The Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Bill (theBill), includes various legislative measures intended to pave the way for compliance with the US Foreign Account Tax Compliance Act (FATCA).
Specifically, the Bill (released in November 2013) proposes a framework for the implementation of:
the proposed intergovernmental agreement (IGA) between New Zealand and the US relating to FATCA compliance; and
(any future foreign account information-sharing agreements that may be entered into by New Zealand with other countries.
FATCA is a significant piece of legislation that was passed by the United States Congress in March 2010. FATCA establishes a mechanism for the supply of information to the US IRS to enable the cross-checking of tax returns of US citizens and residents who invest through accounts located outside of the US. FATCA requires US citizens or tax residents to report particular foreign assets to the IRS regardless of whether or not they live permanently in the US.
At an international level, FATCA also requires foreign financial institutions (FFIs) to annually report to the IRS about offshore accounts held by US citizens, US tax residents and certain other US entities with application from 1 July 2014. An FFI will include (unless specifically exempted from reporting) entities such as banks, insurance companies, custodial institutions, hedge funds, mutual funds, superannuation funds and private equity firms.
The primary concern for New Zealand FFIs in respect of FATCA will be in ensuring that they achieve "complying FFI" status. The sanction for being a non-complying FFI is that a 30% withholding tax will apply to all US-sourced payments or distributions of interest, dividends or sale proceeds made to that entity. There are significant obligations which must be satisfied in order to be a complying FFI, including identifying account holders who are US persons or foreign entities with substantial US ownership, and reporting that information annually to the IRS (or, as addressed further below, to the New Zealand IRD).
The New Zealand Government has entered into discussions with the US to enter into an IGA in relation to FATCA compliance. An IGA would mean that New Zealand FFIs would not be required to negotiate an individual FATCA agreement with the IRS, and would instead deal directly with the New Zealand IRD.
Under an IGA a government may agree to legislate to remove legal obstacles to compliance for the FFIs, such as privacy or anti-discrimination laws. The government would also allow FFIs to report to that government's taxation authority rather than to the IRS. That government's taxation authority may also gain some reciprocal rights to the account information of that country's citizens with bank accounts in the US. An IGA is also important in that it specifies the kinds of entities, products and services that will be exempt from FATCA obligations due to there being a low risk of involvement in US tax evasion.
It is anticipated that the New Zealand/US IGA will be heavily based on the reciprocal model IGA for countries with a pre-existing double tax agreement, which can be viewed here.
Commentary to the Bill notes that under the terms of the proposed IGA, New Zealand FFIs will be required to collect information on their customers who are, or are likely to be, US taxpayers. This information must then be sent to the IRD who will in turn transmit that information to the IRS through the existing exchange of information mechanism in Article 25 of the double taxation agreement between New Zealand and the US. The Commentary also states that the IGA will contain reciprocal rights for information to be sent from the IRS to the IRD.
Proposed legislative changes to accommodate the proposed IGA and FATCA
The proposed measures in the Bill relating to the anticipated IGA and FATCA compliance in New Zealand include the following:
A new Part 11B of the Tax Administration Act 1994 (the TAA) containing the following broad requirements:
due diligence obligations for New Zealand FFIs to identify potential US customers;
an obligation upon New Zealand FFIs to provide to the IRD any information which the IRD is obliged to pass on to the IRS under the IGA;
an obligation upon New Zealand FFIs to provide information to third parties (such as foreign competent authorities or other financial institutions) in situations detailed in the proposed IGA;
a requirement for New Zealand FFIs that meet certain requirements (with those requirements to be detailed in the proposed IGA) to register directly with the IRS; and
a prescribed form in which information is to be delivered to the IRD;
A requirement will also be introduced for an FFI to retain sufficient records to allow the IRD to assess compliance with Part 11B of the TAA; and
New "strict liability" and "knowledge" offences will be introduced relating to an FFI's failure to register with a foreign competent authority as required under Part 11B of the TAA.
Failure to comply with other obligations under Part 11B will be dealt with under existing penalty provisions in the TAA.
Clarification is also provided in the Bill and Commentary that:
The IGA (and any future foreign account information-sharing agreements) will be double tax agreements for the purposes of the Act. A consequence of this is that the IGA will generally override the Inland Revenue Acts, the Official Information Act and the Privacy Act; and
Any FATCA withholding that a person suffers (due to non compliance with the FATCA information sharing requirements) is not deductible, even where the general permission for deductibility is satisfied. The IRD's preliminary view is that the FATCA withholding will also not be available as a tax credit under subpart LJ of the Act as it is more akin to a penalty than a withholding tax.
The measures contained in the Bill (if enacted) will be effective as of 1 July 2014. From that date New Zealand FFIs will be required to comply with the due diligence and record keeping obligations detailed in new Part 11B of the TAA.
The IRD has advised that technical guidance will be published in the near future to advise New Zealand FFIs of their FATCA obligations. In the meantime, New Zealand FFIs should continue to review and implement FATCA due diligence and information reporting procedures in anticipation of the impending application date.