FATCA update: financial institutions given reprieves - well, sort of
In February last year, the IRS issued proposed regulations providing guidance to foreign (ie, non-US) financial institutions (FFIs) as to the procedures and requirements these institutions must set in place in order to comply with the Foreign Account Tax Compliance Act, know to most as FATCA. As a recap, this law was enacted in 2010, as a means of ensuring that foreign financial institutions provide the US Internal Revenue Service (IRS) with information on the account holdings of US persons. This law has been seen by some as an overreach by the US government but, nonetheless, most foreign governments and regulators have advised their financial institutions that they will need to comply with these 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 on 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 approximately five years for FFI's to be completely compliant, there were two pressing deadlines that were begging to raise significant concern for FFI's in Thailand. The first being the signing of a FATCA agreement between the FFI and the IRS and the second being the revamping of client on-boarding procedures. The regulations originally proposed that foreign financial institutions must enter into an agreement directly with the IRS by June 30, 2013 and have completed the on-boarding revamp by July 1, 2013.
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 has not issued final regulations even though these had been promised by late summer. Foreign financial institutions 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 FFIs, which normally approach change in a conservative manner, the prospect of having to implement such significant changes without proper finalised guidance and under the pressure of such tight deadlines was, if not paralysing, then at least unsettling.
Over the past few months, the IRS has issued pronouncements which appear to provide some relief to weary FFIs trying to get their heads around the entire 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 impacted 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 and IGA between their government and the US would relieve them of the need to actually perform the required due diligence and reporting. This was not at all the case. The only impact of the IGA would be to be to change to which agency 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 an FFI is able to properly identify when an account holder is a US person. Those who hoped that their governments would step in and fend off the US's demands for information soon found their hopes dashed. In addition, the IRS has 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 IRS by entering into a FATCA agreement by the agreement deadline, which was June 30, 2013 until things changed last month.
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 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 to immediately initiate their FATCA programmes if they want to have the on-boarding processes in place and signed-off in time to meet the new December 31, 2013 deadlines.
The time to act is now, otherwise, FFI's will not be considered FATCA compliant and will start suffering potentially ruinous economic consequences from January 1, 2014.
This information is intended as a general guide only. Tax law is complex and professional advice should be taken before acting on the information provided.
Jonathan Blaine is Associate Principal at KPMG Thailand.