webinar slides: the impact of fatca regulations on your withholding tax compliance processes

Withholding Update – FATCA, FDAP, and More

Presented by: Ed Jenkins Director, CBIZ MHM, LLC Laura Olivieri, CPA Managing Director, CBIZ MHM, LLC

August 14 and 20, 2014

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Before We Get Started…


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Today’s Agenda

1. Introduction and Learning Objectives 2. Review the general structure and implications of three

common withholding tax regimes in the Internal Revenue Code or “IRC”.

a. Chapter 1/61 – The old back-up withholding or “1099” and W-2 withholding regime.

b. Chapter Three – FDAP Income – fixed, determinable, annual or periodic income.

c. “New” Chapter Four (FATCA) – FDAP “plus” payments, focusing on applicability to Non-financial Foreign Entities.

3. Accounting policy, procedure and internal control considerations.

4. Unclaimed Property considerations.

AGENDA ITEM #1: INTRODUCTION & LEARNING

OBJECTIVES


How do you conceptually get from the issuance of final FATCA regulations to implementing withholding tax compliance processes?

We would like to walk you through the

connectedness of the new and existing regulations to implement FATCA, to the internal control structures and accounting processes companies should be considering.

Introduction


After this webinar, participants you should be able to: Understand the various terms and acronyms related to

withholding regimes. Explain the general structure of the three withholding

regimes. Explain to a client or supervisor what changes are

appropriate to accounts payable and payroll processes to comply with the updated withholding regimes, while being aware of the various internal control objectives to consider given the updated COSO framework and SOX.

Know where to get forms and publications

Learning Objectives

AGENDA ITEM #2: WITHHOLDING REGIMES

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There are three withholding regimes to review today: Chapter 61 – good old “1099” and “W-2” withholding at

the source on income paid to domestic payees. Chapter three – Fixed, determinable, annual and

periodic (“FDAP”) withholding on payments of income to non-resident alien individuals and foreign corporations.

Chapter four – Foreign Account Tax Compliance Act (“FATCA”) withholding on FDAP “plus” payments of income to Foreign Financial Institutions (“FFI”) and Non-Financial Foreign Entities (“NFFE”)

Withholding Regimes

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In addition to the preceding acronyms and definitions, Treasury Regulation §1.1471-0 lists 142 terms or acronyms specifically defined in the Section 1471 regulations, in addition to terms defined elsewhere!!!

Terminology is therefore a major part of getting your head around the withholding regimes.

Withholding Regimes

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Tax Type Tax Authority Withholding Authority

Info Reporting Requirement

US Individual, Estate, & Trust Income Tax

IRC §1 IRC § 3402/3406

IRC § 6041/604X/6051

US Corporate Income Tax and Foreign Corp ECI (and BPT)

IRC §§11/882/884

IRC § 6041/604X

NRA FDAP Income Tax IRC § 871 IRC § 1441

Reg §1.1461-1(b)(1) Reg §1.1461-1(c)(1)

Foreign Corporate FDAP Income (Not ECI)

IRC § 881 IRC § 1442

Reg §1.1461-1(b)(1) Reg §1.1461-1(c)(1)

Foreign Financial Institutions

IRC § 1471 Reg §1.1474-1(c)(1) Reg §1.1474-1(d)(1)

Non-Financial Foreign Entities

IRC § 1472 Reg §1.1474-1(c)(1) Reg §1.1474-1(d)(1)

Withholding Regimes – Statutory Construct

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Some other authority is relevant as well: Sourcing of income rules: §§861-865 Definitions of entities: §7701

Withholding Regimes

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Chapter 61 of the IRC outlines withholding of income tax for US persons in IRC Sections 3402 and 6051 (employees) and 3406 and 6041 (non-employees/back-up withholding).

Applies graduated rate withholding on income from employment and back-up withholding at a 28% rate on payments made by US payors of US sourced fixed, determinable, annual or periodic (FDAP) income to resident alien and US citizen employees and domestic entities.

Chapter 61 Withholding

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Chapter three of the IRC outlines withholding tax on non-resident aliens and foreign corporations in IRC Sections 1441 through 1464.

Section 1441 applies to non-resident aliens Section 1442 applies to foreign corporations Applies a 30% withholding tax on payments made by US

payors of US sourced fixed, determinable, annual or periodic (FDAP) income to non-resident aliens and foreign corporations

Enforces the tax imposed by Chapter 1 of the IRC by mandating withholding and reporting.

Chapter Three “FDAP” Withholding

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Types of FDAP Income: Interest other than Section 1273 OID Dividends Rents Salaries and Wages Premiums Annuities Compensation Emoluments Any other fixed or determinable annual or periodic gains

profits and income

Chapter Three “FDAP” Withholding

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The Foreign Account Tax Compliance Act (FATCA) became law March 2010 under the Hire Act. IRC §1471-1474, Chapter 4, targets tax non-compliance by US taxpayers with foreign accounts. Final Regulations were issued January 2013. The focus of FATCA is on reporting of foreign accounts, it is not meant to be an additional tax liability. The reporting targets include: US taxpayers with Foreign Financial Accounts (Form 8938) Foreign Financial Institutions (FFI) reporting financial

accounts held by US taxpayers, and Foreign entities in which US taxpayers hold a substantial

ownership interest.

Chapter Four “FATCA” Withholding

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The “Big Picture” of FATCA was really to close some cracks in the tax structure. Domestic payees are taxed under Chapter 1 and enforced via Subtitle F, Chapter 61 (Procedure).

Foreign corporations and non-resident aliens were taxed under Chapter 1 (Subchapter N) and enforced via Chapter 3.

Other entities were falling through the cracks. FATCA was engineered to make sure domestic taxpayers were

reporting all income received by foreign entities in which a domestic taxpayer had an interest

FATCA was also engineered to withhold and report on foreign entities that should be subject to Chapter 3 withholding


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FATCA is primary to the other withholding regimes (must be applied first, but only Chapter 3 or 4 will apply – not both).

A 30% withholding tax on ‘withholdable’ payments’ to undocumented account holders/payees or non-compliant foreign entities.

Very broad rules, so many exceptions and exclusions to consider

Enhanced due diligence and documentation requirements than currently in existence under Chapter 61 and Section 3406.

Tax treaties do not apply for FATCA purposes.

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The nature and extent of any reporting obligations will be determined based on: Classification of the payor (US, Non-US) and its FATCA

status (FFI, NFFE, etc.) The nature of the payment (Is it a withholdable

payment?) The documentation available with respect to the payee

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Foreign Financial Institutions (FFI)

To avoid FATCA withholding on payments to FFIs, the FFI can enter into an agreement with the US government to disclose US accounts. See next slide for entities classified as FFIs.

Some entities excluded from the FFI include certain start-up companies, 501(c)(3) organizations, certain foreign retirement plans and some bankruptcy situations.

Intergovernmental agreements (IGA) in place between the US and approximately 30 countries.

Model 1 agreement allows disclosure from the FFI to the foreign government with an information exchange with the US government

Model 2 agreement allows disclosure directly from the FFI to the US government

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FFIs Reg§1.1471-

5(d),(e)

Banking

Investment Entities

Treasury Centers, Certain

HoldCos and Insurance

Entities

Holds Assets for Others


Foreign Financial Institutions

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Chapter Four “FATCA” Withholding A Non-Financial Foreign Entity (NFFE) is defined as any foreign entity that is not a FFI. An NFFE is exempt from withholding if:

Publicly traded (or affiliates) Exempt Organization or IRA US state or US possession REIT, RIC, or SEC registered Common Trust Fund Broker/Dealer Active NFFE

An Active NFFE if preceding year assets and income are less than 50% passive

May use a calendar or fiscal year Related party payments are excluded under §954(d)(3) May use Book value (IFRS, GAAP, etc.) or FMV calculation method

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Consider FFI categories found in a non-financial group, such as Holding Companies and Treasury Centers.

If a potential FFI exists within an affiliated group, calculate the passive portion based on Expanded Affiliated Group (EAG). All three factors must be met for the group to be classified as a

NFFE: Total passive income of group is less than 25% Gross Income of FFIs in the group less than 5% of the total Group Income Group assets that produce passive income is less than 25%

The test excludes intercompany related party transactions.

Test must be performed each year (3 prior tax years) and must pass all years (not an average).

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If a withholding agent that has control, receipt, or custody of income makes a withholdable payment to a non-FATCA compliant person, the 30% withholding tax will apply. A withholdable payment includes:

US source FDAP – Fixed Determinable Annual or Periodic (FDAP) Gross proceeds from sale of assets that give rise to FDAP (effective 1/1/2017) OID paid on redemption Withholding gross up by the withholding agent Payments in connection with lending, forward contracts, dividends, interest, custodial fees, bank and

brokerage fees

Non-withholdable payments include: Short-term obligations (less than 183 days) US effectively connected income (ECI) Nonfinancial payments for services, use of property, office/equipment leases, software licenses,

awards, prizes, interest on accounts payable Proceeds from sale of assets that do not produce FDAP income Grandfathered obligations in existence as of 7/1/2014 (extension to 12/31/2014)

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If an FFI, compliance includes: Entering into agreement with the IRS (Participating FFI) Covered by a Model 1 Intergovernmental Agreement (Model 1 IGA) Covered by a Model 2 Intergovernmental Agreement (Model 2 IGA)

If an NFFE, compliance includes:

Certification to the withholding agent regarding ownership of the NFFE by ‘substantial US owners’

Providing the name, address, and TIN of each ‘substantial US owner’ Substantial US owner includes those with more than 10% direct or indirect

ownership (or if an investment company, then any percentage) of the stock of a corporation or capital or profits of a partnership

A withholding certificate is provided with a valid exemption

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New Form W-8-BEN-E & Additional Forms and Filings: Withholding agent must withhold unless they receive a valid W-8 form Withholding agent must file Form 1042-S, due 3/15 each year Withholding agents also file Form 8966 to report payments to Passive

NFFEs if there are any substantial US owners of the NFFE. See W-8BEN-E Part XXVI, Box b.

There is a higher requirement to identify issues on the documentation Check information against other documents received to ensure consistency. Do you have any

reason to know that the information is incorrect?

Taxpayers can check the claimed FFI status on the IRS website http://apps.irs.gov/app/fatcaFfiList/flu.jsf

IRS recently issued a new W-8BEN-E for entities

http://apps.irs.gov/app/fatcaFfiList/flu.jsf

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Various options available for the withholding calculation: Remit net payment (encourage payee to claim refund) Remit gross payment (have documentation to support no withholding) Remit gross payment (with majority of payments outside of FATCA/assess risk). Remit net payment and fund the W/H for the vendor

Example of non-compliance penalties: US Co pays US source interest to a foreign entity. US Co fails to obtain a valid W-

8BEN-E, does not withhold, and does not file a Form 1042/1042-S. US Co is liable for withholding and penalties (secondary liability) including:

Withholding agent’s liability 30% Failure to File Failure to Deposit Failure to File Information Reporting Return Intentional Disregard Penalty (if applicable)

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IRS Notice 2014-33 Issued May 1, 2014 allows for a transition period for

enforcement and administration of FATCA compliance (as well as rules modified under Chapter 3, 61 and §3406). Calendar years 2014 and 2015 will be regarded as transition years. Changes the date on pre-existing (“grandfathered”) obligations to

12/31/14 Taxpayer must make a ‘good faith effort’ to comply with the

requirements

AGENDA ITEM #3 POLICY, PROCEDURE AND CONTROL

IMPLICATIONS

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The Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission released an updated Internal Control – Integrated Framework in May 2013.

The internal control framework was updated to reflect the many changes in business, economic and operating environments and to provide a more adaptable structure to accommodate rapid change.

COSO defines internal control as: Internal control is a process, effected by an entity’s board of

directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.

Policy, Procedure & Control Implications

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COSO identifies five components of internal control:

1. Control environment,

2. Risk assessment,

3. Control activities,

4. Information and communication, and

5. Monitoring activities.

FATCA impacts each of those elements of the internal control framework. So companies must alter the elements of their internal control structure somewhat in order to deliver the “reasonable assurance” to constituents of the company.


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The FATCA impact to elements of the internal control framework are largely summed up by one idea:

Know Your Vendor/Supplier. That means requesting the necessary information from vendors before a check or wire transfer is issued to the vendor.

Implicit in knowing your vendor is the documentation of that knowledge in an easily accessible (but secure) fashion.

The changes to the internal control framework are therefore changes to procedures to make sure your company has the requisite information to classify, withhold and report on vendors and other payees.


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Absolute Rule #1: Ensure that you receive a Form W-4, W-8, or W-9 or other qualifying documentation. If a payment is not subject to US withholding, there should be clear

indication on the invoice or contracts (such as foreign source income)

Absolute Rule #2: Be organized. Whether it is electronic (scanned or electronic documents) or in paper, have an easily retrievable system of filing documents for subsequent use in reporting and audits (internal, external, AUP or tax).

Absolute Rule #3: Have an established record retention policy and follow it in practice.

Absolute Rule #4: Have a FATCA compliance plan that is documented and maintain records of meetings and activities to implement the plan in order to clearly establish “Good Faith”.


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Absolute Rule #5: Make sure the withholding, depositing, and information reporting requirements with respect to payments to foreign persons are included in the company’s annual compliance calendar.

Absolute Rule #6: If these functions are not subjected to internal audit scrutiny, be sure to test compliance with procedures regularly. (Surprises in non-compliance can be bad from a penalty perspective and will generally not be viewed in a positive light for department management!).



FATCA compliance action plan: Document discussions relating to process updates (meeting minutes,

agendas) Identify withholding agents

Any person (US or Foreign) in whatever capacity acting that has control, receipt, custody, disposal or payment of withholding payments

Categorize the foreign entities Multinational companies should check the current structure for Insurance companies, Holding companies, etc.

Consider foreign branches and foreign disregarded entities Scrutinize any cross-border payment (with 3rd parties and with related parties). Ensure proper documentation is collected and retained. Check outstanding obligations for potential grandfathered obligations.

Consider FATCA requirements if obligation is materially modified Withholding agent may rely on statement of issuer as to whether grandfathered

Interface with any impacted departments such as Treasury, Purchasing, Accounts Payable, etc.


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Today’s Agenda

1. Introduction and Learning Objectives 2. Review the general structure and implications of three

common withholding tax regimes in the Internal Revenue Code or “IRC”.

a. Chapter 1/61 – The old back-up withholding or “1099” and W-2 withholding regime.

b. Chapter Three – FDAP Income – fixed, determinable, annual or periodic income.

c. “New” Chapter Four (FATCA) – FDAP “plus” payments, focusing on applicability to Non-financial Foreign Entities.

3. Accounting policy, procedure and internal control considerations.

4. Unclaimed Property considerations.

RESOURCES FYI

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Publication 515 Withholding of Tax on Nonresident Aliens and Foreign Entities

Publication 519 U.S. Tax Guide for Aliens Publication 901 U.S. Tax Treaties

Helpful IRS Materials (www.irs.gov/Forms-&-Pubs)

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SS-4 Application for EIN W-2 – Wage and Tax Statement W-4 – Employee Withholding Allowance Certificate W-4P – Withholding Certificate for Pension or Annuity Payments W-7 – Application for IRS ITIN W-8BEN – Certificate of Foreign Status of Beneficial Owner for

U.S. Tax Withholding W-8BEN-E – Certificate of Foreign Status of Beneficial Owner for

US Tax Withholding and Reporting (Entities) W-8 ECI – Certificate of Foreign Person‘s Claim That Income Is

Effectively Connected With the Conduct of a Trade or Business in the United States

IRS Forms and Instructions

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W-8 EXP – Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding

W-8 IMY – Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding

941 – Employer’s Quarterly Federal Tax Return 945 – Annual Return of Withheld Federal Income Tax 1042 – Annual Withholding Tax Return for U.S. Source

Income of Foreign Persons 1042-S – Foreign Person's U.S. Source Income Subject

to Withholding


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1042-T – Annual Summary and Transmittal of Forms 1042-S

5471 – Information Return of U.S. Persons With Respect To Certain Foreign Corporations

5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

8865 – Return of U.S. Persons With Respect to Certain Foreign Partnerships

3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts


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926 – Return by a U.S. Transferor of Property to a Foreign Corporation

8233 – Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual

8938 – Statement of Foreign Financial Assets 1099-XX Series of Reporting Forms A, B, C, CAP, DIV, G, H, INT, K, LTC, MISC, OID, PATR, Q, R, S,

SA (FinCEN) 114 – Report of Foreign Bank and Financial

Accounts (FBAR) Available at (www.irs.gov/Forms-&-Pubs)



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webinar slides: the impact of fatca regulations on your withholding tax compliance processes

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