Industry sees opportunity and threat in Fatca delays from US IRS

A number of organisations analysing Fatca and developing IT, accounting or other solutions for affected financial organisations have pointed to both positives and negatives in the latest announcement by the US Internal Revenue Service that it is to delay implementation of the law.

The Foreign Account Tax Compliance Act will force foreign financial institutions (FFIs) to account for and report on their US clients. The IRS has said in its latest Fatca statement that is now minded to give FFIs more time to put in place the systems and policies required to collect and pass on the information and withholding tax payments that need to be provided to itself.

It has also agreed to change certain terms used in the original drafting of the legislation, following feedback from FFIs to itself and to the US Treasury Department, the branch of the US federal administration responsible for putting the law into effect.

The US Treasury has been heavily bogged down negotiating deals with foreign governments , the bilateral so-called Intergovernmental Agreements, which are supposed to ensure that affected financial businesses do not get squeezed between jurisdictional conflicts, sparked by competing demands from Fatca and domestic tax law in their home countries.

The UK is the only European country to have finalised an IGA thus far, whereas others such as France, Germany, Switzerland and Spain have only reached agreement on a framework for negotiating their respective IGAs. Theoretically, the US must negotiate bilateral agreements with each and every jurisdiction where affected FFIs are located, because Fatca is about collecting tax at a time when most countries’ governments are keen to increase their own tax revenues to deal with sovereign balance sheet issues.

Effectively, the IRS has pushed out the actual implementation of Facta by another year at least, during which time other regulatory changes could take place both in the US and Europe, which in turn raise the spectre of further confusion around what Fatca actually entails for financial businesses.

The full list of changes and new dates from the IRS are available here: IRS Fatca Announcement

Responding to the changes, Colin Camp, managing director of Products and Strategy at Dion Global, which has just produced a Fatca White Paper and launched software that is meant to facilitate implementation of Fatca at the company level, said that in his opinion, the delays were likely down to the difficulties in negotiating IGAs.

“These have complicated an already intricate and delicately balanced situation, and have made the implementation of this major piece of legislation even more challenging, because of the variety of requirements that they introduce,” he said.

“The specific delay on the withholding tax piece was not a real surprise as this is one area that is being closely examined in the IGAs, particularly with regard to the question of overseas banks withholding tax on recalcitrant clients – or in other words, becoming the IRS’s tax collectors.

“We anticipate further developments in the area of classification over the coming months and years; Fatca is the start of this process, not the end point. With that in mind, firms should not take their collective feet off the gas on this issue. Instead, they should look to implement solutions that have the flexibility to support them now, and into an as-yet uncertain future.”

Jim Muir, director of AutoRek, which provides data reconciliation services, said that the delay, while well intentioned, could lead to other difficulties.

“However, good, well-intended regulation, such as Fatca, should not be postponed simply because institutions are in a state of poor preparedness. In this case, the perception in the public eye may be that the regulators and authorities are simply too soft on banks and other financial institutions who have had quite some time to get ready for Fatca.”

Muir also said that further delays posed moral hazard for the industry.

“Given the delays in CASS, Solvency 2 and now Fatca, there is a danger that if you were running project resources for a major financial institution and a “must-do” regulatory project came up, there would be temptation to bet that the authorities would back down and instead focus your resources on projects that maximise profit.”

Jennifer Sponzilli, tax partner at KPMG, reacted positively to the IRS statement.

“The biggest item is the much anticipated alignment of effective dates for new account opening procedures to 1 January 2014 for US withholding agents, Foreign Financial Institutions (FFIs) in IGA jurisdictions, and FFIs in non-IGA jurisdictions. In line with that thinking, the earliest FFI Agreement effective date will also be 1 January 2014. Alignment of these effective dates will make it easier for global institutions to have the same milestone dates for their FATCA project plan for all jurisdictions.”

“Perhaps even more exciting is the unexpected deferral of withholding on US source gross proceeds to those amounts paid after 31 December 2016. This date matches that of the earliest effective date of withholding on passthru payments.

“Other good news is that the 2013 and 2014 reporting for US and recalcitrant account holders will not be due until 31 March 2015. Interestingly, this leads to the conclusion that US and recalcitrant accounts identified by the end of 2014 will have to report 2013 data. The data to be reported is simply the name, address, taxpayer ID and year-balance for 2013, but it is important to note because the reporting requirement will apply to periods prior to identification of accounts being reportable. Pre-existing prima facia FFIs and high value accounts need to be reviewed and remediated by the end of 2014, so the 2013 and 2014 reporting will certainly include US and recalcitrant accounts of high-value account holders, as well as payments to non-participating FFIs. To review and remediate all remaining accounts in 2014 would seem unwise, as that will subject them to 2013 reporting. If financial institutions wait until 2015 to review and remediate those other accounts, then it appears the reporting on the US and recalcitrant accounts found among them would only be on 2015 information.

“Finally, the announcement clarified grandfathered obligations in three situations: (1) obligations that generate foreign passthru payments (that are not otherwise US source withholdable payments) are grandfathered if issued within six month after final regulations are issued defining “foreign passthru payments;” (2) obligations that will be considered as making US source withholdable payments due to the re-characterisation of certain payments on notional principal contracts are grandfathered if issued within six month after final regulations are issued; and (3) obligations that are posted as collateral to secure grandfathered notional principal contract obligations are themselves treated as grandfathered.”

 

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