FATCA: What Finance Professionals at U.S. Multinationals Need to Know


U.S. multinationals will need to carefully inventory their outbound payments to determine if withholding is necessary and if the grandfathering provision applies.

Under FATCA, certain U.S.-sourced payments remitted abroad will be subject to a 30 percent withholding rate unless information on the recipient is provided to the payor or the IRS. For U.S. multinationals, FATCA compliance should begin now with a thorough review of accounts payable processes.

To ensure compliance, multinationals should identify their outbound payments from the U.S. to foreign financial institutions and entities. For the time being, a withholdable payment includes U.S.-source fixed, determinable, annual or periodic (FDAP) income. This would cover items such as dividends, interest, rents, royalties, etc. Beginning Jan. 1, 2015, the definition of a withholdable payment will be enlarged to encompass U.S. gross proceeds.

Obligations that are outstanding on Jan. 1, 2014, are not subject to FATCA withholding, however, under a grandfather provision. As a result, U.S. multinationals will need to carefully inventory their outbound payments to determine if withholding is necessary and if the grandfathering provision applies.

Once outbound payments have been identified, they need to determine whether the recipient is a foreign financial institution (FFI) or a non-financial foreign entity. Some financial institutions and non-financial foreign entities, such as publicly traded companies, will be exempt from withholding.

Income directed to FFI that is not exempt from withholding must be segregated into two categories: payments to participating FFIs, and payments to non-participating FFIs. A participating FFI is one that has entered into an agreement with the IRS and has certified that it will review its accounts and provide information on U.S. account holders on an annual basis. Payments to non-participating FFIs will be subject to 30 percent withholding. Additionally, in some instances, payments to participating FFIs may be subject to FATCA withholding.

Professionals at non-financial foreign entities will need to provide documentation to U.S. withholding agents in order to avoid FATCA withholding. Specifically, the non-financial foreign entity will need to certify that it is not substantially owned by U.S. persons. Where the non-financial foreign entity is substantially owned by U.S. persons, then information on U.S. owners will need to be provided to the U.S. withholding agent to avoid FATCA withholding.

FATCA’s reach extends much farther than just financial institutions, and professionals at U.S. multinationals need to start preparing themselves now to ensure they are compliant next year.

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