Joan C. Arnold
Under current law, payors of U.S. source interest, services fees,
royalties, and dividends are obligated to withhold 30 percent tax
(unless exempt or reduced by treaties) pursuant to Section 14411
and report them on Form 1042. The Internal Revenue Service (IRS) is
aggressively pursuing audits in this area. Many non-financial
institutions have found that their accounts payable departments are
challenged in complying with such rules. Under the Foreign Account Tax
Compliance Act (FATCA), additional compliance burdens will be imposed,
starting in 2013, and companies need to start thinking now about how
FATCA will affect them.
This article introduces the basic issues for payors that are
nonfinancial institutions that will be caught in the FATCA maze. It is
the first article of many, as the rules are being developed. Stay tuned
for the updates.
FATCA provides for the following basic rules:
It's important to note that the FATCA withholding is in addition to
and not a substitute for the Section 1441 withholding. For example, if
the U.S. company is paying a U.S. source royalty to a foreign
corporation, it is subject to the 30 percent Section 1441 withholding,
and the FATCA withholding, unless exemptions are managed. In many
situations the Section 1441 withholding may be avoided if the payee
provides a properly completed Form W-8BEN on which it claims the
benefits of a treaty to reduce the rate to zero. Even assuming that the
form is received, and it's accurately completed, it will not preclude
the rules of FATCA (unless subsequent guidance so permits). If both
FATCA and Section 1441 withholding apply, the payments could be reduced
by 60 percent.
The goal of FATCA is to provide transparency, so that U.S. persons
cannot inappropriately hide income and assets behind foreign entities.
Given that goal, at least in the context of NFFEs, there is not a great
deal of avoidance that should occur, and the government is looking at
potential exemptions that would reduce the FATCA burden. The initial
guidance is found in Notice 2010-60. The Notice provides for certain
exemptions, and asks for comments on potential exemptions from FATCA for
payments to NFFEs. The relevant provisions are:
Payments made to public companies that are not FFIs are statutorily
exempt from FATCA withholding, but as of yet there is no guidance on how
to prove the status of the payee as publicly traded, and there is no
definition of publicly traded.
Numerous questions abound. For example, in the holding company
exemption, does it matter if the shareholders of the company are
themselves FFIs? For the finance center, are payments it makes subject
to FATCA, even though the payments are foreign-source?
A number of these possible exceptions were the subject of a FATCA
presentation made at the International Fiscal Association USA meeting on
February 25, 2011. A link to the presentation can be found at http://www.pepperlaw.com/pdfs/Intl_Fiscal_Assoc_USAMeeting_Arnold_022511.pdf.
While the FATCA rules are still in the development stage, companies
need to start considering what they may need to do to bring their
accounts payable and treasury functions into compliance. A good starting
point would be a review of the Section 1441 procedures in place to test
for the strength of those procedures, and to understand what challenges
may be faced in achieving FATCA compliance. We'll be following up with
more on this topic as guidance is developed.
1 All Section references are to the Internal Revenue Code of 1986, as amended.
material in this publication was created as of the date set forth above
and is based on laws, court decisions, administrative rulings and
congressional materials that existed at that time, and should not be
construed as legal advice or legal opinions on specific facts. The
information in this publication is not intended to create, and the
transmission and receipt of it does not constitute, a lawyer-client
article is republished with permission of Pepper Hamilton LLP. Further
duplication without the permission of Pepper Hamilton LLP is prohibited.
All rights reserved.
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