Governments risk falling short of FATCA demands

Governments around the world could find themselves under-resourced when the Foreign Account Tax Compliance Act deadline for collecting information on US clients arrives in September, one expert has said.

Ellen Zimiles, managing director, head of global investigations at US firm Navigant, said governments will be handed an “unprecedented” amount of information when the deadline for foreign financial institutions (FFIs) in countries with a model 1 inter-governmental agreement (IGA) to provide information on all their US clients to their national tax office arrives on 30 June.

“The issue now is whether governments in these countries can handle all the information that has been given to them,” Zimiles said. “While the US will allow a grace period to give governments time, they will ultimately have to create a protocol for processing this data.”

Passed in 2010 by US president Barack Obama and introduced in July last year, FATCA requires FFIs from around the world to identify and report the financial details of all their American clients, whose tax duties still apply when they move either themselves or their money from the US.

Local litigation

Zimiles said another issue governments may face is litigation from its citizens who see the new reporting burdens placed on them as a result of FATCA as a breach of privacy.
Information a FFI must provide on US clients includes their name, their US taxpayer identification number, their address, their account number, and account balance or value.

““The issue now is whether governments in these countries can handle all the information that has been given to them”

She added that FATCA’s unprecedented nature may also throw up issues involving the preparation of staff involved in its implementation and administration.

“Nothing like FATCA has ever been implemented before and governments may find that they have not hired enough people, or that the people they have hired are not well enough prepared for the sheer volume of information and unpredictable consequences.”

An IGA is an agreement designed to facilitate the exchange of data between an FFI and the IRS by providing advantages such as relaxed deadlines and increased clarity and simplicity around due diligence, with country specific provisions.

A Model 1 IGA, which is held by the majority of compliant countries including the UK and its crown dependencies, requires an FFI to provide US information to its government’s local revenue authority by 30 September 2015.

Zimiles said the initial outrage that surrounded the global nature of FATCA was unjustified, adding that the IRS is not pursuing people as aggressively as many media reports have suggested.

Spread

“A lot of people were initially outraged by FATCA, but what we can see now is that the US’ approach to retrieving tax has spread to other countries. For example, the UK’s agreement with its crown dependencies requiring the automatic exchange of information,” she said.

“It is not a case of the IRS sitting there waiting to pounce on any country that has struggled to comply immediately following the reporting deadline, after all, it has repeatedly stressed it willingness to assist with compliance.

“What people outside of the US may forget is that the IRS has other large issues to address such as the use of tax returns for identity fraud.”