Easing the FATCA Compliance Burden

New IRS guidance seeks to reduce the FATCA compliance burden for intermediated payments

Jeffrey S. Freeman, J.D., LL.M

ftx-tax-solutions2Foreign Account Tax Compliance Act (FATCA) has been seen by many institutions as a burden due to the enormous amount of process, reporting and documentation changes that they were required to undergo in order to be compliant. Under the 2010 FATCA regulations, participating FFIs must report U.S.-owned accounts to the IRS. If they fail to do so they can face a 30 percent withholding tax on their U.S. source income. As Foreign Financial Institutions (FFIs) race to the July 1 FATCA implementation date when reporting and withholding requirements are set to take effect, the IRS has issued new guidance. These changes seek to reduce the FATCA compliance burden on withholding agents and participating FFIs in the case of intermediated payments.

FATCA Reporting Changes

FFIs were able to breathe a little deeper after the IRS released Revenue Procedure 2014-38 on June 24, 2014. FFIs will no longer be required to perform duplicative reporting of substantial U.S. owners when a participating FFI receives payments as an intermediary on behalf of a passive non-financial foreign entity (NFFE).

Withholdable Payments

When a withholdable payment is allocated to an account holder of a passive NFFE FFI that has one ore more substantial U.S. owners or controlling persons (defined by Model 2 intergovernmental agreement), the FFI may certify on the withholding statement that it is reporting the account holder as a U.S. account. This relieves the entity of its obligation to obtain and report about a passive NFFE with substantial U.S. owners, unless it has reason to know that the certificate is incorrect or unreliable.

Payments for Pooled Accounts

FFI can now allocate payments to documented account holders that are exempt from reporting and withholding. Where before the payment would have been allocated to each payee of the payment onto its withholding statement, the IRS will now allow FFIs to allocate a portion of a withholdable payment to a group of documented account holders for whom withholding and reporting is not required. In the example of a withholding rate pool of exempt payees for a payment of U.S. bank deposit interest that is allocable to a group of documented foreign offshore bank account holders, FFIs will no longer be required to provide specific information and a valid withholding certificate or other appropriate documentation for each individual payee.

About Freeman Tax Law

Freeman Tax Law is a boutique tax law firm with national exposure with the expertise and professional staff equipped to handle all domestic and international tax law matters. Freeman Tax Law regularly represents clients in disclosures to the IRS. Our firm also routinely advises banks and financial institutions on how to comply with FATCA and works with consulting/technology firms to implement systems for FFIs. In addition to handling complex tax controversies, the Freeman Tax Law team has extensive expertise in assisting clients with wealth management and estate planning.

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