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Foreign financial institutions given reprieves in US, sort of...

Jan 16. 2013
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LAST FEBRUARY, the US Internal Revenue Service (IRS) issued proposed regulations providing guidance to foreign financial institutions on the procedures and requirements they must put in place to conform to the Foreign Account Tax Compliance Act (Fatca).

This law was enacted in 2010 to ensure that foreign financial institutions (FFIs) provide the IRS with information on the account holdings of Americans.

The law has been seen by some as an overreach by the US government, but most governments and regulators have advised their financial institutions to comply with the rules or run the risk of suffering what could be a business-busting 30-per-cent withholding rate on US source payments, including gross proceeds from the sale of certain financial assets.

The regulations provide for a phased approach to the modification of on-boarding due diligence procedures and the adoption of reporting and withholding procedures. While this phased approach provided a period of about five years for FFIs to be completely compliant, there were two pressing deadlines that were begging to raise significant concern for FFIs in Thailand.

The first was the signing of a Fatca agreement by the FFIs and the IRS, and the second was the revamping of client on-boarding procedures.

The regulations originally proposed that FFIs be made to enter an agreement directly with the IRS by June 30, 2013, and have completed the on-boarding revamp by July 1.

Thai banks and other financial institutions had been starting to fear the looming Fatca deadlines, especially in light of the fact that as of the end of October, the IRS had not issued final regulations even though these had been promised by late summer.

FFIs were faced with the prospect of investing significant time, money and human resources into analysing, revamping and implementing changes to their client on-boarding procedures globally, without having a clear view of what procedures would satisfy the IRS’s due-diligence and data-collection requirements.

For the FFIs, which normally approach change in a conservative manner, the prospect of having to implement such significant changes without properly finalised guidance and under the pressure of such tight deadlines was, if not paralysing, at least unsettling.

Over the past few months, the IRS has issued pronouncements that appear to provide some relief to weary FFIs trying to get their heads around the compliance exercise. These announcements include the issuance of model intergovernmental agreements (IGAs) and revised timelines for the roll-out of Fatca.

While these announcements appear at first glance to provide much-needed relief, upon further review, they only alleviate the immediate panic based on the unrealistic mid-2013 deadlines.

The first of these reprieves came back in July with the announcement that the IRS had issued model IGAs. Many inside the affected FFIs, who would be tasked with addressing and driving through the Fatca due-diligence and reporting reforms, misunderstood the purposes of the IGAs. They often believed that such an agreement between their government and the United States would relieve them of the need actually to perform the required due diligence and reporting. This was not at all the case.

The only impact of the IGA would be to change the agency to which the information is reported. It does not relieve FFIs from the burden of reporting or change the level of due diligence required to satisfy the IRS that they are able to identify properly when an account holder is a US national.

Those who hoped that their governments would step in and fend off the United States’ demands for information soon found their hopes dashed.

The IRS has also only engaged with a limited number of countries, leaving FFIs in all other jurisdictions to fend for themselves in establishing a direct relationship with the US tax agency by entering a Fatca agreement by the agreement deadline, which was June 30, 2013, until things changed.

At the end of October, a second round of dispensations was delivered by the IRS when it announced that the deadlines originally set out in the proposed regulations would be extended. The most pressing deadlines relating to new due diligence procedures and the signing of the Fatca agreement have been graciously extended, but unfortunately only by six months.

Thus what was a mild sense of panic has now been reduced to a sense of futility mixed with the recognition that FFIs need immediately to initiate their Fatca programmes if they want to have the on-boarding processes in place and signed off in time to meet the new deadline of December 31, 2013.

The time to act is now. Otherwise, FFIs will not be considered Fatca-compliant and will start suffering potentially ruinous economic consequences on January 1, 2014.

nThis information is intended as a general guide only. Tax law is complex, and professional advice should be taken before acting on the information provided.

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