The FATCA Act - How Inter-Governmental Agreements Will Operate

Colin Camp

Dion

25 March 2013

Editor’s note: As the international financial industry continues to adjust – or tries to adjust – to the provisions of the US FATCA Act (Foreign Account Taxation Compliance Act), this publication carries this short comment from Dion, the financial software solutions firm. It is written by Colin Camp, managing director, products and strategy, at the firm. The opinions here are not necessarily shared by this publication but it is pleased to add them to the debate about this important issue.

Even though the final regulations have been published, the sheer volume of “noise” around FATCA and the “will they, won’t they?” stories regarding the signing of inter-governmental agreements are creating a great deal of uncertainty in the market. This is added to, in no short measure, by the anti-FATCA lobbyists who are succeeding in raising questions about the integrity of the US legislation - particularly following rumours of China refusing to consider an IGA unless they receive more tax information on their citizens with US assets, and Russia becoming the latest state to attack the reach of the regulations.

In reality, the basic fact is that no-one knows what is going on behind closed doors between the US and other countries - and firms shouldn’t use IGAs as an excuse to hold off on FATCA compliance.

The intention of the IGAs is to ease the burden of the regulations on a country’s financial industry, and enhance existing tax cooperation arrangements with the US. Whether or not your country has signed an IGA has no bearing on FATCA compliance.

On the table

For many countries - especially those with major financial centres - an IGA is already on the table. But given the detail in the final regulations, the two templates for IGAs and the missing information that the industry is still waiting on from the US Internal Revenue Service, it will take time for government departments to digest everything, identify the local products and businesses that can be excluded and ensure the correct model agreement is in place. Working out the specifics will require liaison with local industry bodies and market participants, as well as input from the IRS and US Treasury. Even when countries are confident they have identified the correct model, the IGAs may require changes to or implementation of new local laws. This won’t happen overnight.

As the FATCA regulations stand today, foreign financial institutions need to register or sign an agreement with the IRS before October 2013 or they will not be included in its first list of participating FFIs due to be published in December this year. If they aren’t on this list, they not only face the risk of withholding tax on their US sourced transactions, but also the reality that some of their counterparties may refuse to engage with them going forward. It remains down to each individual FFI to get its own house in order in terms of implementing a FATCA compliance programme. And while this is on the agenda of many, it’s surprisingly only being actioned by a few.

The only thing financial institutions can do is put a programme in place to comply with the regulations as they stand now to ensure they avoid any potential repercussions down the line. That said, institutions must ensure their systems are flexible enough to cater for any last minute changes and be able to incorporate the subtleties contained within local IGAs where relevant. This is particularly important for institutions operating across multiple jurisdictions where IGAs may be signed at any point in their compliance programme.

When it comes to FATCA the advice is simple. Despite all the uncertainties, FFIs must ensure they are ready for the regulations. It’s not going to disappear any time soon and the clock is ticking.