Do Your Withholding Processes

Comply with FATCA?

The recently enacted Foreign Account Tax Compliance Act (FATCA) added a chapter to the Internal Revenue Code

designed to prevent U.S. persons from using offshore accounts and investments to evade U.S. tax. Effective July 1,

2014, any person making a payment of U.S. source income to either a Foreign Financial Institution (FFI) or a Non-

Financial Foreign Entity (NFFE) must consider whether it is subject to FATCA.

U.S. entities, both financial and non-financial, that make payments of U.S. source income to non-U.S. persons will

be affected. There is a potential 30% U.S. withholding tax imposed on U.S. source "withholdable payments" made

to a non-U.S. entity under FATCA. The U.S. payor will need to understand the entity classification of its non-U.S.

payees under FATCA and will be required to maintain documentation on these non-US persons.

Since the new FATCA requirements did not replace the existing withholding rules on payments of certain U.S.

source income to non-U.S. persons, businesses are currently reviewing their processes to ensure proper compliance

with the existing withholding rules as well as the new FATCA provisions.

Entity Classification

The compliance requirements for FFIs are significant, so the first step in the process is to determine whether an

entity is classified as an FFI or a NFFE. An FFI is a foreign entity that meets one of the following criteria:

1. Accepts deposits in the ordinary course of a banking or other financial business;

2. Holds, as a substantial part of its business, financial assets on behalf of others;

3. Is engaged in the business of trading, investing or managing financial assets (e.g., securities, commodities,

partnership interests, and notional principal contracts) on behalf of customers;

4. Is a holding company or treasury center formed in connection with or availed by an investment vehicle, such as a

hedge fund or private equity fund; or

5. Is a foreign regulated insurance company that issues or makes payments with respect to cash value insurance

contracts or annuities.

A foreign entity that does not meet any of the foregoing criteria for treatment as an FFI is classified as an NFFE.

Thus, for example, a non-U.S. holding company with subsidiaries engaged in a non-financial business is generally

treated as an NFFE. Also, a foreign insurance company that sells insurance products without a cash value is not an

FFI but instead is classified as an NFFE. In addition, the FATCA regulations specifically exclude certain non-U.S.

entities from FFI status, including certain start-up companies formed with the intention of operating a non-financial

business, non-financial entities in liquidation or bankruptcy, and treasury centers that are part of a non-financial

group.

Once the classification of the non-U.S. entity is determined under FATCA, a payment made to that entity should be

reviewed to determine whether it is a payment of U.S. source income, and if so, the type of income.

Income Classification

If a non-U.S. entity does not comply with the provisions of FATCA, a U.S. payor is required to withhold 30% on

any U.S. source "withholdable payment" to that entity. A withholdable payment is generally defined to include:

1. Any payment of U.S. source interest, dividends, rents, royalties, salaries, wages, annuities, or other fixed,

determinable, annual or periodic income (FDAP);

2. Any gross proceeds from the sale or disposition of U.S. property that can produce interest or dividends; or

3. Interest paid by a foreign branch of a U.S. bank.

A payment of U.S. effectively connected income is not treated as a withholdable payment (and therefore is exempt

from FATCA withholding).

Non-Financial Foreign Entities (NFFE) Most non-U.S. operating businesses will be classified as NFFEs. Although FATCA is primarily focused on curbing

perceived tax evasion by U.S. persons holding accounts or investments in foreign banks and other FFIs, it is also

aimed at U.S. persons holding interests in NFFEs whose principal assets generate passive income and therefore

present a higher risk of tax evasion. FATCA addresses this second objective by requiring NFFEs to disclose their

substantial U.S. owners (i.e., persons owning more than a 10% interest in the entity). Thus, unless a payee exception

applies, an NFFE receiving a U.S. source withholdable payment must attest to certain information regarding its

FATCA classification under penalties of perjury on a completed Form W-8BEN-E provided to the U.S. payor. The

30% FATCA withholding tax will apply to any NFFE failing to provide this information.

FATCA withholding, however, is not required with respect to withholdable payments made to "excepted NFFEs"

that are considered a low risk for tax evasion. An "excepted NFFE" includes the following foreign entities:

1. Publicly traded corporations and certain non-financial affiliates;

2. Non-financial holding companies;

3. Intercompany treasury and hedging centers that are part of a non-financial group; and

4. NFFEs in which less than 50% of their gross income is passive income and less than 50% of their assets are held

for the production of passive income (i.e., "Active NFFEs").

Certain other exceptions apply to withholding under the FATCA rules, including payments made in the ordinary

course of the U.S. payor's business for non-financial services, goods, and use of property. This also includes interest

on outstanding accounts payable arising from the acquisition of non-financial services, goods and use of property. In

addition, debt obligations outstanding on January 1, 2014 and certain other "grandfathered obligations" are also

exempt from FATCA, unless material modifications are subsequently made to the loan.

Practically, the U.S. withholding agent's reliance on the exceptions to FATCA withholding will vary. From the

withholding agent's perspective, collecting all W-8BEN-E forms may prove easier than determining various

exemptions.

FATCA and the Existing Withholding Requirements

Although both FATCA and the existing U.S. withholding tax rules levy a 30% withholding tax on payments to non-

U.S. persons, FATCA withholding applies to a broader range of income than the existing regime and applies

regardless of statutory or tax treaty exemptions or reductions. As a result, the existing withholding processes and

procedures you may currently have in place can act as a starting point, but changes will be required to comply with

the FATCA provisions. Existing withholding rules and FATCA have different objectives, encompass a different

range of payments and require different information from foreign payees. FATCA withholding starts with U.S.

source "fixed or determinable annual or periodical" income ("FDAP") (which is where the existing withholding

rules end), but generally extends to gross proceeds, and does not include the existing withholding rules' exceptions

for ordinary course of business income and grandfathered interest payments.

A few examples illustrate the differences between FATCA and the existing withholding rules.

1. U.S. source interest may not be subject to the existing withholding rules by reason of a treaty exemption,

however, it may be subject to FATCA withholding;

2. U.S. source services are subject to the existing withholding rules but not FATCA withholding if classified as

ordinary course of business income;

3. Gross proceeds are subject to FATCA, but are not subject to the existing withholding rules.

Furthermore, payments that are exempt from the existing withholding tax may become subject to FATCA

withholding. For example, interest payments on a grandfathered obligation may ultimately be subject to FATCA if

there is a material modification to the loan.

Prior W-8BEN forms currently held by withholding agents only provide the information necessary under the

existing withholding rules and are insufficient for meeting the FATCA requirements. If a prior W-8BEN is relied

upon, additional information will be required to supplement the outdated form. Many payors will request a W-

8BEN-E to ensure compliance with both the existing withholding rules and FATCA. The IRS has released revisions

to other forms such as the Form W-9 and Form 1042, for example, in order to comply with the FATCA

requirements.

Revised Form W-9 (released August 30, 2013)

Form W-9 is used by payees to certify they are U.S. persons and to provide their Taxpayer Identification Number

(EIN, SSN or ITIN) to facilitate 1099 reporting by the withholding agent. Recent changes to the Form W-9 as a

result of FATCA include the addition of an "Exemption from FATCA Reporting Code," if any. Other changes to the

W-9 include clarification regarding the treatment of disregarded entities and the addition of a FATCA-specific

certification statement.

The latest Form W-9 was released August 30, 2013; however, the IRS did not provide a period of time for

implementing this new form. The FATCA regulations allow up to six months to implement a revised Form W-8, but

this rule does not apply to Form W-9. Absent any guidance, we recommend implementing the new Form W-9 as

soon as practical and consider requesting updated forms from significant vendors first.

New Form W-8BEN-E (released March 29, 2014)

The original Form W-8BEN has been split into two forms. New 2014 Form W-8BEN is for use solely by

foreignindividuals, whereas the new Form W-8BEN-E is for use by entities. Pursuant to instructions that were

posted on the IRS website on June 24, 2014, Form W-8BEN-E must be provided to the withholding agent by all

non-U.S. entities receiving a withholdable payment or receiving a payment subject to the existing withholding rules.

The IRS instructions further provide that withholding agents have six months to begin using this new form.

Withholding agents that make payments to non-U.S. entities which are not subject to FATCA will not need to

collect additional information for FATCA. Therefore they can rely on the existing Form W-8BEN until it expires

(generally three years) before collecting the new Form W-8BEN-E. Our recommendation, however, is to begin

collecting the new Form W-8BEN-E as soon as possible as well.

In summary, given the additional FATCA requirements and their effective dates (beginning July 1, 2014), taxpayers

should review current withholding procedures and assess whether processes in place are FATCA compliant,

including payment identification and documentation requirements. Withholding agents that fail to comply with these

new requirements could face significant penalties.

While the existing withholding rules and FATCA requirements are independent of each other, the FATCA rules

must be applied first. As a result, withholding agents should review their payment procedures to ensure FATCA and

withholding compliance. For assistance with the completion of applicable forms, documentation policies or a

withholding process for non-compliant payees, contact your local CBIZ MHM tax professional.

Copyright © 2014, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the

express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering

legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any

action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this

information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could

affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC and other Financial Services subsidiaries of CBIZ, Inc.

(NYSE: CBZ) that provide tax, financial advisory and consulting services to individuals, tax-exempt organizations

and a wide range of publicly-traded and privately-held companies.