US tax compliance act threatens tardy banks

Banks around the world have reluctantly agreed to “play ball” with the US government on FATCA

Global financial institutions are scrambling to meet the deadlines imposed by FATCA, and foreign governments are actively engaged in discussions and negotiations with the US government to enter into a so-called inter-governmental agreement (IGA) to ease the impact FATCA imposes on its local financial institutions.

So what is FATCA? FATCA is a bill passed by the Obama administration to combat offshore tax evasion by US taxpayers and to recoup federal tax revenues. FATCA requires foreign financial institutions (FFIs) to identify and report on their US account holders. The US will publish a list in June 2014 of all banks that have registered to become FATCA compliant. A bank that is on that list will be required to withhold 30 per cent of some payments to a bank that is not on that list. FFIs failing to fulfil this requirement will have 30 per cent on US-source FDAP payments (fixed determinable annual periodical payments, e.g. interest from nostro accounts at US banks, dividends from US securities, or gross proceeds of sale of property in the US) withheld starting from July 1, 2014 and foreign pass-through payments (payments from Participating FFIs) starting from January 1, 2017.

As the deadline draws near, global and local banks have commenced complying with the FATCA regulations. This includes undertaking an impact assessment on business units, developing a compliance roadmap, reviewing and remediating existing customer accounts, contacting identified US customers, and updating customer on-boarding procedures. FATCA projects require participation from multiple stakeholders across a bank’s operations, including but not limited to retail, corporate, financial institutions, risk management, tax and compliance, operations, IT, and accounting. As FATCA is a US tax law that is being upheld by US banks and the Internal Revenue Service (IRS), banks in Asia and in other parts of the world have engaged external consultants to assist and advise them on the alignment of FATCA requirements and change management to banking processes.

Most Vietnamese financial institutions have not yet commenced FATCA projects. Most are under prepared and will be adversely affected. The last quarter of 2013 saw a large increase in the number of FATCA related queries from banks in Vietnam. FATCA will affect all banks in Vietnam due to the large interbank market. It means a compliant bank on the US list that has borrowed on the domestic interbank market will be required to withhold 30 per cent of the interest payment to a bank that is not on the published list of compliant banks.

The Vietnamese government has started to look into FATCA requirements as all banks, insurance companies and investment funds in Vietnam will be affected in some way. Some countries have signed an agreement with the US lowering the FATCA burden, but Vietnam has not yet done so.  Entering into a separate FFI Agreement with the IRS is the only logical choice for banks in Vietnam if they want to comply with FATCA. The IRS released the final FFI Agreement form on December 26, 2013 with additions on definition cross-reference. The FFI Agreement will become effective starting from July 1, 2014 and the last day to register with the IRS for direct reporting is April 25, 2014. The US government is adamant that there will be no further extensions.

The registration deadline is April 25, 2014. Prudent banks need to take action now to reduce the risk of unnecessary loss. They should start by conducting an impact assessment and cost analysis to quantify and forecast the impact of FATCA compliance versus non-compliance.

Complying with FATCA is optional, but non-compliance will lead to higher costs for most banks.

The views expressed by the authors here do not necessarily represent the views and opinions of KPMG Vietnam.

For further information, please contact:

Jeff Sea – Partner, Tax & Corporate Services

Le Thi Kieu Nga - Partner, Tax & Corporate Services