FATCA withholding on payments to nonfinancial foreign entities: a broad new requirement.

AuthorChambers, Valrie
PositionForeign Account Tax Compliance Act

Most CPAs are familiar with the offshore asset disclosure provisions of the Foreign Account Tax Compliance Act (FATCA). Beginning with 2011 tax years, Sec. 6038D requires the annual disclosure on Form 8938, Statement of Specified Foreign Financial Assets, of an individual's specified foreign financial assets when their aggregate value exceeds certain thresholds. In addition, many CPAs are aware of the disclosure rules FATCA applies to foreign financial institutions regarding their U.S. depositors.

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What many CPAs may not be aware of, however, is FATCA's impact on domestic withholding agents. Beginning July 1, 2014, U.S. taxpayers that have nothing to do with financial services will be required to collect, analyze, document, and report information regarding payments to both foreign financial institutions and nonfinancial foreign entities (NFFEs). The effective date for FATCA withholding was originally scheduled to be Jan. 1, 2014. On July 12, 2013, the IRS issued Notice 201343 to extend the effective date to July 1, 2014. CPAs should use the additional six months wisely to educate themselves and their clients.

The FATCA definition of a withholding agent is drafted broadly, and it requires any person, acting in any capacity, having the control, receipt, custody, disposal, or payment of an item of income that is subject to FATCA withholding to have appropriate documentation. Withholding agents that fail to obtain this documentation are required to withhold 30% on the gross payment. As a result, all U.S. persons (individuals, businesses, trusts, retirement plans, tax-exempt organizations, etc.) are potentially affected. Many will find complying with this part of FATCA to be very time-consuming and will need to put into place new policies and procedures in their accounts payable function.

This item examines the portion of FATCA that relates to payments to NFFEs and why it is important for most CPAs to advise their clients on what withholding agents must do to be ready on July 1, 2014.

FATCA was signed into law in March 2010 as a "revenue raiser" that was part of a much larger bill, the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147. FATCA was also a response to the revelation that the Swiss investment firm UBS had been actively helping its clients evade U.S. taxes by establishing foreign bank accounts, moving funds into those accounts, and not reporting the income earned. In August 2009, the Swiss government agreed to abandon its historical protection of the identity of depositors and turned over the names of 4,450 U.S. nationals who had a total of $18 billion in assets on deposit with UBS.

FATCA's multipronged approach to identifying unreported offshore income includes the provisions regarding...

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