With tax reporting deadlines just around the corner, it's important to ensure that your FATCA compliance is on the right track. FATCA, or the Foreign Account Tax Compliance Act, took effect in 2014 as a way of stemming the tax evasion through the use of Foreign Financial Institutions (FFIs). As part of a two-tiered approach to tax reporting, the Internal Revenue Service (IRS) requires individuals and corporations to report qualifying funds each year.
In addition, the FFIs engaged in business with U.S. taxpayers are also required to file with the IRS, specifying which of their clients are actually U.S. persons, and which assets they have in the institution's care. In effect, it is a check and a double-check, all to make sure that there are no pockets of hidden income soaking up more interest in an offshore account.
How might this affect you? Maybe the company you own has recently made overseas expansions and is using local FFIs for a portion of your financial services needs. Or maybe you are one of the FFIs who want to stay in the IRS's good graces by verifying and cooperating with FATCA's various demands. FATCA is quite comprehensive, and when combined with the efforts of other countries to crack down on offshore tax evasion, it requires a good deal of time, energy and money to comply and remain compliant.
During the past five years, FATCA has expanded. However, in October 2018, the IRS announced that a requirement scheduled for implementation on January 1, 2019 — one that required FATCA withholding on gross proceeds that could produce U.S.-sourced interest or dividends — had been postponed and may be eliminated. FATCA rules and compliance are constantly evolving, as are reporting regimes around the world. That's why it is even more critical to stay up to date with FATCA and create a reporting template that ensures ongoing compliance.
The Importance of FATCA Templates
Creating a FATCA reporting template can help simplify and streamline your FATCA reporting. While a major compliance deadline passed in January, it's still important that your company, its entities and its suppliers are — and remain — in compliance.
The IRS is staffing up by hiring examiners designed to curb offshore tax abuses. Neglecting FATCA compliance can result in heavy fines and penalties, in addition to reputational damage. It's much easier to implement FATCA compliance and remain compliant than to suffer through audits, penalties and fines. With that in mind, here are seven items that should be included in a FATCA reporting template:
- Tax documentation: Mechanisms must be created whereby your organization collects tax documentation for both U.S. and foreign subsidiaries and suppliers. In addition to Form W-9, forms in the W-8 series may apply. Collecting tax documentation up-front is much easier than trying to obtain it in the middle of tax reporting season. In addition, requiring suppliers and entities to ensure that all of their documentation is up-to-date on an ongoing basis is critical.
- FATCA classification: All entities must be classified into one of three categories, as mentioned above: U.S. entities, foreign financial institutions and non-financial foreign entities. There are sub-categories of non-financial foreign entities, which include active, passive or corporations that are publicly traded (and their affiliates). Non-financial foreign entities must provide appropriate, valid documentation about U.S. owners with substantial interest, unless an exemption applies. Many organizations are unaware that their employee benefit plans meet the definition of foreign financial institutions, although they may qualify for an exemption. You must also consider whether treasury centers, holding companies, captive finance companies, special-purpose entities, bank-like subsidiaries and non-U.S. insurance companies are appropriately classified, as they may meet FATCA's test as foreign financial institutions.
- Withholding: The United States imposes a 30 percent withholding tax on some U.S. source income that is paid to entities that don't participate in FATCA or that lack the appropriate documentation. Tracking tax documentation and following up and withholding the appropriate amounts is a necessity in order to comply with FATCA. FATCA compliance must be integrated with accounts payable and treasury to ensure that appropriate withholding can occur as necessary.
- Reporting on certain U.S. source income paid to non-U.S. persons: From the compliance standpoint, FATCA reporting is critical. Tax documentation and withholding must be done correctly so that accurate and timely reporting can occur. In entities with multiple subsidiaries, especially those with foreign subsidiaries, customers and suppliers, FATCA compliance must occur year-round to ensure that reporting is correct.
- Common Reporting Standard (CRS): The common reporting standard, or CRS, is an Organization of Economic Cooperation and Development (OECD) that requires financial institutions to collect and review information and documentation from financial account holders and then report back to local tax authorities. CRS is a global reporting standard that allows the common exchange of information about financial holdings between financial institutions, governments and companies.
- Multinational compliance: FATCA and CRS overlap, providing multinational corporations and their subsidiaries with the opportunity to optimize tax reporting compliance. It's vital to ensure that your FATCA and CRS compliance is uniform across subsidiaries and jurisdictions.
- Creating an audit trail: To ensure that you are fully compliant with FATCA, creating an audit trail of compliance efforts is critical. You want to be sure to document compliance across subsidiaries, divisions and countries, so that you can proactively deal with any potential IRS compliance reviews or audits.
Stay Compliant With the Right Technology
Trying to stay up-to-date with the ever-changing nature of FATCA reporting, along with the evolution of your organization, is a big task. This is exactly why many companies leverage technology to ensure proper entity management and compliance.
Blueprint's FATCA solution provides an efficient and cost-effective FATCA compliance tool that removes the burden of manual processes for your legal and compliance staff. It eases the FATCA compliance burden through a simple step-by-step Wizard for each account, while creating a recorded audit trail for each step of the process.
If you have questions about FATCA filing or want to discuss ways that Blueprint's FATCA solution might benefit your organization, call us today to arrange for a demonstration.