Dayle O. Blair, GUEST COLUMNIST
How will FATCA affect businesses?
THE FOREIGN Account Tax Compliance Act (FATCA) is an important development in the United States of America's efforts to improve tax compliance.
The Internal Revenue Service (IRS) focuses on foreign financial assets and offshore accounts in order to catch tax dodgers, tax cheats, and even overseas businesses fully or partially owned by American citizens, green card holders or American businesses who do not know that they should file US tax returns and pay US taxes.
There are two main ways that FATCA will affect businesses; one that puts the compliance cost burden on the businesses and owners to comply with US tax laws; and the other on foreign financial institutions (FFI) to implement the infrastructures to report the information that is required by the IRS.
How businesses and owners will be affected?
American businesses operating overseas must file tax returns annually and pay taxes where applicable, just as individuals. Businesses will have to expend more financial resources because they will now have to improve their compliance, and some businesses will have to seek costly professional help to do so. Depending on how a business is classified, it will generally need to file one of the following costly returns on an annual basis:
Form 3520 - Annual return to report transactions with foreign trusts and receipt of certain foreign gifts;
Form 3520-A - Annual information return of foreign trust with a US owner;
Form 8865 - Return of US persons with respect to certain foreign partnerships;
Form 5471 - Information return of US persons with respect to certain foreign corporations.
Form 5471 is critical, because it affects a person who owns more than 10 per cent of the share capital in a foreign corporation, or if a person is an officer or a director in a foreign corporation. Its importance is further stressed because, let's say a wife and husband own a small business that is a company in a foreign jurisdiction, they may be required to file five sets of returns with the IRS as follows: the personal return to declare any income received from the business; then one in the business name to report the business' financial activities; another to report their interest in the business for informational purposes; and, if the FATCA threshold are met, then there must be one to comply with FATCA requirements.
In addition, if the business has a bank account with more than US$10,000, there must be another return filed to an organisation other than IRS to report the bank account information.
One should note that the requirements for partnership are almost consistent with those of corporations. So, now you see that FATCA compliance may be costly to businesses, but the IRS sees it as necessary because it wants to know who has businesses offshore and whether taxpayers with interests offshore are complying with their tax obligations.
How the FFI businesses will be affected?
In order to fully comply with the IRS/FATCA requirements, FFIs will see their business operating costs increase significantly. Those costs increase will be attributable to the following:
Conducting a current assessment of business systems and operations.
Increased professional consulting cost.
Increased human resources cost.
Continuous reporting to the IRS.
Investment in new software and hardware to capture information as required by the IRS.
Conducting gap analyses against identified requirements.
Whenever necessary, businesses may have to create a department just to deal with FATCA compliance.
Developing action plans to implement changes required for FATCA compliance.
Conduct self-audits to determine if the FFIs are operating within the legal framework to be compliant with the requirements of FATCA.
Application of risk-mitigation strategies, as customers information obtained in strict confidence may now have to be shared with third parties.
In addition to the above, whenever the US$50,000 threshold is met, there will be a withholding of 30 per cent cost to the FFIs for not reporting the required information on the account holders. To avoid this, FFIs may register with the IRS, obtain a Global Intermediary Identification Number and report certain information on US accounts to the IRS as required.
FFIs that enter into an agreement with the IRS to report on account holders may be required to withhold 30 per cent on certain payments to foreign payees, if such payees do not comply with FATCA, thereby increasing their business costs.
US financial institutions and other US withholding agents must both withhold 30 per cent on certain payments to foreign entities that do not document their FATCA status and report information about certain non-financial foreign entities.
US financial institutions and other types of US withholding agents are required to withhold 30 per cent of certain US source payments made to foreign entities, if they are unable to document such entities for purposes of FATCA, resulting in additional business costs.
Businesses should note that costs incurred as a penalty for failure to comply with FATCA may not be claimed as expense on the tax returns tendered to the IRS.
While FATCA may be considered costly to taxpayers, business and FFIs business, costs will not be considered as any good excuse for non-compliance; hence, everyone should try their best to comply, because the consequences of the non-compliance will be very costly.
Dayle O. Blair is an attorney-at-law, certified public accountant and a certified international tax adviser. He can be reached for comments at email@example.com, firstname.lastname@example.org or 876-906-1016 or 876-625-9680.