The purpose of the agreements is to help foreign financial institutions (FFIs) in these jurisdictions (partner FFIs) to avoid local “legal impediments to compliance, simplify practical implementation and reduce FFI costs”.
While the development of FATCA partnerships is significant, early reports have contained a number of misperceptions and missed the larger implications for future obligations of both FFIs and US financial institutions (USFIs).
Partner Country FFIs remain subject to FATCA due diligence and reporting rules
In the short term, each FATCA partner country must agree to: implement legislation to require all FFIs (unless excepted under the agreement or US guidance) in its jurisdiction to collect “the required information” (a term left undefined) and report it to their home country tax authority; enable such FFIs to apply the “necessary” due diligence rules; and transfer such information to the US on an automatic basis, rather than requiring a request for specific information about a particular taxpayer. Only in the “medium term” would the FATCA partners agree on common reporting and due diligence standards.
The clear implication is that partner FFIs will be required by their own jurisdictions to apply the FATCA due diligence standards and report the “required information” to their own tax authorities. It is unclear if these agreements will relieve partner FFIs from the extensive proposed reporting rules that apply, not just to US account information, but to essentially all payments subject to FATCA withholding regardless of whether any tax was actually withheld.
Partner FFIs escape some but not all passthru payment obligations
Partner FFIs would not have to withhold on passthru payments to (other FFIs in the same jurisdiction or another FATCA partner jurisdiction; or recalcitrant account holders (and such accounts would not have to be closed). Such FFIs are still required to withhold on passthru payments to third-country nonparticipating FFIs unless the FATCA partners work out an alternative that can satisfy the US Treasury that such an accommodation will not spawn “blocker” institutions harbouring US tax evaders. Accordingly,a contentious – and expensive – passthru payment obligation remains on the table for partner FFIs.
All FFIs in a partner jurisdiction must comply
An FFI typically may choose whether or not to be a participating or nonparticipating FFI. Some FFIs, for example, have considered either disinvesting from US assets or eliminating US accounts as a way to minimise FATCA compliance costs (regardless of how effective such strategies may be). However, the effect of a FATCA partnership agreement is that all FFIs in the particular jurisdiction must comply, unless they are excepted. Granted, the US has agreed to work with the FATCA partners to find more excepted entities in those jurisdictions, but FATCA carve-outs have been relatively modest to date.
Hidden danger for US financial institutions
The US, by contrast, agrees to impose reciprocal obligations on US institutions. US institutions would have to comply with still undetermined due diligence criteria to identify and report accounts held by FATCA partner citizens and entities to the IRS. Presumably these obligations would extend to bank deposit interest and other amounts that have, to date, been deemed outside of such obligations. USFIs should monitor how FATCA partnership agreements may directly affect them.
The good and bad effects on local law
FATCA partnership agreements appear to resolve the impediments to FATCA compliance from local legal restrictions since partner FFIs would be operating pursuant to the FATCA partner’s version of FATCA and reporting to the FATCA partner’s tax authorities. However, it is also probable that FATCA partners will commit to verify that partner FFIs comply with the new laws. Ironically, partner FFIs may have a higher compliance burden than non-partner FFIs, who will not be subject to any sort of external FATCA audit under the proposed FATCA regulations under typical circumstances.
The ticking time bombs: limited FFI branches and affiliates
The proposed FATCA regulations essentially give the FATCA partners – and any other jurisdiction that joins the group – until 2016 to adopt the above implementing legislation. At that time, any branch or affiliate in those jurisdictions that fail to comply with FATCA, perhaps due to local legal restrictions, would become FATCA non-compliant as would the rest of the worldwide affiliated group to which it belongs. The apparent purpose of the 2016 effective date for “limited FFI branches and affiliates” is to “encourage” FATCA partnerships to the greatest extent possible.
The problem of hybrid financial groups
It remains unclear how difficult it will be for a multi-national financial group, whether FFI or USFI, to deal with two parallel regimes – the standard, US-imposed FATCA regime in non-partner jurisdictions and a multilateral regime in partner jurisdictions. Financial institutions should assess their particular structure, procedures and IT systems in determining the advantages and disadvantages of the FATCA partnership development.
Whither FATCA? The road to tax intermediation
One should avoid viewing FATCA as simple US unilateralism. The policy goal of the US could not be clearer: to use FATCA to accelerate the development of an extensive multilateral reporting system. FFIs and USFIs should look beyond FATCA when modifying their existing procedures and IT systems to anticipate their role as tax intermediaries with information of interest to the tax authorities of many different countries.
John Staples (jstaples@bsmlegal.com) , Burt, Staples & Maner
