FATCA Registration and the Responsible Officer’s Big Responsibility under FATCA

Since the passage of the Foreign Account Tax Compliance Act (FATCA) in 2010, rumors have been swirling around financial institutions regarding its implementation. There was talk about the US requiring all foreign financial institutions (FFIs) to disclose the names of its US account holders to the IRS; about how a FFI’s non-participation in the FATCA program would turn it into a pariah in the financial community because no financial institution in the world will want to do business with a non-FATCA compliant FFI.

What is FATCA and are the rumors true?

FATCA is part of a larger piece of legislation called the Hiring Incentives to Restore Employment Act (HIRE) that was passed by the US Congress. Although FATCA has some tax components, it is actually more of a compliance measure aimed at curbing tax evasion or possible tax evasion by US persons. FATCA requires FFIs to disclose to the US Internal Revenue Service (IRS) specific information on financial accounts identified as held by US persons. FATCA imposes a 30 percent penal withholding tax on all withholdable payments to FFIs that fail to comply with the disclosure requirement.

In order to address the requirements under FATCA, some foreign governments, such as those of the United Kingdom, Switzerland, Norway, Germany and Japan have entered into inter-governmental agreements (IGA) with the US. The IGA provides an alternative regime for compliance by FFIs. Under a Model I IGA, FFIs are required to register with the IRS but do not enter into an FFI agreement. Instead, under a Model I IGA, the FFIs are required to disclose required information on financial accounts held by US persons to the competent authority in their jurisdiction. On the other hand, the Model II IGA requires direct reporting to the IRS.

Because of bank secrecy laws in the Philippines, financial institutions are faced with some challenges in complying with FATCA. Thus, industry groups have been lobbying the Philippine government through the Bangko Sentral ng Pilipinas (BSP) to work with the US IRS and the US Department of Treasury to enter into a Model I IGA with the US. However, there is still not much happening on this end and it is not expected that an IGA will be entered into before the conclusion of the initial registration period for FFIs.

In the meantime, the FATCA registration deadline looms in the horizon and Philippine financial institutions will have to face the inevitable and register as a participating FFI (PFFI) or be faced with a penal 30 percent withholding tax on all their US source income.

On 15 July 2013, the IRS will open its FATCA registration portal to allow FFIs to register. Later in the year, the IRS will assign a global intermediary identification number (GIIN) to each FFI that registers under FATCA. The last day to register to ensure inclusion in the initial FFI list is on Oct. 25, 2013. The FFI list will be published by the IRS on Dec. 2, 2013.

Upon registration, the FFI enters into an FFI agreement with the IRS. As a PFFI, the obligations of a financial institution under an FFI agreement with the IRS will be to report required information on financial accounts held by US persons and to withhold tax on certain withholdable payments.

In addition to the two major obligations mentioned, a PFFI must appoint a responsible officer (RO) to oversee the PFFI’s compliance with the requirements of the FFI agreement. The RO must establish a compliance program that includes policies, procedures and processes sufficient for the PFFI to comply with the requirements of the FFI agreement. In addition, the RO must periodically review the sufficiency of the FFI’s compliance program and the FFI’s compliance with the FFI agreement during the certification period.  Under the FATCA regulations, the RO is required to certify from time to time that the FFI has complied with the required obligations under the FFI agreement. The attestation by the RO will not merely involve confirming compliance with the obligations under the FFI agreement by signing off on a certification. Rather, the RO must provide specific details of the procedures conducted by the FFI in order to comply with its obligations under the FFI agreement. In addition, the RO is required to report the results of such procedures conducted and report any material failures/events of default. The RO is also required to submit to IRS review, if required, and respond to requests for additional information from the IRS.

Indeed, the FATCA regulations impose a tall order on the RO. In view of this, it will be paramount for financial institutions to have effective compliance programs to assist the RO in the timely and accurate delivery of the certifications required. Lapses in compliance which lead to the failure to perform material obligations with respect to due diligence, withholding or reporting requirements of the FFI agreement may be considered an event of default and possibly expose the FFI to the 30 percent penal withholding tax on withholdable payments. Definitely, under the FATCA final regulations, the attestation by the RO carries with it the weight of the entire financial institution’s compliance program.

It will be interesting to note how the Philippine government and Philippine-based FFIs respond to the US law. While FATCA has engendered quite a bit of grumbling about the US laws “incursion” into domestic matters non-compliance by the FFIs will have financial, as well as repercussive consequences.

Kathleen L. Saga is a Senior Manager from the Tax Group of Manabat Sanagutin & Co. (MS & Co.), the Philippine member firm of KPMG International. Ms. Saga is a member of the Global FATCA Desk of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected]