By Michael Klein
A
number of Cayman Islands merchants who accept American Express credit
cards have fallen foul of new United States tax regulations, which
require them to submit their US tax status to credit card providers and
other payment processors.
Section 6050W of the US
Internal Revenue Code requires merchant acquiring entities in the US
like American Express to document the status of any US or foreign
business they settle transactions with.
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The merchant
businesses that failed to provide the information before 31 December,
2012, are subject to a 28 per cent US federal backup withholding tax on
their payments. Under the law, payment processors have to withhold the
tax and transfer it to the US Internal Revenue Service.
Ristorante
Papagallo in West Bay is one of the businesses that have already seen a
withholding tax deduction on transactions using American Express. Vico
Testori, Papagallo’s manager, said in January American Express had
deducted 28 per cent of the gross amount paid with its credit cards but
he had never received any communication from the credit card provider.
“They
never sent the forms. We were not aware of the issue at all. It just
came up when we did the reconciliations, we noted that there was money
missing.”
Mr. Testori said he had also not received
anything from his bank, Cayman National Bank. “They were told by
American Express, that American Express would deal with it,” he said.
Although
section 6050W the US tax code is aimed at American taxpayers, who have
to provide their taxpayer identification number, foreign merchants using
the payment services are subject to the regulation if their
establishment has a physical address or bank account in the US, or if it
processes transactions in US dollars, as it is the case with credit
cards.
To comply with the regulation, Cayman
businesses that accept US credit cards have to complete US tax form
W-8BEN to certify their status as a non-US merchant and submit it to
their payment processing provider.
Not all merchants
have determined yet whether any withholding tax has been deducted from
the American Express payments. Giuseppe Gatta, manager of the Lighthouse
Restaurant, said the business’s accountant is double checking the
financials but he is aware that colleagues in the industry have been
affected.
He said the first time he was made aware of
the issue was on 18 January, nearly three weeks after the deadline,
when his bank Butterfield forwarded an e-mail from American Express to
him. “Butterfield said this is an Amex notification which they have
provided directly. Directly to whom? Not to me,” Mr. Gatta said.
Another
local business that has seen taxes withheld from transactions using
American Express is Avis, even though the company had disclosed its tax
status. Lee Foster, manager of Avis, said his company had submitted the
form in October 2012, two months ahead of the deadline, after American
Express had contacted the merchant.
He said in his
case American Express was very vigilant about the issue because a
regional manager for the payment card provider came to Grand Cayman to
collect the required documentation.
“We were well within the time frame to submit the W-8BEN form. I believe it’s a glitch,” he said.
Asked
whether he expects to get the money back from the IRS, Mr. Foster said,
“I certainly expect to get this money back from American Express.”
Bruce
Sigsworth, senior supervisor, merchant services with Butterfield Bank,
said it appears the issue is limited to American Express customers,
because other US payment card processors like VISA, MasterCard or
Discover have requested the needed information from merchants upon
registration.
Mr. Sigsworth confirmed that, to his
knowledge, none of Butterfield’s customer merchants have seen any
withholding tax deductions so far.
“We have got a
call from Cayman National and they told us that they had seen
deductions. They do their own processing, so I don’t know if they were
not in the loop with Amex and got notified. We did get notified,” he
said.
Cayman National Bank declined to comment on the
issue and the number of its customers affected by US withholding tax
deductions on American Express transactions.
Cayman
banks such as Butterfield and Cayman National are only intermediaries in
the payment process, Mr. Sigsworth explained, saying the relationship
is between American Express and the merchant who accepts the credit
card.
The bank noted that American Express went out
directly to Butterfield client merchants “some time last year”, because
most merchants called the bank “for security reasons to find out that
the information was legit”, Mr. Sigsworth said.
The
e-mail sent out by Butterfield on 18 January had been passed on to the
bank by one of its clients who had received it from another merchant.
“We
decided to send it to all our customers just in case because it
included a contact number for American Express, which Amex has directed
us to tell our merchants to call to see whether they are compliant or
not.”
He added, “We have been in contact with Amex to
find out which of our merchants will have to fill out the form, but
they were not able to [say].”
Both Papagallo and the Lighthouse have stopped accepting American Express credit cards for the time being.
Avis
will make a decision by Wednesday evening whether it will continue to
use American Express. “We want to give our partners an opportunity to
come to the table,” Mr. Foster said.
American Express had not responded to an invitation for comment by press time.
