US companies already have to comply with a variety of IRS regulations when it comes to paying vendors. As if that didn’t keep tax and accounting departments busy enough, your company is now also required to adhere to the new FATCA regulations. Fortunately, it’s not as overwhelming as it may at first seem, and we have summarized the most important information from Accounting Today’s March 4, 2015 webinar on the topic for you in this article. Sponsored by Avalara, “FATCA Audits: Are You and Your Clients Ready?” was presented by two of Avalara’s tax experts: Silvia Aguirre, Chief Certificates Officer, and Matt MacNeil, Manager, Tax Technology Services.
What is FATCA?
FATCA stands for the Foreign Account Tax Compliance Act. The new FATCA regulations are supposed to help decrease tax evasion through foreign entities, and the IRS is starting FATCA audits now. Foreign institutions already have to report to the IRS about paying US entities, but US entities now have increased responsibilities when it comes to making payments to foreign institutions.
How Does FATCA Impact Your Business?
To put it in simple terms, FATCA has changed its withholding requirements. The range of payments subject to withholding has broadened, while existing withholding rules are still in place. Existing rules on tax withholdings are independent of the new FATCA regulations, but FATCA has to be applied first.
It’s important for you to determine whether your company is a withholding agent and therefore subject to FATCA regulations. If your company is in control of money that eventually goes to a person or company subject to withholding, then you’re considered to be a withholding agent. As a withholding agent, you have to do your due diligence.
You also need to understand that withholding rules can fall under Chapter 3 or Chapter 4 of the Internal Revenue Code. Chapter 3 covers withholding for a variety of payments. This type of withholding is guided by tax treaty and may include withholding reduced rates. FATCA is similar to Chapter 3, but rates are not reduced by tax treaties. Remember: FATCA always applies first. If it does not apply, then you may still have to withhold under Chapter 3.
What You Need to Know
With the new FATCA rules, your foreign payees are more likely to be subject to 30% withholding tax. Examples of payments that may require withholdings include dividends, rents, interest, royalties, salaries, wages, annuities, and proceeds from the sale of property that could produce interest or dividends.
As a withholding agent, you are required to collect the correct W-8 forms from your foreign payees. Using a legacy form is not sufficient because the form has undergone drastic changes. This means you’ll be required to collect new W-8 forms from all of your current foreign payees, even from those payees for whom you already have a W-8 on file.
In the future, you also need to use the new W-9 form. This form was updated for FATCA, but, unlike the W-8 form, you can still use previously collected W-9 forms as long as the information is still valid.
Forms W-8 and W-9 are used to establish proof that the foreign individuals or corporations you’re sending payment to are properly registered with the IRS. These forms are used to validate tax identification numbers and ensure that the payee isn’t subject to backup withholdings.
Still not sure which forms apply to which payees? Here’s a review of the relevant forms and the payees to which they apply:
- Form W-8BEN: Foreign individuals
- Form W-8BEN-E: Foreign businesses
- Form W-9: US entities, citizens, or residents
What to Expect in a FATCA Audit
During a FATCA audit the IRS will have to determine which of your payees are foreign. Additionally, the IRS will seek a list of all payments sent to foreign payees and will then determine which of the payments are subject to withholding tax.
Be aware that, by default, the IRS presumes that the 30% withholding applies, which means that the burden of proof is on you to show justification for not withholding the appropriate taxes. Punishment for not withholding is serious. Not only are you responsible for paying all of the tax that should have been withheld, but you’re also liable for applicable interest and penalties on top of that.
How to Comply with FATCA
It’s important to collect, validate, and manage the required documentation appropriately. Your company needs to have procedures in place to ensure that every payee has filled out the proper documentation.
The first step of your payment process should be sending out the appropriate forms to the payee and requesting them to be filled out. Once the payee returns the form, you can send funds without withholding taxes. However, if you do not receive the form from your payee, you will have to withhold taxes from any payments you send.
Here is a list of scenarios in which you’re required to withhold taxes:
- When there is no W-9
- When there is no TIN (tax identification number)
- When the form is not signed/certified
- When the IRS says that the TIN is not valid or has errors
- When the IRS requires you to withhold taxes
Now that you know a little bit more about FATCA, you may feel a little overwhelmed with the requirements you have to meet. As if recordkeeping is not difficult enough you are also required to keep the forms up-to-date. The form W-8, for example, expires after 3 years.
The good news is that we can make it easier for you to keep up with IRS regulations by keeping your documents safely encrypted on our servers. Now you can dig through your documentation to find out which forms need to be updated without going through numerous filing cabinets or storage closets.