Fatca Creates Uncertainty for CFOs - CFO Insight: "Parts of the US Foreign Account Tax Compliance Act (Fatca) will come into effect in 2013. But because few countries have yet to sign bilateral contracts with the US, it’s unclear how many European banks will actually fulfil Fatca’s requirements. As a result, experts disagree on its consequences for corporate finance."
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CFOs can't be certain about Fatca's effects on their companies yet
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At the moment, nobody really knows what the consequences of the US tax legislation known as Fatca will look like – even though it will take effect in less than 4 months. While some financial experts believe that corporate loans may become more expensive for European companies that own businesses in the United States, others suggest that nothing will change for the majority of corporates. CFOs have no choice but to monitor the ongoing negotiations closely.
The decisive question is whether the vast majority of European banks will be willing and able to fulfil the Fatca requirements. This new legislation will oblige them to reveal American customers' account information in order to counter tax fraud and evasion.
If foreign banks do not submit this information to the Internal Revenue Service (IRS), the US tax authority, Fatca requires them – from 2014 onwards – to keep a 30% withholding tax on the interest income. In this case, banks will ask their US customers for compensation, a gross tax, in addition to the interest payment. This will force European firms to pay more for a loan if their US businesses are involved.
The decisive question is whether the vast majority of European banks will be willing and able to fulfil the Fatca requirements. This new legislation will oblige them to reveal American customers' account information in order to counter tax fraud and evasion.
If foreign banks do not submit this information to the Internal Revenue Service (IRS), the US tax authority, Fatca requires them – from 2014 onwards – to keep a 30% withholding tax on the interest income. In this case, banks will ask their US customers for compensation, a gross tax, in addition to the interest payment. This will force European firms to pay more for a loan if their US businesses are involved.
New UK/US agreement forces banks to co-operate
Uncertainty as to whether such cases will actually occur remains great because intergovernmental agreements with the United States are still rare. Nonetheless, the UK signed a contract last week which forces their banks to co-operate with the IRS. Consequently, UK banks will have to be Fatca-compliant and will not have to pay the withholding tax.
Leaving data privacy concerns aside, this is good news for companies working with those banks. Germany, Spain, Italy and France have also signalled their general willingness to loosen their bank secrecy in order to fight tax evasion. However, conditions and exceptions have not been finalised and it is not yet clear if there will be an agreement at the EU-level.
Thus, not all European banks may be forced to report to the US tax authorities, and may not even be allowed to if national law continues to enforce bank secrecy. “I expect that not all banks will fulfil the Fatca requirements,” says Johannes Tieves, partner at law firm Hengeler Mueller. The withholding tax may not be enough to incentivise them to do so voluntarily because “for those banks that do not have significant US business, the expenses for becoming Fatca-compliant may exceed the benefits,” Tieves adds. Banks have to identify relevant customers, change their reporting structure and may have to invest into new IT.
Leaving data privacy concerns aside, this is good news for companies working with those banks. Germany, Spain, Italy and France have also signalled their general willingness to loosen their bank secrecy in order to fight tax evasion. However, conditions and exceptions have not been finalised and it is not yet clear if there will be an agreement at the EU-level.
Thus, not all European banks may be forced to report to the US tax authorities, and may not even be allowed to if national law continues to enforce bank secrecy. “I expect that not all banks will fulfil the Fatca requirements,” says Johannes Tieves, partner at law firm Hengeler Mueller. The withholding tax may not be enough to incentivise them to do so voluntarily because “for those banks that do not have significant US business, the expenses for becoming Fatca-compliant may exceed the benefits,” Tieves adds. Banks have to identify relevant customers, change their reporting structure and may have to invest into new IT.
Facta impact on syndicated loans
In the case of syndicated loans, Tieves warns that credit costs may rise even if just one bank in the consortium is not in compliance with Facta. This is why he thinks that chief financial officers of European companies should reconsider their credit policies. "They should think about excluding their US subsidiaries from the credit contracts with non-US lenders and instead supply with them with money indirectly,” he says.
Finance functions will also have to carefully review tax gross-up clauses and transfer provisions to tackle the risk that loans are sold to non-compliant banks. "This can be fixed in loan contracts, but it requires bargaining power on behalf of firms," Tieves says.
In contrast, Ralf Temporale, partner at accounting firm Ernst & Young, has better news for European CFOs. According to him, the danger of more expensive corporate credits will be limited to very few cases. First, he believes that there will be an agreement on the EU-level forcing all EU-based banks to co-operate. “There is a clearly communicated political willingness to support fighting tax fraud within the EU,” he says.
Finance functions will also have to carefully review tax gross-up clauses and transfer provisions to tackle the risk that loans are sold to non-compliant banks. "This can be fixed in loan contracts, but it requires bargaining power on behalf of firms," Tieves says.
In contrast, Ralf Temporale, partner at accounting firm Ernst & Young, has better news for European CFOs. According to him, the danger of more expensive corporate credits will be limited to very few cases. First, he believes that there will be an agreement on the EU-level forcing all EU-based banks to co-operate. “There is a clearly communicated political willingness to support fighting tax fraud within the EU,” he says.
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