While the fiscal cliff and its tax implications loom, treasurers are thinking about FATCA and overall reform.
There are a number of tax issues looming on the horizon for corporate treasury, among them the Foreign Account Compliance Tax Act (FATCA) and what is hoped are coming reforms for multinationals.
FATCA, which goes into effect at the start of 2014, is aimed at curbing US taxpayers’ ability to avoid US tax on overseas funds. Banks certainly hope that the IRS backs down from this law or at least considers revising some of the new tax regulation as it pertains to foreign activity. That’s because the increased work entailed in managing tax exposures for foreign banks and financial institutions is expected to be onerous. According to one tax attorney, implementing systems to comply with FATCA is costing banks roughly $100mn or more and currently absorbing a lot of resources. This, along with coming capital and liquidity requirements, will make more expensive corporate banking of all types.
The cost has been a particular issue for foreign banks. So much so that the Canadian Prime Minister Stephen Harper in January met with IRS representatives to discuss the detrimental impact and costs FATCA will have on Canadian banks. The IRS has recently struck deals with Switzerland and Japan concerning FATCA and has negotiated with France, Germany, Italy, Spain and Britain to set up government-to-government information-sharing deals. But at the same time there have been rumblings that some countries, notably China, might ignore the initiative altogether (see related stories here and here).
Similarly, the first filing of FBAR, or the Report of Foreign Bank and Financial Accounts Treasury and its (Form TD F-90 22.1) is due on June 30, 2012. The FBAR requirement is for “all US persons who had a financial interest in or signature authority over foreign financial accounts” to file the form if the aggregate value of the foreign financial accounts exceeded $10,000 at any time during 2011.
Another issue of concern is international tax reform. Most agree that there will not be much movement on this until after the presidential election. If President Obama wins reelection, then MNCs should expect measures to chip away at benefits to foreign earnings, e.g., FTCs and pooling.
To mitigate this risk, there have been several instances of MNCs using acquisitions (reverse mergers) to “move off island” or accomplish an inversion. Ireland and Switzerland are the most popular destinations for these. The third area for concern is changes in tax rules targeting tax planning using intercompany IP payments to transfer income to low-tax jurisdictions and generate FTCs. The subpart-F income regime could be extended to deem the difference between the US tax rate and the low-tax regime’s rate as current taxable US income. The IRS is resorting to this as taxpayers are generally winning in tax court on the transfer pricing issues involved.