FATCA Compliance Matters Affecting Multinationals

Tax Update

Date: June 17, 2013

The implementation deadlines for the Foreign Account Tax Compliance Act (FATCA) are fast approaching. Although FATCA’s primary aim is to identify U.S. persons hiding assets in accounts held with foreign financial institutions, the applicable Internal Revenue Code sections and U.S. Treasury regulations cast a wide net that might cause a nonfinancial multinational business group (Nonfinancial MBG) to be caught within FATCA’s broad reach.

Key Effective Dates

Beginning January 1, 2014:

  • FATCA will impose a 30 percent withholding tax on the payment of U.S. interest, dividends and certain other passive income items (U.S. Source Income) to a nonparticipating foreign financial institution (FFI).
  • FATCA will impose a 30 percent withholding tax on payments of U.S. Source Income to any foreign entity that is not an FFI and fails to provide the name, address, and employer identification number or Social Security number, as the case may be, for any substantial U.S. owner.
  • FATCA will impose a 30 percent withholding tax on passthru payments of U.S. Source Income by a participating FFI to a nonparticipating FFI or to an account holder who fails to provide information to prove it is a U.S. person.

Beginning January 1, 2017, FATCA withholding tax will expand to include gross proceeds from the sale of stock and debt obligations of U.S. companies, and may also expand to include “foreign passthru payments” – a term that is not yet defined in the Treasury regulations.

Payee FATCA Issues

A Nonfinancial MBG may be subject to FATCA compliance rules both as a payee of U.S. Source Income and a payer of U.S. Source Income. On the payee side, one or more member entities of a Nonfinancial MBG may be FFIs. The term FFI is broadly defined to include:

  • Depositary institutions
  • Custodial institutions
  • Investment entities, including venture capital, hedge and private equity funds
  • Certain insurance companies
  • Certain holding companies
  • Treasury centers
  • Captive finance companies
  • Pension funds
  • Retirement funds

Fortunately, the Treasury regulations provide broad exemptions for holding companies, treasury centers, captive finance companies, pension funds and retirement funds. Nevertheless, a Nonfinancial MBG should conduct a thorough review to identify potential FFIs and analyze whether FATCA compliance exemptions apply to them.

In many instances, a Nonfinancial MBG may determine that although one of its members is an FFI, no FATCA withholding tax will result because that FFI does not currently receive (and in the future will not receive) any U.S. Source Income. However, that FFI likely will need to comply with FATCA to enable other members of the Nonfinancial MBG to qualify for exemptions from FATCA.

Members of a Nonfinancial MBG that are not FFIs but receive U.S. Source Income should provide the appropriate documentation (generally, new IRS Form W-8BEN-E) to withholding agents so the withholding agents will not have to withhold 30 percent of the U.S. Source Income.

Payer FATCA Issues

Members of a Nonfinancial MBG that pay U.S. Source Income to foreign entities will need to determine whether they have a FATCA withholding tax obligation as a withholding agent. Among other things, such members will need to determine whether they have received the proper documentation from the foreign entities so FATCA withholding is not required. Additionally, FATCA imposes potentially onerous reporting requirements upon a withholding agent.

Complying With FATCA

As part of the FATCA compliance process, an FFI generally will need to file new IRS Form 8957 and enter into an FFI agreement with the U.S. government. By July 15, 2013, the IRS will launch an online portal through which an FFI can register. An FFI must complete its FATCA registration by October 25, 2013 to be included on the initial list of participating FFIs that will be issued by the IRS during the first week of December 2013. A participating FFI will be issued a global intermediary identification number (GIIN). A participating FFI must provide its GIIN to withholding agents on new IRS Form W-8BEN-E.

Intergovernmental Agreements

The U.S. government has entered into about 10 bilateral FATCA intergovernmental agreements (IGAs) with various countries. The provisions of an IGA generally replace the FATCA rules set forth in the Treasury regulations. Currently, the United States is negotiating IGAs with many countries. An IGA’s terms can:

  • Broaden the types of entities and products that are exempt from FATCA
  • Reduce the compliance burden on FFIs in the local country
  • Alter and simplify the FATCA registration process
  • Replace the obligation to report annually U.S. account information to the IRS with annual direct reporting to local government authorities

Nonfinancial MBGs must take into account applicable IGAs as part of their FATCA compliance analysis.

Responsible Officer

Each participating FFI must have a responsible officer – an individual officer of the organization who is in charge of the organization’s FATCA compliance process. Initially, the responsible officer will be responsible for establishing and implementing the organization’s FATCA compliance program, as well as certifying to the IRS that the organization will comply with its FATCA obligations. Thereafter, the responsible officer will have to periodically certify to the IRS the organization’s continuing compliance with FATCA.


For more information, please contact a member of our Tax practice.

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