New Zealand

Details

  • Service: Advisory, Financial Risk Management
  • Type: Press release
  • Date: 5/10/2012

Media contact

Brett Cammell

External Communications

+64 9 367 5977

+64 21 335 740 

bcammell@kpmg.co.nz

Foreign Account Tax Compliance (FATCA)

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FATCA – it’s not just a US law 

   Media release,  5 October 2012

 

Michael Wright - Senior Manager, Financial Risk Management, KPMG

 

 It has been two and half years since the United States of America enacted its Foreign Account Tax Compliance Act (FATCA) in an effort to combat tax evasion by Americans. 

 

The release of draft regulations in February 2012 has lead to increased outrage around the world as FATCA is seen by many as the US forcing its laws on the rest of the world and turning non-US financial institutions into tax collectors for the US. 

 

Across the globe there has been a significant amount of resistance to FATCA for these reasons as well as the significant impact FATCA will have on the operations and activities of non-US financial institutions such as banks, insurers, investment vehicles, managed funds and family trusts.   FATCA will require financial institutions to collect information on their customers, owners, beneficiaries and investors so that the financial institution can provide information on any US Persons identified to the US Government.

 

Whilst the US Government sees FATCA as an information disclosure regime, it has been introduced against a backdrop of increased taxpayer audit activity and Federal fiscal challenges and is forecast to prevent tax evasion of US$8.7b over the next 10 years. 

 

A sizable sum, however this is less than 1 per cent of the tax revenue the US expects to be evaded over the same period which does beg the question whether the US would be better to focus on other areas. 


This relatively low payback, coupled with the high cost of compliance for non-US entities, does raise the question of proportionality and has caused many to question whether the US is using a sledgehammer to open a peanut. 

 

Under FATCA, non-US financial institutions, including most New Zealand financial institutions, are required to follow strict rules to identify their account holders as either US Persons or non-US Persons. 

 

The financial institution is then required to withhold tax at 30 per cent on certain payments made to account holders where the financial institution cannot confirm the identity of the account holder under the various requirements as either a US person, a non-US person or another financial institution which has signed up to

FATCA. 

 

Under the current regulations the NZ financial institution could be required to close the accounts of individuals or organisations where the account has not been positively identified as either a US or non-US account or as another FATCA compliant organization.

 

The requirement to close accounts is yet another example of why FATCA has created the controversy that it has and it is pleasing to see that this closure requirement has been removed in recently released guidance.


Many financial institutions, Governments, industry associations and other interested parties have made submissions to the IRS on how FATCA can be simplified to reduce the compliance burden whilst achieving its objective.  The IRS is currently working through the hundreds of submissions received and is expected to release final regulations in late September 2012 in time for FATCA to be phased in during 2013 and beyond. 

In the New Zealand context, submission points have included:

 

  • Privacy Act concerns with the disclosure of information to the IRS
  • the high cost of compliance, particularly for local financial institutions and investment vehicles such as family trusts
  • relatively high tax rates in New Zealand mean that Americans are unlikely to be investing in NZ to minimize their taxes payable.


As foreshadowed with the release of the draft regulations in February 2012, the IRS has released a model inter-government agreement which is aimed at facilitating the implementation of FATCA through exchanging information between governments under existing tax treaties. 

 

There are currently two types of model agreements which the New Zealand Government can enter, one with reciprocal obligations and one without.

 

Under both agreements New Zealand financial institutions would be treated as FATCA compliant.  As a result, payments made to New Zealand financial institutions would not be subject to any FATCA withholding so long as both the New Zealand Government and the New Zealand financial institution comply with the various requirements set out in the inter-government agreement. 

 

Very broadly, the New Zealand financial institution would be required to identify US accounts and report on these to New Zealand’s Inland Revenue Department which will in turn provide the information to the IRS.  
 

The model agreements also have schedules where financial institutions or products can be specified to remove them from the ambit of withholding and reporting.

 

Whilst entering an inter-government agreement with the US may overcome some of the legal impediments to FATCA in New Zealand, financial institutions would still be required to follow the detailed requirements to identify US Persons and report on them, albeit to the IRD rather than the IRS.  As a result, most of the detailed and complex requirements on financial institutions remain although the removal of the requirement to close accounts of people not confirmed as either US or non-US persons is a significant improvement. 

 

Where the two model agreements differ is that under the reciprocal agreement the US Government will provide similar information to the New Zealand Government on income earned by New Zealand taxpayers in the US which may lead to increased tax revenues for the New Zealand Government if NZ taxpayers are not declaring their overseas income in New Zealand.  Under the non-reciprocal agreement the US Government will not provide any such information. 

 

The choice of agreement is in effect up to the US as they will not enter a reciprocal agreement unless they are satisfied that the information provided by the US will be used appropriately and only for tax purposes.

Whilst the model agreement provides some more clarity on the requirements, a number of questions remain, including the following.

 

  • If the New Zealand Government enters into an agreement with the US, will the agreement and any New Zealand legal requirements be completed in time to enable financial institutions to implement any changes required?
  • What New Zealand organizations and financial products will be specified as compliant or exempt from FATCA requirements?
  • How will the model agreements be executed?  For instance, the model agreements include commitments to future law changes if necessary which may prove troublesome if Officials are seen to be binding future Governments.
  • How will Inland Revenue require information to be reported so that it can be transferred to the IRS?

 

Initially many viewed FATCA as a tax issue since it can result in a withholding tax.  However, it has become increasingly clear that tax is only one part of the FATCA puzzle and compliance is likely to be the major focus.  Financial institutions will need to consider all their operations and activities to assess the impact of FATCA and design and implement appropriate systems and processes to ensure FATCA compliance. 

 

Specifically, organisations will need to consider:

 

  • the information they collect from new customers and what is known about existing customers and investors so the detailed account identification requirements are met
  • reporting systems and processes to ensure the necessary information can be reported to the IRS or IRD
  • policies and procedures for ensuring on-going compliance
  • the process of making a FATCA withholding and paying the amount to the IRS
  • communications with customers and investors
  • training requirements for staff across the organisation.

 

Organisations currently looking at Anti Money Laundering projects can minimize some of the impact of FATCA by incorporating FATCA requirements into their projects.  In any case, as a project FATCA is unparalleled in its depth and breadth and financial institutions and investment vehicles should already be assessing the likely impact of FATCA and determining how best to comply.

 

 

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For media inquiries please contact:


Brett Cammell

External Communications

+64 9 367 5977

+64 21 335 740 

bcammell@kpmg.co.nz

 

Press releases - KPMG press releases.