In 2010 the US Congress enacted the Foreign Account Tax Compliance Act, which is usually described by the particularly inelegant acronym of FATCA. It is designed to restrict the activities of US tax evaders. The legislation is due to come into force in January 2013 (certain withholding tax aspects of FATCA are being delayed until 2014).
A detailed study of the FATCA regulations makes it obvious that Australian banks, funds and other affected financial institutions will need every day of the remaining time to prepare themselves for the implementation of the new rules.
FATCA compels non-US banks, custodians, brokers, investment funds, insurance companies and other financial institutions (collectively referred to as foreign financial institutions, or FFIs for short) to identify and report to the US Internal Revenue Service (IRS) on relationships they have with US customers, investors and counterparties.
Disclosure will be driven by the threat of a new US 30 percent withholding tax on certain payments that an FFI receives directly or indirectly from US assets. The withholding tax can even cover gross proceeds from the disposal of US debt or equity assets. For many, non-compliance will not be an option.
The proposed regulations were released in February 2012 by the IRS and the US Department of Treasury. The 389 pages of regulations cover a lot of ground and are impossible to summarise here. Nevertheless Australian financial institutions need to be conscious of the implications of FATCA for their ongoing operations. Here are a few points to keep in mind.
- Given the complex structures of many retail and investment banks, determining how entities in an affiliated group can be classified under FATCA will be an issue.
- Banks dealing with non-complying FFIs and recalcitrant account holders will need to build an appropriate withholding capability.
- The remediation exercise on existing customers with links to the US (e.g. US addresses or phone numbers) is likely to be a time consuming and costly exercise.
- Staff involved in processing new customers will need to be trained on what to look out for in account opening documentation and other FATCA-specific requirements.
- System changes will be needed to accommodate new data fields (including the FATCA status of each account holder) to facilitate reporting and other compliance obligations.
As a first step, affected entities should familiarise themselves with the proposed regulations. (KPMG has devoted extensive resources to FATCA and can advise on how the regulations are likely to affect individual entities.) They should keep in mind that FATCA compliance is not ‘business as usual’ and that it adds an important new dimension to organisational risk profiles.
Compared with other regulatory reporting regimes with which financial services organisations must comply, FATCA is unique in the breadth of its coverage, the severe economic consequences of non-compliance and the potentially significant upfront and ongoing costs it imposes on affected organisations. Getting it right will be essential.