Fatca’d By The US IRS
Financial institutions around the world including those in Asia are struggling to stay compliant with local privacy regulations that restrict the sharing of client data, whilst at the same time trying to meet the demands of costly FATCA reporting requirements.
FATCA, the Foreign Account Tax Compliance Act, which came into force after several months of delay on 1st July, 2014, is designed to discourage tax evasion by US taxpayers. However, the controversial federal law, enacted in 2010, has far-reaching extra-territorial implications, not limited to foreign financial institutions (FFI), and Asian companies are feeling its impact.
“Many firms are having to go out of their way to maintain positive client relationships as they are being forced to request US tax documentation from their customers, even if they do not participate in US markets,” according to Matthew Stauffer, CEO of Clarient Global, which provides centralised data and documentation services to help firms meet regulatory requirements.
“It is becoming quite expensive for each firm to build the systems and operational capabilities to capture, track and maintain the data and documents required for FATCA on all clients, regardless of which markets they are trading in with the financial institution,” he said in an interview. Clarient Global is a unit of Depository Trade & Clearing Corporation (DTCC), a provider of clearing and settlement services to the financial markets.
Ong Ai Boon, director, Association of Banks in Singapore was quoted as saying: “We are working towards FATCA compliance. We’ve lobbied, frankly, though we knew we could not wish it away.”
Many activities of nonfinancial business will trigger these new compliance obligations. The definition of an FFI under FATCA is also broad and includes more types of entities that one might expect. Failure to comply with the reporting obligations under FATCA will result in the US Government imposing a 30% withholding tax on certain gross payments made from the US to non-compliant FFIs.
In Asia, Singapore and Australia have entered into a so-called model 1 FATCA Intergovernmental Agreement with the U.S., which requires Singapore-based financial institutions to report information on financial accounts held by US persons to the Inland Revenue Authority of Singapore (IRAS), which in turn will provide the information to the US Internal Revenue Service (IRS). Hong Kong has signed up to model 2, that establishes a framework for financial institutions outside the US to directly report account information to the US IRS, which is supplemented by information exchange upon request between the US and its relevant government counterpart.
Indeed, the cost and complexity of implementation of the law has been extraordinary. The cost of compliance with FATCA has been estimated at over USD eight billion annually and the benefit to the IRS is forecast at less than USD 800 million by the House Ways and Means committee.
PwC advises global organisations to focus on payment details such as which legal entity or department is authorizing or making the payment and the recipient, source and the character of the payment. Payments such as those for services, rents and royalties will be subject to information reporting and withholding requirements. One of the challenges for businesses will be updating systems and processes to distinguish between all of these types of payments.
Businesses that do not adhere to the new obligations may face a variety of consequences including the possible loss of 30% of the value of specific payments. Consistent with other US information reporting regimes, a payor who fails to deduct and remit FATCA withholding when required will be liable for 100% of the amount not withheld as well as related interest and penalties.
FATCA requires US persons defined in a very broad sense to report their financial accounts held outside of the country. This in itself is not controversial, as the Foreign Bank and Account Reporting (FBAR) has been required for years, although FATCA is a step further with more detail, with fewer exemptions and of course with added penalties.
“Dependence on financial institution’s client records to keep track of their tax payments is not a new concept,” says Stauffer. “The level of scrutiny, along with the penalties, are making it difficult for the industry to cope with the increasingly complex demands of FATCA.”
FATCA is part of Hiring Incentives to Restore Employment (HIRE) Act of 2010, commonly known as the “jobs bill.” Ironically, under the Act, the employment of US expatriate citizens has become less attractive. If an employer offers help to relocate, provide tax services or use a foreign bank for payroll the burden and risk for the employer are raised.
FFIs have already begun to limit the account and investment services available to the 7.6 million US expatriates and 13 million greencard holders, their families, US businesses with overseas interests and others. Spouses of US citizens have reportedly had their accounts closed, Fidelity has announced it will no longer sell mutual funds to expatriate Americans and certain banks in Switzerland and Singapore are reportedly declining to open accounts for US citizens.
