FATCA coming, financial institutions should be preparing
Monday January 24 2011 | 08:07 PM

A 30 percent loss of the gross proceeds from the sale of a security will be a reality for non-U.S. financial institutions and certain U.S. account holders when the proposed Foreign Account Tax Compliance Act (FATCA), comes into effect January 1, 2013.

The withholding for such proceeds is one feature of the reporting regime coming soon to a financial institution near you. Melinda Schmidt, director of tax information and withholding practice at KPMG New York, said that perhaps by June the act’s regulations will be out for another round of industry comment, but the countdown to implementation is on.

“We think that following the next comment period will be final regulations,” Schmidt said. “We really need final regulations. If the final regulations got issued at the end of, say 2011, there’s only a year after that until the effective date, and everybody is going to need that year.”

Schmidt was one of the presenters at the International Business and Finance Summit (IBFS) presented by the Bahamas Financial Services Board (BFSB) in Freeport, January 21–23. She, and her local colleague Annie Chinafat, audit principal at KPMG Bahamas, shared some of the key features and requirements of FATCA as currently proposed, in an exclusive interview with Guardian Business.

Under FATCA, a reporting regime, foreign financial institutions (FFIs) must either enter into compliance agreements with the U.S. treasury, or suffer a 30 percent withholding on “withholdable payments”, which includes U.S. source income and proceeds such as interest, dividends, original issue discount (OID), royalties, rent, as well as the gross proceeds from the sale of securities.

The qualified intermediary (QI) regime was also focused on payments to U.S. citizens, but its depth was limited to the direct owner of accounts. A structure like a Bahamian international business company (IBC) was considered a beneficial owner and could draw a corporate veil around its shareowners. If an IBC was owned by a U.S. citizen, that person was not required to be disclosed.

“In FATCA, that all changes,” Schmidt said.

Since the regulations have not been finalized, many of the details of the regime have yet to be defined. However, in late August 2010, the U.S. Internal Revenue Service (IRS) issued notice 2010-60, describing how the regulations would work and providing insight into how regulators were thinking, according to Schmidt.

“At this point the best thing for an FFI to do is to really step back and say, okay if I’m going to be in this – and the majority probably are going to need to be in this – where are my gaps as I know them today?” Schmidt said. She said that enough is known through the law and the notice for FFIs to start looking at their operations, the make-up of their client base, and the information that currently exists. If proposed regulations are issued in June, it will be time to get busy building compliance plans, she added.

Under the proposed regulations, a participating FFI would have several obligations: The collection of documentation on all substantial owners of accounts; observance of new due diligence standards (as yet undefined); 30 percent withholding on account holders who do not consent to disclosure (recalcitrant account holders); IRS reporting at new, not yet defined standards; and submission to some kind of verification, review, or audit process, also presently undefined.

One aspect of the FATCA regime is that it will also dig into non-foreign financial entities (NFFEs) to see if there are U..S citizenss substantially owning them, Schmidt said. If a Bahamian company that is not an FFI has a U.S. citizen owning 10 percent or more of the business and has received a U.S. withholdable payment, for example, under FATCA that U.S. owner would be identified and reported up.

Though the test for substantial ownership is 10 percent in most cases, the test for funds is 0 percent – any U.S. citizens would place them in the substantial ownership category.

Institutions that choose to become an FFI may find a selling point in the fact that they remain in the U.S. market, as the 30% withholding would apply to recalcitrant accounts. Like the QI regime, Schmidt and Chinafat said that there will be opportunities for businesses and entrepreneurs as well. They mentioned form providers, legal advisors, accountants, and audit advisors as potentially benefiting from the regime – as well as FFIs who build processes to be FATCA compliant.

“People should become more familiar with FATCA now. Understand it,” Chinafat said. “When the [final regulations] come out, at least we are ready for [them]… don’t procrastinate.”

FATCA is a part of the Hiring Incentives to Restore Employment (HIRE) Act signed into law by U.S. President Barack Obama in March 2010.