Michael Shashoua: Selling Fatca Globally

While the US is making progress getting international cooperation with the Foreign Accounts Tax Compliance Act (Fatca), due to take effect in 2013 and intended to enforce tax withholding for US firms’ foreign accounts, protocols for that cooperation appear to be a sticking point, and the Act’s future effectiveness still appears questionable.

In February, the US Internal Revenue Service (IRS) issued proposed rules for Fatca. At the same time, it emerged that five European nations—France, Germany, Italy, Spain and the UK—had agreed to work with the US to share information on US citizens investing in foreign accounts. The protocol for what the US and these countries appear to be working toward is more restrictive than what the US is trying to reach agreements on internationally, says Nick Matthews, a consulting partner at Kinetic Partners in London.

“This actually requires the local foreign financial institution (FFI) to report to the local tax authority and then to the IRS,” he says. “It seems more strict and stringent.”

The stricter protocol that could be put in place in the five European countries may make reporting more straightforward, although it won’t change the amount of data work involved, according to Matthews.

For the rest of the world beyond those few cooperating countries, the US will have to deploy some salesmanship. China, Japan, Switzerland and Canada have lined up to oppose it or say they will not cooperate. “The US has tried to convince the rest of the world that Fatca is good for everybody,” says Matthews. “The complexities of Fatca flow from its trying to tax individuals wherever they are. That said, no country will turn down mutually exchanging tax information with other countries.”

Unlike LEI compliance efforts, which could in the long run yield business benefits for firms, Fatca compliance has no such silver lining.

Benefits of Compliance
An unexpected effect of Fatca could be giving non-US financial institutions an unfair advantage, since they would be unencumbered by the Fatca rules that US firms will have to follow for investing abroad, says Virginie O’Shea, analyst at Aite Group. Also, unlike legal entity identifier (LEI) compliance efforts, which could in the long run yield business benefits for firms, Fatca compliance has no such silver lining, O’Shea says. It’s also far more likely to have recalcitrance when it comes to compliance with Fatca than with issuing LEIs.

But non-compliance has its price, as Denise Hintzke, global tax leader for Fatca at Deloitte, explains. If a foreign financial institution does not sign on to the Fatca-required agreement with the US, it can be subject to a punitive 30 percent withholding tax, she explains. Also, FFIs that participate have to commit to paying that 30 percent tax for any business they conduct involving non-withholding or recalcitrant FFIs.

Firms complying with Fatca will now have until June 30, 2013, a date that had previously been set at January 1, 2013. Included in the IRS proposed rules was a plan to maintain and update, quarterly, a list of FFI identification numbers which firms can reference when serving new customers. Population of this database is likely to take into the latter half of 2013, and the format of the form that firms will have to submit is still being developed. This gives firms one to two full years to document all pre-existing accounts, says Matthews. Firms shouldn’t have to “re-paper” every single account, client and investment, he says, but do need to dig into contradictions that turn up, such as a client with a US passport but a UK address.

Matthews expects the whole Fatca implementation process to take into 2015. Even with cooperation, Fatca may not have the desired effect as it could deter business for US firms. “It has led some firms’ custodians and others to not deal with counterparties who are not participating FFIs,” he says. “Because if you only deal with those, you don’t have to withhold. Rather than put in place complex systems, withholding, reporting and tracking with FFIs, it’s easier to not deal with FFIs.”