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The Resource for the Global Finance Profession

FATCA: What Businesses Need to Know

  • By Konstantine Kastens, AFP Public Policy Analyst
  • Published: 2014-03-13

The Foreign Account Tax Compliance Act (FATCA) is scheduled to take effect July 1, 2014. The law imposes new reporting requirements and a withholding mechanism on payments made from U.S. sources to certain noncompliant foreign entities.  

Intending to increase tax compliance of U.S. persons, FATCA uses data-reporting participation from foreign financial institutions (FFIs) and certain non-financial foreign entities (NFFEs), by imposing a general 30 percent withholding obligation on U.S.-sourced payments to said FFI and certain NFFE recipients that do not register with the Internal Revenue Service (IRS).

The law impacts non-financial multinational corporations in three ways:

  • As Payer: Non-financial multinational corporations (NFMCs) and their subsidiaries, regardless of location, making U.S.-sourced payments to non-U.S. entities or person(s) are withholding agents under FATCA.  Many treasury and accounts payable operations make withholdable payments, and thus, should have established procedures for identifying and reporting non-U.S. payees.
  • As Payee: Certain foreign entities receiving withholdable U.S. income must properly substantiate their status as either FFIs or NFFEs.  For a NFFE to qualify for exception to payment withholding, it must be a publicly-traded company and provide documentation to the IRS.
  • FFI: If a subsidiary within an NFMC meets the definition of an FFI (or a non-exempt NFFE), said entity must register with the IRS as a ‘participating FFI.’  Thereafter, it is subject to expansive reporting requirements, including, but not limited to, disclosure of all U.S. account holders or investors. Failing to do so, flags an entity as ‘bad FFI’ and subject to enforcement by withholding of U.S.-sourced payments.

Key terms:

  • ‘Withholdable Payment’ is defined as payment of: U.S.-sourced income fixed or determinable, annual or periodical (FDAP) (i.e., interest, dividends royalties, etc.)
  • ‘Withholding Agent’ is defined as “an individual, corporation, partnership, trust association or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies that has control, receipt, custody disposal, or payment of any withholdable obligation.”
  • Foreign Financial Entity (FFI) is defined as any entity that “accepts deposits in ordinary course of banking” or similar practice; a substantial portion of business holds financial assets of others; or primarily engages in investing, reinvesting or trading in securities, partnership interests or commodities.
  • Non-Financial Foreign Entity (NFFE) is any foreign entity not defined as an FFI.

What treasury centers should do to comply with FATCA:

  • Evaluate whether they or their subsidiary can be defined as an FFI or non-exempt NFFE—and if so, register said entity.  The IRS will post the first list of registered FFIs by June 2, 2014 and will continue monthly updates thereafter. The deadline to register and be included on this first list is April 25, 2014
  • Consider that all foreign subsidiaries receiving withholdable payments must clarify their FATCA status as either FFI or NFFE. (Note: publicly-traded NFFEs seeking exemption must file and provide documentation).
  • As a withholding agent making payments, establish a system to determine whether payments being made to either NFFEs or FFIs (also whether FFI is FATCA compliant or not) are ‘withholdable payments’ under FATCA and report to IRS. This must be in place by July 1, 2014.
  • If a non-exempted NFFE, confirm to the IRS whether entity has substantial U.S. ownership (generally U.S. persons that own greater than a 10 percent interest in entity).
  • FFIs and non-exempt NFFEs that are not FATCA compliant by July 1, 2014 are subject to payment withholdings.


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All rights reserved.

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