In order to offset the costs resulting from the enactment of laws aimed at restoring employment in the United States after the crisis of 2008, the Obama administration made a series of provisions addressing the control and inspection of financial transactions, including in regard to tax aspects. In this context, the U.S. legislative branch enacted the Foreign Account Tax Compliance Act, known as FATCA.
FATCA is an act that transcends the limits of the United States territorial sovereignty and adopts stricter standards of control and inspection of American persons and entities even outside the United States, thus posing challenges to Brazilian institutions, which will have to immediately implement the new rules.
In practical terms, in order to combat tax evasion, FATCA makes it mandatory for financial institutions located outside the U.S. territory managing financial assets owned by American citizens to provide information to the U.S. government. The information to be provided by the Brazilian institutions include the account holder's identity (full name or trade name), business addresses, amounts deposited in the account identified in Brazil, earnings, and any withdrawals made.
The information should be provided directly by the foreign institutions, without going through local authorities. Thus, the U.S. tax authorities will have a new system to detect, identify, declare and withhold taxes, which should be particularly adopted by foreign financial institutions.
FATCA's main objectives are (i) to combat tax evasion through investments in offshore accounts and (ii) to compile data on the capital and income kept by U.S. citizens with financial institutions with activities in the international market.
FATCA cannot be automatically imposed upon foreign institutions. Therefore, as a way of compelling such institutions to adhere to the new control standards, the law provides for the event of withholding of 30% on all payments originated in the United States made to foreign institutions.
Institutions receiving remittances from the USA must meet the requirements in the new FATCA system in order to avoid such withholding and prevent their clients from being automatically subject to such treatment. Although the U.S. government considers foreign institutions' adherence to the new system of control and submission of information optional, it is evident that the choice is eliminated by the financial burden imposed upon the institutions and their clients.
Moreover, Brazilian institutions will have to enter into an agreement with the U.S. tax authority establishing the conditions for the transmission of the required information to be used in the investigation of the United States Accounts, as they are called under FATCA.
By adhering to FATCA, foreign institutions must fulfill several obligations, not only as regards the form of collection and provision of information to the U.S. authorities, but also as regards the withholding of 30% on the remitted amount in case the account holder is considered a "recalcitrant account holder", that is, someone subject to the United States tax laws who fails to fulfill its tax obligations, or if the recipient of the transaction is another international foreign institution that is not compliant with the legal requirements under FATCA.
As regards the banks, the adoption of the new system and the control requirements for the exchange of information is, to some extent, related to the approval of a treaty between Brazil and the U.S. authorities. Otherwise, since Brazilian law forbids the exchange of information protected by bank secrecy, FATCA establishes that the institutions should ask for the authorization from the US account holders in order to provide the required information. More interestingly, FATCA establishes that, if the account holder fails to give the authorization within a reasonable time, the institution should close the respective account.
Implementation of the new procedures and routines to be mandatorily followed by the Brazilian institutions will give rise to a complete revision of governance programs, allocation of resources, and the involvement of various areas of the institution, so as to understand in more depth FATCA's requirements and criteria, since it is already known that the data captured in the KYC processes will not be sufficient to comply with the strictness imposed by the FATCA system.
Overall, it seems to us that the use of thorough transparency by the institution is of the utmost relevance, providing clarifications to the clients whose accounts will be subject to the effects of FATCA about the consequences and impacts caused by the new rules.
Even if the Brazilian institutions adhering to the system of information control and submission seek support in an agreement between the Brazilian and American authorities, it seems to us that they should be prepared to face potential questioning regarding possible offenses against principles and guarantees under the Federal Constitution and the Brazilian legislation.
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