FATCA tax law has bigger impact on foreign than U.S. firms

December 9, 2011

US dollar note and other currenciesBy Nick Paraskeva

NEW YORK, (Thomson Reuters Accelus) – The soon-to-be-implemented U.S. Foreign Account Tax Compliance Act, or FATCA, will have a bigger impact on foreign financial institutions than on U.S. ones, financial industry participants were told at a panel discussion on the law, which is placing new duties on compliance officers.

The event was hosted by the Securities Industry and Financial Markets Association (SIFMA) and conducted by the group’s Operations & Technology Society’s–Securities Operations Section, reflecting the role that staff in the operations units of firms were expected to have in meeting FATCA provisions. 

Despite the word “tax” in its title, compliance professionals are also becoming involved in implementing the act at firms. Indeed a regular certification will be required, by the firm’s chief compliance officer, or an equivalent level person, that the firm has complied with the provisions.

The panel comprised Jon Lakritz, Managing Director PriceWaterhouseCoopers, Mark Naretti Managing Director KPMG, and Kevin Sullivan Assistant Vice President. A SIFMA presentation entitled ‘What you need to know about FATCA’, which was discussed at the event.

FATCA passed in March 2010, but its provisions have not yet fully come into effect. Its passage followed attention in the past few years to U.S. individuals avoiding taxes by opening accounts with foreign financial institutions outside the United States. Income received on these accounts was kept outside of the U.S. tax net, and was not disclosed by the account holder or firm.

Whistleblowers identified some of these avoidance activities to the authorities, leading to investigations in Congress and the IRS. These led to a two-pronged U.S. prevention approach, one being to provide a tax amnesty program for individuals to disclose their earnings, and the other was the passage of FATCA.


Despite the initial intention to be effective in 2013, some parts of FATCA have been delayed to 2014 and 2015. The U.S. government has issued three notices on FATCA, and the final one may be in the New Year. “The delay in the effective date is to give financial institutions time to implement,” Lakritz said.

The act requires financial institutions, including foreign firms, to report on the U.S. owners of accounts to U.S. authorities, and perform due diligence on those accounts to see if they are held by a US or foreign owner. There are also new withholding tax provisions imposed on firms, for those accounts that do not meet certain tests.

FATCA also requires firms defined as foreign financial institutions (FFIs) to enter specified agreements with the US authorities. The scope of firms covered is wider than just banks and broker dealers, and also includes offshore hedge funds, trust companies and collective investment vehicles.

“If certain non-US firms don’t sign the agreements, they may become non-participating foreign financial institutions, and thus become subject to the new withholding tax,” Lakritz said. These agreements require FFIs to perform enhanced due diligence, to find US persons who are hiding behind foreign entities.

U.S. financial institutions are not impacted as much as foreign firms, but are still subject to enhanced due diligence to find U.S. persons who hiding behind foreign entities, and will be subject to the new withholding tax.

The FFI agreements require foreign firms to obtain information on the account-holder, which is necessary to determine if the accounts are U.S. accounts. A senior officer of the firm will need to certify that this has been done, and there has been compliance with the due diligence procedures. If the firm is in a bank secrecy jurisdiction, they should attempt to obtain a waiver of the secrecy provision or close the account.

“Hong Kong customers investing in non-U.S. securities abroad may wonder why they are being asked to sign a U.S. tax form,” Sullivan said. This may be part of the discussion held with foreign clients on “how you prove someone is not a U.S. taxpayer.”


One of the aspects confusing many outside the United States is the global scope of who may be covered. This has led some overseas firms to suggest they may stop acting for U.S. customers. However, even this may not be enough to lead to the firm being fully exempt.

“Even if you have no U.S. customers, you are not out of scope,” Naretti said. “This would also require that the firm not have any U.S. investments and not be part of an expanded affiliated group that includes entities that are participating FFIs,” he said.

Indicators of U.S. status for an individual include being a U.S. resident or citizen or having a U.S. address, and depending on what is found, the firm may request provision of certain types of information, such as a W-9 Form. Indicators of U.S. status for entities is based on whether the institution is U.S. or foreign.

The completion by the firm of certain FATCA steps must be certified by the chief compliance officer or an equivalent level officer. They must certify that the firm had written policies at the date of the agreement to prohibit advising US account holders on how to avoid identification as well as certify that no one in the organization acted outside the those policies.

“Compliance officers may be a little hesitant to sign off on such a broad global FFI certification,” Sullivan said.

Withholding tax under FATCA applies to “withholdable” and “passthru” payments. Withholdable payments include U.S. source income (dividends and interest), and gross proceeds from sale of property. Passthru payments would apply for example where a foreign financial institution pays foreign source income to a non-participating institution. The amount paid depends on the share of US assets held by the FFI.

“A huge administrative burden is being put on financial institutions, and there is a great deal of uncertainty in all areas,” Naretti said.

Monitoring and reporting under FATCA has some similarities with suspicious activity reporting under anti money-laundering laws. These include requirements to establish profiles on each customer, including at account-opening. There is also reporting to authorities of what are termed recalcitrant account holders.

One option for year-end reporting is to report the name, address, and Tax ID number of each account holder that is a U.S. person, and the account number, year-end balance and income and gross proceeds. The other option is to report using the US 1099 Form, although not many foreign firms are expected to take this route as it is more complex.

“It is less burdensome for a U.S. financial institution to comply than for a foreign financial institution,” Naretti said. There is no additional work for individuals’ due diligence and no requirement to calculate passthrus.

“The proposed regulations should be issued by January 1, 2012, or shortly thereafter,” Naretti said. “We are told that we can also expect to see the first draft of the FFI agreement at that time.” The IRS is anticipated to issue the final regulations by the end of summer 2012, which might in practice, mean up to September.

”These rules are fairly controversial, there are a lot of objections from foreign institutions,” Lakritz said. “There are a lot of details we don’t have yet, and many comment letters have been sent to the IRS”.

Some $8 billion over 10 years is expected to be recovered by FATCA. By contrast, the cost of compliance for some large firms is estimated to be between $70 million and $100 million.


(This article was produced by the Compliance Complete service of Thomson Reuters Accelus.  Compliance Complete (http://accelus.thomsonreuters.com/solut ions/regulatory-intelligence/compliance- complete/) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)

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