[International Tax Compliance]
Do you know About FATCA International Payments?
U.S. companies that are making cross-border U.S. source payments are affected by the Foreign Account Tax Compliance Act (FATCA). Certain payments made by U.S. payors are known as “withholdable payments,” and U.S. companies making international payments must now be FATCA compliant. This is known as FATCA Accounts Payable Compliance. The risk of Accounts Payable FATCA Compliance rests with the U.S. payor and not the payee. IRS will look at the U.S. payor, referred to as the withholding agent, as the responsible party. U.S. companies that have relationships with global suppliers, vendors and partners are responsible for obtaining the required information. Those companies that don’t have necessary compliance information are subject to a 30 percent withholding tax penalty as well as a potential IRS audit.
What is a “withholdable payment”? Any FDAP – Fixed, Determinable, Annual, or Periodical – payment is considered a “withholdable payment.” According to the IRS website, FDAP is: “Income is fixed when it is paid in amounts known ahead of time. Income is determinable whenever there is a basis for figuring the amount to be paid. Income can be periodic if it is paid from time to time. It does not have to be paid annually or at regular intervals. Income can be determinable or periodic, even if the length of time during which the payments are made is increased or decreased.” The IRS lists some FDAP examples as:
- Compensation for personal services
- Pensions and annuities
- Rents (not gains from property)
- A sales commission paid or credited monthly
- A commission paid for a single transaction
- Taxes, mortgage interest, or insurance premiums
U.S. companies acting as U.S. payors must know and identify their payees. U.S. companies that have U.S.-based payees should ask for W-9s and a Social Security number for an Individual or a tax ID number for a business.
If a payee is foreign, the U.S. payor has a more complex FATCA responsibility. There are multiple forms in the W series that apply to foreign Payees: W-8BEN, W-8BEN-E, W-8ECI, W-8IMY and W-8EXP. This places a burden on U.S. payors to obtain the right payee form. Commonly, the accounts payable department, the U.S. company’s CPA or legal counsel would make the determination as to which withholding certificate form to request from the foreign payee. For the foreign payee, these tax forms can be challenging to complete, hard to understand and require training.
Under FATCA, U.S. payors that have global suppliers are responsible to ensure that they have updated FATCA withholding certificates in their records to ensure compliance. Otherwise, they are required to withhold 30 percent. Non-compliant U.S. payors could face penalties and/or be subject to IRS examination. U.S. companies should not be victims of their own making. They should consult a tax specialist and make sure that they implement the right FATCA accounts payable procedures.