11th annual domestic tax conference - ernst & young and other information reporting and...

Domestic Tax Conference28 April 2016 | New York City

11th Annual

FATCA and other information reporting and withholding for nonfinancial services companies

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Today’s presentersDeborah PfliegerPrincipal, Ernst & Young LLP

Todd LarsenSenior Manager, Ernst & Young LLP

Thomas FinnertySenior Manager, Ernst & Young LLP

Matthew ByronManager, Ernst & Young LLP

Agenda

► Overview of information reporting and withholding

► Hot topics in the information reporting and withholding practice

► Overview of FATCA► Six-step payment process for US

withholding agents (USWAs)► Intergovernmental agreements (IGAs) and

FATCA legal entity classification► OECD’s Common Reporting Standard► IRS approach to information reporting and

withholding

Overview of information reporting and withholding

Overview of information reporting and withholding

Inter-GovernmentalAgreements

(IGAs)

Common Reporting

Standards (CRS)

Chapter 3Withholding (generally at 30%) and reporting on certain US source income paid to non-US persons

Purpose: Collect tax on US source income of non-US persons

Chapter 61Reporting on US and foreign source income paid to US persons (i.e., Form 1099 reporting)

Purpose: Enable IRS to match income paid with tax filings of US recipients

Chapter 4

FATCA (effective 1 July 2014): Collection, validation and reporting of certain

information to identify offshore income of US persons

Purpose: Ensure US persons pay US tax on worldwide income

Hot topics in information reporting and withholding


► We are now entering the post-FATCA implementation world, ready or not.► Many multinational companies sought to identify the impact of FATCA and found that

their compliance under chapters 3 and 61 was not ideal► The philosophy of simply collecting Forms W-8 or W-9 from all payees is no longer

adequate and leads to tax exposure.► Robust process and procedures within accounts payable, treasury and others

making payments are necessary to achieve compliance for chapters 3, 4 and 61.► As the IRS begins to examine FATCA compliance, compliance under chapters 3 and

61 will also be addressed.► For many accounts payable and treasury teams, the “exposure” amounts are great

and the presumption rules favor the IRS.


► Form W-8 and self certification requests► Multinational companies are encountering voluminous and immediate requests for

IRS Forms W-8 and W-9 and “self certifications.”► These demands will increase as FATCA and CRS further develop globally.► Failure to prepare will have an adverse impact on financial relationships, whether

new or existing, as well as potential tax and penalty exposure.

► The Common Reporting Standard (CRS)► Though the US is not participating in CRS, entities that do business in or have

relationships with financial institutions in adopting countries will be impacted by CRS.► Another layer of compliance required to transact business globally

► As these regimes change and new requirements arise, multinational companies must be prepared.

Overview of FATCA

Overview of chapter 4 (FATCA)

► The Foreign Account Tax Compliance Act (FATCA) is a 2010 US tax law designed to identify US taxpayers who may be avoiding US taxation by investing in offshore investment vehicles and opening accounts at foreign financial institutions.

► FATCA has introduced new documentation standards, as well as information reporting and compliance requirements for all entities as payors.

► FATCA was generally effective as of 1 July 2014 for US withholding agents.► FATCA imposes a 30% withholding tax on certain US-source income paid to entities

that choose not to participate in FATCA and payees who are not properly documented.► Treasury also released new regulations under chapters 3 and 61 to conform relevant

requirements to the new chapter 4 requirements. These conforming regulations imposed major changes for withholding agents/payors.

Significant upcoming FATCA dates

► FATCA was effective 1 July 2014, with various effective dates thereafter► 1 July 2016 – withholding and due diligence requirements begin for pre-

existing accounts (other than “prima facie foreign financial institutions (FFIs)”)► Note that this approaching date is generating a large number of requests for

withholding certificates that will continue as financial institutions attempt to comply with the rules

► 1 January 2019 – withholding requirements begin for gross proceeds

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Six-step process for US withholding agents

Process flow for USWAs taking into account chapters 3, 4 and 61

► Step 1: Determine whether an amount to be paid is fixed or determinable, annual or periodical (FDAP) income or gross proceeds from the sale of US securities.► If it is not, no documentation, withholding or reporting is required.

► Step 2: If the income is FDAP (or gross proceeds from the sale of US securities), solicit a valid Form W-9 from the payee or determine payee has foreign indicia.► If the payee furnishes a Form W-9 and is not an exempt recipient, report payment on a

Form 1099.► A payee that has not furnished a Form W-9 should be backup withheld upon unless it is an entity

with foreign indicia.

Note: Nonfinancial payments do not require a Form W-9, although a non-exempt recipient must furnish its TIN to avoid withholding and an exempt recipient that does not meet the eyeball test must provide a Form W-9 to avoid reporting. However, common practice is to get a Form W-9 from all US payees.


► Step 3: If no Form W-9 received and there is foreign indicia, determine and document source of income.► If the income is foreign source, no withholding or reporting is required.

► Step 4: If the income is US source, determine whether the payment is a “withholdable payment” for chapter 4 purposes.► If the income is not a “withholdable payment” for chapter 4 purposes, solicit a valid

Form W-8 (no FATCA classification required) and apply chapter 3.► Impose 30% withholding (or reduced withholding rate if the payee furnishes a valid treaty

claim or 0% if the payee certifies that the income is effectively connected with their conduct of a trade or business in the US).

► Report the income and any tax withheld on a Form 1042-S.

Note: insurance premiums and gross proceeds on US securities are subject to chapter 4, but not chapter 3 (gross proceeds become subject to chapter 4 withholding in 2019).


► Step 5: If the payment is a “withholdable payment” for chapter 4 purposes, determine whether the payee furnished valid chapter 4 certifications on an IRS Form W-8 series form.► If the payee has furnished valid chapter 4 certifications, apply chapter 3 (see step 4).

► Step 6: If the payee has not furnished valid chapter 4 certifications, withhold 30% under FATCA and report the income and tax withheld on a Form 1042-S.

Note: FATCA withholdable payments and related withholding that are allocable to certain US owners of certain non-financial foreign entities and owner documented FFIs must be reported on Forms 8966 along with relevant information about such US persons

Intergovernmental agreements (IGAs) and FATCA legal entity classification

Intergovernmental agreements (IGAs)

► To simplify FATCA administration and provide for better coordination with local law, the US Treasury continues to enter into intergovernmental agreements (IGAs) with various countries.

► Two models► Model 1 – Administered by partner jurisdiction► Model 2 – Direct reporting to IRS

► These can alter FATCA entity classifications within a local jurisdiction. ► The regulations provide that for entities residing in IGA countries, the IGA definitions of FFI and

NFFE control, and that the statutory and regulatory definitions under FATCA apply to entities that are resident in jurisdictions that do not enter into IGAs.

► IGAs of certain countries have their own unique list of excepted and deemed compliant entity types, based on the risk profiles of those types of entities within the relevant country.

► IGAs also have specific guidance regarding documentation an FFI can collect to determine the classification of a payee.

Legal entity FATCA classifications

► A multinational organization should classify its entities into three general categories, as follows:► US entities, foreign financial institutions (FFIs), and non-financial foreign entities (NFFEs)

► Sub classifications of NFFE include Active, Passive or Corporation that is Publicly Traded (or its affiliate)

► Generally, a US entity must provide a Form W-9 to payors to document itself as a US person► An FFI must provide valid documentation with a US Global Intermediary Identification Number (GIIN)► An NFFE must provide valid documentation, including information about substantial US owners

unless an exception applies► Foreign financial institutions often request permissible alternatives to official IRS documents

(e.g., self-certifications, substitute IRS forms) and may also combine the FATCA request with other requirements (e.g., CRS, local country withholding).

► Full legal entity analysis and procedures for ongoing and periodic review are critical due to changes in corporate structure and entities and changes in requirements.

Financial institutions

► The definition of a financial institution under chapter 4 generally includes an entity that:► Accepts deposits in the ordinary course of a banking or similar business► Holds financial assets for the account of others as a substantial portion of its business► Is engaged primarily in the business (interpreted broadly) of investing, reinvesting or trading in

securities, partnership interests or commodities► Is an insurance company issuing cash value products or annuities► Acts as a holding company or treasury center that is part of an Expanded Affiliated Group (EAG)

that includes an FFI, though often exclusions can be found for these entities

► Chapter 4 also provides for exclusions for entities engaged in these activities that meet various requirements.

► Each intergovernmental agreement and related guidance has its own definition of “financial institution” and exclusions.

Employee benefit plans under FATCA

► Many employee benefit plans (e.g., retirement funds) meet the definition of an FFI.

► Exceptions from the requirements imposed on an FFI have been created for plans that meet certain characteristics. One such category is “Exempt Beneficial Owner (EBO).”

► An employee benefit plan that is otherwise an FFI may be treated as an Exempt Beneficial Owner (EBO) if it meets certain requirements.► See Treasury Regulation §1.1471-6(f) and/or Annex II of the IGA of the country

where the plan is domiciled and/or operates.

Employee benefit plans under FATCA

► Factors to consider when analyzing an employee benefit plan for FFI status► Who holds the assets and pays the income from the plan?

► Are assets set aside from creditors for the benefit of participants in a trust created by the sponsor?

► Are the assets held by the employer entity (e.g., operating entity)?► Is the sponsor transferring assets to a third party who holds them for the benefit of the

participants (e.g., a government plan, an insurance company)?

► Is the plan an EBO?► Review the plan characteristics against the requriements for EBO status, whether under the

US treasury regulations or an applicable intergovernmental agreement.► If EBO status is not met, identify the type of FFI and the relevant requirements.

OECD’s Common Reporting Standard

Common Reporting Standard (CRS)

► The OECD’s Common Reporting Standard (CRS), a global “FATCA-like” regime, was published on 13 February 2014 and endorsed by the G20.

► On 23 July 2014, the OECD issued Standards for Automatic Exchange of Financial Information in Tax Matters.► Model Competent Authority Agreement (CAA)► Common Reporting Standard (CRS)► CRS Commentary

► To date, almost 100 jurisdictions have committed to implement CRS by 2018.► Participating jurisdictions will need to implement legislation adopting CRS customer due

diligence and reporting obligations.► “Early adopter” (55 jurisdictions as of 10 February 2016 per OECD) jurisdictions have committed

to begin exchange of information by September 2017.

► To date, the United States has not committed to adopt CRS.


► CRS does not require withholding.► Rather it requires financial institutions (FIs) to collect and review documentation and

information from holders of financial accounts and to report to its local tax authority.► The local tax authority then shares relevant information with the other adopting

jurisdictions.► For this purpose, an FI is required to perform due diligence to identify the status of

accountholders.► Similar to FATCA, these requirements create the need for entities to understand their

status under CRS and their ownership.


► Self-certifications► The Business and Industry Advisory Committee to the OECD (BIAC) released sample self-

certifications for controlling persons, entities and individuals. The OECD maintains that these are not necessarily to be considered best practice documents.

► Self -certifications often include requests for information under FATCA and other local regimes that are similar (e.g., UK Crown Dependencies and Overseas Territories (CDOT)).

► Controlling Persons► A person can become a controlling person through management activities or by nature of their

ownership interest.► Controlling person information for reportable entities that are passive NFFEs and investment

entities located in a non-participating jurisdiction and managed by another financial institution is required.

► Controlling persons must provide a self-certification in addition to what they certify on behalf of an entity. The self certification must include their TIN and DOB.

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IRS approach to information reporting and withholding

IRS approach to information reporting and withholdingtimeline

‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15

Major revisions to Chapters 3 and 61

Industry Directive on Form 1042 audits

Form 1042 audits of large financial institutions

Form 1042 Voluntary Compliance Program

IRM on Form 1042 audits

Form 1042 Tier 1 study

Foreign Payments Practice (FPP) established

FATCA and other new information reporting and withholding (IRW) guidance developed

FATCA and conforming regs effective date

FATCA and conforming regs relief period


► IRS is taking a “more with less” approach.► Increased use of systems and information/data to promote compliance.► The US and most other developed countries are increasing emphasis on

information sharing and data matching.► This increases the effectiveness of the IRS Form 1042 enforcement program.

► Reduces number of audits necessary to enforce compliance► Improves audit selection► Increases efficiency and impact of audits through issue identification

► In the midst of the “more with less” approach, they have established significant resources for enforcement of information reporting and withholding requirements, including Form 1042 audits.


► IRS Foreign Payments Practice ► Responsible for Form 1042 and other examinations, planning and analysis,

providing guidance to field agents and the service centers, supporting voluntary compliance, and handling certain information and data (e.g., GIIN processing)

► IRS counsel► Dedicated counsel to support field examinations

► Other field guidance► Internal Revenue Manual (IRM) provision 4.10.21, “US Withholding Agent

Examinations – Form 1042”► Industry Directive on Form 1042 Examinations (2003)► International Practice Units regarding foreign payment issues (e.g., treaties,

sourcing, income classification, tax withholding certificates, etc.)


► Service centers► Newly trained, dedicated resources on foreign payment issues► Focus on withholding credits/refund claims

► Reviewing refunds more carefully► Under HIRE Act the IRS has 180 days before interest is paid on claims for refund► Increased number of refund claims being questioned and denied

► More notices inquiring about Forms 1042 not filed

► Penalty abatements remain available under the law► However, the IRS is exerting more control over process

► Voluntary submission process is still available

IRS approach to information reporting and withholding:Audit selection factors

► Factors that may be used to select withholding agents for audit (regardless of whether they have filed a Form 1042 for the years in question):► Coordinated Industry Case audits ► Tax return data (e.g., compare Forms 5471 and 5472 to Forms 1042 and 1042-S)► Refund claims/withholding tax credits► Evidence of erroneous reporting or withholding (i.e., withholding rate vs. treaty

country vs. income type)► Information return matching

IRS approach to information reporting and withholdinginformation document requests (IDRs)

► Forms 1042 and 1042-S filed for years under audit► Extension of the statute of limitations on assessment for Forms 1042 and 945► Operation manuals and written procedures pertaining to the company’s NRA

withholding and reporting process, including:► Procedures to determine whether a payment is:

► Made to a foreign person► FDAP income► US source

► Procedures used to validate tax documentation (i.e., Forms W-8)► List of departments (and contact info for responsible persons) that make payments► Forms W-8 and W-9► Payment/invoice data► Payee information (e.g., vendor master data)

Domestic Tax Conference28 April 2016 | New York City

11th Annual

11th annual domestic tax conference - ernst & young and other information reporting and...

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