Draft FATCA bill for consultation
The Ministry of Financial Services has floated for consultation a draft bill aimed at providing a framework for the implementation of the agreement which was signed on November 3, 2014 between The Bahamas and the United States (U.S.) to implement the provisions of the United States Foreign Account Tax Compliance Act (FATCA).
Guardian Business considers some of the highlights of The Bahamas and the United States of America Foreign Account Tax Compliance Agreement Bill, 2014, which is designed – among other things – to confer powers on the competent authority (the financial secretary) to obtain information that is necessary for the proper administration and enforcement of the act and to ensure the performance of the obligations agreed to by The Bahamas under the agreement.
In the “objects and reasons” section of the bill, the government sets out its reasoning for the legislation, pointing out the ways the FATCA regime impacts financial institutions in The Bahamas, many of which have customers and clients who are “U.S. persons for United States tax purposes”.
The ministry points out that currently, under the 2002 TIEA (Tax Information Exchange Agreement) between The Bahamas and the United States, relevant information is made available upon request, and that request must satisfy certain preconditions. FATCA was passed in 2013 and as such is the new standard for U.S. tax information exchange.
The IGA (intergovernmental agreement) proposed to be negotiated by The Bahamas is the Model 1B IGA. This model contains two annexes and is the unilateral model. Under this proposed IGA, The Bahamas undertakes to obtain specific information with respect to U.S. reportable accounts and to annually exchange that information with the United States. Under Model 1B, a Bahamas financial institution (BFI) is required to register with the Internal Revenue Service, scrub its system and report to competent authority in The Bahamas.
Under the FATCA regime, a third party intermediary – a foreign financial institution (FFI) – must perform financial due diligence on its customer and client base. This due diligence is conducted to determine whether there is any evidence relevant for United States tax purposes and where there is, the FFI must report key information to the Internal Revenue Service (IRS) or its competent authority, who will, pursuant to an IGA, report that key information.
The ministry also notes that under FATCA, withholding agents are “mandated” to withhold 30 percent of any U.S. source payment on transactions done by financial institutions that do not meet the requirements of the legislation.
“We bear in mind two important facts: first, a U.S. person for tax purposes is taxed on worldwide income and that person therefore has a duty to report and pay relevant tax on that worldwide income. Second, the United States has one of the largest securities and investment markets and a large network of correspondent banks. It is well nigh impossible today to do business without coming into contact with its financial system,” the ministry said.
Article 4 of the proposed IGA, which the ministry asserts is one of the most important articles of the proposed IGA, speaks to conditions to be satisfied before each BFI is treated as complying and not subject to withholding under section 1471 of the IRS code; to suspension of rules relating to recalcitrant accounts; to special treatment of Bahamas retirement plans; to special rules on related entities and branches that are non-participating financial institutions.
