On 8 February 2012 the US Treasury released regulations relating
to the reporting and tax withholding requirements of Foreign
Financial Institutions (FFIs) under the Foreign Account Tax
Compliance Act (FATCA).
FATCA requires FFIs across the globe to report to the IRS on the
US accounts they hold. Non-compliance with its requirements will
result in a 30% withholding tax being applied to all US sourced
income flowing into that FFI.
The regulations represent the most recent guidance provided on
FATCA since its enactment in 2010. It has been hoped that they
would provide some answers to the many questions and concerns
raised by the previous guidance notes.
A chief concern amongst FFIs has been that compliance with FATCA
provisions could trigger a breach of their local law. For instance,
a direct report to the IRS of a client's personal account
information is an almost certain breach of the Island's data
A joint statement issued alongside the release of the
regulations by the US, France, Germany, Italy, Spain and the UK
shows how the US may intend to deal with this issue. These
countries have agreed to a reciprocal inter-governmental agreement
to exchange bank account information on each others citizens where
those citizens hold accounts in partner countries. The UK will pass
on information on US accounts in the UK if the US agrees to
reciprocate for UK accounts in the U.S.
The five listed countries are the only current FATCA Partner
countries, but the US Treasury has suggested that it is a model
that could be expanded to other countries. FATCA Partners will be
required to enact any necessary legislation to guarantee that FATCA
provisions can be enforced without contradicting local law.
FFIs based in FATCA Partner countries will enjoy a range of
benefits that other FFIs will not, including: reporting to their
respective government rather than directly to the IRS; avoiding the
need to enter a direct FFI agreement with the IRS; no subjection to
withholding tax on payments made to them; and the chance that their
FATCA Partner country may have negotiated for their specific
category of FFI to be deemed compliant with FATCA without the need
for IRS registration.
Becoming a FATCA Partner would offer obvious benefits for the
FFIs located in Guernsey and Jersey, but can an agreement be
reached with the US? The omission of major finance jurisdictions
such as Canada, Switzerland and the Netherlands as initial FATCA
Partners raises the question as to whether Guernsey or Jersey will
be prepared to meet the necessary terms to become a FATCA Partner.
The other side of the coin is whether the US will want an agreement
with them! The US has been vocal in its disapproval of offshore
jurisdictions (which it sees as tax havens) and their terms for
FATCA Partnership may be more onerous than the Channel Islands can
The US Treasury's press release accompanying the regulations
set out three headline objectives, these are:
reducing the administrative burden of identifying US accounts
by allowing FFI's where possible to use ID documentation
collected as part of their AML procedures;
expanding the categories of FFIs that are deemed to be FATCA
compliant without the need to enter into a FFI agreement with the
IRS (with the idea to focus the aim of FATCA at higher risk
financial institutions); and
phasing in the reporting and withholding requirements over an
expanded transition period to allow FFI's more time to develop
the necessary systems and procedures they will need to be
The regulations are dense and will need a full analysis to
determine if, and to what extent, these objectives have been
achieved. For instance, will an extended transition period assist
FFIs in non-FATCA Partner countries that will still be faced with
the choice of a possible breach of local law or the imposition of a
withholding tax against it?
The majority of Collas Crill's clients across both Channel
Islands will be affected by FATCA in some way. In light of this we
have established a FATCA team with a broad range of knowledge
across the FFI sectors most likely to be affected by FATCA. The
goal of this team will be to offer a bespoke service to adapt a
client's existing procedures and documentation to make them
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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