by Brian Mahany
While most of our blog posts are written to be entertaining, its tough to find any humor in FATCA. If you don’t already know what an IRS Form W8 is then there is no need to read any further. (FATCA stands for the Foreign Account Tax Compliance Act, a W8-BEN is a Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding – see what I mean!) Foreign financial institutions have just a few months to get ready before the new FATCA program goes into effect. Failure to comply could result in some hefty monetary consequences.
There are actually several permutations of the basic W8 form. These include the W8-BEN (described above), the W8-CE (Notice of Expatriation and Waiver of Treaty Benefits), the W8-ECI (Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States), the W8-EXP (Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding) and the W8-IMY (Certificate of Foreign Intermediary, Foreign Flow Through Entity or Certain U.S. Branches for United States Tax Withholding).
If this sounds complicated, it is. Most tax attorneys we speak to still have yet to master the forms and how they impact foreign financial institutions. We have partnered with Finomial to help foreign hedge funds and banks reduce this daunting task to one that can be easily automated.
[While Finomial has the ideal software solution for identifying which account holders are subject to FATCA compliance, some understanding is helpful for compliance officers. This is Part One of a series of articles we hope will educate financial institutions. Of course, with any new law there will be many unanswered questions at first. When that happens, our team of offshore reporting compliance lawyers are ready to help. Unlike general tax firms, we are a national boutique that concentrates in FATCA and offshore reporting. The CPAmerica International organization of accounting firms have named us their sole source legal services provider for foreign reporting and FATCA issues. If you need additional information, our contact information is at the bottom of each article.]
At the heart of the new FATCA regime is the requirement for foreign financial institutions to identify account holders with potential ties to the United States. Other countries are now studying FATCA and may soon pass similar legislation. This actually raises the stakes for banks and other financial institutions because they will now have to comply with both American law and their own rules.
Developing compliance efforts for American account holders may seem like a pain – and it is – but other countries will probably be doing the same thing.
The driving force for due diligence begins with the W8 forms. These forms offer a structured method of gathering necessary documentation. Luckily providers such as Finomial have offered a software driven platform to automate that process.
As a financial institution, IRS regulations state that you “are responsible for ensuring that all information relating to the type of income for which Form W8 is submitted is complete and accurate.” If the rules stopped right there, hedge funds administrators and others could argue that they had the right to rely on whatever the account holder provides. Fearing that taxpayers might lie to remain off the IRS’ radar, the government says that financial institutions can’t rely on account holder provided information if the institution possesses other information in its files that is inconsistent or would cause a “reasonably prudent person” to question the claims made.
Unfortunately, there is little guidance offered on how to define a “reasonably prudent person” or how such a person might think. Service providers are developing software that answer some of those questions. Make sure, however, that the IRS is willing to accept the software you are using.
Future articles will go into more detail on the W8 forms, W9 requirement, the 8938 (that is the form many clients of foreign financial institutions must file) and the 8233 forms, among others. We will also use these articles to provide important updates as new regulations or changes are announced. You can follow these articles through our blog or on our website (a new section dedicated to foreign financial institutions will be unveiled on October 15th).
Now is the time to ask questions and begin compliance efforts if not already underway. For more information, contact attorney Wassim Malas at (414) 223-0464 or by email at , tax practice managing attorney Bethany Kroes at (414) 223-0464 or the author, attorney Brian Mahany at (414) 704-6731 (direct).
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Detroit, Minneapolis, Portland ME and coming soon, San Francisco. Services available worldwide.