The IRS recently updated Publication 5118 to reflect changes made to the Foreign Account Tax Compliance Act (FATCA) Online Registration System regarding sponsored entities. 

The Law in General

The Hiring Incentives to Restore Employment Act of 2010 added Chapter 4, commonly known as FATCA, to the Internal Revenue Code. Under the rules, a withholding agent is generally required to withhold a 30% tax on certain payments to a foreign financial institution (FFI) unless the FFI:

• Has entered an FFI agreement with the U.S. to, among other things, report certain information with respect to U.S. accounts,
• Is treated as complying with the requirement, or
• Satisfies the requirements but elects to be withheld upon rather than report on certain payments.

The FATCA rules are essentially a mechanism to enforce reporting requirements. Chapter 4 also imposes withholding, documentation and reporting requirements on withholding agents with respect to certain payments made to certain non-financial foreign entities (NFFEs). Registration is often required even if the FFI has no U.S. account holders.

Certification

A FATCA certification consists of one or more series of questions the responsible officers  of certain entities, such as FFIs and NFFEs, must answer and submit to the IRS to confirm an entity’s compliance with FATCA requirements.

There are two general types of certifications: 

1. Relates to certification of an entity’s preexisting accounts (COPA)
2. Relates to the entity’s compliance with various FATCA requirements (periodic certification). 

The COPA is a one-time certification while the periodic certification is every three-year event.

Sponsoring Entities

Regulations permit certain FFIs and NFFEs to be sponsored by other entities for purposes of satisfying their Chapter 4 requirements. Generally, a sponsoring entity is one that agrees to perform Chapter 4 due diligence, withholding and reporting requirements on behalf of certain FFIs (referred to as “sponsored FFIs”) or Chapter 4 due diligence and reporting obligations on behalf of certain direct reporting NFFEs (referred to as “sponsored direct reporting NFFEs”).

Online Registration

The FATCA Online Registration System is a secure, web-based system that, among other things, allows FFIs and direct reporting NFFEs to register themselves online as various FATCA-related entities such as a sponsoring entity of a sponsored FFI or a sponsoring entity of a sponsored direct reporting NFFE.

The IRS has updated IRS Publication 5118 to provide details about a couple of enhancements recently made to the system:

1. A sponsoring entity can now cancel its sponsorship via the system. 
2. A sponsoring entity can now include canceled sponsored entities in its certifications done via the system. This applies to both a COPA and a periodic certification.
3. An FFI can no longer delete its registration
4. A lead FFI can no longer delete member registrations.

IRS Forms

Quite often, an entity or individual is introduced to the FATCA system when a Form W-9, W-8BEN or W-8BEN-E is requested. These forms can be rather daunting and confusing. However, without completing and signing the form, a financial account may not be opened.

Costly Penalties

Failing to comply with FATCA can lead to costly penalties or possible 30% withholding on U.S. source income. It is important to comply and avoid additional time and effort to fix a problem. Doeren Mayhew’s international tax advisors are pros at navigating FATCA issues and can help you understand all aspects of compliance with the law.