New Zealand financial institutions’ FATCA obligations are clarified with today’s signing of a NZ/US intergovernmental agreement (IGA). The long-awaited agreement comes not a moment too soon, with the 1 July implementation date just over two weeks away.
FATCA’s global reach
FATCA (short for Foreign Account Tax Compliance Act) is a US initiative designed to target tax evasion by US taxpayers with assets hidden offshore. It requires financial institutions around the world to identify and report information on accounts held by US persons or risk a 30% withholding on US sourced income. Regardless of whether they invest in the US market, non-compliant financial institutions could be “shut out” of transactions with compliant counterparties because of the global reach of FATCA and the way in which it operates.
Under the IGA, the New Zealand government agrees to implement rules to require and enable New Zealand financial institutions to comply with their FATCA obligations. In exchange, the US government agrees to treat all New Zealand financial institutions as deemed compliant.
Comparison with the Model IGA
New Zealand financial institutions are likely to have designed their FATCA compliance programmes on the basis of the model IGA released by the US Treasury in November 2013. Fortunately, as expected, the NZ IGA is not materially different from the November model. Consistent with US Treasury practice to date, New Zealand-specific exemptions are mostly set out in the Memorandum of Understanding that accompanies the IGA rather than in the IGA itself.
Key points to note about the NZ IGA and Memorandum of Understanding are:
- There are some New Zealand-specific exemptions from FATCA, including for:
- donee organisations and registered charitable organisations
- entities that manage or operate an employee stock option or share purchase plan if they are not otherwise a financial institution
- The New Zealand Superannuation Fund, the Guardians of New Zealand Superannuation and any wholly-owned subsidiary authorised to carry out their investment functions
- Maori authorities as defined in the Income Tax Act 2007, and
- tax pooling accounts as defined in the Income Tax Act 2007.
- There is no specific exemption for KiwiSaver funds, but it is expected that these funds would qualify for the exemption for “treaty-qualified retirement funds”.
- Designated settlement systems under the Reserve Bank of New Zealand Act 1989 (which includes NZ Clear) will not have any reporting obligations in relation to securities registered with them if the securities are held by or through one or more financial institutions. Instead, the other financial institutions would be responsible for any necessary reporting.
- Australian residents are counted for the purpose of meeting the 98% local client threshold in the exemption for “financial institutions with a local client base”.
- New Zealand Inland Revenue must notify the US Treasury if it has reason to believe that minor or administrative errors by a New Zealand financial institution may have led to incorrect or incomplete reporting or otherwise infringed the IGA. The US Treasury may also contact NZ financial institutions directly if it believes that there are such minor or administrative errors.
- The NZ IGA does not contain the two alternative transitional due diligence procedures provided for in the updated model IGA released by the US Treasury last week. The only alternative transitional procedure that is likely to be relevant in the New Zealand context is one that allows financial institutions to treat entity accounts opened before 1 January 2015 as pre-existing accounts. New Zealand should be entitled to the benefit of that alternative procedure under the most favoured nation clause in the IGA once there is another signed IGA that contains that provision. Given the fast approaching 1 July implementation date, however, this procedure is likely to be too little, too late for most New Zealand financial institutions.
Legislation expected to be passed next week
The IGA (and FATCA) will be brought into New Zealand law by amendments to the Tax Administration Act 1994. The amendments are contained in the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill that is currently before Parliament. The Bill is expected to be passed next week when the house reconvenes.