FATCA, which was enacted in 2010, creates new information reporting and withholding rules for payments made to certain foreign financial institutions (“FFIs”) and other non-financial foreign entities (“NFFEs”). Every foreign entity is classified either as an FFI or as an NFFE. The FATCA rules generally become effective with respect to payments made on or after July 1, 2014.
FATCA is intended to increase transparency for the Internal Revenue Service (“IRS”) with respect to U.S. persons who may be investing and earning income through FFIs and NFFEs. While the main goal of FATCA is to gain information about U.S. persons, FATCA imposes a 30% withholding tax on certain payments made to FFIs and NFFEs if applicable documentation and reporting requirements are not met.
In general, after June 30, 2014, unless an exemption or a FATCA Intergovernmental Agreement applies, all FFIs will be required to enter into disclosure compliance agreements with the U.S. Department of Treasury (i.e., “FFI Agreements”), under which the FFIs are required to report directly to the IRS on their U.S. accounts, or be subject to the 30% withholding tax. FFIs that enter into FFI Agreements with the IRS are known as participating FFIs, and, upon registration with the IRS, will be issued global intermediary identification numbers (GIINs), which serve as poof of their participating FFI status. An FFI that does not enter into an FFI Agreement will be treated as a nonparticipating FFI for purposes of FATCA (unless an exemption or FATCA Intergovernmental Agreement applies).
All NFFEs that are not excepted under the FATCA rules (e.g., passive NFFEs) must report and/or certify as to any substantial U.S. ownership on Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), or be subject to the same 30% withholding tax.
These new reporting and withholding rules will affect account-opening processes, transaction processing systems and “know your customer” procedures utilized both by U.S. financial institutions, such as Banesco, and by foreign banks.
FATCA withholding responsibilities fall primarily on U.S. withholding agents, including Banesco, to the extent they have control, receipt, custody, or disposal of a withholdable payment made to an entity that is subject to FATCA withholding. Accordingly, Banesco will be required to withhold and remit to the IRS a 30% FATCA withholding tax on certain withholdable payments.
Withholding agents, including Banesco, must annually report their aggregate FATCA withholding on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and file Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, with respect to each foreign person who receives a withholdable payment.
In addition, the terms of certain FATCA Intergovernmental Agreements will require withholding agents, like Banesco, to report to the IRS certain identifying information (name, address, etc.) and account information (year-end balance, etc.) concerning foreign account holders. This information will potentially be available to the tax authorities of the account holders’ countries of residency.
Because Banesco does not give tax advice, we urge you to seek independent professional advice if you have any questions regarding FATCA or how it may affect you.