Do you conduct business with foreign businesses? If so, you may have a new reporting requirement under the Foreign Account Tax Compliance Act (FATCA) rules that went into effect on July 1, 2014. As FATCA, passed by Congress in 2010, has been implemented over the years, we have seen increased disclosure and reporting requirements for both individuals and businesses. FATCA’s goal is to find unreported offshore income earned by U.S. citizens and residents. To this end, the focus was first on foreign banks and investment firms, known as foreign financial institutions (FFIs.) The new rule will seek to identify Non-Financial Foreign Entities (NFFEs) that may have U.S. owners earning unreported income.
How does that impact a U.S. company operating here at home? If you enter into cross-border transactions that require you to pay amounts to foreign entities, you fall under the broad definition of withholding agent. A foreign entity is defined as any foreign person other than an individual; foreign entities include foreign corporations, partnerships, trusts and estates. The IRS defines a withholding agent as anyone who can disburse or make payments of an amount subject to withholding. Payments you make to foreign entities, unless specifically exempted or excepted, are subject to withholding at a rate of 30%.
When making a payment to a foreign company you will now need to determine if the transaction falls under an exemption or if the foreign entity itself falls under an exception.
Exemptions: Some common payments that are exempted from withholding under this rule include payments for services (including wages) , office and equipment leases, software licenses, transportation, awards, prizes and scholarships. Payments that are specifically not exempted include interest, dividends, lending transaction payments, forward or futures contracts and premiums for insurance contracts or annuity contracts.
Exceptions: Entities that fall under the exception include publicly traded corporations and active businesses. A business is defined as active if less than 50% of its gross income for the preceding taxable year was passive income and less than 50% of the its assets are assets that produce passive income. Passive income is generally dividends, interest, rents and royalties, and capital gain. NFFEs that certify that they have no substantial U.S. owners can also be excepted from withholding.
As a withholding agent you are required to request a completed Form W-8BEN-E from the foreign entity. This form will allow you to determine if the entity falls under an exception or if the transaction is exempt. It is important to be aware of the withholding and reporting requirements under FATCA. A withholding agent who fails to withhold is liable for any tax not withheld plus interest. This is a very brief summary that does not cover every circumstance. We are available to discuss your particular situation if needed.
Written by Helen Schussler
