Asia appears to be slightly behind Europe in getting ready for sweeping US anti-tax evasion regulations known as FATCA, but all regions need to push ahead in preparing for these rules, a global accounting firm says.

Asian firms appear to be behind their European counterparts in getting ready for the US FATCA tax compliance regulations, although all regions have much work ahead to prepare, accountancy firm WeiserMazars argues.

The Foreign Account Tax Compliant Act requires institutions, including what are called Foreign Financial Institutions to identify any US clients as such and provide such data to the US Internal Revenue Service. If they do not comply, the US will impose a 30 per cent withholding tax.

Since FATCA was passed by the US Congress more than a year ago, it has prompted fears that some institutions will refuse to deal with any US clients because of the compliance burden. So far, much of the commentary about the impact on expat US citizens has come from the UK and Switzerland, rather than from Asia, particularly given the US crackdown on Swiss banking and high-profile cases such as those of UBS and Wegelin.

Asia may not have been as vigorous in talking about Asia, but that is beginning to change, Susan Grbic, director at WeiserMazars, told this publication in a recent telephone interview from her office in New York. 

“With respect to India and China, they are just starting to wake up to the fact that FATCA is here to stay,” Grbic said.

Her colleague, Stephen Brecher, a partner at the firm, agreed. “Some companies there [in Asia] may hope that their governments could negotiate the situation so that the legislation does not go ahead,” he said.

Early in February, the US and five European nations agreed to try and cut threatened heavy compliance costs of enforcing FATCA by co-operating on how data is transferred to the US. But no Asian countries were mentioned in that agreement.

However, there may be grounds for other jurisdictions in regions such as Asia to enter such an agreement with the US about FATCA, according to Withers, the law firm. It said the US is negotiating similar agreements with China and Japan; Hong Kong and other locations, given the number of US expats living there, are also likely to make such agreements, it said. To underscore Withers' view of the importance of FATCA in Asia, it recently appointed a specialist in this field for its Singapore office. (To view recent articles about Asia and FATCA, click here, and here).

The scope of the act

Documents from the US Department of the Treasury and Internal Revenue Service have also elaborated how FATCA measures will be enforced. Due diligence checks will not affect existing clients with $250,000 or less on certain types of account, for example.

According to some industry figures, there are more than seven million expat US citizens but fewer than half a million of them file a US tax return. As the US taxes citizens on a worldwide basis – unlike the practice of most countries – the potential tax net compliance costs are large.

The worldwide system of tax, seen by some commentators as oppressive, has a strong defender in WeiserMazars’ Brecher, who argues that more and more nations are likely to seek more international co-operation in preventing tax evasion.

“It’s often said that the US tax system is one of our best exports. The OECD is assessing offshore voluntary compliance on a global basis,” he said.

He said other governments will look at the US experience in judging how to set their own processes for preventing tax evasion. “We are going to see increasing numbers of non-US governments looking at what happens with their own citizens [living abroad]. There is going to be broadening out of this area regarding global [tax] reporting for high net worth individuals,” he said.

As if to bear out his prediction, the French government’s recent reforms of its trusts law increased disclosure requirements, such as in case where a beneficiary or trust settlor lives outside France. The rule has been dubbed a French “mini-FATCA”.

No time to waste

Brecher stresses that financial institutions do not have the option of waiting on events.

“We need to get this message [about the importance of FATCA] to the industry around the world. Up until the proposed regulations came out, there has been a bit of a 'wait and see' approach by a significant part of the potentially-affected industry,” he said.

“There are institutions where they are evaluating not to cater to Americans outside the US. There are Swiss private banks who don’t want any more Americans. I believe that Americans will still have access to financial services although they might have to look a little harder. I don’t think they will be closed to getting bank access,” Brecher continued.

“The issue of reporting is not just about tax practice,” Brecher said, stressing that there are other issues requiring greater exchange of information. He pointed to the exchange of data recently agreed, for example, between the governments of Mexico and the US concerning co-operation to enforce Mexico’s exchange controls regime.

Phased

“These proposed [FATCA] regulations adopt a scaled approach,” she said, adding that there are, despite some adjustments, unlikely to be major changes to the launch timetable for the legislation,” said Grbic. “We are telling clients that 2012 is the year to do impact analysis,” she said.

Beginning in January 2013, any firms wishing to become participating FFIs may enter into agreements with the IRS and demonstrate they have processes into place.

She said that a key issue for clients now is to review their onboarding process for new clients. (Onboarding refers to the process of new client acceptance which currently needs to comply with know your customer and anti-money laundering regulations in the US and similar standards in other countries).

“They [firms] are going to have to look at their current KYC and other procedures. These procedures are not going to provide the level of information, however, to comply with FATCA,” she said.

One important issue will be ensuring total transparency over the ultimate the beneficiary(ies) of trusts and other vehicles, such as Caymans-registered funds and the like, Grbic said.

Brecher stressed the importance of firms appointing what is called, under the FATCA legislation, a “responsible person” to take control in making sure compliance is set.

“With funds, I don’t think they have yet really focused on this,” he said.