The Foreign Account Tax Compliance Act, enacted in March 2010, comes into force on January 1, 2013.
The US Treasury proposed detailed regulations on implementation – 400 pages worth – on February 8 of this year. It also at that time announced a related multi-country agreement. The U.K., France, Germany, Italy, and Spain all agreed to share tax information with the U.S.
Global Perspectives, the Dublin-based consultancy, and its managing director, Shane Brett, have put out a white paper on FATCA. As to the history of it, this white paper maintains that many companies (and countries) had expected that FATCA would fade away. This was clearly an error. The multi-national agreement means “FATCA is here to stay.”
Furthermore, the Treasury announced a similar deal with Switzerland and Japan on June 21, 2012. That was only a “framework agreement”; work on the details continues. Nonetheless, Global Perspectives believes it a potentially significant development, as a landmark in the dissolution of traditional Swiss bank secrecy.
Ireland and Luxembourg will likely both sign on soon, too.
The Long Reach
The white paper starts with the observation that the United States is different from nearly every other country on the globe in tax policy. The U.S. requires that its citizens report all their income, wherever in the world they earned it. So although in the multi-national agreement announced in February the U.S. said that it is “willing to reciprocate in collecting and exchanging on an automatic basis information on accounts held in US financial institutions by residents of” the other signatory nations, their situation is not symmetrical.
FACTA follows from the distinct nature of the obligations the U.S. imposes on its citizens living and/or earning abroad. It represents, as the white paper says, the Internal Revenue Service “extending its long reach” in order that non-US companies will have to help it collect taxes. Any foreign financial institution worldwide that does not agree to reporting, disclosure, and withholding of its US clients’ assets will be subject to a 30 percent withholding tax itself on its own and its clients’ US sourced income, applying also to dividends and proceeds from the sale of U.S. assets.
FATCA has not been a priority for many of the affected institutions, because there has been so much else for them to worry about: Dodd-Frank, the AIFM Directive, and so forth. But they now have to “start planning in detail how they will address the disclosure and reporting requirements contained within FATCA.”
One of the onerous features of the regime is that FFIs will have to determine whether the ultimate beneficial owner of the assets or account in their care us more than 10 percent of U.S. origin, something that may be tricky in the hedge fund word given the widespread use of platforms, intermediaries, etc. Know Your Customers processes will have to be enhanced, and related software beefed up.
Anecdotes and Conflicts
Some small FFIs may respond by ridding themselves of US clients. The white paper observes, “There have been plenty of anecdotal reports in the press of U.S. citizens being asked – or even forced – to withdraw their assets and close accounts.” For larger FFIs that isn’t an option. But even large FFIs have become skittish about taking on new US expats as clients are allowing the creation of new accounts.
US citizens in Switzerland in particular “have already complained of having their accounts closed down and are having trouble finding other local banks to take them on (so they can have wages paid into their accounts, write checks for day to day living, etc.)”
For their part, the FFIs have run into an inherent conflict. FATCA can compel them to release investor information even when “to do so is completely illegal” under their own country’s laws. The conflicts are common enough that the IRS has “provided for a 2 year transition” on disclosure requirements.
There is some good news, though, as FATCA moves closer to implementation. The IRS has created a category called “deemed compliant,” for certain FFIs – chiefly, it seems, traditional pension funds – that won’t have a need to enter into an agreement regarding their U.S. clientele. The category will be a narrow one, though, and the authors of the white paper are skeptical “whether the exemption will be of much use to Asset and Hedge Fund Managers.”
Other good news is that the updated rules have offered a clearer definition of a “financial account” than anything that preceded them, and that a FATCA reporting officer at an FFI will be able to certify that his institution is in compliance, without calling in an external auditor.