Gross Proceeds Reporting under FATCA
In practice the United States (US) Foreign Account Tax Compliance Act (FATCA) will impact nearly all non-US entities that receive US source income, as nearly all types of US-source income are included within its scope. FATCA withholding on ‘withholdable payments’ generally began on 1 July 2014. A withholdable payment is defined as a payment of US-source Fixed (or for which the amounts to be paid are known ahead of time) or Determinable (or there is a basis for figuring the amount to be paid) Annual (or paid yearly) or Periodic (or paid from time to time no specifically in regular intervals) income (FDAP). FDAP income is defined to have broad application, and generally includes all US sourced income, except for gains that are made from the sale of real or personal property. There are some exceptions however, such as qualified scholarship income and tax-exempt interest.[1] Examples of FDAP income include interest; dividends; pensions and annuities; alimony; royalties; original issue discount; real property income (e.g. rents); scholarships; fellowship grants; prizes, compensation for personal services; a sales commission paid or credited monthly; a commission paid for a single transaction; a distribution from a partnership that is FDAP income[2]; taxes, mortgage interest, or insurance premiums paid to, or for the account of, a non-resident alien landlord by a tenant under the terms of a lease; prizes awarded to non-resident alien artists for pictures exhibited in the US; purses paid to non-resident alien boxers for prize fights in the US; and prizes awarded to non-resident alien professional golfers in golfing tournaments in the US.
It was previously the case that a withholdable payment would also include the gross proceeds from the sale or other disposition of any other property of a type that can produce interest or dividends that are US source FDAP income, from 1 January 2017 onwards.[3] However, in order to help to facilitate an orderly phasing-in of FATCA withholding, Treasury and the Internal Revenue Service (IRS) intend to amend the US Chapter 4 Regulations under section 1473 to extend the start date of gross proceeds withholding to 1 January 2019. Whilst this delay may provide temporary relief for some firms, it is worth noting that some payments may incorporate multiple elements and may therefore need to be analysed in detail in order to see if they are exempt from FATCA withholding and reporting requirements or not. For example, any corporate distributions that are made now will be treated as dividends in respect of corporate earnings and profits (i.e., potentially subject to withholding), but any excess portion is treated as proceeds from a sale or exchange (i.e., only subject to withholding from 1 January 2019). Another point worth noting is that foreign investments in US stocks or securities may be particularly affected by withholding on gross proceeds of FDAP income, as FATCA withholding will apply even if a sale or other disposition results in an overall loss in the underlying investment.[4]
If you would like to discuss any of the implications of FATCA on your business, or for more information on our regulatory compliance reporting solutions and prices, please email DataTracks at: enquiry@datatracks.eu.
[1] See: FDAP Income, Internal Revenue Manual, 4.10.21.2(11); Commissioner v. Wodehouse, 337 U.S. 369.
[2] Or such an amount that, although not actually distributed, is includible in the gross income of a foreign partner.
[3] The proposed regulations originally provided for a commencement date of 1 January 2015.
[4] For example, if $50,000 of US stock are purchased in 2016, the value of the stock subsequently depreciates, and the US stock are sold after 1 January 2019 for $40,000, the 30% FATCA gross proceeds withholding will still be applicable to the full value of the stock, i.e. a total of $12,000 withholding. A non-FATCA compliant investor will receive $28,000 from an original investment of $50,000.