We recently spoke with Bianca Wright of Nearshore Americas to discuss how best to navigate the murky waters of the Foreign Account Tax Compliance Act (FATCA). As you may be aware, U.S businesses and individuals transacting overseas need to adhere to the requirements and regulations imposed by the Act. Below is an excerpt from the article.
Four Things You Need To Know About FATCA
Differentiating Between Business and Contractors
Greg Freyman, CPA, CGMA, the managing partner of New York City & New Jersey based Freyman CPA, P.C., said that from a tax perspective, IT outsourcing services poses certain FATCA reporting issues related to understanding who is performing the work, how it is being performed, where the work is performed and which countries are involved in the transaction.
“Many companies do not properly document these details and as a result overlook some of the responsibilities associated with FATCA,” he sad.
Freyman explained that the tax reporting should reflect these business activities accurately to meet FATCA requirements. “For instance, the company controller and CFO should advise the Latin American individual or company on completing Form W-8BEN for individuals and Form W-8BEN-E for businesses,” he said, adding that it may be applicable to complete certain sections of these forms to obtain tax withholding exemption on the revenue generated as a result of a tax treaty for those performing services abroad.
He went on to explain that in cases where the services are performed only by an individual and not a business, non-resident alien employees or independent contractors should generally file a Form 8233 to be granted a tax withholding exemption.
Look For Inter-Government Agreements
FATCA is globally enacted, meaning that the requirements and regulations are the same whether you are transacting in Asia, Europe or Latin America. However, there can be differences.
“Any issues unique to Latin America will stem from individual reactions that particular countries in the region have to US companies transacting business,” Ehrenfeld explained.
Many companies do not properly document these details and as a result overlook some of the responsibilities associated with FATCA — Greg Freyman
This is when it is important to know whether the specific country has signed an inter-governmental agreement (an “IGA”) with the U.S. Thomson Reuters, which offers a FATCA software solution, noted that an IGA offers certain benefits to partner countries such as relaxation of deadlines, simplified due diligence, and increased clarity around due diligence with country specific provisions.
There are two models of IGA currently in existence. According to Thomson Reuters, the most notable differences between Model 1 and Model 2 IGAs, are that in Model 2 “financial institutions will report information directly to the IRS rather than their local jurisdictions; and there is no ‘reciprocal’ version of the Model 2 IGA.”
According to Ehrenfeld, Brazil, Colombia, Costa Rica, Honduras and Chile have each signed IGAs and are therefore locked in to specific reporting requirements with respect to financial institutions in their respective countries. According to Thomson Reuters, Nicaragua has agreed to a model 2 IGA “in substance.”
“Each of these countries will therefore have a more clear set of parameters for addressing how local financial institutions handle accounts held by US individuals or companies,” he said.
On the other hand, certain countries like Argentina do not currently have IGAs in place and thus financial institutions in Argentina are less likely to have uniform procedures for addressing US accounts, Ehrenfeld noted.
“Any US company doing business in Latin America should perform due diligence on the specific jurisdiction it seeks to transact business in and focus on whether that particular country has an IGA in place and what mechanics institutions in that country have implemented under FATCA,” he said.”