On 30 June 2014 the Tax Laws Amendment (Implementation of the FATCA Agreement) Act 2014 (FATCA Act) received Royal Assent.
Following the passage of the FATCA Act, it is now crucial that Australian businesses are aware of the impact FATCA will have on their operations and consider the extent to which new policies and procedures are necessary to ensure compliance.
Background - What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is United States (US) legislation that was introduced in 2010 to combat offshore tax evasion by US persons. FATCA was designed to collect information on offshore accounts held by US persons with non-US financial institutions (foreign financial institutions or FFIs) by imposing certain due diligence and reporting obligations on FFIs. While FFIs could elect not to comply, non-compliance exposes a FFI to 30 per cent withholding on US sourced income and gross proceeds from the sale of certain US assets.For most large scale FFIs this made compliance compulsory.
In certain jurisdictions the implementation of FATCA obligations gave rise to conflicts with domestic law (e.g. privacy). To overcome these issues, and simplify certain obligations, the US developed an Intergovernmental Agreement (IGA) approach to implementation with the G5 nations in February 2012. The United Kingdom (UK) was the first to adopt this approach, signing its agreement with the US in December 2012 and passing local law and guidance to implement its obligations under the IGA in August 2013. Since then, an additional 35 countries have entered into an IGA with the US, with a further 50 countries having substantially negotiated an IGA with the US. Australia signed its IGA (Australian IGA) with the US on 28 April 2014.
Tax Laws Amendment (Implementation of the FATCA Agreement) Act 2014
To implement its obligations under the IGA, the Australian Government introduced the FATCA Act, which amends Schedule 1 to the Tax Administration Act 1953 by requiring Australian Financial Institutions to provide the Australian Taxation Office (ATO) with certain information on accounts maintained by US persons.
Following the passage of the FATCA Act, Australian businesses that are classified as a Financial Institution (Australian Reporting FIs), and are not otherwise exempt, now have an obligation under the Tax Administration Act 1953 to comply with FATCA and can no longer choose to opt out. These obligations include registering with the US Internal Revenue Service, undertaking enhanced due diligence on holders of products or accounts that are classified as financial accounts to determine whether any financials account are held by US persons, and reporting on US accounts and non-compliant accounts.
The FATCA Act relies on contents of the IGA for definitional content and to set out the specific obligations of an Australian Reporting FI. While the Explanatory Memorandum (EM) to the FATCA Bill provides some additional direction, including allowing reliance on US Regulations, the ATO has also issued further Draft Guidance Material on the application of the FATCA Act in the Australian. Consultation on the Draft Guidance Material is open until 28 July 2014.
The administration of FATCA requirements, including filing timelines, record keeping, penalties for failure to file reports and penalties for making false and misleading reports, are generally dealt with under the existing provisions of the Tax Administration Act 1953.
Australian Reporting FIs that comply with the obligations under the FATCA Act and IGA, and those Australian businesses that are otherwise exempt (Non-Reporting Businesses), should not be subject to any withholding on US sourced income and should not have any obligation to withhold on payments made to account holders.
With certain FATCA obligations beginning from 1 July 2014, Australian businesses that have not already done so, should act now to determine the impact of these new rules on their operations.
Some of the considerations for Non-Reporting Businesses and Australian Reporting FIS are outlined below.
Under the Australian IGA, an Australian Business will generally be considered to be a Non-Reporting Business where it is not an Australian Reporting FI, or where it otherwise qualifies for an exemption. Broadly the definition of Australian Reporting FI includes banks, custodians, collective investment entities and certain insurance companies. Exemptions apply for certain low risk entities including regulated superannuation funds.
In addition to these entities, the US Regulations and local guidance issued by other foreign regulators also include in scope, holding companies and treasury centres. This is one of many definitional gaps between the Australian IGA and the US Regulations that is addressed in the Draft Guidance Material issued by the ATO.
In light of the above, Australian businesses that are Non- Reporting Businesses should:
- Consider the need to document positions taken on why each entity within the businesses is out of scope. This would be of greater importance for non-financial groups that include holding companies or treasury centres, or for financial groups that qualify for one of the various exemptions.
- Be aware of their FATCA status and be prepared to provide documentation to support that status when dealing with Australian Reporting FIs and other foreign FIs.
In the Australian context this is expected to be by way of a self-certification, although this may generally depend on the approach taken by the specific Australian Reporting FI to its documentation obligation.
For Non-Reporting Businesses with overseas investments or holdings, there may be a requirement to complete US tax forms in order to document their status to foreign counterparties. In this regard, particular attention should be paid to entities receiving income from US sources, as failure to provide appropriate documentation in these circumstances may result in the payment being withheld upon.
As FATCA applies generally to US sourced payments, and not just payments made by US FIs, Australian businesses with US operations should also consider the impact of these rules on payments made by their US operations. These obligations would generally apply to payments that are subject to existing obligations under the US non-resident alien withholding regime, and FATCA compliance should be incremental to existing compliance.
Australian Reporting FIs
The operational impact of FATCA on an Australian Reporting FI will depend on the size and nature of the business.
Generally speaking, Australian Reporting FIs with diverse product offerings and distribution channels, high customer volumes and a reliance on automated systems will be significantly impacted by FATCA obligations. In particular, these businesses will need to consider how governance policies, processes and systems will be modified to ensure FATCA compliance. Given typical lead times for these types of changes and the training requirements for distribution channels, these Australian FIs should have already commenced developing their response to FATCA compliance.
Australian Reporting FIs that have a small or single product offering, limited distribution channels, and low customer volume will be impacted by FATCA, but typically the response time for these entities will be shorter. However, with the obligations beginning from 1 July 2014, these businesses should be acting now to ensure compliance.
As part of any FATCA impact assessment, Australian Reporting FIs should consider the following issues:
- Entity Analysis, Classification and Registration
FATCA obligations apply separately to each legal entity (including partnerships and trusts) within a business and it is necessary to assess the operations of each entity on a stand-alone basis to determine whether or not the entity should be classified as an Australian Reporting FI. For businesses with operations offshore (including branches of Australian operations), this determination will need be made under US Regulations or the IGA and local law in the relevant jurisdiction.
- Due Diligence - New and Pre-Existing Accounts
Australian Reporting FIs generally have an obligation to undertake enhanced due diligence procedures on ‘financial accounts’. For these purpose a financial account generally includes depository accounts, custodial accounts, debt or equity interests in collective investment entities, annuities and certain investment linked insurance contracts. Australian Reporting FIs will need to analyse their product offerings to determine which products are subject to these enhanced due diligence procedures.
- Reporting Obligations
To the extent products are in- scope, Australian Reporting FIs will need to review existing account opening procedures to determine what changes will be necessary to comply with these enhanced due diligence procedures. To the extent that these are not in place by 1 July 2014, Australian Reporting FIs will need to consider what remediation efforts will be necessary.
Where, as a result of completing the due diligence obligations, an Australian Reporting FI identifies a US account or an account held by a non- participating FFI, it will be required to file a report with the ATO in relation to certain income and other transactions on the account. For these purposes an account will be a US Account where it is held by a specified US person, or an entity that is controlled by specified US persons.
In addition to reporting to the ATO, an Australian Reporting FI that is acting as a custodian or intermediary with respect to US sourced payments may also be required to provide information regarding the beneficiaries of such payments to the payer.
Common Reporting Standard (CRS)
On 13 February 2014 the new Common Reporting Standard for automatic exchange of information in tax matters (CRS) was published by the Organisation for Economic Co- operation and Development (OECD). The CRS is a single global standard for the collection and reporting of information by financial institutions on non-residents.
The CRS has been endorsed by the G20 Finance Ministers and Central Bank Governors, however Australia has yet to make a decision on whether or not to implement CRS. The Australian Treasury has released a Discussion Paper seeking views on the timing, likely implementation costs and suggestions on how to minimise such costs. The discussion paper can be found here. The closing date for submissions on the discussion paper is 16 July 2014.
While the development of the CRS has leveraged FATCA and particularly the model IGA, developed by the US differences in both scope and required due diligence processes exist. These differences are likely to make implementation of the CRS challenging for Australian Reporting FIs who have otherwise implemented their obligations under FATCA. In this regard, Australian Reporting FIs should consider the impacts CRS may have on the implementation of FATCA with a view to ‘future proofing’ where possible.