The Foreign Account Tax Compliance Act (FATCA) is a new set of U.S. tax rules that will affect many aspects of the day-to-day activities of the corporate treasury function. FATCA was enacted by Congress in 2010 to detect and deter tax evasion by U.S. citizens and businesses hiding money in foreign countries.
The legislation, which has a general effective date of January 1, 2014, is creating a new tax information reporting and withholding regime through which foreign financial institutions (FFIs) are expected to identify their U.S. account holders and report their account balances and other information.
FATCA was intentionally drafted with a broad definition of “foreign financial institutions” so that the label fits some entities that are not typically considered financial institutions, such as companies engaged in third-party industrial leasing and financing, or in the factoring of receivables. While the law does make exceptions for investment vehicles that are thought of as posing a low risk of tax evasion, such as retirement plans and tax-exempt entities, criteria for these exceptions have been circumscribed to ensure they are limited to low-risk vehicles.
Multinational corporations have only a few months to identify all the prospective FFIs within their organization because they need to undertake some key activities in mid to late 2013 to avoid the substantial tax consequences of noncompliance. For one thing, every legal entity that meets the definition of a “foreign financial institution” must register through an IRS website that will open later this month. Most companies with affiliated groups that contain FFIs will want to register with the IRS before October 25, 2013, to ensure timely receipt of FATCA-related information by counterparties and other business partners.
Some nonfinancial payments are excluded from the scope of FATCA, but these types of transactions are unlikely to be undertaken by the typical treasury function. There are also some grandfathering rules that might limit the impact of FATCA; however, these rules are of limited applicability. Many FFIs are already beginning to request changes to their ISDA agreements to address FATCA. Accordingly, companies need to enhance their focus on proper tax documentation and relevant tax representation in order to manage the risk of FATCA noncompliance.
FATCA’s requirements are similar to existing information reporting and withholding requirements, but the documentation that multinational corporations will begin receiving from payees (e.g., Forms W-8 and Forms W-9) under the new law will be enhanced to satisfy its requirements. For example, they will include new tax certifications and payee statuses. In addition, the withholding regime will become more complex as the current withholding regime is transitioned to meet these new requirements.