Information reporting compliance considerations for nonfinancial multinationals Are you ready for 2015?

www.pwc.com/us/fatca Information reporting compliance considerations for nonfinancial multinationals Are you ready for 2015? December 2014 Contents...
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www.pwc.com/us/fatca

Information reporting compliance considerations for nonfinancial multinationals Are you ready for 2015? December 2014

Contents In brief 1 In detail 2 Are you ready for January 1, 2015?

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Requirements as payors

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Requirements as payees

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Building on Chapters 3 and 61 withholding and reporting

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Operational challenges

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Being ready is critical

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The takeaway 10 Let’s talk 11

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FS Viewpoint

In brief

The provisions of the Foreign Account Tax Compliance Act (FATCA) have brought significant implementation challenges to the financial services industry as well as having a broad impact on nonfinancial multinational companies (MNCs). The implementation of FATCA required changes to the existing information reporting and withholding requirements under Chapters 3 and 61 and Section 3406 of the Internal Revenue Code (Code). The next phase of information reporting compliance requirements will bring additional challenges beginning on January 1, 2015. The approaching deadlines can impact MNCs in many ways: • As payors of “withholdable payments,” MNCs will need to collect and review the recently revised withholding certificates (e.g., Forms W-9 and W-8 and in some cases self-certifications),

perform increased due diligence on the payee, and enhance their withholding and reporting processes. • As payees (recipients) of withholdable payments, MNCs will need to be able to provide the revised withholding certificates to their various counterparties. In order to do that, MNCs will need to review and understand the FATCA status of each of their legal entities and retirement funds. • As both payors and payees, MNCs should evaluate the extent to which their information reporting policies, procedures, governance structures, and systems need to be updated to meet the new requirements. This insight discusses these requirements and how MNCs can address them.

Information reporting compliance considerations for nonfinancial multinationals | Are you ready for 2015?

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In detail

The next phase of FATCA’s requirements are set to begin on January 1, 2015 and, as discussed below, bring into focus the ongoing need for MNCs to conduct a thorough and timely analysis to properly classify their legal entities, primarily non-US, pursuant to the FATCA regulations and the appropriate intergovernmental agreement (IGA) either signed or ‘in effect’ between the United States and over 100 other jurisdictions. The resulting analysis will allow these entities to properly identify themselves on the withholding certificate. MNCs should also examine their operations related to treasury centers, holding companies, and retirement funds for exposure related to information reporting and withholding requirements that were enhanced as a result of the FATCA regulations.

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PwC Foreign Account Tax Compliance Act

An industry leading practice for any MNC that is part of affiliated group owned by a US entity will be to implement an effective compliance program that will reduce or eliminate costly and onerous withholding and reporting requirements and reduce the risk of entities being inadvertently subject to 30% withholding. System and process enhancements, as well as appropriate controls to ensure proper documentation collection and accurate payee certification, may be necessary. At the center of an effective compliance program will be a governance and controls structure that balances the needs of key stakeholders and meets the requirements of senior management.

Are you ready for January 1, 2015?

The first major compliance milestone for FATCA implementation was on July 1, 2014 with the start of FATCA withholding on US source fixed or determinable, annual or periodic (FDAP) income for certain payments. Many MNCs, regardless of their industry, may have already taken effective action to enhance

existing information reporting and withholding procedures to meet the burdens of FATCA compliance. This includes incorporating changes to existing information reporting and withholding processes and procedures. While July 1, 2014 has passed, there remains a number of significant requirements to implement on January 1, 2015.

The requirements effective on January 1, 2015 will impact MNCs in two important respects: (1) their requirements as payors and (2) their requirements as payees. The table below summarizes the requirements. Requirements as payors

Requirements as payees

Requirement

As payors of US source FDAP income, MNCs need to have procedures to identify FATCA withholdable payments, obtain the FATCA status of a foreign payee, and verify the completeness and reliability of the recently revised withholding certificates received from a payee.

As payees, in order to avoid 30% withholding on payments received, non-US entities within MNC groups need to be aware of their FATCA status and be prepared to certify that status by providing a properly completed withholding certificate to other withholding agents/payors.

Documentation

Forms such as the W-8BEN and W-8BEN-E are more complex, with new information required.

MNCs receiving withholdable payments or opening accounts overseas likely will be asked to provide a withholding certificate or self-certification.

Reporting

FATCA imposes new reporting requirements in addition to the existing reporting requirements under Chapters 3 and 61 of the Code.

Information reporting compliance considerations for nonfinancial multinationals | Are you ready for 2015?

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Requirements as payors

Documentation of payees FATCA required a new set of entity categories and certifications to be added to the Form W-8 series. These categories add complexity to the forms previously used solely for purposes of Chapter 3. The expanded withholding certificates create a more complex due diligence process for withholding agents to ensure completeness, accuracy, and consistency with other documentation. As an example, MNCs receiving a Form W-8BEN-E from a participating foreign financial institution (PFFI) will be required to verify the name of the entity, the country, and the global intermediary identification number (GIIN) provided with the information on the IRS website. Certain certifications must be present on the form for it to be valid.

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PwC Foreign Account Tax Compliance Act

The complexity involved in tax form validation requires controls that ensure that the review is performed by a qualified person and that there is appropriate approval and sign-off. The use of tools and templates are considered industry leading practices to reduce the overall information reporting risk to MNCs. Accounts payable and treasury departments may be requesting and maintaining documentation from payees related to the existing withholding and reporting requirements. However, as a result of the FATCA regulations, MNCs may be required to update their documentation.

For entities

For individuals

Reporting

Effective January 1, 2015, for example, withholding agents may accept only the newly revised Forms W-8BEN-E or W-8-IMY for certification of the FATCA status of a foreign entity or intermediary. A February 2006 version of the Form W-8BEN received from an entity on or before December 31, 2014 will remain valid until it expires (which is typically to the end of the third calendar year following the year it was provided). Procedures and controls should be established to ensure that a valid withholding certificate is collected from entity payees after January 1, 2015.

The February 2014 version of Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) must be used for certification of an individual’s FATCA status. While the current version of the Form W-8BEN (Individuals) received prior to its release in February 2014 will remain valid until it expires, MNCs should put systems in place to ensure that prospectively the current version of Form W-8BEN is collected from individuals.

FATCA imposes reporting requirements in addition to the existing reporting requirements under Chapters 3 and 61. The reporting for 2014 payments is not due until March 2015. Some of the reporting requirements now potentially facing an MNC include but is not limited to the Forms 1042 and 1042-S. These forms have been updated to include FATCA-relevant fields and will be used to report US source income paid to non-US persons that are withholdable payments under FATCA.

Information reporting compliance considerations for nonfinancial multinationals | Are you ready for 2015?

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Requirements as payees

Entities within MNC groups that receive withholdable payments may also be subject to 30% withholding under FATCA. NonUS entities that fail to timely and properly identify themselves to their withholding agents may be subject to 30% withholding. To the extent FFIs exist within an MNC groups, they may be subject to FATCA withholding if they fail to provide valid documentation and a GIIN to prove their compliant status. For example, treasury

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PwC Foreign Account Tax Compliance Act

centers must evaluate whether they are classified as FFIs to ensure that appropriate documents can be provided to requesting banks and other payors. In addition, it is critical that nonUS entities within an MNC group should have determined their FATCA legal entity classification to facilitate the process of completing withholding certificates (or self-certification).

Building on Chapters 3 and 61 withholding and reporting MNCs should already have robust compliance programs to meet their existing information reporting and withholding requirements. However, a number of MNCs that were in compliance with their requirements under Chapters 3 and 61 are finding that they have a number of new or revised responsibilities and requirements because of the harmonization of the existing requirements with FATCA. For Chapter 3 purposes, withholdable payments, subject to 30% withholding, generally include all items of US source FDAP income unless an exception applies. FATCA has a similar rule that includes all items of US source FDAP income unless as exception applies. However, the exceptions

for these two regimes are somewhat different. Accordingly, it is important for treasury functions, accounts payable departments, procurement, shared services, and other areas of a global organization that make payments to understand where they are similarities and differences. MNCs, especially those that make global payments out of a single shared service center, will face a significant challenge to update information reporting and withholding systems and processes to distinguish between all the different types of payments. However, it is important that the challenges be addressed by January 1, 2015 when the current withholding requirements are expanded by FATCA.

Information reporting compliance considerations for nonfinancial multinationals | Are you ready for 2015?

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Operational challenges

Clearly, FATCA has introduced a complex regime that may necessitate significant structural and operational changes within MNC groups to ensure effective and ongoing compliance. Governance Another industry leading practice is to establish or enhance a governance structure with sufficient reach and seniority to ensure comprehensive compliance. This is necessary to ensure that timely decisions are made involving all key stakeholders within the MNC group. In order to implement a successful FATCA compliance program, the key stakeholders must buy-in, as various functional groups perform activities that may impact FATCA compliance. Written policies and procedures documenting required controls are the foundation of a FATCA compliance program. Likewise, documented controls ensure verification, approval, and sign-

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PwC Foreign Account Tax Compliance Act

off for key processes to ensure compliance or that compliance breaches are timely discovered and remediated. Ongoing legal entity analysis also should be an integral part of the compliance and controls program. As operations continue to evolve, entities will be formed, acquired, dissolved, or liquidated. MNCs need to ensure that there is ongoing assessment so that an entity’s FATCA classification is updated or certified where necessary. Changes in circumstances affect the validity of withholding certificates. It is therefore important that the lines of communication between stakeholders in an organization allow for adequate updates to documentation and entity certification. Executive sponsor A number of successful FATCA compliance programs have executive sponsorship from within the organization. For MNCs

that are not located or resident in an IGA country, the FATCA regulations provide specific instructions and certifications for a responsible officer (RO) of an FFI. Even where an RO is not required by the regulations, an RO structure is recommended because it will allow consistency and coordination in the group’s compliance program and will satisfy the need for an effective and practical governance and controls structure. As such, the RO should be a person with sufficient authority within an MNC group to ensure effective cooperation and compliance from key stakeholders. System and process enhancements System enhancements are an essential part of most FATCA compliance programs. The same systems that were previously used to track payments subject to existing information reporting and withholding likely will be used to track withholdable payments under FATCA. The FATCA status

of entities subject to withholding also will need to be tracked in operating systems and accounting platforms. This will require adding additional fields to capture FATCA changes, both for types of entities and withholdable payments not covered under Chapter 3. Automating these processes will ensure more effective compliance and reduce the incidence of human error and material breaches under FATCA. These FATCA changes can present formidable but manageable challenges to MNCs. They can be costly and likely require thoughtful planning, as well as buy-in from stakeholders. Given the risks associated with noncompliance for FFIs, or MNCs in their role as withholding agents, the implementation of a governance structure should be undertaken sooner, rather than later.

Being ready is critical

If compliance program enhancements have not been completed by January 1, 2015, it is important that MNCs consider implementing or enhancing their information reporting and withholding compliance programs and put controls in place to ensure that appropriate and valid documentation is being collected. As payors, MNCs are liable for withholding taxes, as well as penalties and interest, in situations where withholding was required but not applied.

The definition of an FFI is broad, and can produce unexpected results. Accordingly, MNCs should examine all of their entities, with an increased focus on those that generally trigger a concern, including holding companies, treasury centers, insurance related entities, companies engaged in financial transactions, and nonUS pension plans. Regulatory and legal entity changes could alter prior legal entity classifications. It is therefore important that there is ongoing assessment of the classification of legal entities within the MNC’s group.

Information reporting compliance considerations for nonfinancial multinationals | Are you ready for 2015?

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The takeaway

FATCA requirements loom large as January 1, 2015 approaches and MNCs face new FATCA milestones. Challenges exist and will continue to persist, but these challenges are manageable if there is a methodical and timely approach to determining and complying with FATCA requirements. For a successful navigation of the complexities of FATCA and the requirements looming on the horizon, MNCs need to undertake a complete compliance initiative that: • Identifies and engages internal and external stakeholders.

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PwC Foreign Account Tax Compliance Act

• Leverages third parties and service providers, as needed. • Defines roles and responsibilities of internal and external stakeholders. • Ensures initial and ongoing legal entity, products and services, payments and payee analyses so that withholding and reporting requirements are clearly defined. • Builds on existing information reporting and withholding regimes to incorporate FATCA changes.

Let’s talk

For more information, please contact one of the following members of PwC’s Global Information Reporting Network. To view contacts for over 70 countries worldwide, click here. Additional information For more information about FATCA, please visit PwC’s FATCA web site.

Information reporting compliance considerations for nonfinancial multinationals | Are you ready for 2015?

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