Kim Majure is a principal in the International Tax Services group of the Washington National Tax practice, focusing on inbound and outbound tax planning and controversy. Kim advises clients on international tax planning and controversy issues, including cash management and deferral planning, withholding, cross-border financing, and multinational structuring.
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Kim Majure: So now if you're on the other side of the payment, so you have foreign entities that are receiving payments, there are some traps for the unwary there too. And the biggest, hottest issues that we see are things like cash pooling, because physical cash pooling all of a sudden has implications of bank. And there are a lot of companies with physical cash pooling that are set up for pure, pure commercial purposes that would never imagine themselves as banks, even though they know that there is some internal cash deployment function there.
If you're a bank, you're sitting right there with the other banks that are on the hot seat for reporting and for doing significant due diligence, and although as an internal entity, your reporting and compliance would be a lot lower in terms of burden and resource constraints and how much hassle is this going to take you every year to do. It's really not a great place to be. As I said, for a lot of non-financial companies, they're not even going into this aware that they have the problem.
The other really big issue is foreign pension plans because if you think about it, foreign pension plans are collected investment vehicles. Right? So they are foreign financial institutions on a presumptive basis. Now at some point, the government realized that these foreign pension plans, they serve a public purpose and they're legitimate and they really shouldn’t be lumped in the same category as the potential aiders and abetters to U.S. tax evasion that they're targeting. So there are significant exemptions that are available for them. But the key, of course, is sitting down and making sure that you qualify for those exemptions.
And the real problem there is that the folks who understand the law are not the folks who understand the features of each plan. So you've got to find the foreign fund managers, sit them down, walk them through the requirements, kind of try to get to similar terminology, and then once you do, then figure out whether the exemptions apply. And if the exemptions don't apply, you still have to wrestle with, "What are we going to do with this entity?"
If the entity is receiving U.S. source investment income and you don't want that income haircut to the detriment of your foreign employees, then what you need to do is register that foreign fund as a participating FFI with the U.S. government.
If you think about it though, the types of information that those foreign funds have is not the types of information that the U.S. government is looking for. They're going to run into the exact same problem as on a withholding agent side. Their systems aren't set up for this new regime.
These foreign fund managers, they know who they're supposed to pay and they know the addresses where they're supposed to send the checks, but they don't really have any information with respect to the tax residence of these beneficiaries. And so to comply, there really needs to be an extra level of communication and coordination between the employers who set them up and the fund's trustees or managers who administer them.