Even non-US funds that invest in American securities are thought to be potentially affected if they are made to provide details about every US retail investor who owns their fund.
The new regulations are due to take effect at midnight on 31 December 2012.
FATCA
UK and European banking and funds industry officials familiar with the new legislation – embedded within Obama’s recent HIRE bill and known as FATCA (Foreign Account Tax Compliance Act) – say the full extent of its effects on banks, trusts, wealth managers and fund management organisations cannot be accurately predicted until key details have been finalised.
In the meantime, officials from such organisations say they intend to work closely with the US Treasury and Internal Revenue Service (IRS) over the next few months to ensure that the bill is workable and does not inflict burdensome compliance costs on their members.
The British Bankers’ Association, for example, "is concerned about the potential implications” of the legislation, and for this reason “will be working to develop the US Treasury and IRS’s understanding of the practical issues that will need to be addressed to enable the law to be implemented,” a spokesman said.
European Fund and Asset Management Association director general Peter De Proft said his organisation had also been following the course of the legislation through Congress “very very closely for months”, and that it too intends to work with the US Treasury to ensure that its members’ interests are taken into account.
“There are a number of practical issues, and that’s what we’re looking at, in a constructive way,” he added. “It is an important issue that has to be dealt with.”
Focus on reporting requirements
Concerns centre on the legislation’s requirement that all foreign financial institutions, or FFIs, must report information about all of their US account holders to the IRS, and withhold as tax 30% of the income from the account of anyone who declines to reveal his or her details.
There is already a precedent for this in the form of so-called Qualified Intermediary regulations, which were brought in by the IRS in 2001 and tightened up in 2008, and which require foreign banks to report back to US tax authorities certain information about their American clients.
It was these rules which Swiss bank UBS ran afoul of, as it recently admitted, by failing to properly withhold American taxes on the accounts of thousands Americans. It has now agreed to pay hundreds of millions of dollars in taxes, interest and fines to US authorities and cooperate with further investigations. Meantime, another major foreign bank is reportedly about to be subject to a similar prosecution.
The difficulties for non-US financial institutions include the fact that they don’t always know the full details of their clients’ nationalities – many people hold dual citizenship, for example – and that the beneficial owners of assets are not always clear, particularly when they are held through platforms and through advisory or wealth management firms that hold the account records as nominees for the end investors.
An ‘out’?
One funds industry tax expert said that some funds industry officials are hopeful that such entities as large, widely-held European collective schemes, for example, might be given an “out” from having to comply with FATCA if they already meet stringent anti-money-laundering and know-your-customer regulations, particularly if they also agreed to report on any irregularities they found.
“The argument would be that European funds with these kinds of controls in place would be an unlikely place for US tax evaders to put their money,” he added.
Some UK and European experts say they believe US lawmakers simply do not fully understand the implications for Americans or its capital markets of the new law, as currently drafted, or the way retail funds are sold in such markets as the UK, where fund platforms are widely used.
A measure of the growing frustration over US efforts to shift the burden and expense of tracking down its tax-evading nationals onto foreign financial institutions was apparent last month, when a senior Swiss markets regulator was quoted as saying that Swiss banks were right to close thousands of American-held accounts, and even to avoid having any US clients, because of unclear IRS rules.
‘Good intentions’
Jay Krause, a London-based partner of Withers, the international law firm, who is himself American, noted that the intentions behind the bill were “largely good – that US people should not be able to escape their tax liabilities by investing through non-US entities”.
“But the effects are that [as currently drawn up], it will likely drive US investors and account holders to a somewhat limited number of institutions, most likely US institutions and a handful of non-US institutions that have the expertise to draw on,” he said.
Josh Matthews, managing partner of Maseco Financial, a London-based advisory firm which specialises in looking after American expatriates, knows first-hand that some European banks and custodians “are already asking their American clients to leave,” because they are ending up as his clients.
Maseco, which is FSA-, SEC- and L’Arif-regulated, has benefited from a growing trend among banks and custodians to outsource or redirect their American customers.
It opened an office in Geneva six months ago and is planning to open another in Zurich. It also has an office in New York, and has an institutional arm that provides both branded and white-label financial services to non-US financial services companies that have American clients, including banks and wealth managers.
"If foreign banks or custodians want to continue working with US taxpayers, they are going to have to invest time, effort and money into significantly changing their client take-on process, client review process and their US tax reporting capabilities, among other things," Matthews said.
More information on FATCA and the HIRE Act may be found at http://hireact.org/ . The full text of the Hiring Incentives to Restore Employment Act (HR 2847) may be found here.
