Better late than never: Delayed reaction to the US Foreign Account Tax Compliance Act

FATCA is part of a larger piece of legislation called the Hiring Incentives to Restore Employment Act (HIRE) that was passed by the United States Congress in 2010.

Although FATCA has some tax components, it is actually a compliance measure aimed at curbing tax evasion or possible tax evasion by US persons.

FATCA requires foreign financial institutions (FFIs) such as depositary institutions, custodial institutions, investment entities and certain types of insurance companies that have cash value products or annuities, to disclose to the US Internal Revenue Service (IRS) specific information on financial accounts identified as held by US persons. Under the FATCA rules, any FFI that does not register for FATCA purposes and does not disclose the required information to the IRS would be subject to a penal 30 percent final withholding tax on its US source income.

After passage of the law, the US Treasury department came out with voluminous proposed regulations regarding the implementation of FATCA. In the Philippines, the reception to FATCA was lukewarm initially as it was generally viewed as US legislation having no impact on Philippine financial institutions. However, as FATCA registration deadlines drew closer, increased concern over its impact on FFIs caused many financial institutions to take a second look.

Because of bank secrecy laws in the Philippines, financial institutions are faced with challenges regarding FATCA disclosure requirements. Thus, industry groups have been lobbying the Philippine government to enter into an inter-governmental agreement (IGA) with the US. However, the government response seems to be delayed so financial institutions are faced with the task of determining how FATCA will impact their organization and whether it is necessary to register for FATCA purposes.

In light of the slow progress on the IGA, the Bangko Sentral ng Pililpinas (BSP) issued a memo last year essentially advising banks and non-bank financial institutions to evaluate if their institutions are covered by FATCA and to make the necessary preparations to comply with FATCA.

In the same vein as the BSP, the SEC recently issued SEC Memorandum Circular No. 8 addressed to all non-bank financial institutions (NBFIs) under the supervision of the SEC to evaluate if their corporation was covered by FATCA. Specifically, NBFIs were instructed to conduct the following procedures:

1. Evaluate if the company is a foreign financial institution covered by FATCA.

2. Study the potential effects of FATCA to its business and determine the necessary steps to take to avoid the unfavorable consequences of non-compliance with FATCA requirements.

3. Establish a policy and prepare the company’s operating systems which would enable it to capture and perform tagging of its account holders subject to the FATCA requirements.

4. Consider the provisions of domestic laws, such as, but not limited to, the Securities Regulations Code, the Investment Company Act, the law on the Secrecy of Bank Deposits and the Data Privacy Act in crafting the guidelines.

5. Raise all FATCA-related questions of concerns of NBFIs through its respective association which shall act as the central depositary of FATCA- related inquiries and collate such queries for a more systematic submission to the US government;

6. Consider the inclusion of instructions/disclosures in the company’s respective notice to clients.

7. Discuss in its annual and quarterly reports the level of its compliance with FATCA regulations, starting with the quarter report ending March 31, 2014 that is due on or before May 15, 2014.

The SEC further instructed that if the NBFI determines that it is covered by FATCA, the NBFI should refer to the US Internal Revenue Service (IRS) notices to avoid being withheld upon, consider registering with the IRS, obtain a Global Intermediary Identification Number (GIIN) and report the required information on accounts held by US persons.

While the guidelines issued by the SEC are for NBFIs, it does not necessarily mean that FATCA does not apply to all other corporations. For example, under the FATCA regulations, an FFI that registers with the IRS for FATCA purposes is required to also register all entities within its expanded affiliate group (EAG). An entity is considered to be within the EAG if the FFI owns more than 50 percent of the total voting power and the total value of the stock of a corporation. 

FATCA may also impact corporations that do business with FFIs that do not register for FATCA purposes because the FFI will be subject to a penal 30-percent withholding tax on all its US source income. Thus, investments held by a corporation in a non participating FFI will consequently bear the tax.

Aside from determining whether the NBFI and other corporations will be affected by FATCA, if an entity is covered by FATCA, it is also required to create a policy and put a system in place to capture the accounts and information required to be reported to the IRS.

Apparently, there are quite a number of issues and challenges with respect to complying with FATCA, and while the SEC circular is informative, it does not give specific guidelines to help corporations determine whether they are covered by FATCA. Thus, it is recommended that NBFIs and other concerned corporation seek the help of experts who have an extensive international network who have a better understanding of FATCA and its implementing regulations.

Kathleen L. Saga is a director from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm 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 views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.