Foreign Account Tax Compliance Act (FATCA) provisions, which are getting implemented this year are the new US rules designed to discourage tax evasion by US citizens and residents, by gathering information on US persons. FATCA was signed into US Law in 2010, as part of the Hiring Incentives to Restore Employment Act.
US persons are subject to US tax, regardless of residence. FATCA is also applicable for foreign financial institutions (FFIs). The FFIs include banks, investment companies, asset managers, brokers and insurance companies with life products. Non- financial foreign entities namely investment groups and family offices will also come under the purview of FATCA. If the FFI is compliant, it will enter into FFI agreement with the Internal Revenue Service (IRS) of US Treasury and must provide US customer details to the IRS. It must also withhold 30% from US sourced income payable to “recalcitrant” account holders and non-participating FFIs. If the FFI is non-compliant international banks might refuse to deal with the FFI. It may also suffer 30% withholding on certain US sourced payments and reputation risk.
Correspondent banking customers are already asking the FATCA compliance initiatives via periodic questionnaires. Loan syndication participants are insisting on FATCA status. Non-participating FFIs may loss business opportunities. The key activities of FFIs in relation to FATCA will include FATCA training and awareness, developing a FATCA policy, registration with the IRS, new customer on boarding procedures from 1st July 2014, information technology support for FATCA implementation, FATCA reporting, impact on funds and credit card transactions and implementation at international locations. The US Department of the Treasury is engaged with more than 60 countries and jurisdictions around the world to improve international tax compliance and implement the information reporting and withholding tax provisions. It has also published model inter governmental agreements (IGAs) for implementing FATCA. These models serve as the basis for concluding bilateral agreements with interested jurisdictions.
US Treasury has developed two model IGAs that facilitate the implementation of the FATCA rules, fulfil FATCA’s policy objectives and further reduces the burden on FFIs located in different jurisdictions. The IGA model 1 will involve no direct interaction between the FFI and the IRS except the registration and will involve reporting to local regulators. The model 1 has been signed by the UK, Germany, Spain, Denmark, Norway, Ireland and Mexico UAE and Qatar. The IGA model 2 will involve FFIs to enter into agreement and transfer data directly to the IRS and the latter to have direct access to banks for clarification, additional data requests etc. The model 2 has been signed by Switzerland and Japan.
In November-December 2013, the US Department of Treasury signed bilateral agreements with jurisdictions namely France, Costa Rica, Malta, the Netherlands, The Islands of Bermuda, and three UK Crown Dependencies: Jersey, Guernsey, and the Isle of Man. Till end of 2013, the US signed 18 FATCA intergovernmental agreements and 11 agreements in substance. The US government is still engaging in discussions with a number of other countries and jurisdictions ahead of the 2014 implementation date. The history of Gulf Cooperation Council (GCC) countries, in term of taxation, is evolving and their taxation authorities are still developing their capabilities. GCC countries should conduct adequate preparations to implement FATCA including accurate awareness of its requirements.
Many GCC financial institutions, that have regional and international activities, need to conduct intensive changes in their internal systems and mechanisms to comply with the new FATCA. Governments and financial institutions should take into consideration FATCA’s related challenges and actual difficulties including structural, regulatory, legal, commercial and financial to address FATCA impacts.
The discouragement to tax evasion will receive a boost through FATCA.