Large banks get registered with IRS

KARACHI: Pakistan’s large banks have completed the registration process with the Internal Revenue Service (IRS) – the US government agency responsible for tax collection and law enforcement – to report the data (dollar-denominated transactions) of US persons to it, banking sources said on Wednesday.

They have got the registration as a participating foreign financial institution as per the direction of the State Bank of Pakistan (SBP) issued on April 30, 2014, directing all banks to get registered by May 5, 2014.

The central bank also advised the banks, development finance institutions and microfinance banks to report their action by May 10, 2014.

The sources said that some medium and small size banks were still considering whether or not to register with the IRS.

After this registration, all Pakistani banks would need the full disclosures of dollar-denominated remittances transactions with all the foreign institutions.

Apparently, the sources said, the local law of secrecy of data as mentioned in the “Section 70 of the Payment Systems and Electronic Funds Transfer Act 2007” prohibits the disclosure of the client information to the third party.

It is important to mention here that non-compliance with the US Foreign Account Tax Compliance Act (FATCA) would result in a 30 percent withholding tax and apply as of January 1, 2013 to interest, dividends and sales returns paid to non-cooperative institutions and customers from the US sources.

In future, FATCA-compliant financial institutions may refuse to deal with non—FACTA registered financial institutions, which will have negative consequences for the banking and financial industry of Pakistan.

All the foreign financial institutions (FFIs) will have to modify their software internal process, disclosure requirements, various reports and forms, data capturing for the entire dollar transactions. And, this is estimated to cost them $25 to $30 million, according to the banking sources.

Moreover, the reporting requirement will enhance software modification cost and recalculated charges.

Banking sector experts said the SBP is one of the best regulators in the world, but its progress on this issue is very slow.

The central bank also advised banks to consult with the “chapter 4” of the guidelines circulated by the Pakistan Banks’ Association for understanding the detailed process of registration.

According to the SBP, the government is in constant touch with the US authorities to enter into intergovernmental agreement as has been done by other countries of the world. Therefore, change in status as a result of government efforts, if any, will be shared as and when it is materialised.

Any decision to register with the IRS may be taken keeping in view the entity’s status as per the evaluation exercise conducted by banks, development finance institutions, microfinance banks as FATCA regulations may not be applicable on certain entities due to their local/small business.

With regard to the registration process, all banks are advised to observe certain points, such as they shall neither opt as a qualified intermediary at this stage nor register as a limited foreign financial institution since both the options of registration are not available within one jurisdiction, said a SBP’s circular.

If the banks decide not to register due to low or local client base or if they do not receive any US sourced withholding payments, they shall do so on the sound basis of determination with the approval of their board of directors and submit the same to the SBP, the circular added. Foreign subsidiaries and branches of banks shall immediately be advised about the registration process, as necessary, in order to meet the timelines.

Moreover, necessary due diligence measures, including identification of pre-existing accounts of the US persons and on-boarding of new customers should be undertaken as per requirements and timelines of FATCA.

The circular stated that consent of the US persons (for both pre-existing accounts of the US persons as well as accounts of new customers being on-boarded) to share their accounts’ information with the US tax authorities might be re-verified by the banks and all relevant documents be kept on record.

The US Treasury Department, on January 17, 2013, released final regulations referred as FATCA to implement the US reporting and withholding rules originally enacted in 2010.

These rules require foreign financial institutions with $50,000 of any US taxpayer’s foreign financial assets to report such holdings directly to the IRS.

To properly comply with these new reporting requirements, a foreign financial institution will have to enter into a special agreement with the US treasury by December 31, 2013.

The regulations will be effective from January 1, 2014. Initially, the treasury asked the FFIs to sign agreement with it by June 2013. The proposed regulations were issued in February 2012.

The US government has introduced a new extra-territorial reporting regime for FFIs to combat tax evasion by the US persons (natural, residents, non-residents, dual nationality holders, green-card holders and non-US citizens who reside in the USA for at least 183 days).

The IRS requires all FFIs to get compliant by the start of 2013 with their reporting regime.