As US legislation can have no extraterritorial effect, ‘participation’ is through an agreement between the FFI and the IRS.
FFIs who choose not to participate, will be subject to a punitive 30% withholding tax on US source income. For example, if a South African bank or fund chooses not to participate in FATCA when dividends are paid on any US shares, the punitive 30% withholding tax will be applied to the payment to the South African bank or fund regardless of whether it has US account holders.
From a US perspective, FATCA has evolved and builds on two existing regimes - Anti-Money Laundering (AML) and the ‘QI regime’.
In terms of the QI regime, large international financial institutions, through contractual arrangements with the IRS, act as Qualified Intermediaries (QIs), in terms of which the QI agrees (among other things) to collate and report certain US tax information. South African FFIs do not currently participate in this regime which will make the withholding requirements under FATCA much more onerous than for international FFIs that are QIs.
While current on-boarding systems and AML procedures would be the starting point to achieve FATCA compliance, US tax definitions as read with the FATCA specific provisions must be applied to determine the US status of an account.
In addition, while FATCA may be US tax legislation, a whole range of local legal issues must be evaluated to determine if an FFI is legally able to participate in FATCA.
The following are key to ensuring an appropriate organisational response to FATCA:
- The initial response by most local and international financial institutions is that FATCA should be implemented by the Tax Department. As there is very little local tax interpretation and analysis required, FATCA’s impact must be assessed in conjunction with a US tax specialist.
- All financial institutions are faced with the assessing of FATCA requirements within a changing regulatory environment. Due to its far-reaching implications, most financial institutions have started a high-level scope and scale exercise to determine its possible impact.
- FATCA implications should be managed as part of a regulatory change management programme within the financial institution with the capability to run a number of core work-steams comprising, for example, tax technical, local legal technical, AML, operating model and IT.
FATCA is not about taking a decision to exit from US assets or US accounts. In addition to other FATCA requirements, an FFI must disclose the requisite information to the IRS regarding its US accounts or certify that it has no US accounts.
Due to the expansive set of FATCA requirements, all FFIs should be doing a high-level scope and scale evaluation to determine where it will impact their business.