FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA)

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Derrick Skrycki, Accounts Payable Manager of SSC

Ed Jennings, Tax Director

Agenda

•What is FATCA?•How does it impact us?•How is it different from current foreign vendor filing and withholding requirements?

•What do we need to do?

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Plan A

•Plan B – Proceed with the Power Point Presentation

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What is FATCA • New Law - FATCA requires foreign banks and certain

foreign companies with substantial U.S. owners to report to the IRS information about their U.S. account holders or owners. • The goal is to prevent U.S. citizens from hiding their income

overseas.• FATCA allows the IRS to reach around the world and track

down money that is taxable to U.S. citizens.

• How can the IRS enforce foreign banks and businesses to report this information? - The IRS puts the onus on the US buyers to ensure compliance. • For payments that fall under the FATCA umbrella, if the

foreign bank or business does not comply with the law, the payer (i.e. U-M) must withhold 30 percent.

• These withholdings are reported on Forms 1042-S.

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What payments are subject to this withholding requirement?• Shared Service Center (SSC) and/or Treasury

departments may need to withhold on the following (possible payments in issue are highlighted in ‘red’ below): • Dividends and gross proceeds on U.S. securities • Interest on debt • Interest on original issue discount • Payments when payer is acting as a transfer agent • Bank and brokerage fees • Dividend equivalent payments • Investment and fund manager fees

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How Does it Impact Us?

• Onus on U.S. Buyers – Buyers must determine whether the payee is a foreign financial institution (FFI) or a nonfinancial foreign entity (NFFE).• If an FFI or Banks have entered into this agreement, they will

indicate it by checking the box labeled "Participating FFI" on Form W-8 BEN-E • If a bank indicates that they are a nonparticipating FFI, or fails to

complete the Form W-8 correctly, then U-M must withhold 30 percent on payments that are subject to FATCA.

• If an NFFE, U-M must review the company's Form W-8 BEN-E to determine whether they selected "Passive NFFE." • If so, then they must indicate whether they have no substantial

U.S. owners (then no withholding) or, if they have them, must provide their name, address, taxpayer identification number, and ownership percentage of each (again, no withholding).

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What is a Form W-8 BEN –E?

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How is it different from the current foreign vendor filing and withholding requirements?

• Currently – U-M collects certification forms (Forms W-8) from foreign vendors who earned their income in the U.S.• It then files Form 1042-S with the IRS (and a copy with the foreign vendor)

reporting the income earned.Withholdings – Based on these certification forms, withholding is required

at 30% unless a reduced rate or an exception applies.Exceptions include treaties, certain forms (e.g. Forms W-8ECI and W-

8EXP) and the type of transaction or purchase, i.e. goods.The form 1042-S may still be filed even when no withholdings are required.The vendors will use this form to file their income tax return, e.g. Form

1040-NR for Non-Resident Aliens (NRAs). Note - The payer is responsible for the withholdings (30% on the

payments made) should the vendor not provide the correct form.• FATCA - This new law requires reporting and withholding on income not

earned in the US but only for those FFIs and Non-FFI’s that do not comply.

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Current Certification Forms or Forms W-8 Series

• Note that the Form W-8BEN-E defers to these forms.

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Forms Descriptions

Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding

Form W-8ECI Certificate of Foreign Persons Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States

Form W-8EXP Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding

Form W-8IMY Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding

Other Questions?

• Are all foreign vendors subject to this requirement?• FATCA excludes individuals but includes all other foreign

vendors.

• What is the Timeline for this withholding?• January 1, 2015 - U.S. buyers must begin withholding on FATCA

payments to new accounts held by non-participating FFIs and passive NFFEs. • Accounts existing before then are not affected.

• Jan. 1, 2016: All foreign accounts which includes accounts existing prior to January 1, 2015 are now subject to FATCA withholding. • Please note that payees can no longer rely on pre-FATCA

Form W-8s.

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Impact on U-M• Central Units – SSC will request for a W-8 BEN-E for

foreign vendors in accordance with the timeline noted and any other required information to determine whether a withholding is proper.• It will work with Procurement and Tax for appropriate

consulting resources.

• Campus Units – SSC will need to work with units to collect and obtain the necessary information. These units may assist the process by collecting this form directly. • Note that the need to collect this information should be prior

to paying any vendor.

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Recap• Is it a Foreign Vendor?• If so, what certification form do they provide?

• If U.S. sourced income (the vendor is providing the services on U.S. soil) then one of the following:• Form W-8BEN• Form W-8ECI• Form W-8EXP• Form W-8IMY

• If Non-U.S. sourced income, then use the Form W-8BEN-E.

• If Form W-8BEN-E - if the box “Participating FFI” or “Active NFFE” is not checked then it should be reviewed by the tax department to determine the need to withhold.

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Educational Sessions and Materials• Unit Sessions – We are willing to meet with units to

discuss the implementation of this new law. • Wolverine Tower – We are scheduled to hold group

meetings as follows based on interest in attendance.• January, 20th, Thursday at 1 p.m. to 3 p.m.• February, 19th, Thursday at 1 p.m. to 3 p.m.• March 11th, Wednesday, at 8 a.m. to 10 a.m.

• Materials – We will make this power point presentation and certain frequently asked questions available on the SSC website.

• Hotline – Feel free to call SSC for questions regarding procedures at 734-763-6401 and Tax for questions regarding the applicability of the law at 734-763-3282.

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Questions?

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