Financial Sector Concerns Persist Despite US FATCA Relaxations

by Glen Shapiro, LawAndTax-News.com, New York

13 February 2012

Despite an attempt to reduce the administrative burden imposed on them within the newly-announced draft regulations for implementing the United States Foreign Account Tax Compliance Act (FATCA), foreign financial institutions (FFIs) remain concerned at the costs they will still have to bear, and at the uncertainties that still remain.

FATCA, enacted in March 2010, is intended to ensure that the US tax authorities obtain information on financial accounts, above certain limits, held by US taxpayers at FFIs. Failure by an FFI to disclose information to the Internal Revenue Service (IRS) would result in a requirement to withhold 30% tax on US-source income.

After its enactment, FFIs across the world (including banks, investment funds and insurance companies) all expressed concern about the legislation, in particular at the costs of compliance and the penalties that would ensue in case of non-compliance.

Compliance with FATCA will need modifications to many processes and systems to produce the required information, with substantial investment in identifying and documenting US clients, withholding 30% tax if they cannot, or will not, participate, and then reporting information to the IRS.

It had been indicated that some financial institutions faced one-off costs of up to USD100 million to achieve FATCA compliance, and that others had begun to refuse to deal with US clients.

After the issue of the new draft regulations, Adrian Harkin, global FATCA leader at KPMG, commented that “reactions to (the) draft FATCA papers will be mixed.”

“On the one hand,” he said, “the IRS has done a good job in listening to the financial services industry and has tightened the scope of FATCA, making the proposals more proportionate. We estimate that these measures could reduce the implementation cost of FATCA by more than USD10bn.”

He included, within the IRS’s cost-reducing measures, the granting of ‘deemed compliant’ exemptions to local banks, smaller banks and collective investment vehicles, and the narrowing of the definition of ‘financial account’, which does not mention investment banking and funds products.

Harkin also noted that thresholds have been raised and that the draft rules make significant changes to the new customer documentation requirements. The proposed regulations calibrate the due diligence requirements based on the value and risk profile of the account, and by permitting FFIs in many cases to rely on some of the information they already collect, including information received to comply with ‘know your customer’ rules.

However, KPMG has also calculated that “FATCA will still cost the industry much more than it is likely to raise for the IRS. Plus, the introduction of bilateral FATCA agreements between countries will add more complexity into the mix for the biggest global financial institutions. The bottom line is FATCA continues to present a major challenge to the industry at a difficult time and any efforts to further reduce its impact would be welcome.”

From a US point of view, Kenneth E. Bentsen, executive vice president of the Securities Industry and Financial Markets Association, also emphasized the complexities that remain within the new regulations, stating that “the proposed regulations are nearly 400 pages long and include substantial modifications to the preliminary IRS guidance on FATCA. We look forward to analyzing the proposed regulations in more detail with a keen eye towards their impact on foreign investment in the United States, commercial viability, compatibility with local laws and the costs and compliance burdens.”

He concluded that the “implementation of FATCA will (still) impose significant challenges and costs for many US financial services firms and their customers.”

Within the fund management industry, Julie Patterson, Director of Authorised Funds and Tax at the Investment Management Association (IMA) said that the sector welcomed the joint statement by the six governments, which commits them to exploring a common approach to FATCA implementation, as well as the fact that “on initial review the draft regulations take into account the IMA’s lobbying by providing a special exemption for regulated investment funds where the distributors of the funds comply with certain criteria.”

However, she also felt the need for a more careful examination of the complicated regulatory document as “it is not clear whether the draft wording provides the exemption we are seeking for pension funds.”

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