. The revised series of forms W-8 will assist with the identification of the payees for FATCA classification, and the revised forms 1042 and 1042-S will satisfy the year end reporting. These new forms require expanded information and must be used for 2014 by withholding agents and payees subject to the FATCA rules.

How to proceed

If you have or have had at any point in the last year, any foreign assets, or if you conducted business with any foreign individuals or entities in 2014, be sure to mention it as your tax filings are being reviewed. Your tax preparer can help you determine whether you are responsible for complying with FATCA, help you establish a FATCA compliance plan and fill out the appropriate filing documents (Form 8938, Form W-9, Form W-8 or proper variant, Forms 1042 and 1042-S) for yourself, your business and any other person for which such a form would be required.

Keep in mind that failure to comply is a serious offense, with financial penalties and interest tacked on to noncompliant tax returns. Your experienced tax preparer can help you identify how FATCA will impact you and your business, stay in compliance and minimize the filing hassle and impact on your bottom line business and personal assets. 

Mary Vasilescu is an international tax expert and partner in the New York City office of Wiss. Reach her at mvasilescu@wiss.visioncreativegroup.com.