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FATCA: Move Over FFIs, Here Come the NFFEs

Stage-curtainsMost people would agree that the Foreign Account Tax Compliance Act and foreign financial institutions are like peanut butter and jelly.  Whether or not you like the combination, they simply go together. 

Their pairing has been reinforced by the frequent publicity garnered by FFIs and the expanded withholding obligations FATCA has imposed on them.  But CPAs beware!  Lurking backstage is another set of entities affected by the rules of FATCA that you need to keep in mind.

Don’t get me wrong, FFIs definitely deserve the attention.  Of the four new tax code sections added to address the additional withholding requirements related to FATCA, one is devoted solely to withholdable payments made to FFIs.  But like any Hollywood hit, there can be more than one star of a show.

And in this case, non-financial foreign entities, also honored by FATCA with a code section of their own, fit the bill.   NFFEs are a default category of entities made up of any foreign entity that is not a financial institution - that covers a lot of businesses.  Like FFIs, withholdable payments to NFFEs are subject to documentation requirements that, if not fulfilled, require the withholding agent to withhold a tax equal to 30% of the amount of the payment.  In fact, companies may even have to obtain proper documentation on their own foreign subsidiaries in relation to certain internal payments or face the 30% withholding penalty on those payments.

While NFFEs are not subjected to the same rigorous information reporting under FATCA as FFIs, they still have their own set of onerous documentation requirements. And companies will need to have processes in place prior to the Jan. 1, 2014, effective date to accommodate them.

To avoid the 30% penalty, an NFFE that is not exempted by one of the exceptions must either certify to the withholding agent that they do not have any substantial U.S. owners or, in the case of an NFFE that has substantial U.S. owners, provide the name, address, and U.S. taxpayer identification number of each substantial U.S. owner.  The information pertaining to the substantial U.S. owners must also be reported to the IRS.

Directors-chairWhat does this mean for my fellow CPAs?  Upfront due diligence is a must.  Be ready to walk your clients and organizations through the added documentation rules imposed by FATCA as they relate to NFFEs in order to ferret out any new reporting responsibilities. If necessary, companies will need time to tweak their documentation processes in advance of the effective date. 

The focus of attention should be on the accounts payable function, especially around payments made to foreign vendors.  While there is an exception for payments made in the “ordinary course of business,” it still leaves quite a list of vulnerable payment types, including but not limited to:  

  • Royalties
  • Interest
  • Rent
  • Tax payments
  • Payments for services

As CPAs, we need to be vigilant and diligent in communicating the effects of FATCA on withholdable payments made by FFIs and NFFEs alike.  Both entity types deserve equal attention as both are subject to the same 30% withholding penalties for non-compliance.

Kristin Esposito, CPA, Tax Technical Manager, American Institute of CPAs. Kristin serves as staff liaison to the International Tax Technical Resource Panel as well as the Employee Benefits Tax Technical Resource Panel and related task forces.  Before coming to the AICPA, Kristin spent more than 15 years in a variety of corporate tax positions.  She holds a Bachelor of Science in Business Administration with a concentration in Accounting from West Chester University and a Master of Taxation from Villanova School of Law.

Directors chair image via Shutterstock

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