Certified Financial Translations for FATCA Obligations

Certified Financial Document Translation Services

We’ve blogged about the importance of certified financial document translation services. As many attorneys and law firms service corporations and financial institutions, many will likely be seeing FATCA related issues come across their desk in the coming months. FATCA, which went into effect on January 1st, 2013, sets forth new US withholding tax obligations for US and non-US companies and financial and non-financial institutions.

Congress has given the Treasury and the IRS broad regulatory authority to provide details on how to comply with these obligations.

Your obligations under FATCA vary depending on whether you are:

A Non-US Financial Institution (either a Qualified Intermediary or a Nonqualified Intermediary

  • A US Withholding Agent
  • A US Multinational Corporation
  • A Non-US, Non-Financial Entity

Non-US Financial Institutions: Qualified Intermediaries and Nonqualified Intermediaries

Non-US financial institutions, both QIs and NQIs, must determine whether they will enter into an agreement with the IRS to identify US account holders or be subject to 30% withholding on withholdable payments. A good FFI must: (1) identify US accounts, (2) comply with ongoing due diligence rules, (3) provide an annual report to the IRS, (4) provide the IRS with any additional information requested, (5) withhold on uncooperative account holders, and (6) if necessary, request waivers from US account holders to allow their names to be disclosed to the IRS. Needless to say, this process is both cumbersome and expensive. For example, the foreign financial institution will have to provide foreign language translations of all account information to the IRS.

An FFI must review its current systems and processes to determine what identifying information it collects from account holders and where and how that information is stored. FFIs will need to assess what organizational, system, and process improvements will need to be made to ensure the FFIs’ compliance with the FATCA obligations, and also to ensure their continued compliance with the section 1441/NRA withholding rules. FFIs should consider telling their respective industry groups and the IRS their views on how they can comply with FATCA as a practical matter.

However, these considerations will vary depending on the FFI’s product offerings and client base, and whether the FFI is a QI or NQI.

The IRS will expect QIs to agree to the specified obligations, likely amending the QI Agreements accordingly. A QI must assess whether it operationally can accept the additional FATCA burdens, whether it should eliminate its US client base, or whether it should even give up its QI status and divest from the US market. Withholding QIs will need to consider what systemic changes will be required for withholding, not only on US source FDAP payments, but also on gross proceeds.

For NQIs, the issue is one of strategy. An NQI should assess its customer base, its potential operational obligations, and the market pressures and consequences of being a good versus bad FFI. NQIs too may consider divestment of US customers and/or US investment.

US Withholding Agents

USWAs will be required to identify customers who are FFIs and determine whether they are good or bad FFIs. USWAs must also be able to identify customers who are NFFEs and verify whether they have any substantial US owners. USWAs must be able to withhold on bad FFIs and NFFEs who refuse to provide information about US owners and also on any “passthru payments” to good FFIs who have “bad” clients and elect not to do withholding themselves. Withholding systems must be capable, for the first time, of withholding 30% on proceeds from the sale of US securities. Additionally, USWAs must be able report information to the IRS regarding the substantial US owners of NFFEs.

USWAs will need to develop processes and procedures for identifying good and bad FFIs and NFFEs. USWAs’ systems will need to be enhanced to manage FFI status, NFFEs, and the corresponding withholding and reporting requirements.

US Multinational Corporations

MNCs should determine whether and what type of US source vendor and other payments are made to non-US entities. MNCs should also determine if any withholdable payments are made to NFFEs subject to the FATCA rules, and if so, request those NFFEs to identify any substantial US owners. Of course in order to make this determination certified foreign language translations of the payments and transactions could be required.

MNCs will have to withhold the FATCA 30% tax on any NFFEs who fail to provide US owner information and on any bad FFIs. MNCs that act as their own transfer agent will also need to identify NFFE shareholders and either obtain information regarding substantial US owners or withhold at 30% on withholdable payments.

MNCs will need to develop processes and procedures for identifying withholdable payments and good and bad NFFEs, and also for providing US ownership information to the IRS. MNCs should review the withholding capabilities of their current systems and determine what systems enhancements and operational changes will be required to comply with FATCA.

Non-US, Non-Financial Entities

NFFEs will need to determine whether they will disclose their substantial US owners, if any, or be subject to 30% withholding on withholdable payments. The affected NFFEs are not just those that have investment accounts with a financial institution but also those that provide services in the US, license patents, trademarks and copyrights (e.g., software) in the US, or receive payments of rents on property in the US. NFFEs receiving only income effectively connected with a US trade or business do not fall under the FATCA rules.

NFFEs who do not want to be subject to withholding (i.e., good NFFEs) must establish appropriate controls, systems, and processes to identify substantial US owners (generally, those with more than 10% ownership unless the NFFE is an investment company, in which case, any US owners), and also to report the identifying information about those owners to the IRS.

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