Cautiously welcomed by the industry, the latest proposals indicate that some of the pressure on institutions affected by the regulation will be eased, although a substantial compliance task still lies ahead.
Under the Act, all foreign (non-US) financial institutions (FFIs), including banks, custodians and investment vehicles that invest in or hold US assets and receive US-sourced income on behalf of account holders or investors, will bear significant reporting obligations to the Internal Revenue Service (IRS).
In practice, this means that most major UK financial firms will have to agree to inform the IRS annually about their US clients. Otherwise, 30% of all income from US investments will be withheld and their access to the US financial markets will ultimately be curtailed.
Compliant firms will also be required to withhold tax at 30% on any US-sourced income that they themselves pass on to their account holders or investors under some very complicated withholding.
'Industry rumblings'
Since the Act became law on 18 March 2010, there have been rumblings across the industry of the significant burden on non-US firms in complying with the Act. In particular, there have been concerns expressed over the scope, application and timescales.
In response, last week’s long-awaited announcement from the IRS and US Treasury outlined a series of amendments and clarifications to the Act which go some way to ameliorating the demands asked of FFIs.
Modifications
Of most significance to many firms are the modifications and clarifications to the required due diligence procedures, which will largely allow firms to rely on existing Know Your Customer (KYC) and Anti Money Laundering (AML) documentation, and will subject most lower-value accounts to a review only of electronically-searchable information.
This appears sensible, although the doubling to $1m of the threshold for higher-value accounts requiring additional review will be cold comfort to the funds industry.
The stated aim is to avoid substantial changes in due diligence procedures; in practice certain procedural changes and KYC remediation may still be required.
The timescale set out for implementation has been a concern of industry lobbyists, who feel that the deadlines are very tight for the compliance work and systems changes required.
In response, the IRS has given an extension of the transition period for reporting and withholding requirements, moving the timeframe for reporting on income and gross proceeds to 2016 and 2017, respectively, with an extension to the timeframe for the withholding requirements on pass-thru payments to 1 Jan, 2017.
Government deals
In recognition that FATCA places considerable burdens on non-US firms for the benefit of the IRS, the proposed regulations were accompanied by announcements of potential inter-governmental coordination.
Details are still to be hammered out, but it is intended that such measures would avoid legal restrictions on disclosure of information and, to some extent, ease the reporting requirements by permitting reporting to domestic authorities, while providing an added benefit for the jurisdiction concerned of reciprocal disclosure of information by the IRS.
These amendments will no doubt relieve some of the administrative demands currently facing FFIs and may soften the necessary procedural change required in institutions.
Nonetheless, significant work lies ahead. The 30 June, 2013 deadline for entering into agreements with the IRS itself has not changed, and there is substantial compliance work to be done before then, to ensure that the transition to FATCA compliance will be successful.
Nick Matthews and Matt Haddow are respectively a member and a consultant at Kinetic Partners
This article was originally pubished on 17/2/2012
