Mark Jansen of PricewaterhouseCoopers explains the main details and implications for both financial institutions and customers of the Foreign Account Tax Compliance Act (FATCA) enacted in the US.
Date: Jun 2011
Tags: Regulation, Tax, Operations
Essentially, it is about capturing information on US customers of financial institutions around the world, to identify who should be applicable to pay US taxes.
The backdrop, he explained, is the significantly increasing level of debt over the last two years. Although the US has a global tax system in place, the US authorities feel that they are not collecting all the taxes from those individuals around the world who should be paying tax.
FATCA is therefore an attempt to put in place a system by which they can get those people who should be paying tax to do so, said Jansen. The US Internal Revenue Service (IRS) is trying to do this by forcing banks to identify potential US taxpayers and provide information to the IRS on those individuals.
Who FATCA impacts
Ultimately, Jansen said FATCA impacts all financial institutions globally, because they need to sign an agreement with the IRS to look into all their customers with assets greater than US$50,000 to identify if they have indicators of US tax status.
If institutions don’t do this, then any income they derive from the US through sales proceeds, interest income, dividend income and other forms will be subject to a 30% withholding tax in the US.
Practical impacts
For private banks in particular, FATCA is really an extension of their existing know-your-client procedures, said Jansen, so they will need to collect extra information they don’t already have on their customers.
Some examples of such data might be information on the customer’s place of birth, on the power of attorney over the account, or on where a power of attorney resides. These are all indicators which might show potential US tax status for the IRS.
For customers, meanwhile, Jansen said the biggest impact is that avoiding US tax is now much harder. Banks will also struggle to accept customers who are not prepared to give them information around their tax status.
Common FATCA myths
According to Jansen, there are two common myths relating to FATCA. The first is that it is not just limited to US customers. At the end of the day, banks need to go through their entire customer base to identify who should potentially be paying US taxes.
The other myth is that not dealing with the US in an attempt to avoid FATCA is not an option. There are also IRS rules on how compliant banks have to treat non-compliant institutions for their non-US payments.
Similar developments elsewhere
In terms of the potential for other jurisdictions to follow suit, Jansen said this is part of a global trend around tax avoidance.
A lot of tax treaties are being signed and there are various territories closely looking at FATCA and whether they want to do something similar, he explained. The big question is whether they have the clout.
At the same time, from the industry’s standpoint, there is a lot push-back because implementing it is not so easy; plus, it is very costly.
