The 2010 Foreign Account Tax Compliance Act (FATCA) contains provisions designed to ensure U.S. taxpayers pay taxes on income from foreign accounts. The final regulations related to the FATCA provisions were issued in January 2017. There were no significant changes from the proposed regulations. We want to provide a re-cap of the regulations and provide some best practices for complying.
If your company has overseas contractors, vendors, and suppliers; you are subject to increased reporting and “know your customer” requirements to avoid being required to withhold tax from payments to these foreign vendors and suppliers despite compliance with the U.S. tax regulations.
A U.S entity that makes virtually any type of payment to a foreign financial institution (FFI) is required to withhold and pay 30% of the payment to the IRS, unless the status of the FFI has been documented as exempt and reporting requirements are met. A FFI is broadly defined as any entity that holds deposits or financial assets in the ordinary course of business. Payments subject to withholding include interest, dividends, royalties, premiums, annuities and wages. The requirements for payments to foreign contractors, suppliers, and vendors but not FFIs are less stringent but you still need to document their FATCA status to demonstrate that there is no requirement to withhold.
Other key provisions:
- FATCA makes it clear that “dividend equivalents” paid by U.S. corporations to foreign individuals and entities are to be treated as U.S.-source dividends for tax purposes.
- You must file with the IRS and furnish to any relevant payment recipient a report of payments subject to FATCA by March 15 of the calendar year following the year in which the amount subject to reporting was paid. (Forms 1042, 1042-S).
Recommended best practices
- Since it is often unclear whether an entity is foreign or US, it is good practice to request all vendors, contractors and suppliers to complete the applicable Form W-9 or W-8 series form before making payments to them. Acquire certain “know your customer” documentation to demonstrate that you have no obligation to withhold from payments to non-FFI contractors, suppliers, and vendors.
- You and anyone in your company responsible for making payments, should familiarize themselves with these rules and create a process to that documents the status of each foreign payee. Your systems will also need track payments made to these vendors as you must file Forms 1042 and 1042-S by March 15 of the year following the calendar year during which the payments were made.
Congress has made it more difficult for U.S. taxpayers to avoid tax on overseas accounts. You should review your transactions with your foreign contractors, vendors, and suppliers to ensure that you are in compliance with the provisions of FATCA now and in the future. If you believe that these provisions apply to your company, a deeper discussion of the requirements and reporting is likely appropriate. We look forward to working with you to expand on any or all of these changes further and discuss the impact of these changes on your business organization and practices. Please contact Steve Gallant to schedule a meeting to evaluate the compliance necessary for your particular situation or read more about our international tax services.