Make no mistake: The IRS really wants to find your offshore assets.
FATCA, FFI, NFFE, IGA, GIIN, KYC… how many acronyms does it take for the IRS to demonstrate that they really want to find your offshore assets? If the acronyms don’t get you, the 30% withholding tax imposed for failing to comply with the FATCA rules may.
Final regulations under the Foreign Account Tax Compliance Act (FATCA) were issued in January. These regulations painstakingly attempt to identify all of the players, the players’ roles and the costs for not playing by the IRS’s rules in the offshore assets reporting game.
FATCA is the IRS’s global initiative to capture information on U.S. taxpayers’ “offshore” foreign assets. The players in this game include U.S. taxpayers with offshore assets and with greater than 10% ownership in a foreign entity, foreign financial institutions (FFIs), non-financial foreign entities (NFFEs) and withholding agents.
Leading off are U.S. taxpayers with specified foreign assets who do not provide the required information to their respective FFIs; these “recalcitrant account holders” are subject to a 30% withholding tax on certain payments from the FFIs.
Next at bat are the FFIs that harbor the assets. FFIs that agree to report and register with the IRS will be a “participating FFI” and avoid the withholding tax. “Deemed-compliant FFIs”—considered low-risk entities—may or may not need to register with the IRS and may also be safe from the withholding tax. “Non-participating FFIs,” who choose not to follow the FATCA requirements, are hit with the 30% withholding tax on certain U.S.-source payments.
The lightest hitter in the lineup is the NFFE—any foreign entity that is not a financial institution. Many types of NFFEs are exempt from the FATCA withholding requirements—active NFFEs, publicly traded corporations, expanded affiliated group (EAG) members of a publicly traded corporation, certain U.S. possessions-organized entities, and other excepted nonfinancial entities.
Umpiring is done by the Withholding Agents. Once the bases are loaded with U.S. account holders, FFIs and NFFEs, it is up to the withholding agent to confirm that the players are safe at the plate without any withholding or to call them out via the withholding tax.
U.S. taxpayers with offshore assets should be prepared to supply and verify their U.S. taxpayer information to their FFIs. FFIs opting to participate in the FATCA requirements will need to register with the IRS (after July 15, 2013). Participating FFIs must report certain U.S.-owned accounts and could be required to withhold on payments to recalcitrant account holders.
NFFEs need not register with the IRS, but must provide ownership information to withholding agents when requested. Failure to provide the required information will subject the NFFE to the 30% withholding tax.
Withholding agents play the most important role in the FATCA game and are tasked with knowing the FATCA players and their positions on the field. Any U.S. or non-U.S. person (including an FFI) that has control, receipt, custody, disposal, or payment of any withholdable payment (including pass-through payments) has withholding agent responsibilities.
Withholding agents must determine whether an FFI is participating, deemed compliant, or non-compliant, and whether their associated NFFEs have registered their ownership and identified their substantial U.S. owners. If the FFI is non-compliant or if the NFFE does not disclose its substantial U.S. shareholders, then the withholding agent must withhold 30% of any withholdable payment.
“Withholdable payments” encompasses two main categories—U.S.-sourced income such as interest, dividends, royalties, etc., and gross proceeds from the sale or other disposition of property that can produce U.S.-sourced interest or dividend income.
The U.S. government is also entering into intergovernmental agreements (IGAs) with other countries in an effort to facilitate cooperation and side-step local privacy laws. IGAs represent information exchange agreements between the IRS and the tax authorities of foreign countries. Two IGA models currently exist:
• Model 1, where the FFI must report information on U.S.-owned accounts to their local tax authority, who in turn reports that information to the IRS. In reciprocal Model 1 IGAs, the U.S. reports the same type of information back to the foreign tax authority.
• Model 2 requires FFIs to report U.S.-owned account information directly to the IRS.
As of May 2013, seven countries (including the U.K., Mexico and Switzerland) have entered into an IGA with the U.S., and another 40 IGAs are in the works.
Taxpayers need to determine their position on the playing field as quickly as possible. For example, multinational corporations with in-house banks or captive insurance companies could risk making an error if they think that their groups do not include FFIs. Once this determination is made, they must decide whether they want to play the FATCA game—if they are not exempt, will they meet the reporting requirements or will they suffer the 30% withholding tax?
The key point is to KYC—know your customer. Now is also the time to know your FATCA obligations, know your filing and reporting requirements, and know that the IRS is intent on finding those offshore assets and penalizing those not willing to play the game by their rules.
Any tax advice contained herein was not intended or written to be used, and it cannot be used by any taxpayer for the purpose of avoiding U.S. federal, state, or local tax penalties. You should consult with your professional tax advisor to discuss the potential application of this subject matter to your particular facts and circumstances.