IRS could struggle to reciprocate on FATCA IGAs

InvestorsLegalOperational RiskPrime BrokerageRegulation
09 Oct, 2012

The IRS could struggle to reciprocate details on non-US accountholders in US financial institutions with countries which have signed intergovernmental agreements (IGAs) on FATCA, it has been warned.

FATCA could lead to headaches in Washington

A well-placed source in Washington circles said the IRS was facing budget cuts from Congress, and would be hard-pressed to meet its obligations with countries which have signed IGAs.

“The IRS has a huge amount of work to do if it is to meet these obligations. IGA obligations will cost a lot of money and will require the IRS to set up systems and upgrade their IT so they can provide the relevant data to signatory countries. It will be another layer of workload for the IRS to handle,” said the Washington-based lawyer.

IGAs stem from accusations that FATCA was one-way traffic in favour of the US. The US is in the process of signing IGAs with several countries including Germany, France, Spain and Italy whereby in exchange for full FATCA cooperation, US authorities will provide these countries with details on their own recalcitrant taxpayers in US financial institutions.

The UK signed the inaugural IGA with the US on September 12, 2012 while Ireland is likely to follow suit shortly.  Different IGAs are also being negotiated with Switzerland and Japan in what is likely to sow further confusion into an already complicated process for the IRS.

The IRS, excluding the reciprocal agreements with third countries, is going to be inundated with data on anywhere between 100,000 and one million foreign financial institutions. “The IRS does not have the manpower to handle the huge volumes of work it has been assigned let-alone deal with these IGA requirements on top of it,” said the lawyer.

However, the lawyer warned financial institutions not to write off the agency just yet. “FATCA implementation is a high priority for the IRS, and the agency has demonstrated time and time again that it can meet a challenge when it is required to do so, even in the face of budget constraints and limited resources,” added the lawyer.

Others agree the IRS is aware of the challenges ahead. “The IRS recognises the challenge of becoming a clearing house for every country which has signed an IGA with US authorities,” said Ken Owens, assurance partner at PricewaterhouseCoopers in Dublin.

There are also data privacy concerns. Robert Mirsky, head of the hedge funds group at KPMG, speaking in July, said IGAs presented a conundrum for US authorities, adding the agreements might breach US data privacy laws. Mirsky said US authorities had demanded assurances from third countries that the information they supply be strictly used only for tax purposes and kept confidential.

The US has a non-reciprocal IGA version as well whereby US financial institutions will be under no obligation to supply data to third countries with weak tax regimes and unsound privacy safeguards.

FATCA has alarmed financial institutions including hedge funds. Failure to comply with FATCA will result in a 30% withholding tax on US-source payments to non-participating FFIs.

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.

The Joint Committee on Taxation in Congress predicts FATCA could raise approximately $8.5 billion for government coffers.

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