In March 2010, the FATCA was enacted in the United States ("US") for the purpose of preventing the non-compliance of US persons with US taxation laws through the participation and cooperation of foreign governments and financial institutions.

FATCA Implementation in Malaysia

On 30 June 2014, Malaysia reached an agreement in substance with US to implement the FATCA, based on the Model 1 Intergovernmental Agreement ("IGA"). However, the IGA is still in the process of finalisation and as at the time of writing, the Malaysian government has yet to announce a date for the finalisation of the IGA.

Under the framework of the Model 1 IGA, Malaysian-based Financial Institutions ("MYFIs") are to report the required account information on US persons to the Inland Revenue Board Malaysia ("IRBM"), who will then share this information with the US Internal Revenue Services ("US IRS"). The Malaysian government has recently announced that the deadline for the submission of reportable information for the years 2014 and 2015 by MYFIs to the IRBM is 30 June 2016.

In anticipation of the finalisation of the IGA, the IRBM has taken certain steps to prepare for the implementation of the FATCA in Malaysia. On 15 March 2015, the IRBM published the draft Malaysia-US IGA Guidance Notes ("Draft Guidance Notes") on their website, which provide in detail the new due diligence and reporting obligations for MYFIs in relation to the FATCA. The Draft Guidance Notes were open for public consultation during the period from 15 March 2015 to 15 April 2015. Following the comments received during the public consultation period on the Draft Guidance Notes, the IRBM has issued a revised version of the Draft Guidance Notes on 11 September 2015 ("Revised Draft Guidance Notes").

Furthermore, the IRBM had also conducted testing sessions on the FATCA International Data Exchange Service ("IDES") system, for MYFIs which had completed the IDES enrollment. The IDES system is an online data transmission system that allows the US IRS to exchange taxpayer information with foreign tax authorities and is also the system through which MYFIs will have to file their FATCA reports.

Overview of the FATCA

Under the FATCA, MYFIs are required to undertake new obligations to identify US accounts and report the requisite information to the IRBM. Section 6.1.2 of the Revised Draft Guidance Notes defines a MYFI as one of the following:  

  • a custodial institution;
  • a depository institution;
  • an investment entity; or
  • a specified insurance company.

All MYFIs as listed above are required to undertake the FATCA reporting obligations and are to be identified as Reporting MYFIs, unless they fall under one of these categories:  

  • an Exempt Beneficial Owners as defined in section 8.2; or
  • a Deemed-Compliant MYFIs as defined in section 8.8.

If a Reporting MYFI does not comply with these obligations, the MYFI could possibly be treated as a Non-Participating Foreign Financial Institution ("NPFFI") by the US IRS and could possibly be subject to 30% withholding tax on all US-sourced payments at the discretion of the US IRS. The US IRS retains a list of NPFFIs that require other participating FATCA-compliant financial institutions to report on should they hold an account with them. A NPFFI is defined as a financial institution that is not participating under the FATCA. Additionally, penalties may also be imposed by the IRBM against non-compliant MYFIs. The details of these penalties have yet to be revealed by the IRBM.

Any other entity that is not a MYFI will then be determined as Non-Financial Foreign Entities ("NFFE"), which are then further sub-categorised as either Active or Passive. Whilst NFFEs are not under any obligations to register with or report to the IRBM or the US IRS, it must still determine its own FATCA / IGA classification and, where necessary, self-certify its classification to the Reporting MYFI that maintains its financial accounts. This is an important step as only a Passive NFFE will need to be assessed by Reporting MYFIs when undertaking the due diligence procedures under the IGA. This is to ensure that the Controlling Persons of the Passive NFFE are not US persons who fall under the FATCA.

FATCA Registration of MYFIs

The FATCA withholding of US sourced payments commenced on 1 July 2014. As Malaysia is included in the US Treasury's list of jurisdictions with an IGA in effect with the US since 30 June 2014, MYFIs are not considered as NPFFIs and are not subject to withholding tax.

As there has been no announcement as of yet regarding the finalisation of the Malaysia-US IGA, it is uncertain at this juncture when the FATCA reporting obligations will come into full force for MYFIs. However, Reporting MYFIs are already able to register themselves on the US IRS website to obtain their Global Intermediary Identification Number ("GIIN"), for inclusion under the IRS Foreign Financial Institution List. Furthermore, the IDES system is been set up and a prudent MYFI should take this opportunity to familiarise itself with the FATCA system of reporting before it is implemented fully in Malaysia.