The recent signing of the intergovernmental agreement between Australia and the United States will reduce the compliance burden on Australian financial institutions complying with FATCA, whilst improving tax-information sharing between the two countries.
What is FATCA?
The United States’ Foreign Account Taxation Compliance Act (FATCA) is the attempt by the United States to detect US tax residents (and foreign entities in which US taxpayers hold a substantial interest) using accounts with offshore financial institutions to conceal income and assets from the United States IRS. The intended effect of FATCA is to reduce tax evaded through these offshore accounts. In order to achieve this goal, FATCA - which commences on 1 July 2014 - imposes extensive reporting, due diligence and withholding obligations on financial institutions both within and outside of the United States.
The Australian Intergovernmental Agreement
On 28 April 2014, Australia and the United States signed an intergovernmental agreement (IGA) that will significantly reduce the burden for Australian financial institutions to comply with their obligations under FATCA. This is because, under the IGA:
- Australian financial institutions are required to report information about account holders who are likely to be US taxpayers to the ATO, rather than to the IRS
- more time is allowed for Australian financial institutions to comply with the reporting requirements
- there is no requirement for complying Australian financial institutions to impose a 30% FATCA withholding tax on any pass through payments to account holders that choose not to enter FATCA or to other non-FATCA compliant financial institutions, and
- superannuation entities (including pooled superannuation trusts) and government entities will generally not be captured under FATCA.
Together, these changes make FATCA for Australian financial institutions a solely reporting based set of obligations mandated by Australian legislation (through amendments to the Taxation Administration Act 1953). Failure to comply with the obligations locally will result in administrative penalties of up to 25 penalty units. However, it is important to note that failure to comply with the obligations may result in the Australian financial institution being deemed a “Nonparticipating Financial Institution” by the IRS leading to the imposition of 30% withholding tax on any US-source withholdable payments made to it.
Significantly, the removal of the requirement for withholding to be made on account holders that choose not to enter FATCA and non-FATCA compliant financial institutions means that Australian financial institutions will no longer be expected to operate as de facto tax collectors for the IRS.
The IGA is another step towards an increasingly high degree of international cooperation between governments and regulators. The IGA will help facilitate the bilateral sharing of tax information between the ATO and the IRS, with the likelihood that there will be a degree of cooperation between all countries entering into IGAs with the United States under FATCA. This cooperation will likely lead to an enhanced tax system integrity that may result in increased audit activities by regulators globally.
Next steps for compliance
The key obligations for Australian financial institutions in complying with FATCA relate to registration, account holder due diligence and reporting.
Australian financial entities should consider whether they need to register with the IRS for FATCA, particularly if they have any accounts held by US tax residents and if they receive any direct or indirect US source income.
Existing Australian foreign financial intermediaries (FFIs) will need to register with the IRS through their Online Portal by 1 January 2015. As a result of the Australian IGA, Australian FFIs that register with the IRS will become “Registered Deemed Compliant FFIs” and be provided with a Global Intermediary Identification Number (GIIN).
To assist with initial compliance with FATCA, fund managers or trustees may register with the IRS as sponsoring entities for one or more “sponsored entities” (namely, funds). The sponsoring entity is responsible for the due diligence and the reporting obligations for their sponsored entities. Accordingly, sponsored entities will not need to obtain their own GIIN until 1 January 2016. Until this date, sponsored entities will be able to use the GIIN of their sponsoring entity, but will need to register with the IRS and obtain their own GIIN after 1 January 2016.
Account holder due diligence
Under FATCA, Australian FFIs are also required to undertake due diligence of new and pre-existing accounts. Accounts held with Australian FFIs as at 1 July 2014 will be considered “pre-existing” accounts for the purposes of due diligence obligations. To facilitate compliance, several deadlines have been provided for completing the due diligence based on the account type. Australian FFIs will also be required to implement new account opening procedures to identify US account holders from 1 July 2014.
By 31 December 2014, due diligence must be completed for pre-existing accounts prima facie FFIs held by Australian FFIs (i.e. accounts of institutional clients). By 30 June 2015, due diligence must be completed for pre-existing “high value” individual accounts (accounts valued at over US$1 million). By 30 June 2016, due diligence must be completed for pre-existing “low-value” individual accounts (accounts valued at between US$50,000 and US$1 million), and for accounts of entities not identified as being FFIs.
Due diligence is not necessary for pre-existing or new accounts of values below US$50,000.
Information collected on US account holders is reported directly to the ATO. For the purposes of FATCA reporting, the first year-end date is 31 December 2014. Under the IGA, Australian FFIs must file their 2014 calendar year FATCA reports with the ATO by 31 July 2015.