Finance executives busy with the many ramifications of Dodd-Frank see more potential problems looming with the Foreign Account Tax Compliance Act (FATCA). When FATCA goes into effect in 2013, it will require foreign financial institutions (FFIs) to provide much more information on payments for activities that originate in the U.S. and could subject such institutions to a 30% U.S. withholding tax on those payments. The most direct issue for U.S. companies is how FATCA will change processes and documentation for their payments to non-U.S. entities, such as directors' fees paid to foreign board members who attend board meetings in the U.S., or dividends and royalties to a foreign parent company. There is also the issue of whether non-U.S. entities owned by a U.S. company are considered FFIs.
Companies “need to begin to identify whether they make payments to non-U.S. businesses that would potentially be subject to FATCA’s withholding tax and whether their subsidiaries qualify as foreign financial institutions,” says Jonathan Sambur, a lawyer at Mayer Brown. The definition of an FFI has been dramatically expanded to include hedge funds, private equity funds, certain insurance companies and other collective investment entities.