October 2020 Foodman website and JD Supra
witholding tax

What if a U.S. Withholding Agent  of a Foreign financial Institution (FFI) erroneously applies a 30% Internal Revenue Code (IRC) Chapter 4 FATCA Withholding to a payment to the FFI? What can be done to recover the funds?     

Who is a Withholding Agent?

You are a withholding agent for purposes of Chapter 4 if you are a U.S. or foreign person, in whatever capacity acting, that has control, receipt, custody, disposal, or payment of a withholdable payment.

What is a FATCA Witholding Payment?

A withholdable payment is a payment of U.S. source fixed or determinable annual or periodical (FDAP) income. Chapter 4 withholding applies to withholdable payments made to an entity payee that is an FFI unless the withholding agent is able to treat the FFI as a participating FFI, deemed-compliant FFI, or exempt beneficial owner. FATCA withholding also applies to withholdable payments made to a passive NFFE that fails to identify its substantial U.S. owners (or certify that it does not have any substantial U.S. owners).  

In order to determine if withholding applies the payee’s chapter 4 status must be determined by applying the documentation requirements of chapter 4, generally by obtaining a Form W-8 (or, under an applicable IGA, a similar agreed form) associated with the payment, or other documentation for payments made outside of the United States on offshore obligations. Withholding under chapter 4 also applies to account holders of a participating FFI or registered deemed-compliant FFI that the FFI is required to treat as recalcitrant account holders.

What to do if Erroneously Withheld?

The process for an FFI to obtain a credit or refund of excess taxes withheld under IRC Chapter 4 (FATCA) is challenging.  Obtaining direction and assistance directly from the IRS is challenging

The efficient procedure to recover erroneously withheld funds is to obtain Representation in order to communicate with the IRS.  A Qualified Tax Professional that is knowledgeable and an expert in U.S. Tax Law compliance ought to be considered as a Point of Contact (POC) with the IRS.