For years I have been jealous of other people’s job titles, not necessarily the jobs themselves, just their titles. It is not that many people really judge what one does as a profession, but most at least like to have a basic knowledge so they can overlay stereotypical attributes to people they meet. While people with proper cool jobs, like traders or deal persons can be straightforward, others can be slightly more obscure and still sound quite cool (a bank teller or a research analyst can say they work in banking or finance). As a practitioner in the Automatic Exchange of Information Regimes (FATCA and CRS) even obscurity offers little help as accountant equals boring, and saying you have anything to do with tax often leaves you standing by yourself in a corner.
In addition to the negative impact on one’s social status, there are many good business reasons that have given financial professionals an excuse to limit their exposure to FATCA and CRS, these reasons include:
- Since its introduction tax authorities have encouraged financial institutions to follow a “best efforts” approach to compliance;
- Tax authorities themselves have acknowledged being overwhelmed by a flood of filings and have had limited resource to evaluate their accuracy; and
- Tax authorities have not started to assess significant penalties, this has ranked compliance priority below regimes that risk greater cost to the business.
As a practical “adviser to respected financial institutions” it has been difficult to encourage my clients do more than just enough to get over the line when the above reasons held true. However, these reasons do not hold true anymore; tax authorities have now become stricter and are threatening significant penalties that introduce a greater risk to the business.
As businesses are now more focused than ever on operations and cost savings, there is an even greater incentive to outsource this work, which can create greater risk. However, with tax authorities pushing back deadlines, there is more time for those responsible within the organisation to focus on getting it right (or ensuring their outsource provider gets it right).
I thought I would offer some support to those people in the form of practical Q & A (there are plenty of sources of technical mumbo jumbo already out there). Clearly the limited number of questions will only offer a limited amount of help, so I will continue to publish new Q&A on a periodic basis, please feel free to reach out with any additional questions you have.
Q1: Does this impact all businesses?
A1: Yes. Though the rules are more burdensome on “Financial Institutions” every business is likely to be impacted to a certain degree as follows:
- Non-financial services businesses that do not receive US income: your obligations should be limited to providing additional information to a bank on account opening;
- All businesses receiving US income: FATCA is primarily a US withholding tax regime, if your business receives US income you must certify to the US payor that your business is either exempt or compliant with FATCA.
- Financial services businesses: all financial services businesses must perform an exercise to determine if they are considered a Financial Institution under the broad definition in the rules of both regimes. Businesses considered Financial Institutions must undertake such activities as performing due diligence on all their financial interest holders, registering with local tax authorities and/or the US IRS, and submitting annual reports.
Q2: We are in the financial services industry, can we assume we are considered a Financial Institution under the rules?
A2: It is likely, though there are exceptions. It is also important to review the entity classification rules to identify the type of Financial Institution as this dictates the extent of your obligations.
Q3: Is there a real difference between FATCA and CRS?
A3: While there are different nuances to the rules under each regime, both regimes are generally based on the same set of rules. Therefore, compliance requirements are similar and processes can be leveraged to meet the obligations under both regimes. The primary differences are that FATCA has a US withholding element and focuses on the reporting of US Persons whereas CRS does not have withholding and focuses on reporting persons tax resident in countries that have adopted CRS. Failure to comply with both regimes may result in local penalties.
Q4: We are eligible for reduced withholding under a US treaty, are we still at risk of US withholding?
A4: Yes, the US now has two levels of withholding tax, one for FATCA (under Chapter 4 of the Internal Revenue Code) and one under traditional principles (Chapter 3). The treaty continues to allow for reduced rates under Chapter 3, but unfortunately Chapter 4 comes first. If entities do not certify their compliance with FATCA they cannot access treaty benefits and will be subject to withholding.
Q5: We are earning interest income on portfolio debt issued out of the US, which is exempt under US domestic principles, not a treaty, do we still need to worry about FATCA?
A5: Yes, even domestic exemptions, like the portfolio interest exemption, are not applied until after FATCA compliance or exemption is confirmed on a US tax form W-8BEN-E provided to the issuer.
Q6: We receive US source payments on behalf of our investors, what are our responsibilities?
A6: Payors of US source income are generally liable for underwithholding unless they can demonstrate withholding was not required with a valid and reasonable US tax form W-8 or W-9 provided by the beneficial owner of the payment. Non-US intermediaries and tax transparent entities must provide the US payor a Form W-8IMY along with US tax forms W-8 or W-9 from their underlying investors.
As these forms are often complicated, investors occasionally breach one of the prescribed validity rules. Commercially, it is clearly best to avoid telling your investors that they are subject to 30% withholding tax because they completed the wrong form. Practically, it is easiest to review these forms at account opening to ensure valid forms are collected and investors are happy when they receive the full payment. Valid US tax forms are also useful in determining the Financial Institution’s reporting obligations under FATCA.
Q7: We don’t receive US source payments, should we still collect tax forms?
A7: Yes. While many Financial Institutions collect US tax forms as a part of their usual account opening procedures, they should similarly be collecting self-certification forms to comply with CRS. These forms also need to be reviewed for validity or reasonableness as it is a requirement under the rules, but also because these forms often provide the information necessary to determine whether the account holder is reportable and, if so, the information that needs to be reported.
