Inter-governmental cooperation on FATCA could lead to delays to the regulation

19 Apr, 2012

Foreign jurisdictions contemplating inter-governmental cooperation with US authorities on FATCA could ironically struggle to become compliant with the rules in good time, a major Washington law firm has warned.

US Treasury and five EU countries (UK, France, Germany, Spain, Italy) are currently negotiating FATCA compliance amid concerns the all-expansive rules violate EU data protection legislation. One potential compromise could be for Foreign Financial Institutions (FFIs) in these countries to pass information about their clients to national regulators, who in turn would submit the data to the Internal Revenue Service (IRS).

“Jurisdictions considering inter-governmental cooperation on FATCA could find themselves getting delayed and unable to reach the original FATCA implementation deadline of January 1, 2013. If national regulators want FFIs to supply data on their clients, they may need to pass legislation enabling this, which could be time consuming,” said Mary Burke Baker, government affairs advisor at K&L Gates.

Furthermore, developing infrastructure to cope with the influx of information, as well as standardising the data between these five EU countries, could be a challenge.  “Such changes take time, and it is unlikely to be ready in time,” she added. “Ironically, FFIs in countries which don’t have agreements with the US in place would find it easier to comply in time,” said Burke Baker.

The US has reportedly been offering deal-sweeteners to these countries in exchange for FATCA cooperation. Some have argued if the IRS were to supply information about third countries’ own recalcitrant account holders and non-tax payers, it could bolster the likelihood of a final agreement.

Interestingly, the US recently announced (effective April 19, 2012) final regulations pertaining to reporting US interest paid to “non-resident aliens”. These rules will require US financial institutions to report interest payments paid to non-US citizens on US accounts to the Internal Revenue Service.   According to Burke Baker, “the US could then supply this information to countries with which the US has entered into a Tax Information Exchange Agreement (TIEA).”  She added this rule was invariably tied to US efforts to garner greater international cooperation over FATCA.

Under FATCA, FFIs which include hedge funds, must enter into an agreement with the IRS to supply detailed information on all of their US clients as part of the US tax authorities’ clampdown on tax avoidance among wealthy Americans. Some Congressional figures anticipate the rules could generate up to $100 billion for government coffers although these figures have been disputed by industry participants.

Failure to comply with FATCA will result in a 30% withholding tax on US-source payments to non-participating FFIs.  Hedge funds will be required to disclose the details of all investors, not just US clients, to fulfil FATCA’s compliance requirements. Counterparties and prime brokers will be forced to have compliance requirements in place stipulating their hedge fund clients are obeying the rules.  A 2011 survey by KPMG revealed just 32% of financial institutions expected to be fully compliant with FATCA come January 1, 2013.