Impact of IRS Rules on Businesses outside of the US

Posted February 3, 2013

A couple weeks ago, the Nassau Guardian reported that the Bahamas Hotel and Tourism Association reported a problem to the Caribbean Hotel and Tourism Association. A change in US tax regulation has meant that US credit card companies were implementing an automatic 28% withholding fee on payment to their members. Undoubtedly this is a situation that can potentially impact any business with American clients. Businesses need to understand it and they need to be prepared.

The Foreign Account Tax Compliance Act (FATCA) is part of the effort by the US government to prevent money laundering, and reduce tax evasion. It has implications for (1) Americans residing outside of the US, (2) for financial institutions outside of the US with American clients and for (3) non-American businesses with American clients. In this commentary, I am only focusing on number (3) non American businesses that receive payments from American entities.

A few weeks ago, I myself received an email. A non-American business who has serviced American clients for several years was suddenly being asked by their American clients to provide an EIN or an employee identification number. An EIN is a type of Federal Tax Identification Number (TIN) and is used by the IRS to identify a business entity. The American client is obligated to ask questions because under the law (IRC 1.1441-2), both the American client making the payment and the non-American entity receiving the payment may be held responsible for any tax that may be owed to the IRS.

By asking for an EIN, the American payer or client is doing the right thing and you as the non American supplier are obligated to provide the necessary paperwork to confirm your status under the IRS code. The article in the Nassau Guardian noted that even “credit card companies that process payments for US card holders are required to collect and verify the tax identification number (TIN) and legal name associated with that number for each merchant customer”. Again, an EIN is a type of TIN which as described above, allows the IRS to uniquely identify an entity.

According to a Bahamas Hotel and Tourism Association notice published in the Guardian: “If there is a discrepancy between the merchant’s TIN and associated legal name in the credit card processing company records and IRS records, or if the merchant does not provide TIN, the IRS now requires the processing company to withhold 28 percent of the merchant’s future payment credit card transactions until the issue is resolved,” the notice read. “The ‘back up withholding’ provision of the law went into effect for transactions on and after January 1, 2013.”

The point must be made that the implications of this law may extend beyond hoteliers but may impact anyone accepting payment (by credit card or otherwise) from American individuals and companies. This means, restaurants, incoming tour operators, tour guides, consultants, athletes, even carnival bands, party promoters, entertainers and those in the creative industries. The point should also be made that these non-American entities receiving payment from American entities may not necessarily have to pay tax, only to file the necessary paperwork. In other words, for many, they are required to report – not to pay.

According to the Bahamas Hotel and Tourism Association, American Express appears to be the only credit card company enforcing the law so far. Apparently, several hotels have already been impacted by the new regulations and have had the withholding fees levied on them. Should all the credit card companies start implementing the withholding fees, restaurants, hotels, and other tourism-oriented businesses across the Caribbean who service American visitors could see their cash flow affected. Of course there may also be professional service fees involved in complying with the tax regulations.

Depending on the nature of your business, it would make sense to consult a qualified professional. It may even be sensible to consult a professional before any payments are withheld. As happens during situations of uncertainty, many will come forward offering solutions – for a price of course. Businesses and individuals are advised to be careful in taking advice from those not qualified to offer it. The IRS is quite specific and under Circular 230 (Rev. 8-2011) recognises only certain professionals to practice before them. Under section 10.3, this restricted list includes qualified US Attorneys, American Certified Public Accountants (CPAs) not under suspension or disbarment and Enrolled Agents (qualified by the IRS themselves).