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Foreign Account Tax Compliance Act (FATCA) 

Foreign Account Tax Compliance Act (FATCA)

 

On 18 March 2010, President Obama signed the Foreign Account Tax Compliance Act (FATCA) into law. This legislation, enacted to prevent offshore tax abuses by U.S. persons, includes a new withholding regime that is designed to achieve intent by imposing a 30 percent withholding tax on certain foreign entities that refuse to disclose the identities of these U.S. persons.

 

The Act, which will come into effect on 1 January 2013, introduces a new withholding regime that is designed to compel foreign financial institutions to disclose certain details of their U.S. customers by imposing a 30 percent withholding tax on entities that that do not comply with reporting and enhanced Know Your Client (KYC) requirements.

 

The implications of FATCA, and in particular its withholding and reporting regimes, are wide-ranging for financial institutions, investment entities, and many other global organisations.

Who is impacted?

 

Foreign financial institutions, including Hong Kong based financial institutions and Hong Kong branches of international financial institutions, are all subject to the impending FATCA regime. Equally impacted are all residents in Hong Kong with U.S. citizenship or U.S. residency status, as the FATCA rules will require compliant financial institutions to disclose their account information to the Internal Revenue Service (IRS). Additionally, certain non-U.S. account holders will be required to comply with requests from their financial institutions for additional documentation in order to avoid being subject to the 30 percent withholding tax.

 

Under FATCA, "Foreign financial institutions" (FFIs) include:

Banks 
Private equity funds 
Hedge funds 
Institutional investment funds 
Retirement funds & trusts  
Insurance companies 
Securities brokers and dealers. 

 

In essence, any non-U.S. organisation that holds or manages customers' money is considered an FFI subject to FATCA, irrespective of where it is headquartered or whether or not the shareholding structure is American.

 

What effect will FATCA have on your business?

 

Organisations will need to rapidly determine the potential business implications of FATCA and define their compliance strategy accordingly. Although the deadline of 1st of January 2013 may seem to be a long way off, FFIs will need to consider the overall complexity induced by addressing the elements required by FATCA.

 

Executives should make it a priority to increase their organisation's FATCA knowledge. Some people seem to think that since FATCA is an IRS regulation, that it is a "tax issue" and only tax departments need to be cognisant of it. However, in reality, FATCA implications are pervasive across Operations, IT Risk and Tax; therefore, at a minimum, these departments should be well-informed and prepared for whatever action the organisation takes regarding FATCA. 

 

Many organisations will have to significantly revamp their KYC & Anti Money Laundering (AML) procedures; they will also need to adjust their underlying IT infrastructure in accordance with those changes, which is a potentially difficult, time consuming and expensive process.

 

Some organisations are also considering the possibility of entering into negotiations with the IRS in order to receive an exemption from having to comply with FATCA, in cases where the business model of the organisation would clearly have nothing to do with U.S. customers or possible U.S. tax evasion (e.g. non-life insurance companies, mandatory provident funds). 

 

 

Charles Kinsley

Charles Kinsley

Principal, Tax - member of KPMG FATCA Working Group

+852 2826 8070

KPMG TaxWatch Webcast Replay

TaxNewsFlash

Since the enactment of the Foreign Account Tax Compliance Act (FATCA) in March 2010, the IRS issued several rounds of preliminary guidance prior to the release of proposed regulations on February 8, 2012. KPMG has prepared an analysis that examines these provisions.

 

The Treasury Department and IRS released for publication in the Federal Register proposed regulations (REG-121647-10) as guidance concerning information reporting by foreign financial institutions for U.S. accounts.

 

The IRS released an advance copy of Notice 2011-53 which provides a timeline for the implementation of information reporting and withholding provisions under chapter 4 of the Code (referred to as "FATCA").