The federal government has long had a problem with scofflaws who avoid paying taxes on their investment income by investing overseas.
In an attempt to solve this problem, Congress enacted provisions commonly referred to as the Foreign Account Tax Compliance Act, or FATCA.
The law is designed to persuade foreign financial institutions to report information, including investment income earned, about U.S. citizens and residents who maintain accounts with them. The big-stick incentive is a 30% withholding of U.S. source payments to the foreign financial institution if the institution fails to report its U.S. account holders or qualifies for a withholding exemption.
Why should anyone in the property-casualty business care? Because premiums remitted to foreign insurers are subject to FATCA withholding requirements unless the foreign insurer demonstrates that it complies or qualifies for an exemption. And the best part? The entity that remits the premium payments to the foreign insurer is responsible for verifying the insurer’s status and then withholding 30% if necessary.
Generally, a foreign insurer is not subject to withholding if:
• It does not have any cash-value business (so it is not a foreign financial institution subject to withholding under the statute). There is no de minimis exception; an insurance company that mainly issues property and casualty policies but makes payments with respect to even a single cash-value insurance contract will be subject to FATCA.
• It is domiciled in a country that has entered into an Inter-Governmental Agreement for FATCA compliance with the U.S.
• Or it has executed an agreement with the IRS agreeing to submit reports on its U.S. account holders.
A broker can document a foreign insurer’s exemption from the FATCA withholding requirements by having the foreign insurer submit an executed withholding certificate (IRS Form W-8BEN-E). This demonstrates eligibility for an exemption. As a practical matter, it is unlikely a broker will remit any premium to a foreign insurer that does not qualify for a withholding exemption unless the prospective insured is willing to pay a 30% surcharge to secure the coverage. The foreign insurer is likely to take the position that the coverage is not valid absent payment of the full premium.
Although the final regulations contain numerous changes relevant to foreign insurers, they do not provide relief for brokers because premiums paid on insurance and reinsurance policies, including property and casualty policies, remain potentially subject to 30% withholding. The result? A broker paying a premium to a foreign insurer will generally need to determine whether that carrier is compliant. It may also be exempt because it has no cash-value business.
Determination is generally based on the foreign insurer’s submission of the IRS withholding certificate verifying its qualification for one of the withholding exemptions. For carriers that have cash-value business, the withholding certificate will include a Global Intermediary Identification Number (“GIIN”) that can be verified against an IRS list.
GIINs will be assigned, beginning no later than October 15, to foreign financial institutions that have registered and agreed to comply with FATCA. The IRS will electronically post a full list of institutions that have been issued GIINs on December 2, and the agency intends to update the list monthly. To be included on the December 2 list (the only one issued before Jan. 1, 2014, withholdings begin), financial institutions can register with the IRS no later than October 25.
Foreign insurers that are not foreign financial institutions (because their business is limited solely to property-casualty and they do not issue cash-value insurance products) will be able to certify they are exempt from withholding using the same withholding certificate.
Although the final regulations do not appear to provide significant relief for brokers, the IGAs between the United States and other nations could greatly ease compliance burdens. Treasury has entered discussions on IGAs with more than 50 countries. As of press time, eight had already executed or initialed IGAs.
Under the first type of IGA (a “Model 1 IGA”), a foreign country agrees to adopt rules to require financial institutions otherwise not exempt under the IGA to identify and report information about U.S. accounts. Local tax authorities then exchange information with the United States. Financial institutions organized in that foreign country generally are treated as compliant with FATCA. The United Kingdom, Denmark, Ireland, Italy, Norway, Spain, and Mexico have signed or initialed Model 1 IGAs.
Under the second type of IGA, a Model 2 IGA, a foreign country agrees to direct and enable all nonexempt foreign financial institutions in the jurisdiction to register with the IRS and report specified information about U.S. accounts directly to the IRS. Those financial institutions are then treated as FATCA-compliant. Switzerland has initialed a Model 2 IGA.
To comply, brokers likely will need to modify existing systems and processes to document any foreign payee not subject to withholding. If you do choose to withhold for any foreign payees that are not exempt, you also will need to establish procedures to track the payments and to document the withholding. Those are the FATCA facts.