May 17th, 2012 by Angela Offerman
Convey attended the IRS public hearing on the proposed regulations for the Foreign Account Tax Compliance Act (FATCA) implementation in Washington D.C. this week to follow the financial industry’s reaction to this hot topic. With twenty one speakers and over eighty comment letters from financial institutions around the globe, the hearing was very well attended as representatives voiced their pushbacks and proposed changes to FATCA. We noticed many commonalities among the various speakers and put together some high-level takeaways to summarize the key discussion topics.
Recommendation to delay implementation
The undertone of the entire hearing was that no one believed they had enough time to implement the systems and procedures necessary for compliance in the timeframe the IRS has outlined. Most representatives recommended a one year delay for the implementation of the account holder documentation requirements, from January 1, 2013 to January 1, 2014, and an 18 to 24 month delay for withholding requirements. Speakers highlighted that the novel approaches and circumstances to withholding demand brand new technologies that will require extensive time to understand and phase into organizations.
Revision of documentation requirements
Another heavy theme throughout the hearing was the requirements to document account holder status, which speakers took issue with for several reasons. First, several representatives highlighted the redundancy and conflicting requirements with anti-money laundering procedures (AML) and know your customer (KYC) directives already in place. While many people voiced their beliefs that existing AML/KYC standards should provide the U.S. sufficient information, others called for a higher level of coordination to be achieved to eliminate the unnecessary burdens and costs from the commonalities between the two. Speakers also lodged concerns of negative effects on client relationships or loss of business from the invasive information requested. Finally, a representative from Switzerland even stated that some FATCA requirements, such as the documentation requirements, conflict with their local laws.
Some countries are not targets for tax evasion
Multiple organizations from Japan, Canada, and Australia all conveyed similar messages at the hearing—their countries are not targets for tax evasion. All three countries believe the FATCA regulations are far too extensive for their countries given the types of financial products that the majority of financial institutions offer to US Account holders. Japanese companies focused on cash value insurance products, Canada on retail checking and savings accounts, and Australia on retirement accounts. Furthermore, Japan and Australia noted the extremely small number of U.S. citizens living in their countries meaning the required measures foreign financial institutions would need to undertake would not return substantial information or revenue to the IRS. Canada also focused on the unique tax evasion treaty already in place with the U.S. and the two countries similar tax systems that make the country an unlikely safe haven for those looking to evade taxes.
Several speakers also requested the IRS further examine the withholding practices and how implementing them as proposed may have a design flaw for certain industries. Examples focused on brokerage accounts ending trading days in negative balances due to real time withholding, and in the case of brokerage to brokerage transactions, trades not being allowed to settle because full payment will not have been received by the selling agent. Another speaker pointed out that the documentation processes actually eliminated any client from opening an account online.
U.S. financial institutions were troubled by the training needed for back office staff on the new job functions that will come with the complex technologies and stringent requirement of FATCA, but the concern was even worse for foreign financial institutions. International speakers stressed that the rules needed to be significantly simplified and streamlined so they can be used by employees around the world who will experience major language barriers and have difficulty understanding the requirements. Without a delay in the implementation date or ease in the rules to allow for a better understanding, foreign countries warned of turning away U.S. business, as many Asian banks who argue that the U.S. is outsourcing its tax compliance to have already done.
Lack of International FACTA acceptance
A fear of International FACTA acceptance not being as widespread as needed to make it a successful instrument for reducing tax evasion was another common concern among attendees. Many countries foresee the IRS having one definition of FATCA compliance with companies in one country, but a different definition in another, requiring foreign financial institutions to maintain multiple processes depending on what country they’re operating in. This would compound the responsibilities of foreign financial institutions to a point they feel, would not be scalable.
The IRS will now take some time to consider this week’s discussion and comment letters on the proposed regulations before finalizing FATCA regulations. We will keep you informed when new information is available.
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