FATCA documentation gathering process – practical tips

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Kimberly Tan Majure and Bruce W. Reynolds, KPMG LLP, Washington D.C. and Bloomberg BNA, Arlington  

Kimberly Tan Majure works for KPMG LLP, Washington D.C. and Bruce W Reynolds works for Bloomberg BNA in Arlington.

This is the concluding article in a 3-part series on FATCA compliance requirements for non-financial US companies. This article focuses on the process of gathering crucial documentation from payees to determine whether or not there is a need to make a withholding before making payment and advises on the various forms that need to be filled out for reporting purposes or to claim an exemption from withholding.

I. FATCA documentation

The heart of the FATCA compliance exercise is to have in hand, before making a withholdable payment, either documentation establishing that the payee is not subject to Chapter 4 withholding,1 or analysis establishing that the payment itself is exempt from withholding. Gathering documentation from payees is a large communications exercise. Foreign payees are being asked to interpret and sign a US tax form of significant complexity. Reactions to that request will be all over the spectrum, from simple compliance, if the payee has enough US business activity already to be familiar with the requirements and what it must do, to an initial belligerent refusal (usually accompanied by threats to cut off business) if this is something new to it. In designing a documentation request programme, what are some considerations that will minimise reactions of the latter type?

II. Documentation requirements for Chapter 4 status

“Documentation” for Chapter 4 purposes means primarily one of the new Forms W-8 (or for a US payee when required, the old, familiar Form W-9). There are five Forms W-8 in draft for adoption and use simultaneously under Chapters 3 and 4. The addition of Chapter 4 status and the kinds of payment relevant to Chapter 4 have dramatically increased the length, complexity, and requirement of US tax knowledge to understand and complete at least two of these; the W-8BEN-E (to be used by legal entities that beneficially own the payment being made) and the W-8IMY (to be used by various kinds of intermediary, transparent entity, or other recipient that is not a beneficial owner). At the same time, the Chapter 4 regulations increase the importance of receiving the correct form, correctly filled out. They have broadened the standard under which a withholding agent is considered to have reason to know that a Form W-8 is unreliable or incorrect, by specifying various factors that could provide such a reason. Among those factors can be (depending on whether a new or pre-existing obligation is being paid) information in account-opening or other customer account systems. Among other matters, you should consider in advance how much advice you will be prepared to give a payee in filling out one of these forms. Under Chapter 3, experience showed a high error rate in completing Forms W-8, and the longer more complex versions will not mitigate that. In many cases, your payee's US activity may not be a major part of its business, so that it might view seeking its own US tax advice as uneconomical. In that case, commonly, the payee comes back and asks; “What should I say here?”. On the one hand, helping the payee fill out the form gets it completed and into your files. But on the other hand, doing that increases the possibility that by assisting in completing the form, if there's anything wrong with it, you have forgone the right to rely on it absent the specific “reason to know” factors in the regulations. In any event, you should anticipate a high initial error rate, and a need to return forms for correction. One way to address foreign vendor confusion may be to design your own substitute form. That would allow you to restrict the information required by the form to points that are relevant for Chapter 3 and Chapter 4 in the transactions that you do. The Chapter 4 regulations specifically provide for the creation of substitute forms, which may be tailored to the withholding agent's transactions, and set out certain requirements for what must be in one.2 There are many ways in which a substitute form must simply mirror the official form, but it may at least eliminate transactions that are not relevant to your withholdable payments. A substitute form, if it can be simpler than the official form, offers the side benefit of eliminating the official form indicia, which by itself can help to defuse foreign businesses' generally extreme reluctance to sign US tax forms. The downside, of course, is the cost of creating various tailored substitute forms, plus any cost (and potential risk) of determining which tailored variation applies in any given situation.

At this point, it would be natural to start looking for ways to avoid asking payees to sign the current W-8s, and thereby avoid the difficulties just described. The Chapter 4 regulations mention other forms of documentation that can be used to determine both US and foreign status, but also status under Chapter 4, and this might appear to be an easier route to go down than requesting official forms. While this might work for transactions under certain circumstances, it is unlikely to be widely useful. First, the regulations generally limit alternative documentation to use in transactions that are considered “offshore obligations.”3 Offshore obligations are defined as those executed and maintained by the withholding agent's office or branch only outside the US.4 Second, alternative documentation is defined to include substantial legal documents, such as certificates of incorporation and certificates of residence from a foreign government, third-party credit reports, letters from government agencies or statements on a government website, and financial statements.5 These may turn out to be harder to collect than an actual W-8, and should probably be left for consideration as “Plan B” for non-US offices.

Another issue that has come up, generated by a misunderstanding of a somewhat vague provision in the regulations,6 is whether current Forms W-8BEN that may be on-hand can be used to determine exemption from Chapter 4 withholding. The regulation is clear that current W-8s can be relied on to establish a payee's status as a foreign individual, foreign government or international organisation. For other entities, the existing Form W-8 may be relied upon only if supported by two forms of other documentary evidence. One is documentary evidence of the kind described in the preceding paragraph to confirm the Chapter 4 status of the entity. The other is any supplementary information for specific transactions, such as documentation of owners of a passive NFFE, and so forth. In the absence of that supporting documentation, you must use presumption rules to determine what the Chapter 4 status actually will be.

The presumption rules, as noted earlier, are not intended to excuse withholding, but simply direct a withholding agent to one or the other of the withholding and documentation regimes.7 Thus, for example, a person presumed to be an individual in the first instance is presumed to be a US individual in the absence of certain specified indicia that apply only to entities. In the absence of documentation, a US individual is presumed to be a specified US individual, which means that an FFI must treat that person as an account holder subject to reporting (and ultimately withholding from foreign passthru payments). Likewise, an NFFE must treat that person as a substantial US owner if the person owns a sufficient interest in the entity. Similarly, an entity that is presumed to be foreign is presumed to be a non-participating FFI, and the portion of any payment made to an entity deemed to be an intermediary under the presumption rules is deemed to be made to a non-participating FFI account holder of the intermediary. All in all, the presumption rules are intended to be overly cautious in classifying undocumented persons, likely resulting in a more instances of withholding and reporting than might otherwise arise. Consequently, it is wise to avoid reliance on presumption rules, and try to get the necessary forms.

III. Gathering crucial and relevant information for the forms

As part of the documentation exercise, it is important that the staff who will receive the documentation be trained to know what should be on the forms. The Chapter 4 regulations do not permit a “receive, file, ignore” reaction. Rather, they raise the threshold for acceptance of information from foreign vendors, whether on official Forms W-8, substitute forms, or other documentation, by specifically requiring that they be reviewed, evaluated, and accepted. You must, for example, confirm documentation claiming participating or compliant FFI status against registration numbers that will appear on the IRS's website. With regard to other entities' documentation, you must check account-opening and other vendor documents to make sure that nothing in them conflicts with what is on the Form W-8. The staff will also need to pay quite a bit of attention to what they should be seeing on the forms the vendors return. Regulations list a number of factors on the face of forms that are specifically characterised as “reason to know” that the form is incorrect.8

The more diverse your vendor records and account payable procedures, the more time you will need to plan for this due diligence on the Forms W-8. Groups within the company who know the facts should be talking to groups who know the law; close coordination between the department managing the document collection process and the tax department will be necessary. Experience under Chapter 3 indicates that the high error rate occurs on both sides (foreign vendors filling them out and US companies accepting them). Chapter 4-compliant forms are an order of magnitude more complex than those formerly used just for Chapter 3. It is likely that a fair percentage of initial forms will have to be returned to the vendor for correction. It is also important to assign some people with authority to work with the staff members who will be interfacing with the foreign vendors. In most companies, the group that goes out asking for withholding documentation is the Accounts Payable department. It is impossible to underestimate the amount of resistance that can arise from this exercise. Much of that can be moderated or eliminated if somebody with an appropriate title and level of authority can communicate with resistant foreign vendors. As important or more is the fact that without knowing that management is standing behind this exercise, and is willing if necessary to require compliance with the withholding obligation at the possible expense of future business with a vendor, the staff doing the document collection may tend to cave in to objections and either not collect W-8s or accede to accepting incorrect ones, before letting payments go out the door. Your company may accept that conclusion, but that is a level of risk assumption that probably should be made with management's participation, and at least its knowledge.

IV. Document the documentation

Having and being able to produce documentation of foreign payees' withholding status with respect to any payment -- whether that is a Form W-8, other documentary evidence, or other information -- is essential to meeting the “reliably associate” requirement in the regulations.9 At a minimum, this means that any certifications from the payee must be stored and must be retrievable. Withholding records and documentation are also, of course, tax records subject to the general record retention requirements.10

Both Chapter 3 and Chapter 4 regulations have specific instructions about receipt of Forms W-8 electronically,11 and the IRS has published guidelines for maintenance of records electronically (including imaging what was originally a hard-copy record).12 This means you can receive forms either in hard copy or electronically, and store them electronically, if you don't want to keep pieces of paper.

In an entirely manual environment, a vendor's record should contain not only the vendor's certification (Form W-8, etc.), but also any relevant notes or notations made in connection with the review and acceptance of that certification. As we have noted above that this may mean a search through other systems that may have information about this particular vendor, an indication that someone made that search and found no information of concern should be part of the retained documentation. Most companies' payment processes, though -- and particularly accounts payable processes -- are automated. This means that whatever information is coming through in a documentation exercise must be translated into the payables system in the form of entity codes, income codes, and exemption codes (or a withholding indicator if withholding will be required). The IRS has listed all of these codes on its draft Form 1042-S, at least as it currently proposes to require them.13 (You should be aware that there are now separate Chapter 3 and Chapter 4 entity, income, and exemption codes. Existing codes that may be in the IT system to manage Chapter 3 withholding will not be sufficient for Chapter 4 reporting or withholding if that will be required.) Then, to meet the “reliably associate” requirement, the system must either store an image or store the information from the Forms W-8 (or other vendor certifications that have been received) or must provide a “locator” code to another IT or filing system where those forms or that information is stored.

No matter whether payee records are manual or automated, they should be designed to act dynamically. Some of the Chapter 4 entity statuses, exemptions and income categories are based on facts, which can change over the course of a vendor relationship. The draft Forms W-8BEN and W-8BEN-E, but not the current draft W-8IMY (at least not yet) include a certification that the signatory will submit a new form within 30 days of any relevant change in the facts that have been certified. This improves the chance that company personnel who manage payments will see something that triggers a change in the payee records when necessary. However, the requirement that statements in the form not be contradicted by information in other company records means that other departments of the company should be primed to alert the group managing payments to such things as changes in financial instruments or accounts that might terminate grandfathered status, change relationships with entities, etc. Going forward, the general counsel should develop a standard contractual term -- if your business uses contracts -- requiring vendors and suppliers to provide information about relevant changes in activity; various other departments should similarly develop processes to make the group that manages payments aware of relevant changes that they encounter. Then finally, an important “documentation document” is a process manual that describes the procedure the company established for obtaining vendor or other payee certifications, reviewing and determining the acceptability of those certifications, and recording the information received in setting up a new account, as well as similarly dealing with changes. Putting down in one place what your processes are has multiple benefits. First, it gives you a description against which you can check what is actually being done to ensure that no material gaps in the process are creating an exposure. Second, it gives you a document that can be used as a reference by the staff that manages the process. Finally, if you should be audited for withholding compliance, you will need it; the IRS will ask about it as an initial part of its audit process,14 and you probably won't have time to prepare a manual within the time you will be given to respond to the information document request. Just demonstrating that you developed a formal process and documented it is valuable in showing that you are trying to comply with the rules.

V. Payees in your group

Your inventory of your group's foreign entities may have located some that currently are being asked to provide a Form W-8BEN or that receive Forms 1042-S from you or from unrelated payors. These will be an indicator of an entity that will need to provide W-8BEN-Es to avoid FATCA withholding, because FATCA withholdable payments are in general congruent with §1441 withholdable payments. You may need to triage the analysis of these entities, in order to focus on those with greatest exposure to withholding. The most exposed companies are those involved in financial activities, especially if they should happen to operate a business that could be encompassed by one of the prima facie FFI SIC codes.15 Payors are going to ask whether their payees are financial institutions. The analysis of whether any of your affiliated entities are or are not FFIs should be considered a hot-button issue, because if you cannot conclude that they are not, so that they can sign NFFE certifications, they will need to be registered or otherwise become compliant, or they will be considered non-participating FFIs, and will be subjected to withholding by their payors.

Entities that make things, provide services, or otherwise seem to operate a “real” non-financial business are more likely to be both non-financial and active NFFEs. In that arena, though, the issue to plan for is the time needed to secure information to make the necessary calculations, particularly if any of the entities are non-controlled joint venture entities. Non-controlled entities generally are not in your expanded affiliated group, because that status requires “more than 50 per cent” ownership of vote and value by group members.16 But if your company has responsibility for the operations, is the tax matters partner, or will be viewed as responsible for managing this US-based withholding issue, this may still be your concern. It can take a bit longer to get necessary information from a non-controlled foreign entity (and the controlling investors), and this must be taken into account. If you are a publicly traded company that is not in a financial business, you may be considering the publicly traded affiliate exception for your foreign affiliates (that is, ones your group controls). In principle, this exception is easy to establish and rely upon, because it tends to be relatively “set and forget.” Under it, any corporation that is a member of the same expanded affiliated group as a publicly traded NFFE is also an “excepted NFFE.”17 A problem with that position is that, even though it reflects the literal language of the regulation, we understand that informally the IRS believes that controlled foreign corporation subsidiaries of US publicly traded corporations should not be able to take advantage of that particular exception, that it should be available solely to foreign affiliates of foreign publicly traded companies. It does not seem possible to sustain that interpretation with a change in the regulation or some other kind of pronouncement, but if this exception is one your US-owned group plans to rely upon, it might be wise to consider a backup active NFFE position.

Finally, it may be easiest for your foreign affiliates simply to forgo certifying excepted NFFE status, and instead provide a substantial US ownership disclosure. The second draft Form W-8BEN-E, released by the IRS in May 2013, permits the disclosure statement if the foreign entity is “not certifying its status” as an excepted NFFE. Thus, it appears that a foreign payee may disclose US owners without prejudice to any future arguments that an NFFE exception in fact applied. This may be the easiest way to proceed, particularly for members of controlled multinational groups.

VI. Concluding remarks and recommendations

In conclusion, you can take away four very simple points from this discussion about FATCA compliance. First, this is not something that can be ignored in the hope that it will go away or not apply to you. Although the degree of difficulty in compliance varies considerably with the number of foreign payees your company or group deals with, most companies today have some form of cross-border dealings, and so have some amount of compliance to do. Many groups will find (some to their surprise) that they have payee issues as well as payor issues to manage. Second, while non-financial businesses do not have the same magnitude of issues that financial institutions have, they are not overly endowed with time, particularly those that have a decentralised payment system or many independent payment points, and thus have significant IT systems work to do. Unfortunately, the fact that aspects of the system are still being developed does not provide a stable analytical base for designing a compliance programme, but the integration of Chapter 4 and Chapter 3 and the fact that the new Chapter 4 rules apply only to payments that in principle are already being managed under Chapter 3 does give you a head start.Third, as the discussion above indicates, designing a compliance programme that takes account of the “KISS” principle (“keep it simple,…”) will provide the best certainty that you are compliant. You are probably best served by insisting upon a Form W-9 or Form W-8 (or a substitute form if you design one) from all of your payees, and simply establishing that as a payment policy, setting up a process to collect those forms, and using that inflexible policy as a way to deal with objections. Going forward, it would be best to incorporate both your procurement group and your general counsel (or contracting group) in the document collection process because they will address suppliers, vendors, and contractors at a time when they are being most cooperative. Finally, in the initial stages of collecting payee documentation, you should expect initial adverse reactions from foreign payees, as they begin to encounter these requirements and what they mean for them. The advice for dealing with that is just to grin and bear it; it will eventually get better. That occurred when the Chapter 3 regulations took effect in 2001, and as foreign payees encountered more requests from more customers, they calmed down and realised that it was just one more requirement they had to contend with in order to do business with the United States. Although these requirements are materially more complicated, there is no reason to expect the reaction to be different over time.

Kimberly Tan Majure is Principal in the International Corporate Services group of the Washington National Tax Practice of KPMG LLP. in Washington, D.C. and she may be contacted at kmajure@kpmg.com.
Bruce W. Reynolds is Managing Editor -- International Tax at Bloomberg BNA in Arlington, VA and he may contacted by email at breynolds@bna.com.
Copyright 2013, The Bureau of National Affairs, Inc.
Reproduction or redistribution, in whole or in part, and in any form, without express written permission, is prohibited except as permitted by the BNA Copyright Policy.


1 Regs. §§1.1471-2(a)(1), 1.1474-1(a)(4). The requirement that documentation be in hand pre-payment is worded a bit more generally than in Chapter 3 regulations (compare Regs. §1.1441-1(b)(2)(vii)(A)), but the intent is there.

2 Regs. §1.1471-3(c)(6)(v)(A).

3 Regs. §1.1471-3(d).

4 Regs. §1.1471-1(b)(82).

5 Regs. §1.1471-3(c)(5)(ii).

6 Regs. §1.1471-3(d)(1).

7 Regs. §1.1471-3(f). With regard to the individual mentioned in the paragraph, while individuals are not themselves the subject of Chapter 4 withholding, so that would not be required if the person were presumed to be a specified US person by a direct obligor, parallel presumption rules under backup withholding would then apply to require backup withholding.

8 Regs. §1.1471-3(e).

9 Regs. §§1.1471-2(a)(1), -3(c)(1).

10 Regs. §§1.6001-1(a), -1(e).

11 Regs. §§1.1441-1(e)(4)(iv), 1.1471-3(c)(6)(iv).

12 Rev. Proc. 97-22, 1997-1 C.B. 652; Rev. Proc. 98-25, 1998-1 C.B. 689.

13 The Apr. 2, 2013 draft can be found at http://www.irs.gov/pub/irs-dft/f1042s--dft.pdf.

14 IRM (07-29-2008). Note the suggested subjects of IDRs nos. 2 and 3.

15 Regs. §1.1471-2(a)(4)(ii)(B).

16 §1504(a)(2); Regs. §1.1471-5(i).

17 Regs. §1.1471-2(c)(1)(ii).

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