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.
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.