Confusion still reigns over how to implement a new US law aimed at revealing the financial assets of US taxpayers in foreign countries.
This is despite the US Treasury unveiling its ‘final rules’ recently on how financial institutions can implement the Foreign Account Tax Compliance Act (FATCA) which is US legislation to compel foreign financial institutions (FFIs) to disclose the account details of their US taxpaying clients.
However, there are still tens of thousands of banks, insurance companies and fund managers worldwide are still confused about how to apply FATCA.
For institutions in many countries, the act of complying with FATCA’s demands would lead to them breaching laws – mainly on data protection – and so many governments are negotiating bilateral tax deals to clarify various issues.
Countries that have so far signed up allow for their institutions to hand over the requested information at government level which is then traded for information about their taxpayers in the US.
Concern over fines
The big issue for many of the world’s 300,000 financial institutions is that they have to comply with FATCA by January 2014 which means many will not have a bilateral tax arrangement in place with the US.
Without such an agreement, the financial institution cannot send information to the Internal Revenue Service (IRS) without committing a crime in their country.
In turn they face a hefty fine of a 30% withholding tax on all transactions between the institution and the US.
One country which has flagged this up as an issue is Australia where the final rules for implementing FATCA have caused concern.
A spokesman for accountancy firm Ernst and Young said: “The impact of regulations on Australian institutions is far from certain but the final rules have helped bring clarity to the situation.
Struggle to beat deadline
“Now many institutions are waiting for the details of a potential Intergovernmental Agreement (IGA) between Australia and the USA to help understand the impact of FATCA.”
A spokeswoman for fellow accountancy firm KPMG said: “The regulations bring certainty but there are still issues over the timeframe involved for many institutions who will struggle to meet the first deadline.”
Martin Dobbins from financial firm State Street said: “The big question now is how IGAs come into play and how their local legal requirements meet the IRS requirements.
“As more countries sign up to FATCA, the clarity becomes clearer but while people focus on what FATCA wants from them, IGAs are asking the IRS for information in return and they too are having to create the infrastructure to do that.”