During this past month, FATCA sponsoring entity regulations were finalized and the IRS issued additional guidance on FATCA periodic certifications. U.S. brokers with a largely domestic retail customer base sometimes ask about FATCA and when they have to worry about it for tax reporting. So as we poke our heads out of the trenches from Form 1099 corrections and Form 1042-S filings, I thought I’d offer a few thoughts about FATCA for U.S. banks and brokers and, in particular, the less-known Form 8966 – the FATCA Report.
It’s a bit of side joke among information reporting specialists who traditionally have focused on domestic retail individual customers that FATCA is still a little foreign to them. Enacted originally in 2010 and implemented over the last five years or so, the Foreign Account Tax Compliance Act (or FATCA for short since tax folks love acronyms) requires reporting on offshore financial accounts held by U.S. individuals. The goal is the same as domestic Form 1099 reporting: increase transparency and reduce the incentive for tax evasion.
Since the accounts in question are offshore, the institutions largely responsible for such reporting are non-U.S. financial institutions. But U.S. financial institutions have a significant role to play. They need to screen account holders that are entities to see if they are compliant with or exempt from FATCA obligations or otherwise apply a flat 30% withholding tax on financial payments to such entities. This is the “stick” that the U.S. government uses to make sure the foreign financial institutions (FFI) conduct the intended reporting.
From a reporting perspective, this screening and potential withholding translate into an overlay of FATCA requirements to the traditional Form 1042-S filing which U.S. banks and brokers with non-U.S. account holders have come to know all too well (especially in March since March 15 is the filing deadline for Form 1042-S). The already complicated demarcation of NRA statuses and exemption codes and treaty rates is now mixed with a host of FATCA statuses and exemption codes. But perhaps a less known impact of the FATCA on reporting by a U.S. withholding agent is FATCA Form 8966.
When does a U.S. bank or broker dealing with accounts in the U.S. need to worry about Form 8966 reporting? Form 8966, concisely titled “FATCA Report,” serves multiple purposes, but, for U.S. banks and brokers, the form generally comes into play in two scenarios.
The first is where the U.S. withholding agent has as an account holder a non-U.S. entity that has certified on its Form W-8BEN-E to a FATCA status of Passive Nonfinancial Foreign Entity (passive NFFE). The passive NFFE is generally a non-U.S. entity that has principally portfolio (passive) investment income but is not managed by a financial institution (for example, an offshore personal investment corporation used to invest in stock and securities). Under FATCA provisions, it must disclose any specified U.S. persons (including individuals) that are substantial owners (10% vote or value threshold). The U.S. withholding agent must then report on such U.S. owners on Form 8966.
The other scenario is where the U.S. withholding agent has agreed to accept an offshore entity that has the status of Owner-Documented FFI as an account holder and the ODFFI provides information on its underlying owners that are specified U.S. persons (again, principal targets are U.S. individuals). ODFFI designation is used by certain investment entities to essentially delegate FATCA reporting to the withholding agent that has agreed to accept the account holder as a customer. In this case as well, the U.S. withholding agent must report on Form 8966.
Form 8966 must be filed by April 1 for the prior calendar year. Among the information required for the form is information on the entity account holder, identifying information in regards to the underlying U.S. owner, and financial information relating to the account.
What this means, of course, is not only having procedures in place to determine when Form 8966 reporting is triggered but also updating systems, as necessary, to capture information on underlying U.S. owners of passive NFFEs and ODFFIs where applicable. There also needs to be logic to map underlying owner data to Form 8966 fields and procedures for validating data parameters and format as required by the form. Thought also needs to be given to the submission process since, unlike other information reporting forms that are generally submitted through the FIRE (Filing Information Returns Electronically) portal, Form 8966 is filed through the IRS International Data Exchange Service or IDES.
There are other situations where U.S. withholding agents have to worry about FATCA, in particular where it has offshore operations or affiliates. A U.S. withholding agent that acts as a sponsoring entity to an offshore affiliate that has the FATCA status of a Direct Reporting NFFE could also have a Form 8966 filing responsibility. And if the U.S. withholding agent serves as a compliance FI or sponsoring entity to offshore affiliates, it could potentially also have FATCA certification requirements.
Foreign or not, given the growth of investment and trading platforms that have increasingly global reach, FATCA is something that even U.S. withholding agents with a traditionally domestic retail customer base should become familiar with.