U.S. Law Shakes Tourism Sector

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A new law imposed by the Internal Revenue Service (IRS) is setting off alarm bells among members of the Bahamas Hotel and Tourism Association (BHTA).


Beginning this year, all transactions using U.S.-based credit cards are subject to an automatic 28 percent withholding fee unless the client is compliant with new regulations.

The law appears to have caught members of the BHTA by surprise. According to a warning circulated to BHTA members, significant funds are being held by the IRS following a number of transactions so far this year.

The new regulations, however, will be applicable to cardholders across the region.

In its memo to members, the BHTA reported that most members were not aware of the change. So far, American Express appears to be the only credit card company enforcing the law, although it should eventually apply to all U.S.-based credit cards.

"Several hotels report to us that they have filed as required and are still experiencing 28 percent withholding," the notice said.

"BHTA has brought the matter to the attention of Caribbean Hotel and Tourism Association ... to be given urgent attention at this weekend's board meeting."

The BHTA urged members to "protect themselves immediately".

Under the new rules, added to the U.S. Tax Code in January 2012, credit card processing companies must collect and verify the tax identification number (TIN) and legal name associated with that number for each merchant customer.

"If there is a discrepancy between the merchant's TIN and associated legal name in the credit card processing company records and IRS records, or if the merchant does not provide TIN, the IRS now requires the processing company to withhold 28 percent of the merchant's future payment credit card transactions until the issue is resolved," the notice read. "The 'back up withholding' provision of the law went into effect for transactions on and after January 1, 2013."

In an added twist, non-U.S. merchants must declare their status, meaning everyone is essentially subject to the law until they have properly documented their status with the IRS.

Guardian Business understands that retrieving the 28 percent withholding fee is costly and takes a great deal of time.

Some credit card companies may include additional reporting or administrative fees, making the whole proposition even more costly.

The new regulations, if enforced across all companies, could present a huge cash flow problem and logistical nightmare for tourism stakeholders across the region, particularly for small-to-medium-sized businesses.

It also represents a brave new world of regulatory standards for the tourism sector in The Bahamas and beyond. Similar to the Foreign Account Tax Compliance Act (FATCA), which has changed the game for the region's financial services industry, the new regulations are intended to boost transparency. In other words, the reporting is intended by Congress to help the IRS identify under-reported sales of U.S. customers.

The new rules should be a hot topic in the coming days. The Bahamas hosts Caribbean Marketplace, a regional event organized by the Caribbean Hotel and Tourism Association, kicks off at Atlantis today.

Jeffrey Todd, The Nassau Guardian
Published: January 21, 2013

 

Last Updated on Wednesday, 06 February 2013 06:46