Global Tax Compliance Alert for 2012

icon Blog  •  posted 02/18/12

Proposed FACTCA Regulation Less Onerous Than Expected

An issue that companies’ AP departments need to be aware of is compliance with the Foreign Account Tax Compliance Act (FATCA). A 30 percent tax that must be withheld when paying foreign entities found not to be in compliance with FATCA. It will come as good news to controllers and their AP departments, however, that new FACTA rules are less onerous than anticipated. For example, the proposed regulations contain measures that alleviate foreign financial institutions’ concerns about the costs of compliance as well as possible conflicts between FATCA and local laws. The new rules also grant a blanket exemption for all payments made in the ordinary course of business that are for nonfinancial purposes. If AP is making payments of interest and dividends (unless the interest payment is because the company is purchasing on a deferred basis), however, the payments would be liable to FACTA compliance. 

Documentation is required under FATCA to make a payment without assessing the withholding tax. Controllers, treasurers and other finance managers responsible for FATCA compliance should ensure that such documentation from all shareholders that are foreign entities is obtained. Controllers should focus attention on those accounts with the greatest potential for concern—especially larger accounts. The U.S. Treasury just announced an alliance with regulators in France, Germany, Italy, Spain and the UK to have information required by the IRS under FATCA be delivered through existing government-to-government mechanisms.

Does Your Company Have a Foreign Tax Exposure Risk?

The Securities and Exchange Commission (SEC), concerned about on the impact on U.S. companies if euro zone or other nations raise their corporate tax rates to solve budget crises, is stepping up its scrutiny of foreign tax exposure. It’s no secret that to avoid domestic taxes, U.S. corporations are parking immense amounts of cash overseas. As a result, the SEC is looking closely at companies with large overseas operations.

If, as a result of the escalating sovereign debt crisis, those companies’ cash hoards become subject to higher tax rates overseas, cash flow and liquidity could be negatively impacted—a scenario corporate controllers should be alert to. Controllers at companies with such exposure should also prepare for heightened SEC scrutiny of their disclosures of information—particularly the breakdown in cash and short-term investments versus the amounts held in offshore accounts—in their regulatory filings.