26 June 2012
Foreign Account Tax Compliance Act (FATCA) has been introduced to help prevent tax evasion by US citizens and is applicable to US individual taxpayers holding offshore investments and has far reaching consequences for financial institutions including banks, insurance companies, pension funds, mutual funds, investment managers, private equity funds and broker dealers, collectively identified as foreign financial institutions (FFIs).
FATCA will effectively require the FFI to become a collection and information gathering agent on behalf of the US government. The FFI will have an agreement in place with the US Internal Revenue Service (IRS) to identify their US account holders and report them annually to the IRS. Failure by an FFI to agree to report the US account holders will result in a 30% tax on payments of income from the US.
The guidance introduces new categories of FFIs that are subject to reduced FATCA obligations and still considered compliant.
Timings of certain provisions such as reporting of income and gross proceeds will now be phased in to ease the initial burden on those within scope. Additionally, amended rules on pass-through payments will also allow greater time for institutions to work through identified issues and allow the IRS to agree a flexible approaches with governments that enter into agreements to facilitate implementation of FATCA.
A significant challenge for affected firms will be updating customer due diligence processes to identify clients who could potentially be classed as US persons. As a result it is important to review relevant systems and controls which are likely to include the following areas:
- review of customer on-boarding procedures to ensure they allow for identification of US status;
- review of existing client accounts to determine account holders’ US status;
- develop reporting measures and processes to ensure annual reporting requirements to the IRS can be met on implementation.
The legislation comes into force on 30 June 2013 and firms should act now to ensure applications are ready to be processed ahead of this date, particularly because the IRS has indicated it will not accept applications any later than 1 January 2013. An FFI must enter into an FFI agreement with the IRS by 30 June 2013, in order to be identified as a ‘participating FFI’ in sufficient time to allow withholding agents to refrain from withholding beginning on 1 January 2014.
To discuss any of the issues raised, please contact the Moore Stephens team.