FATCA & MNCsFATCA will affect more than financial institutions. Multinational corporations (“MNCs”) outside the financial industry will also need to be complaint with FATCA once it goes into effect on January 1, 2013.
FATCA imposes a thirty (30) percent withholding tax on “withholdable payments” made to non-U.S. entities unless those entities make certain disclosures, either to the IRS or the withholding agent. The withholding agent will be required to file any information it receives to the IRS. For more information, click here.
First, an MNC should determine whether and what type of withholdable payments it makes to non-U.S. entities. Withholdable payments include U.S. source income and gross proceeds from the sale of securities that could generate U.S. source income, but does not include income that is effectively connected with a non-U.S. person’s U.S. trade or business. That should exempt many fees for services performed by foreign entities, but would clearly cover many royalties and rents. Moreover, MNCs that act as their own transfer agents may be paying dividends or gross proceeds that are subject to withholding.
Second, an MNC should determine what kind of non-U.S. entities it pays. Publicly traded nonfinancial foreign entities (“NFFEs”) and their subsidiaries are generally exempt from FATCA, but other NFFEs and foreign financial institutions (“FFIs”) must follow the disclosure rules or face the withholding tax. Accounts payable systems typically do not have this capability, so they will need to be reengineered or enhanced.
Third, an MNC will need to develop processes and procedures for identifying withholdable payments to NFFEs and requesting that they disclose their substantial U.S. owners. The MNC will also need to put in place a procedure for reporting that information to the IRS. If the MNC pays FFIs, it will need to be able to distinguish between FFIs that are following the disclosure rules (“good” FFIs) and those that are not. To the extent the MNC pays “bad” FFIs and NFFEs, it will need to be able to withhold tax, pay it over to the government, and file related tax returns and payee statements.
MNCs should re-examine their all of their accounts payable processes with these requirements in mind.