DALLAS—With the Foreign Account Tax Compliance Act (FATCA) scheduled to take effect on July 1, many treasury departments are making sure they know what they need to do to comply. Not surprisingly, the law was a major topic of discussion at this week’s AFP Treasury Advisory Group meeting in Dallas.
FATCA imposes a 30 percent withholding tax on payments of American-source fixed, determinable, annual or periodical (FDAP) income paid to certain foreign financial institutions (FFIs) and some nonfinancial foreign entities. S. Michael Chittenden, a senior associate with Miller & Chevalier who spoke to the TAG attendees, joked that FATCA is basically “extortion,” as the U.S. government is essentially saying, “If you don’t give us the information on your U.S. customers, we’re going to take 30 percent of all of your U.S. source earnings.”
In the future, it will only get tougher for companies, added Chittenden. Effective in 2017, the government will take 30 percent of the gross proceeds from the sale of assets that produce U.S.-source interest and dividends. “As an example, let’s say you bought $100,000 of IBM stock as a financial institution,” he said. “You sell it a few years later for $50,000 because something really bad happened to IBM. The federal government would take $15,000 of that, leaving you with $35,000 of your original $100,000 investment.”
Earlier this month, the Internal Revenue Service (IRS) announced that 2014-2015 would be treated as a transition period for FATCA. Still, Chittenden is wary of this grace period and advises nonfinancial companies to keep working to comply under the original timeline.
“Speaking from a legal perspective and as someone who works with companies when the IRS comes knocking to impose penalties, we don’t like this very much at all,” he said. “It’s a very nebulous standard; it’s up to the agent to decide whether or not you complied in good faith. You probably are going to have to go to appeals and fight about it, which involves hiring lawyers. So basically, keep working, and try to comply. This did not delay the effective date of FATCA. It is still effective July 1.”
Companies should begin by reviewing their entire organizational chart for potential foreign financial institutions (FFIs), including corporate affiliates, partnership interests, and branch operations. “Because of the deadline for registering the FFIs, you have to start by documenting all your foreign entities,” said Chittenden.
It is important that every organization consider who is in their expanded affiliated group (EAG). These are all the entities that share:
- 50 percent of the value and 50 percent of the profits (for corporations)
- 50 percent of the value or 50 percent of the profits (for partnerships)
- 50 percent of the beneficial interest (for trusts).
EAGs that contain FFIs may have registration requirements and due diligence requirements for any accounts that they maintain.
Because local banking laws in foreign jurisdictions may prevent FATCA compliance, the U.S. Treasury Department has been working with more than 80 countries on intergovernmental agreements (IGAs), which are similar to treaties. More than 30 countries have signed an IGA, and about another 30 are treated as having one in place.
These agreements primarily affect the obligations of FFIs, but can also have an impact on U.S. withholding agents. “For example, some payees in IGA jurisdictions will have a different Chapter 4 status than they would under the [FATCA] regulations,” Chittenden said. “So when you’re going through your chart and looking at all your affiliates, if they’re in an IGA jurisdiction, you might need to look at the IGA to figure out whether or not they’re an FFI. We have clients who, under the regulations, would have an entity that’s an FFI but under the IGA it’s not.”
Time’s almost up
In many companies, tax has been taking the lead on FATCA, and many TAG members noted that their tax groups are. However, others revealed that their tax departments have taken a hands-off approach. “My tax department thinks it’s not a big deal,” said a treasurer. Another treasurer said that his company’s tax department is “not doing anything at all” about FATCA. Regardless, treasurers need to be involved and if necessary, take the reins.
“The reality is, you’re going to have compliance problems, and you’re going to have 30 percent withholding stuck on you if you don’t [comply with FATCA],” Chittenden said. “So it’s really important that treasury get buy-in from the very top; that the general counsel can’t come in and demand you send money immediately without any documentation. You just can’t do it. The treasury clerk who is wiring the money has to be empowered to say, ‘No.’”