The Foreign Account Tax Compliance Act ("FATCA"): a tsunami in the entire financial services industry…and beyond

Cross-border Deloitte FATCA Group developed especially to follow up recent developments
25 Oct 2010

Diegem, 25 October 2010 - The Foreign Account Tax Compliance Act ("FATCA"), part of the HIRE Act signed by US President Obama on March 18 2010, has been designed to prevent US citizens and businesses from evading US tax by holding income-producing assets through Foreign Financial Institutions ("FFIs") or through Non Financial Foreign Entities ("NFFEs"). Under the new act, a punitive 30% withholding tax will be imposed on qualifying US source payments, unless tough information requirements are complied with. The new regulation will come into force as of January 1, 2013. FATCA will have a broad impact on businesses all over the world as they will likely need to make modifications to their internal systems, control frameworks, processes and procedures for timely compliance. Deloitte has therefore developed a global task force with skilled professionals, who are able to assist companies in preparing for FATCA in the best possible way. In Belgium, a team of dedicated professionals is already on the case as well.

The impact of FATCA

The legislative intent of FATCA is to ensure there is no gap in the ability of the U.S. government to determine the ownership of U.S. assets in foreign accounts. It is currently expected that FATCA would generate approximately 10bn USD on a yearly basis, over a 10 year-period. In addition, for Foreign Financial Institutions (FFI's), FATCA implies significant costs in terms of data gathering, reporting, adaptation of systems, training of personnel, etc.

All foreign entities receiving US source income may be affected by FATCA. FFI's include banks, insurance companies, clearing organizations, custodians, hedge funds, private equity funds and other investment vehicles. NFFEs include all foreign entities that do not qualify as FFIs. If the beneficiary is not FATCA compliant, the paying agent is required to enforce a punitive tax equal to 30% of the gross payment.

For Belgium, the direct impact of FATCA will be twofold. First of all, financial institutions (within the FATCA meaning of the term - the so-called "FFIs") will have to enter into a written agreement with the US tax authorities, and commit to providing the IRS (International Revenue Service) with appropriate documentation regarding their clients or shareholders. Secondly, non-financial institutions (within the FATCA meaning of the term) - the so-called "NFFEs") which receive US source income will either have to certify that they have no qualifying US shareholders or provide certain information to ensure appropriate identification of qualifying US shareholders. This information will be used by the US tax authorities to ensure that these US shareholders adequately comply with their US tax filing obligations (and therefore don't evade US taxes).

Michaël Mohr and Stéphane Jourdain, respectively Tax Partner and Tax Senior Manager at Deloitte Belgium, comment: "The scope of application in terms of qualifying payments is extremely broad, since it includes US source dividends, interest, royalties, rents, wages, fees, commissions, etc… Interesting to note is that, as opposed to the existing withholding tax rules, it also includes the gross proceedings of the sale of assets generating specific US source income".

Deloitte gears up for FATCA

It is fair to say that FATCA will create multiple challenges, which can be a.o. of a legal (e.g. compatibility with data protection legislation), technical (e.g. adaptation of IT systems to the new requirements) or tax (e.g. qualification of certain payments) nature. As such, it will require a multi-disciplinary approach to ensure appropriate compliance. Market players aiming towards full compliance with FATCA must be prepared to invest heavily in systems, reporting, training, etc., which to some may be extremely onerous. This is however the price for avoiding the punitive withholding tax, thus remaining attractive for US investors without penalizing the non US investors.

Michaël Mohr and Stéphane Jourdain: "Businesses should not wait until these rules come into effect to begin assessing their needs and associated costs for compliance. By performing the proper compliance risk assessment now and evaluating necessary modifications to their existing systems, organisations will be armed with the level of risk intelligence required to address compliance with FATCA's new withholding and reporting regime".

In order to keep track of developments and in order to help businesses to become FATCA compliant, a special Deloitte FATCA Group has been established. It will provide services such as tax analysis, tax risk management, assistance with IT implementation, legal analysis, trainings, assistance in communication, etc.

In order to create awareness about FATCA, Deloitte Belgium is organizing on 10 December 2010 a seminar with Belgian, US and Luxemburg speakers. The purpose will be to provide an introduction to the main FATCA features, and to highlight some of the practical implications that such legislation will entail.