FATCA for Companies: The New Reality of Payment Compliance
For those unaware, adherence to key Foreign Account Tax Compliance Act (FATCA) deadlines already passed earlier in 2016, and the final deadlines for compliance are approaching in January 2019. This means companies must register their suppliers in compliance with FATCA to avoid the maximum 30 percent withholding tax penalty.
According to KPMG, the US government has been hiring and training more than 3,000 IRS examiners with process verification and tax audit efforts. For US businesses, this can change the process of dealing with Fixed, Determinable, Annual, or Periodical (FDAP) income payments made across international borders.
I recently spoke with Laurie Hatten-Boyd of KPMG about what companies need to know about FATCA in this new age of accounts payable tax reporting compliance. Laurie heads up KPMG’s tax information reporting and withholding group.
She’s routinely engaged in a wide range of withholding tax advisory services to assist both financial and nonfinancial institutions. Here is my brief Q&A with her about FATCA facts you should know for your clients that would be impacted by the latest compliance rules:
Q: Why should companies in the United States care about FATCA?
A: My standard answer to that is: Because the IRS really cares about this now. Congress believes that as much as $100 billion dollars is lost annually to offshore tax abuses designed to escape disclosure to the IRS. Those 3,000 examiners are trained to focus on Form 1042 audits and are mandated to check them during any tax return examination. Actually, the examiners are required to sign-off to their managers that they specifically inquired about a company’s Form 1042. Since that new requirement has been in place, KPMG has seen this happen repeatedly.
Additionally, the “payor” company (referred to as the withholding agent) is on the hook to ensure compliance. When there is an issue, the IRS generally will not be pursuing the underwithholding from the payee because it is a difficult path to reach their funds. Instead, the IRS will seek payment from a withholding agent, who becomes liable for any tax it fails to withhold.
Q: What risks does neglecting FATCA present? Penalties? Probation?
A: Penalties are the most evident. The IRS will ensure that it gets its revenue one way or another, and that will equal 30 percent of the payment. This means that a withholding agent that makes a $10,000 payment of FDAP income subject to FATCA would be liable for a $3,000 penalty if it didn’t obtain the proper tax documentation.
At the same time, consider what an audit opens up for your business. What other areas then come under scrutiny? And how likely is it that the IRS will continue a deeper investigation in future examinations and audits until you prove you’ve closed that gap? For risk-averse companies, I think it’s easier for them to get the processes in place early and not risk any negative issues arising on audit.
Q: What are some best practices for tax compliance? Who needs to be involved?
A: First and foremost is collection of tax documentation. Companies are accustomed to asking US-based payees for their W-9s and supplying Social Security numbers if they’re individuals and employer identification numbers if they’re businesses.
But for foreign payees, the task is a bit more arduous. There are several forms in the W-8 series that may apply to that entity, depending on where their citizenship is, where they operate, and even the structure of the company.
The W-8BEN, for example, used to be a relatively simple form, and now for an entity it has morphed into eight pages. Your company’s compliance officer (if you have one) likely owns the operational guidance, which includes knowing what treaties the US government has established, what rules are in place, and when they take effect, as well as what forms and declarations a non-US individual or entity needs to provide.
We recommend to our clients that they collect forms upfront prior to any payments. In fact, tax form collection should be a basic tenet to all supplier onboarding, just as it would be to collect their email, phone number, address, and bank routing information.
Likewise, it should be a constant checkpoint for future payments to have that payee ensure their tax declaration is still accurate and valid. It becomes a security blanket that, at the very least, you have documentation. Providing some mechanism where payees can update their information and submit new forms is ideal.
The Treasury regulations that outline these requirements for tax withholding on nonresident aliens and foreign entities is over 500 pages long. Then you have to reference which countries have treaties with the United States and the types of payments those treaties cover.
But many companies don’t have a tax compliance expert at their disposal, and as such, it then falls on the accounts payable staff to be knowledgeable and responsible because they’re on the front lines of communicating with their payees. Unfortunately, that means more work for them.
Q: So besides saying you should collect tax forms for everyone, you seem to be advocating that tax compliance aligns with the payments process?
A: The IRS is going to follow the money in their examinations, so it makes a lot of sense to bring tax compliance in as part of the holistic accounts payables process. Accounts payable staff are the ones with unique insight into who’s paid, how much, and the actual transaction activity.
By enforcing tax compliance to the payment event, you capture what you need for purposes of documentation, withholding, and reporting. It also makes the end-of-year filings easier.
What if that payee closes their business between January when you paid them and December when you’re requesting tax forms? Rather than trying to collect tax information when filing year-end information returns, gather that information upfront or, at the very least, prior to paying.
Many companies choose to run a separate payment process all together for only FATCA-affected payments. This is where you essentially have a team just focused on FATCA and have training in dealing with these payments.
While this certainly can isolate those specific cases, it then becomes an additional hurdle during the payment reconciliation and financial close process. It also means you may have additional staffing requirements. For some withholding agents, collecting forms from everyone is actually a smoother, more compliant, more efficient process.
Q: Won’t the tax form requirement add friction to the payables process?
A: It may, but with the right mechanisms and systems in place to streamline tax form collection, knowing which forms that each payee needs to provide and ultimately automating as much of the process as possible, this becomes easily manageable.
For domestic payees, it’s business as usual to collect Forms W-9. For international payees, they just need to be guided to the right forms and be ready to provide the right documentation and information. And ultimately, it helps the withholding agent with its overall compliance.
It reduces one more risk that they’re paying or reporting to the wrong person or paying someone without posing the appropriate withholding, so a solid FATCA approach adds value beyond the tax reporting benefits.