Global reach

The Foreign Account Tax Compliance Act (FATCA) is complex, wide-ranging, and can be expected to have an impact on private clients globally.

FATCA is a new United States tax law that will effectively come into force on 1 July 2013. Although a US tax law, ?it could affect almost all financial services organisations categorised as either non-financial foreign entities or foreign financial institutions. Such entities include private banks, investment funds, trusts and passive investment companies regardless of where they are based in ?the world.

Penalty charge

These financial businesses will need to plan and progress implementation projects in time to meet the first FATCA deadline of 1 July 2013 for entering into a foreign financial institution (FFI) agreement with the IRS. Businesses that are affected that do not comply will face a potential 30 per cent withholding tax not only on US income, but also on the gross proceeds from the sale of US source assets. This is financially costly in itself, but non-FATCA compliant businesses may see themselves cut off from US business opportunities in the future as FATCA compliance will be a prerequisite to be able to work with many organisations.

Compliance will involve entering into an agreement with the IRS, identifying US accounts and the reporting of an annual return to the US authorities detailing all US accounts. For private clients, this will involve the provision of greater information to their bankers, trustees, investment funds and other similar financial businesses where they have assets and investments.

This may sound simple, but even the process of identifying all US accounts will be lengthy for some businesses. There are seven matters that financial service businesses must search for with respect to their clients. These are known as US idicia and include whether clients have a US place of birth, phone number, mailing address, power of attorney or standing instructions. If any of these indicia are found, then the client will need to produce a US tax document to establish that they are not a US taxable person or entity.

Direct and indirect investments will need to be monitored to identify where US assets are held. The process leading up to the submission of the annual return and build out of a withholding functionality is likely to be lengthy, complicated and costly. Some firms may manage their FATCA compliance in-house or outsource all or part of ?the process.

In practical terms, the implications of the law are numerous. Trust companies will have to review each trust for which they are a trustee and consider the potential FATCA impact. Many trusts will themselves be regarded as an FFI. Where trusts are treated as FFIs, it should be possible for them to enter into ‘full’ FFI agreement with the IRS, although many trust FFIs should fall within the definition of ‘owner-documented FFIs’.

An owner-documented FFI does not need to enter into an agreement with the IRS or report annually. However, such owner-documented FFIs will be required to provide upstream banks with a withholding certificate, annual owner-reporting statements, and documentation for each individual as well as lower-tier trusts and other entities.

Individual impact

For private clients, the impact will depend on whether they have any US connections and whether they hold direct or indirect investments or derive income from a US source. FATCA directly affects a private client’s private bankers and the trustees of any trusts or funds in which they invest.

Clients who are not subject to US tax, but have a US connection, will need to obtain a form from the US confirming that they are not so subject in order to avoid withholding tax on their US investments.

Private clients should prefer their bankers, trustees and investment funds to be FATCA compliant. Take a simple example, a private client with no US connections who has an investment in an investment fund with certain US assets will suffer 30 per cent withholding tax on any US proceeds arising if the investment fund is not FATCA compliant. This is because 30 per cent of the proceeds will be withheld to the investment fund with only the net amount being passed up to the investors.

We are getting many enquiries about FATCA from businesses, including trust companies, and are speaking to people who are now trying to understand its precise requirements and implications. However, in the Channel Islands, we are finding that trust companies appear less prepared. Banks and asset managers are further ahead with their impact assessments and are preparing to implement the required internal system changes that will address their additional reporting requirements, however most trust companies are not yet at that stage.

The question that naturally arises ?is whether financial institutions will ?be tempted to avoid US investments because of FATCA. I think that unlikely, since FATCA is so wide-reaching the majority of international investors will ?be affected by it and will not want to avoid the opportunities the US marketplace provides.

Furthermore, after 2017 there is a possibility of the US deciding to tax non-US assets, unless an institution is FATCA registered. For private clients, it is important to ensure that their banks, trusts and funds are becoming FATCA compliant, and accepting that more information will have to be supplied.

Will other countries follow suit? There is no indication at present, although tax compliance is developing in many guises across a number of jurisdictions. Therefore, it would not come as a surprise if other countries introduced something similar.

• entering into an agreement with the IRS;
• the reporting of an annual return to the US authorities that details all US investors known to be involved with the financial institution;
• the withholding and payment of tax owed.