The requirements of the Foreign Account Tax Compliance Act (FATCA) and other recently revised US information reporting regulations are either effective immediately or are set to apply beginning on July 1. These rules not only impact the financial services sector, but are expected to affect many entities outside of the traditional financial services sector with operations both in and outside of the United States. Unfortunately, many nonfinancial multinational companies (nonfinancial MNCs) still mistakenly believe the two sets of final and temporary regulations released by the US Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) on February 20, 2014 will not affect them. Accordingly, they incorrectly believe that they do not need to take any action to address either FATCA or the corresponding changes to the US information reporting and withholding requirements as part of their overall compliance program.
A number of nonfinancial MNCs that were in compliance with existing information reporting and withholding requirements for payments to US and non-US payees are finding that they have a number of new or revised responsibilities and requirements because of the regulations that harmonize the existing information reporting and withholding obligations under Chapters 3 and 61 and Section 3406 of the Internal Revenue Code (Code) with FATCA. These harmonization regulations not only impact their payment flows, but affect the documentation they receive from payees and the presumption rules that apply with regard to payees who fail to provide valid documentation in a timely manner. Moreover, other nonfinancial MNCs are discovering that the exceptions to what constitutes a foreign financial institution (FFI), which was further clarified under the recently released regulations, may not be as beneficial as they thought they would be. As a result, they are finding that FFIs may exist in their MNC groups.
Fortunately, the Treasury and IRS recently announced that calendar years 2014 and 2015 will be regarded as a transition period for purposes of IRS enforcement and administration with respect to the implementation of FATCA and these fairly complex regulations. This relief means that the IRS will take into account the extent to which withholding agents, FFIs, and other entities are making a good faith effort to comply with the requirements and the modifications to existing information reporting and withholding obligations until calendar year 2016. For example, the IRS will take into account whether a withholding agent has made reasonable efforts during the transition period to modify its account opening practices and procedures to document the Chapter 4 status of payees, apply the standards of knowledge provided in Chapter 4, and, in the absence of reliable documentation, apply the presumption rules. See our Tax Insight on the good faith transitional relief.
This is the latest in our series of Tax Insights describing some of the significant items in the regulations impacting nonfinancial MNCs. The topics addressed in this insight include:
- Documentation needed to classify payees - Rules have been updated relating to the expiration of Forms W-8, validity of facsimile or emailed forms, and coordination of documentation standards under FATCA with Chapters 3 and 61 and Section 3406 of the Code.
- Presumption rules used when payees do not provide sufficient documentation - The presumption rules under existing Chapters 3 and 61 of the Code have been modified to reflect the requirements of FATCA.
An earlier Tax Insight examined entities classified as FFIs, classification of nonfinancial foreign entities (NFFEs), the responsibilities of sponsored entities, the alignment of withholding requirements, and revised reporting obligations. Please also see another earlier Tax Insight which highlighted many of the updates provided in these final and temporary regulations affecting all industries.