August 15, 2013
If your Canadian multinational company has U.S. source income, including inter-company payments from a U.S. subsidiary, it must provide information required by the recently introduced U.S. Foreign Account Tax Compliance Act (FATCA). Even if non-U.S. companies in your corporate group do not have U.S. source income, you will need to determine their status under FATCA.
Failure to comply may result in a 30% U.S. withholding “penalty” on your U.S. source income. Because this withholding is a penalty rather than a tax, it cannot be reduced by a tax treaty nor is it eligible for a foreign tax credit on your Canadian tax return. You may also face trouble dealing with banks and other financial institutions in Canada and other countries, whose FATCA compliance requirements include gathering certain information from their clients.
The FATCA withholding rules and information gathering requirements for Canadian banks and other non-U.S. financial institutions take effect June 30, 2014. Canadian companies should take action now to ensure they will be ready to provide the necessary information to non-U.S. financial institutions, tax authorities and payors of their U.S. source income.
Canada is expected to enter into an intergovernmental agreement (IGA) with the U.S. that would require Canadians to report FATCA information to the CRA rather than the IRS, among other things. Although the details of the anticipated Canada-U.S. IGA are not yet available, the broad form of FATCA will remain.
FATCA is a U.S. law designed to combat tax evasion by U.S. citizens and residents through the use of offshore accounts and investments. This law focuses on reporting by financial institutions and investment entities in Canada and other countries to the IRS about financial accounts and substantial financial interests held by U.S. taxpayers. The withholding on Canadians’ U.S. source income is used as a penalty to compel Canadian businesses to provide the information the IRS requires about U.S. account holders and U.S. owners.
Though FATCA is a U.S.-based initiative, it has been embraced by many countries around the world, which are incorporating the principles of FATCA and its requirements into their own laws by entering into IGAs with the U.S. These countries include the U.K., Germany, Japan, Ireland, Mexico and Norway.
Non-U.S. companies that are not normally considered financial institutions or investment entities may still be considered “foreign financial institutions” under FATCA and may have reporting requirements to avoid the 30% withholding penalty on their U.S. source income and to maintain relationships with Canadian and other non-U.S. banks.
Many companies may be exempt from the reporting requirements because the risk that they may be used for tax evasion is considered low. Nonetheless, these “low risk” entities will still need to certify their FATCA-exempt status to their financial institutions and payors of their U.S. source income, if they have any. The exemptions include, for example, non-financial entities operating “active businesses”, “publicly traded” entities and “charitable organizations”. The exemption rules are complex and have specific definitions — companies may fall into one of many different exempt categories or none.
Since U.S. payors and Canadian and other non-U.S. financial institutions are required to ask for such documentation in mid-2014, Canadian companies may want to prepare now before the withholding rules take effect.
Determining your companies’ FATCA status
Canadian multinational companies will have to determine the status of all the members of their corporate group under FATCA.
Making this determination will require that all Canadian entities first categorize each member in their organization as either a foreign financial institution (FFI) or a non-financial foreign entity (NFFE). Those categorized as FFIs may face additional reporting obligations. The definition of FFI is broad and may unexpectedly include certain investment vehicles, investment managers, holding companies, finance companies, insurance captives and start-ups without significant active income.
A Canadian entity that is not a financial institution is considered a non-financial foreign entity (NFFE). An NFFE may be considered a “passive” NFFE, depending on the amount of its passive income and assets. The IRS is particularly interested in passive NFFEs with substantial U.S. ownership. As such, passive NFFEs would have to meet disclosure requirements regarding their owners to comply with FATCA.
Implications for Canadian multinationals
Most entities within a non-financial multinational company will be classified as NFFEs. However, the definition of an FFI is broad and it is not uncommon for non-financial multinational groups to have “accidental” FFIs in their structure (e.g., certain Canadian entities that serve as a treasury centre or certain captive insurance companies). The key implications of classification as an FFI or an NFFE are as follows.
An entity that is an FFI generally is required to register and enter into an agreement with the tax authorities to become a “participating FFI”. An FFI agreement generally requires the participating Canadian FFI to collect and provide to the tax authorities certain information about some of its stakeholders. Publicly available information may be used for this purpose, such as Schedule 13Gs for stock traded on the New York Stock Exchange. To meet these requirements, it may be necessary for the Canadian participating FFI to establish new procedures and controls.
It is important to note that a Canadian FFI generally is treated as a participating FFI only if all of the FFIs in its affiliated group properly and timely enter into an FFI agreement with the tax authorities.
An entity that is an NFFE generally is required to determine its classification under the many NFFE categories. The Canadian NFFE will be required to certify such classification to its U.S. withholding agents by June 30, 2014 to avoid the 30% percent U.S. withholding penalty on U.S. source income.
Further, financial institutions with which an NFFE does business (e.g., Canadian banks) may require an NFFE to certify its FATCA classification.
A Canadian NFFE that does not qualify for a specific NFFE exception will be a passive NFFE and will be required to report its “substantial U.S. owners”. The Canada-U.S. IGA is expected to provide details on what will constitute a substantial U.S. owner.
This reporting obligation may require the passive NFFE to implement new information collection procedures and controls before June 30, 2014.
Actions for Canadian companies
Your organization may want to consider taking the following actions:
- Perform a targeted review of the enterprises’ organizational chart to identify any Canadian or other non-U.S. “accidental” FFIs in the corporate group before the April 25, 2014 FFI registration deadline.
i. Key entities to be reviewed include, for example, treasury centres, captive insurance companies, holding companies, and other entities the substantial part of the business of which is investing in “financial assets” on behalf of others (including securities, futures or forward contracts, partnership interests or commodities).
ii. Each FFI that receives U.S. source payments or receives payments from a non-U.S. banking institution should register to be a participating FFI before April 25, 2014 to avoid 30% U.S. withholding on such payments. As noted above, a Canadian FFI generally may be treated as a participating FFI only if all of the FFIs in its affiliated group enter into an FFI agreement with the IRS.
iii. Each participating FFI generally would be required to collect and report information regarding its U.S. stakeholders. The first report is due March 15, 2015.
- Analyze the application of the NFFE rules to determine whether the Canadian enterprise is a passive NFFE that would be required to provide information on its substantial U.S. owners by June 30, 2014.
i. If the Canadian enterprise is a passive NFFE, it should establish procedures and controls in order to report its substantial U.S. owners. It would be required to provide its U.S. withholding agents and possibly other FFIs with this information by June 30, 2014.
- Perform a targeted review of the Canadian enterprise’s organizational chart to update its internal withholding documentation by June 30, 2014.
i. Analyze the NFFE classification of any non-U.S. entities that receive U.S. source payments (e.g., dividends or interest) from U.S. entities within the group. Provide forms to the affiliated payors certifying such classification by June 30, 2014.
ii. Analyze payments made by any U.S. entities and determine which entities, if any, make payments subject to FATCA withholding to external parties. Request updated withholding documentation from such external parties.
- Analyze the NFFE classification of all other entities. Be prepared to certify such classification when requested (e.g., from an unrelated U.S. withholding agent or a non-U.S. banking institution in which the enterprise holds an account). U.S. withholding agents may request documentation starting before June 30, 2014.
We can help
KPMG Canada’s experienced, multidisciplinary team of tax and advisory professionals can help your multinational Canadian company meet its FATCA requirements. We provide FATCA advice to a wide range of financial services and general business organizations and can assist you in determining the FATCA categories for entities in your organization. To discuss any aspect of FATCA, please contact your KPMG adviser.
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Information is current to August 14, 2013. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
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