As part of the Act’s “withholding stage”, all foreign financial institutions (FFIs) will now have to disclose all US related information about new and existing clients to the US Internal Revenue Service (IRS).
In the event that an FFI fails to comply, a 30% tax will be imposed by US authorities on withholdable payments made to FFIs.
Qualifying payments can include items such as interest or dividends from US sources, or sale proceeds from property that can produce US interest or dividends, such as those frequently made by expat US citizens and US businesses operating internationally.
Labelled equal parts “unhealthy” and “revolutionary”, FATCA is the IRS’s ambitious attempt to crack down on global tax avoidance by US citizens who work abroad or hold their money in offshore accounts without declaring it to the US authorities.
Passed in 2010 by Barack Obama, the act requires FFIs to identify and report the financial details of their American clients, whose tax duties still apply when they move either themselves or their money from the US.
Technical manager at RL360°, Neil Chadwick, said there is a lot of incorrect information about FATCA in circulation about who is and who is not reportable or at risk of facing a 30% withholding tax.
“The 30% withholding will not apply where the financial organisation is in a jurisdiction that has signed a Model 1 FATCA agreement,” he said. “Also, there are carve outs for certain types of account holders for business in place by the 30 June 2014.
“There are also monetary thresholds to take into consideration as well as whether the institution is required to report a surrender value or an account value.
“As such, there are a lot of factors that have to be considered before arriving at the decision as to whether an account is reportable or not.”
Director of operations at the Wealth Management Association, Andy Thompson, said the self-certifying of new accounts had proved troublesome for many UK-based financial institutions.
“We have worked long and hard to provide self-certification forms aiding FFIs in the very complicated issue of FATCA compliance,” he said. “There is not a defined deadline for self-certification, but the reporting stage will start rolling by next May or June, and by that point it will be too far along.
“I’m sure that most will have sorted it by that point, it is best to get the form sent as soon as possible so it is over and done with.”
He added that the variable classifications of trust have proved difficult for large companies, who have had to provide separate self-certification forms for each service they provide.
“Different firms deal with FATCA in different ways. There are different ways to skin a cat but this will undoubtedly be the introduction of a new era of tax planning.”
To ease in the implementation of FATCA, countries around the world have signed intergovernmental agreements (IGAs) with the US authorities which allow the relaxation of deadlines and an increased clarity and simplicity around due diligence with country specific provisions.
Some jurisdictions have used IGAs to acquire breathing room from US requirements. For example, Russia agreed to share information provided it is first vetted by state authorities, and New Zealand requested that certain “low risk accounts” be exempt from sharing requirements.
James Sellon, managing partner at Maseco, said many countries had struggled to legislate IGAs because of FATCA’s complexity, but added that many had already made provisions:
“We deal with a lot of American clients so FATCA is of paramount importance to us, but we didn’t have to make many changes because had all the data we needed to hand from the very beginning.”
He added that FATCA could lead many companies to drop American clients because of the cost and effort they will now encompass.
“I see a lot of institutions shrinking their US investments and reviewing whether they offer their products to US clients at all,” he said. “A lot of Americans will be asked to move on, this has happened in Switzerland so I would not be surprised to see it in the UK.
“However, after a few months, this could potentially lead to the creation of a range of companies who actively seek US citizens who have been dropped by other firms.”
Similarly, Tom Richards, head of private investment management (offshore) at Thomas Miller Investment, said FATCA could negatively impact the way companies view American clients.
“Rather than looking at whether something is profitable, it has become a case of whether the costs are worthwhile,” he said. “We have a lot of sophisticated investors who are savvy to the needs of FATCA, it isn’t a surprise to them like it would be to more unsophisticated investors.
“We already had an agreement with the US authorities, so we were well placed to do the correct, transparent reporting.”
He added that some non-US clients had been required to report to the US authorities to confirm their non-residence: “I do not think this level of reporting is very healthy,” he said.
Compliance officer Paul Clague added that the laws could create new markets that capitalise on US-suitable investments.
“A lot of US clients have individual needs, and some investments are not appropriate unless they are US domiciled,” he said. “This could create an advice gap if the opportunity becomes big enough; I think companies may look into this in the next two or three years.”
He added that the large size of the US will place passport holders into a predicament: “The US has such long arms it is hard to hide from the authorities. In my opinion, US passport holders will be forced into making a decision or whether or not to renounce their citizenship.
“Many have already renounced their citizenship, and I believe this will be the future.”