Speakers at a recent Internal Revenue Service hearing on proposed transaction-reporting requirements that take effect next January largely focused on the potentially detrimental effects their companies may experience from a foreign-merchant rule contained within the law, according to comments from the hearing.

Merchant acquirers will have to report their retailers’ credit and debit card transactions to the IRS effective Jan. 1 under the Housing and Economic Recovery Act President George W. Bush signed into law in July 2008.

Elavon Inc. and First Data Corp. were among the organizations to comment at the March 15 hearing. The U.S. Department of the Treasury and the IRS issued a draft of the proposed regulations Nov. 23 and closed the comment period Jan. 25. The IRS has not indicated when it may release the final regulation.

Under the proposed regulation, a foreign payment-service entity would not be required to report to the IRS payments made to merchants that do not have a U.S. address if that entity neither knows nor has reason to know that the merchant is U.S.-based, Mary Bennett, director of government and industry relations for the Washington, D.C.-based Electronic Transactions Association, tells PaymentsSource.com. However, service providers in the U.S. must verify that a merchant is a foreign entity.

“The foreign situation is the primary concern,” says Bennett.

Processors and acquirers with international customers under the proposed rules would be required to obtain an official W8 form from every foreign merchant they service to establish the merchant is exempt from the reporting requirements, says Bennett.

The foreign requirement will place the administrative burden of collecting documentation on U.S.-based providers, while foreign merchant-service providers will not be subject to such costs.

The foreign merchant-acquiring business for U.S. companies and their foreign subsidiaries could be harmed “if the IRS adopts the additional documentation approach to foreign entities in its final regulations,” says a First Data spokesperson.

“Most foreign entities do not possess U.S. taxpayer identification numbers that are required on these IRS forms. Additionally, in certain cultures, merchants would loathe having to supply the information required on these U.S.-based forms, as it would be considered an invasion of privacy,” says the spokesperson.

The difficulty in obtaining timely and valid documentation from foreign merchants may result in backup withholding on payments to foreign merchants, “which would further strain these customer relationships,” says the spokesperson.

“As a result, foreign merchants would likely find an acquirer/processor that is native to that country, severely hampering the ability of U.S. companies and their foreign subsidiaries to compete in this marketplace,” says the spokesperson.

The proposed rule “instantly just cuts out the competitiveness of any U.S. company in the international market,” agrees Bennett. U.S.-based providers will have to obtain information from existing clients and require all new clients to supply documentation, she says.

“Who can sign a new foreign client if they will require this paperwork up front and a local processor won’t require that?” Bennett asks. “It shuts down the possibility to acquire new clients and jeopardizes existing ones.”

In his comments during the hearing, Stuart Harvey, Elavon CEO, gave an example of a dry cleaner in Ireland having to supply additional information to its U.S. processor, says Bennett. “Will [the merchant] provide that or just switch to an Irish processor” to avoid the hassle? she asks.

An Elavon representative was unavailable for comment by deadline.

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