FATCA legislation to impact the South Africa financial services sector

South African companies who do direct and indirect business with US organisations, whether in South Africa, Africa, Europe or further afield, must comply with the United States Foreign Account Tax and Compliance Act (FATCA,) or risk being excluded from lucrative markets the world over, reports the Cape Business News.

This is according to Eva Crouwel, Manager in Risk Advisory at Deloitte Cape Town, who says that, since the introduction of the Act in South Africa in 2014, many SA companies in the financial services sector have been ill prepared for its impact, yet, compliancy with a similar Act will also be a requirement starting 2016 by the Organisation of Economic Co-operation and Development (OECD,) giving companies very little time to become compliant.

“FATCA is poorly understood and adopted by companies in South Africa, mostly because it is perceived that the expertise level required for compliance is low and compliance measures are expensive. Yet, the irony is, not complying with FATCA will cost companies greatly and possibly even more,” says Crouwel.

Crouwel explains that FATCA is a series of US-led tax compliance rules for financial institutions to collect, verify and report information on US customers, especially those with offshore accounts and investments. The South African Revenue Service (SARS) has an agreement with the US tax body, the Internal Revenue Service (IRS) that requires SA companies to disclose specific information on their customers and employees with respect to their offshore accounts and investments. Should financial institutions default on providing this, they will be liable to pay both local and international tax penalties, with the ultimate level of non-compliance being market exclusion.

“SARS’s most recent proposal will result in the possibility to penalise companies as much as R16,000pm per non-compliance issue, and businesses may risk removal from the IRS compliant participants list as well as potential IRS penalties. In the case of non-compliance, the IRS can withhold 30 per cent tax on all US-sourced payments received, meaning that any company in South Africa that declares dividends, or has indirect business ties with the US even from another country, will be affected,” says Crouwel.

She uses the example that if a South African company does business with a financial institution in Europe, but this financial institution is listed on the New York Stock Exchange, then the South African company will be asked to comply with FATCA.

“We have also already witnessed an increase in refusal from financial institutions to do business with non-compliant financial institutions across financial markets. Developed countries are already compliant with FATCA and are requiring the same from companies that do business with them, yet our financial services industry has been slow to implement the regulation. The problem is compounded by the fact that SARS retrospectively announced in 2015 that it requires FATCA compliance from 2014, giving institutions very little time to become compliant,” says Crouwel.

In addition, the OECD, the progressive economic policy body of which South Africa is also a member, will rigorously enforce their own version of FATCA which will have implications as from next year.

“The OECD recognises the crippling effect that tax evasion has on emerging markets, and as such, is adamant that global financial markets will have to prepare themselves for an increase in compliance requirements as a result of FATCA. South Africa has claimed to be the first country to be OECD-ready, yet the stark reality is that FATCA is an administrative and tax challenge for firms, due to the multi-level requirements from the IRS, SARS and the OECD,” says Nazrien Kader, head of tax at Deloitte.

To better prepare for the impending legislations, Crouwel recommends that companies ramp up their compliance measures in the short time that is left. She suggests that companies seek appropriate advice, prioritise the requirements and consider implementing measurements and using tools to categorise the important considerations of FATCA. Such measurements include analytic tools for client identification, automated compliance, and an auditable framework for reporting.

“While the administrative burden of compliance may seem onerous, it also brings opportunities and opens doors to discuss new ways for governance and best practice. This is necessary to not only propel the financial services industry forward, but also to avoid being excluded from doing business with international financial markets,” concludes Crouwel.