Top 5 questions about the Foreign Account Tax Compliance Act
It’s been about a year since the Foreign Account Tax Compliance Act (FATCA) went into effect. These are the most commonly asked questions so far:
1. What are the due diligence standards for validating Form W-8BEN-E?
There are three important steps to validate Form W-8BEN-E for accuracy and completeness:
Step 1
Review the documentation line by line to help ensure the form is complete and consistent. A failure on any singular line item does not necessarily fail the form and all claims made therein. However, a withholding agent should watch for fatal errors that would fail the form. For example, if a company in Argentina checks the box that it is a reporting Model 1 Foreign Financial Institution. Argentina does not have an Intergovernmental Agreement (IGA) with the U.S., so this error would fail the form.
Note: A list of IGA countries can be found on the U.S. Department of the Treasury website.
Step 2
Ensure the information provided on Form W-8BEN-E is consistent with other tax information. Contradictions may invalidate the form.
The withholding agent should review the form for an indication of U.S. status (e.g., a U.S. mailing address) or other information that would indicate residence in a country other than what’s claimed on the form for a payee making a treaty-based claim.
A Form W-8-BEN-E that contains indicia of U.S. status is not valid unless documentation supports non-U.S. status. Additional documentation must be obtained to support the claim of residence in the treaty country that does not contain an address outside the treaty country.
Step 3
If a payee claims to be a participating foreign financial institution (FFI), registered deemed-compliant FFI, Reporting Model 1 FFI, Reporting Model 2 FFI, Direct Reporting Nonfinancial Foreign Entity or a sponsored entity, it must provide the global intermediary identification number (GIIN) on Form W-8. The withholding agent must validate the GIIN against the IRS list within 90 days of receipt. This check must be repeated annually.
2. If tax under FATCA is required to be withheld, is nonresident alien tax (Chapter 3) applicable?
No, FATCA is a filter on top of Chapter 3. If FATCA withholding applies, there will be no Chapter 3 withholding.
However, if FATCA withholding does not apply, a withholding agent will look to see if Chapter 3 withholding applies. Even though both rates are 30%, the withholding agent must be able to distinguish which type of withholding applies as it will determine which account funds are deposited to and how the amounts are presented on Form 1042.
- Example 1: ABC Russian Bank fails to provide a Form W-8 to the U.S. withholding agent and is treated as a non-participating FFI. ABC Russian Bank receives $200,000 in U.S. source interest on January 31, 2015. In this case, ABC Russian Bank is subject to 30% FATCA withholding. There is no Chapter 3 withholding.
- Example 2: Assume ABC Russian Bank provides a Form W-8 with a valid GIIN prior to receiving the interest payment. However, it does not make a valid treaty claim. In this instance, ABC Russian Bank is NOT subject to FATCA but is subject to Chapter 3 withholding at a rate of 30%. It is not eligible for a reduced rate since no treaty claim is made to reduce the rate of withholding.
3. How long is Form W-8BEN-E valid to claim treaty benefits and FATCA exemption?
Form W-8BEN-E will remain valid until the last day of the third calendar year following the year in which the form is signed unless a change in circumstances makes any information on the form incorrect. For example, a Form W-8BEN-E signed on June 30, 2015, remains valid through December 31, 2018.
4. Can you use Form W-8BEN-E after the date of payment to avoid liability on under-withholding for the period there was no documentation?
A withholding agent may prove that withholding under FATCA was not required on the basis that a valid Form W-8BEN-E was furnished after the payment date but effective as of the payment date. A signed affidavit (either at the bottom of the form or on an attached page) must state the information and indicate that the representations contained on the form were accurate at the time of the payment.
If it is beyond a year after the date of payment, the withholding agent will be required to obtain documentary evidence that supports the Chapter 4 status claimed, in addition to Form W-8BEN-E and the affidavit mentioned above. Acceptable documentary evidence includes, but is not limited to, the organizational documents (e.g., articles of incorporation), financial statements or a letter from a government agency.
5. When is the withholding agent required to deposit the tax withheld?
All deposits must be made by electronic funds transfer according to the following thresholds:
- Annual deposits (due on March 15 of the following calendar year) — when the aggregate amount of withholding tax is less than $200.
- Monthly deposits (due within 15 days after the close of such month) — when the withholding tax is greater than $200 but less than $2,000.
- Quarter-monthly deposits (due within three banking days after the close of such quarter-monthly period, i.e., 7, 15, 22, and last day of the month) — when the withholding tax is greater than $2,000.
How Wipfli can help
The application of FATCA rules is highly individualized. We can review the facts for your situation and help you create a plan for compliance. For more information on FATCA, speak with one of our international tax advisors or contact us today.
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