RETAIL BANKING | Roxanne Uy, Singapore

Here’s what Asian banks need to know about FATCA

We already know the huge impact, if not burden, the proposed FATCA regulations brings to Asian banks - but what else do we need to know about the new regulation? KPMG, Deloitte and PwC give their insights.

ABF: What do Asian banks need to know about FATCA?

Deloitte: Jim Calvin
Under FATCA, foreign financial institutions (FFIs) are required to report information about offshore accounts and investments held by U.S. taxpayers to the IRS annually. These institutions include banks, insurance and real estate companies, hedge funds, mutual funds, and private equity firms. FFIs must enter into agreements with the IRS. If they fail to enter into such agreements to report U.S. accounts, they will face a 30% withholding tax on U.S.-source income and sales proceeds.

Below are the main points and changes that Asian banks should note from the new proposed regulations:

1. The rules simplify due diligence procedures for certain accounts
The Treasury Department has modified due diligence procedures for pre-existing accounts to permit FFIs to rely on electronic searches for accounts ranging from $50,000 to $1 million. For accounts with a balance of more than $1 million, FFIs will have to do paper searches that would be limited to documentation, current account files, and certain correspondence. FFIs would also be required to question any relationship managers associated with these accounts to confirm that they don't have any knowledge that the client is a U.S. person. Searches are not required for accounts of less than $50,000 or for certain insurance contracts or entity accounts of less than $250,000. In many cases, including most instances of new account onboarding, banks would be able to rely on know your customer (KYC) and anti-money laundering (AML) rules they already have in place.

2. The rules provide some relief around reporting
The proposed rules give FFIs additional time to make adjustments to their systems for reporting U.S. income. Through 2014, FFIs would only have to provide identifying information (name, address, taxpayer identifying number, and account number) and the account balance or value of the U.S. accounts. Beginning in 2016, they will be required to report income. By 2017, the full transactional reporting will be required.

3. The rules give members of expanded affiliated groups more time to comply
These rules would add a three-year transition period to the expanded affiliated group requirement to comply with FATCA. The rules previously required that each FFI in an expanded affiliate group needed to sign up either as a participating or deemed compliant FFI in order for all FFIs in the group to be in compliance - meaning no one could participate if even one affiliate could not satisfy the requirement. The new rules now provide additional time for affiliates that are in restricted countries to enter into agreements. However, these restricted FFIs will still have to go through due diligence requirements with respect to their accounts. And, if they receive 'withholdable' payments, then they will be subject to withholding during this transition period.

4. The treatment of foreign passthru payments remains uncertain
Participating FFIs are required to deduct and withhold 30% of any passthru payment made to a recalcitrant account holder or non-participating FFI. Under previous Treasury and IRS guidance, payments were 'deemed' to be attributable to a withholdable payment based on the percentage of the participating FFI's total assets that are U.S. assets. As a result of concerns raised about the practical difficulties with this approach, there will be further consultation on foreign pass thru payments with the objective of reducing the compliance burden. To facilitate this, withholding on foreign pass thru payments has been deferred to 2017.

5. The categories deemed compliant FFIs has been expanded to include certain local FFIs and investment funds
Certain FFIs including banks, brokers and financial planners, and advisers that are licensed and regulated under local laws will be deemed to be FATCA compliant. This generally requires the FFI to have no place of business outside its home country, solicit customers only in its home country, be subject to domestic withholding and reporting rules for residents, and have at least 98% of accounts held by residents. This may be relevant to regional banks, brokers, and fund managers. Certain investment funds will also be deemed to be FATCA compliant.

6. These are proposed regulations, not final ones
The rules released by the Treasury Department and IRS are not yet finalized. Industry can still submit written or electronic comments to the Treasury Department and IRS by April 30. A public hearing is scheduled for May 15.

KPMG: Charles Kinsley, Principal for Tax and FATCA Team Head
In March 2010, President Obama signed the Foreign Account Tax Compliance Act (“FATCA”) into law to curb perceived tax abuses by U.S. persons with offshore bank accounts and/or investments.

The effective date for the new regime is January 1, 2013. This new legislation also includes a 30% withholding tax on foreign entities that refuse to disclose the identities of U.S. customers effective January 1, 2014.

As drafted, the definition of a Foreign Entity is extremely broad and includes foreign financial institutions, foreign branches of US financial institutions, insurance companies, hedge funds, private equity funds, and other collective investment vehicles.

The withholdable payment definition includes payments of US-sourced fixed and other annual or periodical income, as well as gross proceeds from the sales of assets that generate U.S. source interest or dividends.

The FATCA compliance requirements will necessitate changes to the controls and procedures associated with customer relationship as well as information systems.

FATCA introduces a series of concepts that are new to US tax regulation, including the classification of Foreign Financial Institutions (FFIs) and Non-Finance Foreign Entities (NFFEs). FFI’s will be required to identify US investors with investments in foreign funds, other collective vehicles, insurance companies, etc., and report the transactions to the IRS to comply.

Not knowing or receiving information is not a solution. The withholding tax can be applied where it is not possible to obtain documentation / information on an investor’s nationality, even if the undocumented persons have never received any form of US source income under these rules.

It is clear that the impact on institutions both within the US and around the world is significant. There are major implications on process re-engineering, existing regulatory procedures, tax and systems. In return, the Joint Committee on Taxation estimates that FATCA will prevent the evasion of $8.5 billion of taxes over the next ten years.

PwC: Timothy Clough, Hong Kong Risk & Controls Solutions Partner
FATCA generally applies to all foreign (to the United States) financial institutions whether they accept US customers or not. In order to enter into a contract with the IRS, which is a key requirement under the FATCA rules, financial institutions must agree to performing certain due diligence procedures on their existing customer data. These due diligence procedures are designed to identify indicators of US status within the data and records maintained by financial institutions. In effect, the US taxing authorities are requiring foreign financial institutions to prove the negative (i.e. they have no customers with US status) by undertaking specified procedures and to ensure that their onboarding controls are sufficiently robust to identify customers with US status going forward.

Asian institutions could face significant economic consequences if they fail to enter into an agreement with the IRS. Asian institutions that fail to comply with FATCA will potentially be subject to a new 30% US withholding tax on "withholdable payments". In addition, account-holders who don’t provide the institution with FATCA-required documentation would be deemed recalcitrant. The institution may then be obligated to deduct a 30% withholding tax on certain payments credited to their accounts or otherwise close the account. Each of these actions would also be subject to legal interpretations based on the contractual terms with the customer and local rules and regulations.


For an in depth discussion on FATCA, Asian Banking and Finance will hold a luncheon event on March 29 in Hong Kong. Join us as we dig deeper into this issue. Click here for more details.

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