On June 25, 2014, the Internal Revenue Service released long-awaited instructions to Form W-8BEN-E, used by foreign entities to document their status under both chapter 3 and chapter 4 (the Foreign Account Tax Compliance Act (FATCA)) of the Internal Revenue Code.
The instructions can be found online at www.irs.gov/pub/irs-pdf/iw8bene.pdf.
This follows the release of the instructions, on June 19, 2014, to the revised Form W-8IMY, used by foreign intermediaries and entities classified as “flow-through” from a U.S. tax perspective.
One important point that awaits IRS clarification is when foreign entities will be obliged to provide Form W-8BEN-E when requested by a U.S withholding agent. The instructions are silent on this issue, merely confirming that a fully completed Form W-8BEN-E should be provided to the requester before a payment is made. In addition, the IRS is yet to update its instructions for the requester of the W-8 series of forms, which may otherwise give further guidance.
However, IRS regulations provide that on the issuance of an updated version of a withholding certificate, a U.S. withholding agent may continue to accept the prior version of the withholding certificate for six months after the revision date shown on the updated withholding certificate, unless the IRS has issued guidance that indicates otherwise. The U.S. withholding agent may also continue to rely upon a previously signed prior version of the withholding certificate until its period of validity expires.
As a result, and in the absence of any guidance, it would seem apparent that, until at least August 2014 (six months after the revision date of February 2014 for Form W-8BEN-E), Form W-8BEN can continue to be provided even if Form W-8BEN-E is requested by a U.S. withholding agent.
On May 29, 2014, IRS Associate Chief Counsel (International) Steven Musher went even further to state that the existing series of W-8 forms can be used through Dec. 31, 2014 by taxpayers to begin their account identification procedures under FATCA.
In Notice 2014-33, the IRS also said it would take reasonable compliance efforts into account in a 2-year transitional period providing the responsible reporting party has “made good faith efforts to comply with the requirements of the chapter 4 regulations and the temporary coordination regulations.”
This brings into question the practicalities of how a foreign financial institution (FFI), which may legitimately not yet have a Global Intermediary Identification Number (GIIN), or even be required to have on under an intergovernmental agreement (IGA) or sponsoring agreement, will certify its FATCA status to a U.S. withholding agent since the withholdable payment regime began on July, 1 2014, without completion of a W-8BEN-E. The guidance suggests oral or written confirmation from the FFI but doesn’t provide comment on the format of such confirmation.
It’s clear that the opening months of FATCA will highlight different interpretations, and confusion, as to how FATCA should be implemented, which I am sure will throw off some unexpected situations.
Registration and Compliance
Following its introduction in 2010, there has been much discussion, debate and denial around this extraordinary legislation.
However, despite the initial horror at the implications of FATCA, the four years that have passed have shown this to be the front runner of information exchange agreements being implemented around the world. The IGAs between the United States and various governments around the world have also assisted greatly with the implementation of FATCA.
Given the global nature of the U.S. tax system, every "entity" outside the United States will have a FATCA classification as either a foreign financial institution (FFI) or a non-financial foreign entity. The decision is then whether or not to become FATCA compliant, with the requirement to do so being affected by various factors, including any relevant IGA that may be applicable.
In the context of a foreign trust, it will be considered a FFI, in broad terms, if there’s a level of professional corporate management, (that is, corporate trustee, professional investment manager and so on) and greater than 50 percent of gross income received is derived from passive sources.
Those FFIs wishing to become FATCA compliant have the greatest obligation to consider their registration requirements. To confirm, a non-participating FFI is exposed to the additional 30 percent FATCA withholding tax.
If an FFI isn’t able to avail itself of an appropriate Model 1 IGA, to avoid any exposure to the 30 percent FATCA withholding, registration with the IRS should have been in effect from July 1, 2014. Upon registration, a participating FFI will be issued with a GIIN, which upon presentation to a U.S. withholding agent would confirm FATCA compliance and remove any withholding requirements under FATCA (note regular income tax withholding would still be applicable).
If a Model 1 IGA is in place, such as between the United States and United KIngdom, or a Model 1 agreement has been substantially agreed but not yet signed, the requirement to be FATCA compliant and have a GIIN in place is pushed back until Jan. 1, 2015.
In all cases, a FATCA compliant entity will need to provide information to the IRS, either directly or via their home government dependent upon the applicable IGA, about reportable U.S. persons in 2014. The regular due date is March 31, 2015 but again. many IGAs extend this due date to May 31, 2015.
The requirement to obtain a GIIN isn’t automatic for all FFIs. To reduce the burden of FATCA compliance, it’s possible in certain circumstances for the disclosure and registration requirements to be contracted out to another FFI.
The most applicable routes would be either through being a sponsored entity or an owner documented’ FFI. In both cases an FFI that provides some level of professional management is able to undertake that FFI’s FATCA compliance. In certain circumstances, the FFI that’s contracting out their FATCA obligations doesn’t need to obtain a GIIN.
Many IGAs offer an additional reporting option, referred to as the ”trustee documented” trust route, which allows a corporate trustee that is itself FATCA compliant to take on the FATCA compliance for trusts of which it’s a trustee. In this situation, individual trusts won’t require a GIIN. The corporate trustee however will require two GIINs - one as a single FFI, and one as a sponsoring entity.
The next step is to confirm a FFI’s, and NFFE's, FATCA status to U.S. withholding agents to ensure FATCA withholding isn’t applied.
Iain is an associate director within the trust, estate and family team at Frank Hirth.