This article applies to U.S.-based multinational businesses including those outside of the financial services industry who make payments to non-U.S. individuals and entities.
Abstract: The IRS recently updated its frequently asked questions (FAQ s) on the FATCA Registration System. This article provides background on the Foreign Account Tax Compliance Act (FATCA) and explores the details of the revised FAQs.
The IRS recently updated its frequently asked questions (FAQs) on the FATCA Registration System. The agency has also updated Publication 5118, “FATCA Online Registration User Guide,” to reflect changes to the system.
Chapter 4 Requirements
The Foreign Account Tax Compliance Act (FATCA), which is codified in Chapter 4 of the Internal Revenue Code, provides a mechanism for enforcing reporting requirements on certain foreign accounts. Under Section 1471(b), a withholding agent (that is, anyone making a withholdable payment) is generally required to withhold a 30% tax on certain payments to a foreign financial institution (FFI) unless the FFI:
- Has entered into an FFI agreement with the United States to, among other things, report certain information with respect to U.S. accounts,
- Is treated as complying with the Sec. 1471(b) requirements, or
- Satisfies the Sec. 1471(b) requirements but elects to be withheld upon rather than withhold on certain payments.
FATCA also imposes withholding, documentation and reporting requirements on withholding agents with respect to some payments made to certain non-financial foreign entities (NFFEs).
Chapter 4 regs permit certain FFIs and NFFEs to be sponsored by other entities (known as “sponsoring entities”) for purposes of satisfying their Chapter 4 requirements. Generally, a sponsoring entity is an entity that agrees to perform Chapter 4 due diligence, withholding and reporting requirements on behalf of certain FFIs (referred to as “sponsored FFIs”). Alternately, a sponsoring entity can perform Chapter 4 due diligence and reporting obligations on behalf of certain direct reporting NFFEs (known as “sponsored direct reporting NFFEs”).
Online Registration and Updated FAQs
The FATCA Online Registration System is a secure, web-based system that, among other things, allows financial institutions (FIs) and direct reporting NFFEs to register themselves online as various FATCA-related entities such as a sponsoring entity of a sponsored FFI or a sponsoring entity of a sponsored direct reporting NFFE. The IRS has updated the following FATCA registration FAQs under Registration Updates:
How can a sponsoring entity change its FI type? A sponsoring entity cannot change its FI type. It would need to create a new FATCA Registration account as a single, lead or member FI. Once its registration is approved, if the sponsoring entity account is no longer needed, the sponsoring entity should follow the process to cancel its registration agreement.
How does the FI cancel its registration agreement? Once a registration is in approved status, the FI will have an option on its home page to cancel its FFI agreement. A lead FI cannot cancel its agreement if it has active members or pending transfers into its expanded affiliated group. A lead FI also cannot cancel a member FI’s agreement. The member FI must cancel its own agreement.
Details on canceling agreements can be found in IRS Pub. 5118. Speaking of which, the IRS has also updated Pub. 5118 to reflect that updates to the FATCA Online Registration System have removed an FI’s ability to delete its registration and the ability of a lead FI to delete member registrations.
Compliance is Critical
Failing to comply with FATCA can lead to costly penalties. Contact us today to understand all aspects of the law and for help using the FATCA Registration System.