Fatca - a hurricane heading this way

FATCA will impact every bank, investment company and many insurers globally. In order to become compliant, financial institutions will need to review their customer on-boarding processes, make changes to their withholding and reporting engines and remediate millions of customer accounts globally.

The final draft FATCA rules will be published at the end of the year and the deadline for financial institutions to become fully FATCA compliant is June 30, 2013. It is obvious that globalisation has increased opportunities for investors around the world to diversify their investment portfolio, while foreign markets have become an important source of income for investors.

Under the US regulations, US persons (including US natural persons and legal entities) are allowed to maintain offshore accounts but there is a requirement that the financial information in relation to their accounts must be reported to the US Internal Revenue Service (IRS) for US tax purposes.

US investors may make investments abroad through a foreign entity for legitimate business reasons. However, it is a fact that many US investors utilise offshore entities to disguise their identity in an attempt to avoid paying their US taxes. The US government estimates that offshore tax abuse causes losses of $100 billion annually for the US budget revenue.

FATCA was enacted by the US government on October 18, 2010 with an aim to flush out US tax evaders worldwide.

With the release of FATCA, which is due to come into force in January 2013, the US government expects to prevent US persons from utilising foreign financial institutions and, in certain cases, non-US legal entities (collectively so-called Foreign Financial Institutions (FFIs)) to avoid paying US tax on their overseas assets and income.

FATCA – How it works and what it requires?

The legislative intent of FATCA should be achieved through the introduction and increase of the reporting requirements to the IRS.

The primary objective of FATCA is to collect information about US account holders and owners from FFIs by requiring FFIs to identify, verify and report such persons. For such purpose, FATCA compels FFIs to enter into the IRS agreement under which FFIs are required to comply with a comprehensive information reporting regime.

Non-participating FFIs will be subject to 30 per cent penal withholding applied on US withholdable payments, which are defined to include any payment of US sourced fixed, determinable, annual, periodical (FDAP) income (e.g. dividends, interest, pensions and annuities, rents, royalties), and any gross proceeds from the sale or other disposition of a security that can give rise to the payment of US sourced dividends or interest.

Similar withholding is applied to recalcitrants (i.e. an account holder or customer that fails to comply with reasonable requests for information by an FFI pursuant to the FFI’s agreement) to encourage co-operation.

With the enactment of FATCA, FFIs generally must conduct diligence on their account holders and investors to determine whether their accounts are “US accounts”. Additionally, FFIs will face a choice of whether they will sign an FFI agreement and identify and report to the IRS information about direct and indirect US account holders, or be subject to 30 per cent withholding tax on all direct or indirect US income.

While the regulations implementing the legislation are yet to be issued, financial experts from all corners of the world share the same view that the impact and wide-influence of FATCA will be “very challenging” to many global financial institutions, investment entities, as well as national banks and other financial organisations.

International views and potential actions

A number of international organisations, financial institutions and the governments of other countries have had meetings with and submitted formal comments to the IRS expressing their concerns regarding the breadth of the FATCA rules and the disproportionate effort required to affect them relative to the revenue they will generate for the US government.

For example, while the EU Commission has agreed that FATCA pursues goals similar to those of the EU Savings Tax Directive, it estimates that the costs of modifying IT systems and the administrative burden of ensuring compliance with FATCA would be significant and disproportionate to the EU financial industry.

From another perspective, the British Bankers Association (BBA) notes that many of the complexities and their associated costs would create a powerful disincentive for market participants to enter into FFI agreements.

Can you wait?

Although the FATCA rules are not yet final, Vietnamese financial institutions (i.e. banks, fund managers, insurance companies) should not wait until these rules become effective to begin assessing their needs and associated costs of compliance. Experience shows that the time devoted to developing business requirements, IT builds, and testing to comply with the new regulations can take one to two years.

It is critical for Vietnamese financial institutions to work now with the limited tax guidance available to make a preliminary assessment of its ability to comply with the FATCA framework that currently exists. By performing the proper compliance risk assessment now and evaluating necessary modifications to the existing systems, Vietnamese financial institutions will be armed with the level of risk intelligence required to address compliance with FATCA’s new withholding and reporting regime.

KPMG will be writing other FATCA articles in the subsequent VIR issues. If you would like to discuss any aspect of FATCA, or how KPMG can help you integrate FATCA into your business environment, please contact Le Thi Kieu Nga - Partner, KPMG – Tax & Corporate Services and Punch David Stephen - Director, KPMG – Advisory.

The views of the authors do not necessarily reflect those of KPMG