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FATCA: Compliance by Foreign Jurisdictions

FATCA: Compliance by Foreign Jurisdictions

The Foreign Account Tax Compliance Act, enacted in 2010, creates a new information reporting and withholding regime for payments made by U.S. citizens and U.S.-based companies to foreign financial institutions. The goal of the law is to increase transparency into unreported, taxable income of U.S. taxpayers (both individuals and business entities) with foreign-held accounts.

As of January 1, 2016, 112 countries have signed an Intergovernmental Agreement with the U.S. to comply with FATCA, and more than two dozen others have reached “agreements in substance.” More than 75,000 financial institutions have now registered with the IRS.

Foreign jurisdictional compliance with FATCA requires more than entering into an agreement with the IRS. Financial institutions also must ensure they have proper processes, systems and controls in place to comply with the intent and scope of the law. As some countries develop similar versions of the law and others take actions toward the development of a global standard, financial institutions need flexible processes and IT architectures to adapt to the evolving landscape.

This report outlines some of the steps being taken by different foreign jurisdictions to ensure that U.S. taxpaying entities are properly complying with FATCA guidelines.    

FATCA and Jersey

Despite its small size geographically, Jersey, a five-mile wide, nine-mile long island that is part of the Channel Islands between England and France, is considered one of the world’s biggest offshore banking centers. In December 2013, Jersey signed an agreement with the IRS to implement FATCA. The island’s financial institutions subsequently started to provide the Jersey Taxes Office with required information on U.S. taxpayers, which then forwards this information to the IRS.

Jersey also was an early champion of the Common Reporting Standard (CRS), a global standard for the automatic exchange of financial account information among participating tax authorities. Formulated by the OECD (Organization for Economic Cooperation and Development), the CRS is designed to build upon and be consistent with FATCA. The standard requires all individuals and entities opening a new account with a financial institution in a participating country to provide “self-certifications” affirming their residency for tax purposes.

As of January 1, 2016, the CSR became effective in Jersey, as well as the Cayman Islands, Bermuda, the British Virgin Islands, Guernsey, and other jurisdictions that are part of the “Early Adopters Group.” This group comprises 48 countries in all. In Berlin 0n October 2014, each nation signed the Multilateral Competent Authority Agreement (MCAA) to implement the CRS and begin the automatic exchange of financial accounts information in September 2017.

FATCA and the Netherlands

Among the CSR “Early Adopters Group” is the Netherlands, which drafted the CSR into domestic law for application beginning in January 2016. Three years earlier, the Netherlands reached an agreement with the U.S. to facilitate the implementation of FATCA. In January 2015, the Dutch Ministry of Finance issued a FATCA guideline providing clearer definitions to financial institutions of such technical terms as “customer,” “investment entity,” “custodial institution,” “payment,” and “deposits.”

Clarification also was provided on what constitutes a reportable financial account (and what does not) to the Dutch Tax and Customs Administration, which in turn provides this information to the IRS. In June 2016, the government translated the guideline and other FATCA provisions into English. Recently, the Dutch Ministry of Finance also published a revised decree on tax transparency rules governing limited liability partnerships and has developed a central register of the beneficial or real owners of companies for public disclosure, indicating stepped up efforts against tax evasion.

FATCA and Luxembourg

Similar willingness to become fully transparent in the exchange of information for tax purposes can be found in the Grand Duchy of Luxembourg, which signed an Intergovernmental Agreement with the US government in 2014 to comply with FATCA. A bill of law was subsequently introduced to the Luxembourg Parliament in March 2015. More than 8,500 financial firms in the country have since registered with the IRS to comply with FATCA, a figure that is surpassed only in Great Britain and the Cayman Islands.

FATCA reporting began in August 2015. The penalties for missing, late or fraudulent reporting are stiff—a maximum of 0.5 percent of the amount that should have been reported. This penalty is in addition to the IRS’s 30 percent withholding tax on a financial institution’s U.S. income.

In 2015, Luxembourg created a dedicated Tax Ruling Commission to assume a central role as the country complies with FATCA, in addition to the CSR and various cross-border initiatives predicated on information exchange. To apply toward implementation of CSR in 2017, the country implemented rules in 2016 requiring financial institutions to begin capturing data on income earned by individuals and organizations.

FATCA and Hong Kong

Long considered one of the world’s easiest places to do business, Hong Kong signed an Intergovernmental Agreement with the U.S. in May 2014 to implement FATCA. Registration by local financial institutions started off slowly, due to FATCA’s complexity, with just a fraction of the tens of thousands of financial institutions operating in Hong Kong registering by the first deadline for tax reporting in July 2014.

More than 2,000 financial institutions have since completed their registration on the IRS FATCA portal, albeit still a comparatively small number. This is particularly the case with small banks, of which only a minority is fully FATCA compliant at present. Many smaller banks are “avoiding” registration by ceasing to make U.S.-linked investments, curtailing the opening of new accounts from the U.S. or closing existing accounts of U.S. individuals and businesses.

The main reasons for the institutions’ unpreparedness for FATCA registration appear to be uncertainty over the regulations and data management challenges to comply with the law. Although the IRS issued a notice in May 2014 to relax its penalties through the end of 2015 for Hong Kong financial institutions deemed to be making “good faith” efforts to comply with the law, this “transition period” has now drawn to a close. Non-complying banks may now be exposed to FATCA penalties, particularly if they receive U.S. source payments or deal with participating foreign financial institutions.

FATCA and Thailand

Thailand signed an Intergovernmental Agreement with the U.S. to implement FATCA in June 2014. As part of the agreement, the country has required local financial institutions to report information to the Thai Revenue Department and bank signatories to be physically present at the institutions. Following implementation in July 2014, all Thai commercial banks have indicated their intention to comply with FATCA, and have begun collecting information supporting the identification of U.S. individuals and businesses that are customers or are opening an account for the first time.

Once identified, customers are asked to complete a self-identification questionnaire to determine their status as either a U.S. or non-U.S. citizen. For individuals, this includes providing evidence of U.S. citizenship, place of birth and permanent residence (among other data); for businesses, this includes evidence on incorporation location and whether or not the corporation comprises U.S. shareholders owning in excess of 10 percent. Like financial institutions in several other countries, Thai banks have been given additional time by the IRS to comply with the law, given the costs involved in changing IT systems.

FATCA and Ireland

Ireland signed an Intergovernmental Agreement with the U.S. in December 2012. The country mandated that all financial institutions in the country have relevant systems and procedures to provide necessary reporting to Irish Tax & Customs by June 30, 2015, reviewing their investors and account holders to determine if they have any US reportable accounts for the year 2014. The first returns of financial account information were exchanged with U.S. tax authorities during 2015

As in other foreign jurisdictions, tax authorities have subsequently issued guidance notes clarifying the meaning of various terms. For example, a “Relevant Treasury Company” and a “Relevant Holding Company” are now classified as non-financial foreign entities and not financial institutions.

Ireland is among the early adopters to have implemented the CRS, which was approved by the Irish Parliament in December 2015. Since CRS is broader than FATCA, Irish Tax & Customs has advised entities within the scope of FATCA to establish the procedures required to meet CRS requirements before the implementation date of January 2016. The country’s tax authorities also have issued a detailed standard describing the automatic exchange of financial account information under CRS.  

FATCA and the Cayman Islands

The Cayman Islands entered into an intergovernmental agreement with the U.S. to implement FATCA, although as a British Overseas Territory of the United Kingdom it also adheres to that country’s version of FATCA, called the UK CDOT, referencing the Crown Dependencies and Overseas Territories.

Both rules are quite similar, although there are different documentation requirements in each country. For example, the UK does not need to provide the IRS with taxation information on Cayman residents, as the island has no taxation. Nevertheless, Cayman funds must identify UK residents and U.S. residents to both UK CDOT and FATCA. Other differences involve the definition of what constitutes a financial institution for compliance purposes. As progress continues toward the development of a more uniform global standard, these differences will become less in future.

Conclusion

Despite the need to allow some countries’ tax regimes time to catch up to the process and system enhancements needed to implement FATCA, the fast speed of global acceptance has been impressive. Equally remarkable is the momentum FATCA has ignited around the world to develop national standards that borrow extensively from the law, and a Common Reporting Standard. Even countries long perceived as offshore tax havens have signed on to FATCA, as well as difficult trading partners like Russia and China. Certainly, FATCA’s sharp bite—a 30 percent withholding tax on a foreign financial institution’s U.S. source income—has compelled its wide embrace. Banking is soon to be transparent worldwide.

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