After facing a barrage of criticism over the enormous administrative burden associated with compliance with the USA's Foreign Account Tax Compliance Act (FATCA), it appears the Obama administration may be ready to water down some of the more draconian provisions of the Act.
FATCA, which will require foreign financial institutions (FFIs) to identify all their US customers, is expected to pose a very significant burden on foreign banks, brokers, trust companies and other financial institutions.
The legislation was enacted by Congress in March 2010 and is intended to ensure that the US tax authorities obtain information on financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest, as a result of the belief of the Obama administration that a very significant amount of assets is held undeclared by Americans in overseas jurisidictions.
Under the present proposals, an FFI must enter an agreement with the IRS to provide information on each account and US account holder by June 30, 2013, to ensure that it will be identified as a participating FFI in sufficient time to allow withholding agents to refrain from withholding beginning on January 1, 2014.
Due diligence requirements for identifying new and pre-existing US accounts (including certain high-risk accounts, such as private banking accounts with a balance that is equal to or greater than USD500,000) will begin in 2013, and reporting requirements will begin in 2014.
Emily McMahon, acting assistant Treasury secretary for tax policy, told a New York State Bar Association meeting that the concessions are likely include an extended phase-in period and a work-around of domestic privacy laws (through entering into bilateral cooperation agreements with key territories), after having been deluged with objections that the new regime will be hugely costly, dangerously extraterritorial and may breach privacy laws in the jurisdictions in which the FFIs are based. McMahon also stated that the proposed regulations will try to align FATCA compliance with procedures already in place to comply with anti-money laundering and other customer rules.
Nevertheless, despite these small concessions, considerable opposition is expected to continue as many financial institutions are likely to have to reprogramme existing computer systems and introduce new systems to help the IRS track Americans. In the trust company sector, where many companies remain seriously ill-prepared for the new rules, some trust companies appear to be taking a decision not to offer services to US persons, in order to avoid the burdensome new regulations. However, there will remain the issue for these businesses of how to deal with US persons who may already have an interest in existing structures, as it is not always a simple matter for a fiduciary to resign their role.
Just as an "outsider" my sense is much of financial services is being quite deferential towards the US and FATCA. Is it because they are afraid that if FATCA doesn't work they will be stuck paying a 30% across the board unrecoverable witholding tax. The biggest problem countries for FATCA seem to be places like Canada and the onshore EU with the offshore centres neutral if not reasonably positive about it.
ReplyDeleteTim, technically you are right that FFIs could elect not to comply with FATCA if the FFIs have no US assets, as the US government would then have no investments on which to withhold tax. However, the reality is that a very significant number of the financial services businesses which operate in offshore environments do have interests in the US one way or another, and these clearly face a very real problem. Furthermore, there is an over-arching political sentiment that if the offshore jurisdictions do ignore the FATCA provisions then it will give the US another stick to beat offshore centres with, at a time when many of them are trying to get away from the image of IFCs as a place where money is "hidden".
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