AmCham Macedonia Winter 2015 (Issue 44) | Page 21

ANALYSIS • software licenses Practical impact on Macedonian companies • interest on outstanding accounts payable arising from the acquisition of goods and services. Because of its broad reach, FATCA can affect a Macedonian company as well as its US and foreign subsidiaries as follows: Importantly, most 'pas... Macedonian sive' type payments (such companies should as dividends and interest not described above) do not act now rather than qualify as excluded nonficaught unprepared nancial payments. However, and running the risk an exception may apply for of being subject to interest paid under certain the 30% withholding debt instruments known as tax under FATCA. 'grandfathered obligations' that were outstanding on 1 July 2014, have a fixed term, and have not been materially modified after 1 July 2014. If a payment is a 'withholdable payment' and no exceptions apply, the payor (also known as the 'withholding agent') must obtain documentation from the payee that contains information regarding the payees FATCA status. If the payee does not provide this documentation, the withholding agent is required to withhold 30% of the withholdable payment and remit to the US tax authorities. FATCA and 'traditional' withholding The objective of traditional US withholding is to collect tax on nonresidents who are not engaged in business in the US but whom earn FDAP income that is sourced to the US. The US has a domestic withholding rate of 30%; however this rate is often reduced under a tax treaty with the non-US recipient’s country of residence. Currently there is no treaty in place between the United States and Macedonia. In contrast, FATCA withholding was not designed to be a 'tax' on income. Instead, FATCA was enacted to deter tax evasion by US taxpayers who are earning unreported income through accounts held directly or indirectly through foreign entities. FATCA seeks to achieve this objective by using a withholding tax mechanism to motivate the foreign entities to report information about their US account holders and/or US owners. Tax treaties therefore does not apply to reduce FATCA’s 30% withholding rate. FATCA rules must be applied before the traditional withholding rules. Ultimately, only one withholding tax (FATCA or traditional) will apply. Emerging Macedonia Winter 2015 Issue 44 Macedonian entities (or their non-US subsidiaries) may need to determine and provide documentation attesting to their FATCA classification. The key question for a Macedonian entity that must provide FATCA documentation is to determine its FATCA classification. FATCA divides payees into two categories - FFIs and Non-Financial Foreign Entities (NFFEs). Most FFIs are banks that are involved in depository, custodial or investment activities however holding companies, treasury centers and insurance companies can also be FFIs in certain circumstances. NFFEs, on the other hand, are all entities that are not FFIs. Pathways to compliance FFIs and NFFEs have different paths to achieve FATCA compliance and documentation. If the payee is an FFI, the path to FATCA compliance is generally longer and will depend on whether the FFIs country of residence has consummated an Intergovernmental Agreement (IGA) with the US and the type of such IGA. Macedonia has not entered into an IGA with the US. This means that Macedonian FFIs should consider whether they will need to directly enter into an agreement with the US tax authorities to report specified information about their U.S. FATCA was enacted to deter accounts in order tax evasion by US taxpayers to avoid potential who are earning unreported FATCA wit