In March 2010, the Hiring Incentives to Restore Employment (HIRE) law was adopted in the US. An integral part of this law is known as the Foreign Account Tax Compliance Act (FATCA), which is set to come into force on 1 January 2013. FATCA is aimed at preventing tax evasion by US citizens and residents investing in the US through non-US financial institutions and offshore investment vehicles. FATCA will clearly have a significant impact on US-based as well as foreign companies that have US assets or clients.
FATCA expands the information reporting requirements imposed on foreign financial institutions and other financial intermediaries (“FFI”) that receive certain types of income from the US. Indeed, FATCA grants FFI the right to enter into an agreement with the US tax authorities (the Internal Revenue Service (IRS)). At the same time, FATCA requires the reporting of the name, address and the taxpayer identification number of each US financial account holder who is a US citizen or resident, as well as the account balance, the number or value, and, in certain cases, the gross receipts and withdrawals from the account to the (IRS). A FFI that enters into such an agreement becomes a participating FFI.
The penalty for recalcitrant account holders, non-participating FFI or non-financial foreign entities that do not disclose substantial US owners of US financial accounts is 30% withholding tax, which is applied to certain types of income from the US.
FATCA is a complex, 388-pages document, not taking into consideration the notes that elaborate on certain aspects. It raises many questions, from legal issues connected with the protection of personal data of investors and bank secrets, to the financial and time costs of implementing the US requirements. A special concern that FATCA triggers is its interrelation with the Russia-US double tax treaty that provides for a limited number of occasions for withholding tax. Therefore, the legitimacy of an additional unilateral 30% withholding tax on all payments to Russian residents is debatable.
In light of the above, a relatively long adaptation period is foreseen. Even though FATCA comes into force on 1 January 2013, limited withholding will start as at 1 January 2014, and it is planned to be expanded in a step-by-step approach. Given the significance of the requirements imposed on companies, however, there is no time to lose, as these companies need to work out and start implementing their strategy towards FATCA.
In this regard, support of the Russian Government would be helpful: a number of European countries (France, Germany, Italy, Spain and the UK) have concluded an intergovernmental agreement with the US, allowing for the centralised participation in FATCA through governments. This participation has the advantage of:
- The centralised transfer of data to the IRS by the national tax authorities instead of single entities;
- The commitment of the IRS to provide similar information on the European holders of European accounts in US financial institutions;
- Gathering the information by the national tax authorities without breaching the requirements of the national law; and
- Abolishing certain FFI penalties for the afore-stated European countries.
However, the Russian Government has not officially responded FATCA.
What should be done?
In case the Russian Government does not take any steps with respect to FATCA, Russian companies would be forced to cope with it themselves, i.e. either report their clients to the IRS or suffer a 30% WHT. In this regard, it is recommended to carry out FATCA due diligence to determine the applicability of it to specific types of income, accounts and account holders, and determine their practical effect on business activities.
A strategic analysis should be carried out to decide whether US individuals will be retained as clients and US investments retained in the investment portfolio. If the answer is “yes”, concluding an agreement with the IRS is advisable. If the answer is “no”, US investments should be exited, and contracts with US individuals should be terminated.
In the event that an agreement is concluded between the Russian Federation and the US, then Russian companies should monitor their client base and relations with the Russian authorities responsible for providing data to the IRS.