Guest Column

FATCA: What you don’t know can be expensive

June 27, 2014
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On July 1, the Foreign Account Tax Compliance Act will go into effect — and West Michigan businesses had better be ready.

Although an extension has been granted for companies making a good-faith effort, FATCA becomes the law of the land tomorrow. The new regulations require foreign financial institutions to report financial information to the IRS on U.S. citizens who open or hold accounts in foreign countries or face steep withholdings for failing to do so.

U.S. companies that work with foreign vendors or foreign financial institutions are now required to share information on these service providers and financial institutions with the IRS or face the same sizable financial penalties.

FATCA was enacted four years ago after the United States finally said, “Enough’s enough” when it came to Americans failing to pay taxes on secret offshore bank accounts in the Cayman Islands, Switzerland and other international spots.

Foreign financial institutions and governments initially balked as the unprecedented information requirements from the United States became clear. They worried compliance costs would be expensive, and the potential loss of income would hurt their gross domestic product.

But the United States had shaken a big stick with FATCA: Starting with tax year 2014, foreign banks can either provide this information to the IRS or face 30 percent withholding when they receive payments from U.S. parties.

Acceptance was initially slow. In January, only 18 countries had filed intergovernmental agreements promising to share information. Today, nearly 80 foreign countries — including Canada, one of the largest and most vocal holdouts — have fallen in line. Indeed, some like Mexico are borrowing a page from our playbook and demanding the United States provide information on income earned by its citizens working here.

It is becoming increasingly clear that Americans may not be able to hide money anymore — unless it’s under their mattresses.

FATCA is a new paradigm and a significant first step for unprecedented cross-border reporting of financial information. It has opened the proverbial floodgates for the global sharing of financial information for individuals.

While corporations have had to report foreign holdings for years and individuals have had a requirement that was widely ignored, there’s been no good way to compel foreign banks to report information on individual investors — until FATCA.

In order to prepare, West Michigan businesses must take one of two steps. If you are a financial institution with a branch in a foreign country, you must register your branch operations with the IRS and agree to provide information to the IRS on U.S. citizens. If you are a U.S. company doing business with foreign vendors, you must obtain documentation from those vendors using IRS form W-8BEN-E, or start withholding 30 percent from each of your payments to them. This applies to services, interest, royalties, dividends and similar payments, but not to purchases of tangible products.

Ouch!

One look at Form 8BEN-E might persuade a company to take the 30 percent hit, but the eight-page form is not as intimidating as it seems. Think of it as an extension of the W-9 process, where U.S. businesses secure taxpayer identification numbers for their American vendors — but with Roman numerals.

That’s right, to make things a little more complex, the IRS has added Roman numerals to 8BEN-E, making it — and the NFL’s Super Bowl and the Olympics — the only significant players to rely on the antiquarian numbering system.

While the form may be long, foreign companies are not required the fill out the entire thing. In fact, non-financial foreign entities, or NFFEs, are typically required to provide name, address, indicate they are an active NFFE on line 5, skip to Section XXVI, sign and date in Section XXIX, and they’re done. If not performing services in the United States, there is no need for rank and serial number. And then you can both brag that you are FATCA compliant at your next charity event.

Failure to do so?

There’s that XXX percent penalty to make you reconsider.

Jerry Jonckheere is a partner in the Grand Rapids office of Plante Moran, where he concentrates his practice on international tax issues. He can be reached at Jerry.Jonckheere@plantemoran.com.

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