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How Will FATCA Impact Multinationals?
This article has been republished in Thomson Reuters: Practical International Tax Strategies, 31 January 2013
The Foreign Account Tax Compliance Act ("FATCA") was enacted in 2010 to create transparency and combat what was perceived as tax evasion by US persons holding investments in offshore accounts. The primary goal of FATCA is to allow the Internal Revenue Service ("IRS") and US Treasury to identify offshore income earned by US persons with offshore accounts or investments; and to identify US persons with non-US assets. Denmark, Mexico and the UK have since agreed concluded FACTA exchange of information agreements. Taxand investigates the impact of these developments on corporations operating globally.
Which organisations are impacted?
FATCA will not just impact financial institutions, but will also impact other foreign entities, regardless of whether they have US account holders or owners or hold US stocks or securities. Under FATCA, certain foreign entities will be compelled to identify US persons that may qualify as account holders or owners of these foreign entities. Foreign entities that do not comply with FATCA will face a stiff penalty: a 30 percent withholding tax on certain US-sourced payments received by the foreign entities.
In general, a person making US sourced payments to foreign persons (ie, a "withholding agent") will be required to withhold 30 percent from such US sourced payments ("withholdable payments") unless the foreign payee complies with FATCA. Withholdable payments may include US-sourced dividends, interest, rent; other fixed or determinable annual or periodical ("FDAP") gains, profits, and income; and gross proceeds from the sale of US properties that can produce interest or dividends from sources within the United States, even if such sale would not be otherwise subject to US taxation.
The complexity of the reporting requirements under FATCA varies depending on whether the foreign entity being analysed is a "Foreign Financial Institution" (FFI) or a "Non-Foreign Financial Entity" (NFFE). Here are the requirements in a nutshell:
FFIs: The 30 percent withholding tax will not be imposed as long as the FFI meets the following requirements: (1) An FFI must enter into an agreement with the IRS to comply with FATCA, (2) provide certain information regarding its account holders to the IRS, (3) deduct a withholding tax from certain account holders that do not provide the required information and from other foreign financial institutions that are not complying with FATCA, and (4) provide the withholding agents with a valid certification that it is in compliance with FATCA.
NFFEs: The 30 percent withholding tax will not be imposed as long as the NFFE provides a valid certification to a withholding agent that (1) it is an NFFE and (2) that it has no substantial US owners, or alternatively, provides certain information about any substantial US owners.
Does FATCA apply to my organisation?
To determine whether an entity is an FFI, it is necessary to analyse the overall business activities of the foreign entity. Generally, an FFI is a foreign entity that (a) accepts deposits in the ordinary course of banking or similar business, (b) holds financial assets for the account of others as a substantial portion of its business, or (c) holds itself out as being engaged primarily in the business of investing, reinvesting or trading interest in securities. If the entity is not an FFI, then it is an NFFE. Thus, any foreign entity that receives US source income will likely be subject to FATCA.
Although certain FFIs and certain NFFEs are exempted from the 30 percent withholding tax, qualifying for such exceptions is not an automatic process. The application of any such exception requires a factual analysis. Entities qualifying for an exception are still required to provide to withholding agents a valid certification to establish the entity's exempt statusin order to avoid the penalty withholding tax. Thus, even exempted FFIs and NFEEs will likely be subject to FATCA reporting requirements if they receive withholdable payments.
In February, the Treasury Department and the governments of France, Germany, Italy, Spain and the United Kingdom outlined their intention to explore a reciprocal reporting agreement between the US and each of these countries to facilitate FATCA compliance. Under a partner agreement, FFIs in a "participating country" would comply with FATCA by reporting to their local government, as opposed to reporting directly to the IRS. Since then, Treasury has signed three bilateral agreements and is negotiating agreements with additional countries as discussed below.
Effective dates and deadlines
Although FATCA is generally effective for payments made after December 31, 2012, the IRS issued guidance extending the deadlines of the first requirements to 2014. The following requirements begin in 2014: new account opening procedures; withholding on US-source FDAP income; and due diligence on prima facie FFI accounts and on high-value accounts must be completed in 2014. The IRS has also extended the first FATCA reporting for FFIs to 2015. Although the IRS has previously announced that it would begin accepting FFI applications on 1 January 2013, it is unclear whether it will be ready to do so by then.
Update on countries with bilateral FATCA agreements
United Kingdom, Denmark and Mexico have all signed agreements with the United States to help manage FACTA requirements.
The US Treasury has announced that it is now also pursuing agreements with the following countries: Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore, and Sweden.
Additionally, the US Treasury is discussing viable options for bilateral cooperation with the following countries: Bermuda, Brazil, the British Virgin Islands, Chile, the Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, Saint Maarten, Slovenia, and South Africa. Additionally, Treasury informed that it is in the process of finalising intergovernmental agreements with France, Germany, Italy, Spain, Japan, Switzerland, Canada, Finland, Guernsey, Ireland, Isle of Man, Jersey, the Netherlands, and Norway.
By means of these FATCA agreements, the tax authorities of each signatory country agree to the annual exchange of the information described below with the tax authorities of the other country on an automatic basis.
In general, FFIs of the signatory countries will be obliged to obtain and report certain information with respect to financial accounts maintained by financial institutions and held by certain citizens or resident individuals of the other country, partnerships or corporations organised in the other country or under the laws of the other country, and certain trusts.
The information to be obtained and exchanged includes:
(i) the name, address, and tax identification number of the person or entity that is an account holder of such account
(ii) the account number (or functional equivalent in the absence of an account number)
(iii) the average monthly account balance or value during the relevant calendar year or other appropriate reporting period
(iv) in the case of any Custodial Account (an account for the benefit of another person that holds any financial instrument or contract held for investment)
a. the total gross amount of interest, dividends, and other income generated with respect to the assets held in the account during the calendar year or other appropriate reporting period
b. the total gross proceeds from the sale or redemption of property paid or credited to the account during the calendar year or other appropriate reporting period with respect to which the Mexican financial institution acted as a custodian, broker, nominee, or otherwise as an agent for the account holder
(v) in the case of any Depository Account (any commercial, checking, savings, time, or thrift account, among others), the total gross amount of interest paid or credited to the account during the calendar year or other appropriate reporting period
(vi) in the case of any account not described above, the total gross amount paid or credited to the account holder with respect to the account during the calendar year or other appropriate reporting period with respect to which the financial institution is the obligor or debtor
Failure to obtain and report the abovementioned information by a foreign financial institution or a domestic branch of a foreign financial institution may result in the 30% FATCA withholding tax discussed above.
Set forth below are the most relevant details to date with respect to three of the countries that have recently concluded the exchange of information agreements with the United States with respect to FATCA:
a) United Kingdom
The United Kingdom and the United States signed an intergovernmental agreement on 12 September 2012 after which there was a short period of consultation on the proposed implementation legislation (the response to the consultation will be published on 18 December). The agreement means that UK financial institutions will not have to report the account details set out above to the US but rather to HMRC who will then be able to share with the US under existing tax information exchange arrangements.
FATCA places new burdens on UK businesses, and the UK government has sought to reduce the impact of these, which will come into place in 2015, while removing the risk of the 30% withholding. This is a helpful development but at the same time has increased the information sharing powers of HMRC.
The FATCA treaty with Denmark was signed on 15 November 2012. Once the treaty is implemented into Danish law, Danish resident investors can provide the information required under the FATCA to the Danish Tax Authorities instead of to the IRS.
In order to ensure compliance with the provisions of the FATCA treaty, the Danish Ministry of Taxation expects that an amendment to Danish national legislation will be necessary and is likely to be introduced in 2013. The Danish Ministry of Taxation is currently analysing the extent to which the FATCA treaty implies a need for additional information to be reported to the Danish Tax Authorities by Danish resident banks and financial institutions, other than the information already reported today and how such further reporting requirements should be implemented.
The first reporting to the Danish Tax Authorities of information to be exchanged with the IRS is to be made in September 2015.
After two years of negotiations, on 19 November 2012, in Washington, D.C., the Mexican government and the US government signed the agreement for the exchange of information with respect to FATCA.
The agreement will enter into force on 1 January 2013. However, the Mexican tax authorities haven't established a mechanism for such an exchange of information with the IRS.
By entering into the Agreement, Mexico has positioned itself as one of the countries with best practices in exchange of information according to the standards of the Organisation for Economic Co-operation and Development (OECD) and the G20.
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FATCA is a reality and the number of countries with exchange of information agreements for these purposes will increase over the coming years. Thus, financial institutions must assess whether they or their foreign branches will be subject to the provisions of FATCA.
Foreign financial institutions should also be prepared for the administrative burden and the time and costs that this exchange of information will represent. Failure to comply with FATCA may result in a 30 percent withholding on US sourced payments.