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The Resource for the Global Finance Profession

What Treasurers Need to Know About FATCA

  • By Andrew Deichler
  • Published: 2013-08-20

The Internal Revenue Service has launched an online registration system for foreign financial institutions (FFIs) and certain non-financial foreign entities (NFFEs) to comply with the Foreign Account Tax Compliance Act (FATCA). Corporate treasurers should check and see whether their organizations need to register.

FATCA, set to take effect in July 2014, aims to increase tax compliance of U.S. citizens that use FFIs and certain NFFEs. Foreign banks, investment funds and insurance companies will be required to report Americans’ offshore accounts worth more than $50,000. FFIs and NFFEs that fail to comply face a 30 percent withholding tax on their U.S.-sourced payments, which has the potential to freeze them out of U.S. financial markets, Reuters noted.

The IRS will post the first IRS FFI list in June 2014. To ensure inclusion in the list and avoid penalties, FFIs must register by April 25, 2014. The IRS will begin collecting FFIs’ customer account information in 2015.

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

  • NFMCs and their subsidiaries making U.S.-sourced payments to non-U.S. entities are withholding agents under FATCA. Many treasury and accounts payable operations make withholdable payments, and should have established procedures for identifying and reporting non-U.S. payees.
  • Certain foreign entities receiving withholdable U.S. income must properly substantiate their status as either FFIs or NFFEs. NFFEs must be publicly-traded companies and provide documentation to IRS to qualify for exception to payment withholding.
  • If an entity within an NFMC meets the definition of an FFI or a non-exempt NFFE, it must register with the IRS as a participating FFI. It is then subject to expansive reporting requirements, including the disclosure of all U.S. account holders or investors. Failure to do so will result in the entity being flagged as a ‘bad FFI’ and it will be subject to the 30 percent withholding tax.

Corporate treasury departments should thoroughly evaluate whether their company or a subsidiary can be defined as an FFI or non-exempt NFFE. If so, they must register with the IRS.

Treasurers should note that all foreign subsidiaries receiving withholdable payments must clarify their FATCA status as either FFI or NFFE. Withholding agents making payment must determine whether payments being made to either FFIs or NFFEs are withholdable payments under FATCA and report to the IRS.

FATCA was a major topic of discussion at a recent AFP Treasury Advisory Group meeting, noted Tom Hunt, CTP, AFP’s Director of Treasury Services. “After reviewing the FATCA requirements, one company we heard from modified their wire policy to streamline all of them through accounts payable—the treasury department doesn’t process any wires anymore, even for typical treasury activity,” he said. “This was done so that the tracking and compliance can be done in one location.”

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