Israel puts FATCA cost and compliance under scrutiny

The Israeli government has set up a team of experts to look at the impact of the US FATCA anti-tax management laws.

The government wants to know how the Foreign Account Tax Compliance Act (FATCA) will affect the country’s financial sector and how much compliance is likely to cost.

The team will also consider coming to a bilateral FATCA agreement with the US along the lines of the UK, France, Spain, Italy, Germany and Japan.

Ministry of Finance Director General Doron Cohen believes financial institutions in Israel implementing FATCA will be expensive and wants the committee to offer solutions to laws forbidding banks from disclosing customer details.

Deadline for compliance

FATCA demands foreign financial institutions (FFIs), like banks and insurance companies, must supply information about US taxpayers with offshore holdings to become compliant by June 30, 2013.

The law gives the United States more power than ever to force around 200,000 to 300,000 American citizens and green card holders in Israel to become tax-compliant.

FFIs that fail to comply with FACTA will have a 30% withholding tax imposed on any payments of US sourced income, as well as gross proceeds from the sale of securities that generate US source income.

FFIs will be required to identify all American customers with accounts holding $50,000 or more.

For account-holders with less than $1 million, FFIs will be permitted to rely on records already in possession to identify whether they are American, but for account-holders with more than $1 million, they will be required to make further inquiries.

Philip Stein, president of Israel’s largest US-related accountancy firm Philip L. Stein & Associates, explained FATCA will force almost every Israeli financial institution to become compliant.

Financial firms ditch US client

Banks in Israel have already started quizzing new customers about their US tax status.

Many smaller financial firms have investigated the impact of FATCA and have decided the cost of compliance is too much.

Many of these firms, explains wealth adviser London & Capital are ditching their US clients and refusing to take on new clients who have US tax links

The result is likely to be a large pool of ‘orphan’ US clients dropped by financial firms across the world.

London & Capital’s Daniel Freedman told trade financial publication International Adviser: “Assuming that firms can identify US-linked clients, they are left on the horns of a strategic dilemma: either create a compliant investment solution or do not. Such solutions must not only avoid toxic assets but also meet the onerous reporting requirements.

Challenge of working with US clients

“ Most firms have concluded the costs are too high and have made the commercial decision to exit the market, making their US clients orphan.In dealing with US clients, one has always to understand the challenges of working across the jurisdictions, and the regulatory and investment implications of doing so.

“Wealth managers which want to continue working with clients who have a US tax reporting obligation have had no choice but to invest heavily in systems capable of handling not only the sales aspects of the business but also its operations and – for tax and compliance purposes – more complex investment reporting requirements. This is expensive and time consuming and we expect it to result in a significant number of firms exiting the market.”

Unlike firms that are currently ditching US families and leaving them as orphans looking for advice, London & Capital are actively looking to take on US clients.

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