The US government, in an effort to reduce offshore tax evasion, has taken extraordinary steps to implement FATCA, the Foreign Account Tax Compliance Act. This includes the hiring and training of over 3,000 IRS examiners newly tasked with process verification and tax audit efforts. The implications for US businesses can be dramatic for those who deal with suppliers, partners, and vendors across international borders, since the new rules put the onus of regulatory compliance on the company that’s actually paying the suppliers and carry severe penalties.
While every company’s situation is different, there are considerations that every finance and accounting department should address to avoid an audit or fine (up to 30% of the payment).
1. Suppliers Need Guidance about the Right Tax Form
When working with suppliers, particularly when they are a foreign entity, the process of selecting and completing the right tax identification forms required by the IRS can be overwhelming and confusing. There are a plethora of different form choices they must correctly choose from (W-9, W-8BEN, W-8BEN-E, W-8ECI, W-8IMY, W-8EXP, and Form 8233, etc) and another estimated 1,000 possible points of validation across these forms. Even though an accounts payable department may simply ask the supplier for their form (as they do with domestic suppliers for their W-9’s), the supplier themselves might not know the correct form to provide. Without any guidance, foreign suppliers may need to request professional tax assistance – and perhaps an interpreter – to select and complete these arduous forms, some of which reach eight pages long. That seems unlikely. Most importantly, with the new FATCA rules, the Payer is now responsible for ensuring that their suppliers provide the right form and complete them correctly and, if not, they are on the hook for the maximum tax penalties. So suddenly, the finance department must become tax experts to help suppliers understand their obligations.
2. Forms Must Be Collected Whenever Changes Occur
Businesses data continually changes. Supplier tax data (structures, addresses, etc.) is not immune. As stipulated by the W-8 forms, the supplier must notify the payer within 30 days with new forms that represent their changing situation. However, it may not always be top of mind for the supplier. In that case, the finance team must be proactive and flag for changes (for example, payment destination) and then request the updated tax documentation as well. The best practice approach is to tie payments and supplier tax data closely together.
3. In Some Cases, Tax Withholding Is Necessary
For certain suppliers, the paying company may now need to withhold a percentage of the payment amount depending on various conditions of the supplier’s company structure, what goods or services they are dealing in, or where they establish their business. Withholding must be done for each payment to suppliers that fit these circumstances. It’s yet another reason to keep tax and payment information closely associated.
Subsequently all end of year reporting, for example on 1099 and 1042-S reports, must include information on withholding values as well as the income payment statements.
4. Know the Treaty Countries
To add to the complexity of supplier tax forms, any countries where the US may have an intergovernmental agreement (IGA) to exchange payment reporting may not require withholding. In that case, it’s up to the supplier to provide information on where they are established. For example, if the supplier is in a country where the US does not have an IGA and payment is being sent there (e.g. Russia), yet the supplier is established in a country where the US does have an IGA (e.g. the United Kingdom), additional declaration and documentation will be required and must be investigated.
5. Offshore Payment Sources Are Not Excluded
Let’s say that the paying company pays out from an offshore bank account. Does FATCA still apply? The answer is “maybe,” and depends on the IRS’s interpretation based on the specific situation. If the payment is made from a non-US source to an individual and there is no W-8BEN certifying non-US status, the assumption by default - right or wrong - may be that the individual is a US non-exempt recipient. For the IRS, this is likely the case and therefore withholding must be done. In short, it’s better safe than sorry to collect the necessary exemption paperwork in all cases so that, at minimum, your company avoids any possible interpretation of impropriety.
6. The Paying Company Assumes All Risk
Responsibility for getting the right supplier information is very clear to the IRS. The paying company’s accounts payable department must validate all the information. If the wrong form is provided or completed incorrectly by the payee, the IRS will not fine or audit the supplier but will come after the payer. For any forms that don’t comply, the payer will face a punitive withholding penalty equal to 30% of the payment of which the paying company is liable for. Finance and accounting departments need to understand their exposure to this risk.
The Case for Automating Tax Form Collection
Whatever your view of corporate regulations may be, the United States Congress believes that as much as $100 billion dollars is lost annually to offshore tax abuses designed to escape disclosure to the IRS. For individual companies dealing with FATCA, supplier tax information may seem an afterthought and downright daunting. But businesses need to recognize that the US government is taking the entire process very seriously. Without a serious operational policy and understanding of the challenges, businesses may find themselves getting unwanted attention.
Accounts payable and supplier payment operations are manual enough as is, and adding a complex, rule-driven, form-heavy compliance process to an already taxed operation (pun intended) is not an answer that should sit well with most CFOs. Possibly, the only truly compliant approach may be to use technology to solve the form collection and approval workflow.
Any system approach must go beyond simply uploading PDF files from suppliers or emailing forms back and forth through unsecure, unencrypted channels. It must account for the international business structure of the supplier so that the right forms are used, the information digitally collected whenever possible, the data verified for proper completion, and the backend workflows are established to store and approve the data. Ideally the system is also tied to the payments themselves to streamline withholding calculations, identify changes in supplier data that would warrant a required form update, and generate end-of-year reporting for sending out 1099 and 1042-S forms.
To learn more about complying with the impending FATCA deadline, watch our on-demand webinar with KPMG on accounts payable tax compliance best practices.
By Chen Amit, CEO, Tipalti.