Small Business Reading Room

Monday, April 09, 2012

How Does FATCA Affect Business Owners?

The Foreign Account Tax Compliance Act (FATCA) was signed into law in 2010 to combat tax evasion by U.S. citizens. It requires foreign banks and financial institutions to report U.S. citizens’ account holdings. They can enter into an agreement with the Department of Treasury to provide this information; however, if they fail to do so, they will be subject to a 30% withholding tax on all payments from the U.S. While the Department of Treasury and Internal Revenue Service aren’t expected to release final guidance on this new law until the summer of 2012, it’s important that business owners understand how FATCA can affect them. FATCA is effective for payments after December 31, 2012.

There are two aspects of this law that are of concern to business owners. While FATCA’s effective date is still in the future, many businesses will need to start preparing today to comply with the withholding portion of the law. Depending on your business, you may need to implement internal controls and other systems to ensure you’re in compliance. If you make any payments to a foreign financial institution, you will need to ensure you’re withholding 30% of that payment if that foreign financial institution has not entered into an agreement with the IRS.

Some tax experts and corporate financial officers have estimated the cost to comply with FATCA of multinational banks to be more than $100 million apiece. If you own a business and need to comply with the withholding aspect of this new law, you probably won’t encounter a bill that high, but you should consult your CPA to ensure that the appropriate internal controls are being put in place. Failure to withhold the tax could result in steep penalties and additional tax from the IRS.

You may also be affected by this law if you or your business has more than $50,000 in financial assets at a foreign financial institution. Your foreign financial institution will most likely contact you to gain your permissions to disclose this information to the IRS, especially if they are located in a country with strict privacy laws. However, if you refuse to allow the foreign financial institution to provide this information, they will most likely close your account. Every accountant who has passed the uniform CPA Exam has been trained on addressing and handling this type of occurrence. Therefore, if this happens on an account owned by your business, make your Certified Public Accountant or Certified Management Accountant aware if they are not already.

If you’re concerned about this law and the cost of complying with it, whether as a business owner making payments abroad or because you have assets abroad, there is only one way to not be covered under this law. You will need to cease all activity that relates to foreign finances. This includes ceasing business with a foreign financial institution where you store your money and any foreign investors you may have that would require you to issue payments. This may seem like a drastic move, but it is the only way you will not be required to comply with the law.

Ultimately, this law has the potential to affect every business in this global economy. Many are concerned that the law could hinder economic development and investment in the U.S. from foreign investors. It is important to remember however, that final guidance has yet to be released and while it will not change the basic tenants of the law, it can influence filing deadlines and overall compliance. Be sure to contact your CPA to understand how you might be impacted by FATCA.

By Grant Webb with Bisk Education. Bisk has trained over 140,000 accountants since 1971, has produced multiple Elijah Watts Sells Award-Gold Medal winners and can help you choose the best CPA for your business.



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