FATCA – the Foreign Account Tax Compliance Act – is a measure by the US Government to recoup US tax from funds hidden in offshore accounts.
It will create compliance issues for non-US financial institutions, including in New Zealand. These are to be managed through an Inter-Governmental Agreement (IGA), work on which is underway.
Why worry about FATCA?
The Act creates significant information collation and reporting requirements on foreign financial institutions (FFIs) to ascertain whether customers are US persons whose accounts should be reported, through New Zealand IRD, to the US IRS.
Before the new framework for IGAs, failure to comply would be penalised through a 30% withholding on any US-sourced income derived (and potentially on some other payments).
Against this background and the threat of losing roughly a third of their US income, a number of governments and FFIs worldwide have launched into action. This includes New Zealand with the confirmation last week by Revenue Minister Peter Dunne that New Zealand will seek to negotiate an IGA with the US.
The model IGA – goes some (but not all) of the way
Since last year, we have seen the release of guidance notes and draft proposed FATCA Regulations from the US. The IGA provides another route to compliance and is essentially an agreement to exchange information under which New Zealand would agree to report on accounts held by US persons in New Zealand, and vice versa.
The UK and the US have already signed an IGA to this effect. The main point of interest in the UK/US IGA is the specific products and entities that are included in Annex II of that IGA, being products and entities that are effectively not required to comply with FATCA (for example, certain retirement funds, UK government entities and financial institutions that have an almost exclusive UK resident customer base).
The IGA cannot stand alone. It requires each FATCA partner to enact domestic rules that allow FATCA to be implemented in those jurisdictions. The UK is busy putting these in place.
A number of New Zealand legal issues inherent in complying with FATCA have been identified. At a high level:
- the collection of information from customers and the reporting of that information to the US tax department is contrary to the principles in the Privacy Act 1993
- the requirement to “offboard” customers for failure to obtain requisite information could be seen as discrimination under the Human Rights Act 1993, and
- there is no legal authority in New Zealand for withholding on account of FATCA.
Helpfully, the model IGA goes some of the way to addressing these conflicts with local law. But the due diligence requirements under the IGA, while simpler, are materially the same as the position under the draft Regulations.
What is the current state of play?
The US Government has indicated that the key elements of the model IGA, including the due diligence requirements, are not up for negotiation. But there is still some uncertainty as to the extent that FFIs will need to rely on the US Treasury Regulations when they are released in final form.
In addition, the shape and form of any New Zealand rules implementing FATCA are as yet unclear. There is every prospect that FATCA compliance will, as a practical matter once an IGA and supporting New Zealand domestic legislation is enacted, be determined largely under New Zealand law and with interactions with New Zealand IRD.
From a New Zealand perspective, this seems a better outcome than compliance solely under US Treasury Regulations with enforcement by US IRS.
Under the model IGA, the key date for commencement of new FATCA processes is 1 January 2014, with certain requirements being staggered after that date (for example, reporting, withholding). The same timetable will apply under the draft FATCA Regulations.
We expect that the coming months will be important in terms of getting to grips with what FATCA will mean for New Zealand businesses and obtaining more clarity around the timing of transitional arrangements for the New Zealand/US IGA.
Key matters for New Zealand
- What will the final US Treasury Regulations say and how will those regulations affect what we know today? Somewhat unhelpfully these are not expected to be published until the end of the year.
- Will an IGA be signed between New Zealand and the US? If so, when? Inevitably there will be a number of rounds of negotiation, and it is reported that the US Government has already over 40 foreign governments all wanting to do the same thing at the same time. New Zealand’s IGA is most unlikely to be signed this year.
- What products and entities could New Zealand try to get exempted through Annex II? The focus will be products and entities that US persons are unlikely to have invested in or with. But the US also appears to have a particular concern with products that do not have investment caps. This could be a problem for New Zealand where the norm is not to impose express investment limits. Whether indirect dis-incentives (e.g. limitations of tax benefits) will be sufficient to satisfy US Government concerns is yet to be seen.
- What will domestic legislation look like? How will it fit with what the IGA says and what the final US Treasury Regulations will say? Changes will be needed to the Income Tax Act to require the collection and reporting of the relevant information. Carve outs from privacy and human rights legislation may also be required. New Zealand penalties appear likely to apply for non-compliance with registration and reporting obligations to the New Zealand IRD, which will on-report to US IRS. These will need to be determined under New Zealand law, suggesting the need for New Zealand IRD guidance on the precise nature of the New Zealand law obligations.
- Will there be a grace period for compliance given the tight timing in the model IGA and the time it could take for New Zealand legislation to be passed?
Issues to consider now
- What is your status under FATCA? (This may determine the scope of your obligations.)
- What are your obligations under FATCA? Will you even have any? How far will they extend?
- What systems and processes will FATCA impact in your business?
- How much lead-in time may be required to change things internally in order to implement FATCA (in light of other business priorities)?
- Are there any synergies to be gained by “piggy-backing” off new AML/CFT processes that need to be in place by 30 June 2013.
There are many intricacies and obscure parts to FATCA – the further one treads down the path, the more questions that seem to be raised with very few real answers.
We hope that the guidance from the US will lessen some of the uncertainty around the requirements.
A concerted industry effort is required in order to achieve FATCA implementation in New Zealand and enable businesses to operate effectively going forward in a post-FATCA world.