RETAIL BANKING | Roxanne Uy, Singapore

FATCA set to be a burden to Asian banks

As the US pushes for stricter regulations to avoid tax evasion, Asian banks are forced to follow implementation and remediation requirements by 2015 - find out what analysts from Deloitte, PwC, KPMG, and Ernst & Young have to say.

ABF: How will the proposed FATCA regulations affect Asian banks?

Deloitte: Jim Calvin, Global Tax Managing Director - Asset Management
On February 8, the U.S. Treasury Department and IRS released nearly 400 pages of proposed regulations that provide detailed implementation and remediation requirements for the U.S. Foreign Account Tax Compliance Act (FATCA). All banks in Asia will be affected by FATCA. At a minimum, banks will need to determine whether they can qualify for one of the narrowly written exemptions from the major rules. All other banks must implement documentation safeguards for new accounts, review account documentation for preexisting accounts, and eventually may need to report and withhold tax.

Most of what is required must be completed by June 30, 2015, and very major aspects must be completed as soon as June 30, 2013. This will require all banks to make a significant and immediate commitment in highly specialized resources from now into 2015. Undoubtedly, for an Asian bank or any bank for that matter, locating and retaining such highly specialized teams of people for this period of time will be the most significant challenge to successful execution.

We expect universal compliance with FATCA by Asian banks. FATCA enforces its requirements through a withholding tax on U.S.-source income and assets. This means that any bank having direct or indirect interests in such assets will be forced to comply in order to meaningfully transact in the capital markets. In addition, a joint statement on intergovernmental cooperation was issued with the regulations and indicated that several governments see FATCA-type rules to be of benefit to battling their own tax evasion problems. We do understand that a number of Asian countries are actively pursuing such reciprocal agreements with the U.S.

The joint statement on intergovernmental cooperation named several European countries with whom the U.S. would enter into agreements to report information based upon FATCA. This is generally welcomed as it could eliminate privacy concerns in reporting information directly to the IRS, it may also eliminate legal conflicts in the case of withholding.

Intergovernmental agreements do not and will not create exemptions for banks. Instead, the agreements will only modify reporting of accounts to an “up and over” arrangement rather than requiring reporting directly over to the IRS. Thus, these agreements should not cause banks in Asia to delay the start of their projects. Project managers might only consider executing on their reporting and withholding systems based on the possibility of an agreement covering some or all of their jurisdictions. The regulations provide the detailed roadmap to the implementation of procedures for new accounts and the remediation of preexisting accounts in a manner which will meet the requirements of FATCA regardless of progress made or not made towards intergovernmental agreements.

PwC: Timothy Clough, Hong Kong Risk & Controls Solutions Partner
The Foreign Account Tax Compliance Act places a significant regulatory burden on Asian and other foreign financial services institutions to identify their potential customers who are subject to US tax obligations (US persons) and provide details relating to those customers to the US Internal Revenue Service (IRS). The intent behind FATCA is to keep individuals with US status (i.e. passport, green card, etc) from hiding income and assets overseas for the purpose of avoiding paying taxes on such amounts.

Specifically, in order to comply with FATCA, Asian institutions will likely be required to enhance their customer onboarding and 'know your customer' (KYC) procedures so as to ensure they identify and categorise US persons who wish to open an account with the institution. Furthermore, FATCA will require Asian institutions to use enhanced due diligence procedures to search their existing customer data to identify US persons. Where potential US persons are identified, the institution can generally be expected to reach out to those customers to confirm whether they have US status or not.

As a result, Asian institutions will need to make significant business process and technology changes and perform detailed due diligence procedures in order to comply with FATCA. Furthermore, Asian institutions will need to report on US persons to the IRS and explain to those impacted customers the new requirements.

KPMG: Charles Kinsley, Principal for Tax and FATCA Team Head
FATCA represents a significant challenge for banks. It requires them to provide information to the IRS in respect of their US account holders which they typically do not have. 

A failure to comply could result in the banks being subject to a 30% withholding on certain US sourced income, including gross sale proceeds, or being turned away by FATCA compliant banks. It is expected that complying with FATCA will cost banks and other financial service providers billions of dollars.

Aside from the time and cost concerns, certain Asian countries have strict privacy laws and other laws/regulations which, even if a bank wanted to comply, make it impossible to comply.

Ernst & Young: Rowan Macdonald, Leader of Asia-Pacific Financial Services Tax Team

It is important for the Asian banks to undertake a statistical review of their existing client data to determine how the new thresholds will affect their effort & investment to comply with FATCA.

A detailed review and understanding of the new rules for deemed compliance status could mean that the local banks in Asia would seek to be compliant in a much simpler way.

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