Corporates are roped in to enforce the new tax rule.
The US Foreign Accounts Tax Compliance Act (FATCA) looks set to become a headache for treasury. The act, passed on March 18, 2010, is targeted at US taxpayers who try to hide assets overseas. Essentially, it forces foreign financial institutions (FFIs) and certain other entities to disgorge masses of information about their US clients, or be subject to a 30 percent withholding penalty on US-sourced income. Treasurers are among those tasked with managing the withholdings.
The final implementation rules are not expected until late this year—creating a nail-biting situation for FFIs and other affected entities, since the law goes into effect on January 1, 2013. But as it stands, it appears that corporates will have to impose the withholding penalty on dividends, royalties and rents paid to certain FFIs that act as intermediaries for US investors.
Whether a corporate has to apply the withholding depends on whether the FFI has agreed to provide the requested information to the IRS. That’s not as easy as it sounds: the FFIs will have to get their clients to sign waivers to various national privacy laws to allow the FFIs to deliver the information to the IRS.
Needless to say, some clients may balk, the paperwork might not be done in a timely manner, or the financial institutions themselves may drag their feet or simply refuse to participate. That would force treasury to keep track of a fluid situation to ensure it was getting the withholding right for each of potentially hundreds of institutions.
Treasury must also ascertain whether the foreign entities it deals with are subject to FATCA. For example, public nonfinancial foreign entities (NFFEs) are exempt, but private NFFEs are not.
All this could force corporates to modify or upgrade their accounts payable systems. These will need to track payments to FFIs, keep track of the withholdings, and pay them over to the IRS, along with all the ancillary documentation, things few are currently designed to do. Unfortunately, until the IRS releases the final regs, it will be hard for corporates to determine what they need to do to prepare.