The recent signing of an intergovernmental agreement between Australia and the United States will reduce the compliance burden on Australian financial institutions, whilst improving tax information sharing between the two countries.
What is FATCA?
The United States’ Foreign Account Taxation Compliance Act (FATCA) is aimed at US taxpayers who avoid US tax on income earned on non-US assets that have not been declared to the US Internal Revenue Service (IRS).
In order to combat this perceived tax evasion, FATCA - which commenced on 1 July 2014 - imposes extensive reporting, due diligence and withholding obligations on financial institutions both within and outside of the US.
Failure to comply with these obligations may ultimately result in a 30% withholding tax on US-sourced payments made to non-FATCA compliant financial institutions. Practically, any non-US based financial institution needs to comply with these requirements if it intends to have any US dealings.
Broadly, FATCA will apply to a financial institution which:
- accepts deposits
- as a substantial portion of its business, holds financial assets for the account of others; or
- is engaged primarily in the business of investing or trading in securities, partnership interests, commodities or any interest in such instruments.
Accordingly, FATCA will not only affect banks, but may also impact entities such as:
- building societies and credit unions
- trust companies
- life insurance companies
- private equity funds, managed funds and exchange traded funds
Superannuation entities, government entities and certain small financial institutions will generally not be captured under FATCA. However, exempt entities that invest in offshore funds should consider the FATCA status of those offshore funds when investing. Proper due diligence should reveal whether interests in, and returns received from, offshore funds are subject to FATCA withholding.
The Australia-US intergovernmental agreement
On 28 April 2014, Australia and the US signed an intergovernmental agreement (IGA) that significantly reduces the burden for “Reporting Australian Financial Institutions” (RAFIs) in complying with their FATCA obligations. The IGA has become Australian law through amendments to the Australian tax legislation.
Under the IGA, RAFIs:
- will report information with respect to account holders who are US taxpayers
- are not required to report account holder information directly to the IRS, but rather to the ATO (the ATO will in turn provide this information to the IRS)
- will, generally, not have to deduct a 30% FATCA withholding tax on US-sourced payments to account holders that choose not to enter FATCA or to other non-FATCA compliant financial institutions
- will have more time to comply with FATCA reporting requirements.
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 RAFIs will no longer be expected to operate as de facto tax collectors for the IRS.
Next steps for compliance
The key obligations for RAFIs in complying with FATCA relate to registration, account holder due diligence and reporting.
Australian financial entities should by now be considering whether they need to register with the IRS for FATCA, particularly if they have any accounts held by US taxpayers and if they receive any direct or indirect US-sourced income.
From 1 July 2014, RAFIs are required to implement new account opening procedures to identify US account holders.
RAFIs should also begin conducting due diligence on existing clients to identify US taxpayers (unless those accounts are less than US$50,000). Due diligence must be completed by:
- 31 December 2014 for clients that are “prima facie” financial institutions
- 30 June 2015 for individual accounts over US$1million
- 30 June 2016 for individual accounts between US$50,000 and US$1million, and all other entity accounts that were not initially identified as belonging to “prima facie” financial institutions.
By 1 January 2015, RAFIs need to register with the IRS as a deemed compliant financial institution and obtain a Global Intermediary Identification Number (GIIN).
On an ongoing basis, RAFIs must:
- annually report account information to the ATO, in addition to payments made to non-FATCA compliant financial institutions (by 31 July for the preceding calendar year)
- report to US payors any US-sourced payments made to non-FATCA compliant financial institutions, so that the US payors may deduct the necessary FATCA withholding tax.
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 US under FATCA.
This cooperation will likely lead to an enhanced integrity in the tax system that may result in increased audit activities by regulators globally. Affected institutions should therefore not only act now to address the compliance obligations but also put in place a monitoring program to cover the transition and ongoing developments in this space.