The IRS recently updated Publication 5118 to reflect changes made to the FATCA Online Registration System regarding sponsored entities. Therefore, this might be a good time to review the basics of the Foreign Account Tax Compliance Act (FATCA) and what has changed.

The Law in General

The Hiring Incentives to Restore Employment Act of 2010 added Chapter 4, commonly known as FATCA, to the Internal Revenue Code. Under the rules, a withholding agent is generally required to withhold a 30% tax on certain payments to a foreign financial institution (FFI) unless the FFI:

• Has entered into an FFI agreement with the United States to, among other things, report certain information with respect to U.S. accounts (making it a “participating FFI”),
• Is treated as complying with the requirements (making it a “deemed-compliant FFI”), or
• Satisfies the requirements but elects to be withheld upon rather than report on certain payments.

The FATCA rules are essentially a mechanism to enforce reporting requirements. Chapter 4 also imposes withholding, documentation and reporting requirements on withholding agents with respect to certain payments made to certain non-financial foreign entities (NFFEs). Registration is often required even if the FFI has no US account holders (beneficiaries, shareholders or partners).

Certification

A FATCA certification consists of one or more series of questions that the responsible officers (RO) of certain entities, such as FFIs and NFFEs, must answer and submit to the IRS to confirm an entity’s compliance with FATCA requirements.

There are two general types of certifications: one that relates to certification of an entity’s preexisting accounts (COPA) and another that relates to the entity’s compliance with various FATCA requirements (periodic certification). The COPA is a one-time certification while the periodic certification is an every three-year event.

Sponsoring Entities

Regulations permit certain FFIs and NFFEs to be sponsored by other entities for purposes of satisfying their Chapter 4 requirements. Generally, a sponsoring entity is one that agrees to perform Chapter 4 due diligence, withholding and reporting requirements on behalf of certain FFIs (referred to as “sponsored FFIs”) or Chapter 4 due diligence and reporting obligations on behalf of certain direct reporting NFFEs (referred to as “sponsored direct reporting NFFEs”).

Online Registration

The FATCA Online Registration System is a secure, web-based system that, among other things, allows FFIs and direct reporting NFFEs to register themselves online as various FATCA-related entities such as a sponsoring entity of a sponsored FFI or a sponsoring entity of a sponsored direct reporting NFFE.

As mentioned, the IRS has updated IRS Publication 5118 to provide details about a couple of enhancements recently made to the system. First, a sponsoring entity can now cancel its sponsorship via the system. Also, a sponsoring entity can now include canceled sponsored entities in its certifications done via the system. This applies to both a COPA and a periodic certification. Interestingly, an FFI can no longer delete its registration and a lead FFI can no longer delete member registrations. So, I guess once you are in the system, you are in there forever!

IRS Forms

Quite often, an entity or individual is introduced to the FATCA system when a Form W-9, W-8BEN or W-8BEN-E is requested. These forms (especially the 8-page Form W-8BEN-E) can be rather daunting and confusing. However, without completing and signing the form, a financial account may not be opened.

Costly Penalties

Failing to comply with FATCA can lead to costly penalties or possible 30% withholding on US source income. Therefore, it is important to be in compliance and avoid additional time and effort to fix a problem. Moore Doeren Mayhew has experience with FATCA issues and can help you understand all aspects of compliance with the law. Contact us or your Moore Doeren Mayhew professional.

Thank you.

Neal Weiss co-authored this article.