FATCA Regulations and the IGAs

The Foreign Accounts Tax Compliance Act (FATCA) was enacted into law in the USA on March 18, 2010.  FATCA introduces a new reporting regime, which compels certain foreign entities to disclose information on US persons with offshore accounts.  Failure to comply will entail the imposition of a 30 per cent withholding tax on withholdable payments paid, directly and indirectly, to certain foreign financial institutions (FFI) and certain other foreign entities. 

On July 26, 2012, the US Department of Treasury (‘the Treasury’) released two versions of the Model 1 Intergovernmental Agreement (IGA), reciprocal and non-reciprocal versions as they relate to the automatic exchange of information between the partner jurisdiction and the US Internal Revenue Service (the IRS).  On November 14, 2012, the Model 2 version of the IGA was issued, whereby FFIs would report specified information directly to the IRS, in a manner consistent with the final regulations, supplemented by the government-to-government exchange of information.

The IGAs contain two Annexes -  Annex I provides guidance on due diligence obligations for identifying and reporting on US reportable accounts and on payments to certain non-participating financial institutions, and Annex II outlines the entities that would be classed as exempt beneficial owners other than funds; funds that qualify as exempt beneficial owners, small or limited scope financial institutions that qualify as deemed-compliant FFIs, investment entities that qualify as deemed-compliant FFIs and other special rules to be applied to investment entities and the accounts excluded from the definition of financial accounts. 

Under the IGA, a FFI can be a custodial institution, a depository institution, an investment entity, or a specified insurance company.  A FFI that is resident in a Model 1 IGA partner jurisdiction will be governed by the terms of the IGA in effect with that jurisdiction and implementing the laws and regulations adopted by that jurisdiction.  The FFIs will be required to, among other things, identify and annually report certain details of US reportable accounts (eg name, address, tax identification number, account balances and income earned) to the local tax authorities or competent authority, followed by the automatic exchange of information between the government of the partner jurisdiction and the Treasury.

On January 17, 2013, the Treasury and the IRS released the final regulations for FATCA.   The most significant changes contained in the final regulations are attributable to the Treasury and the IRS’s attempt to harmonise the final regulations with the requirements set forth in the IGAs.  The definition of FFI changed for a partner jurisdiction financial institution (FI) to include an investment entity, which means any entity that primarily conducts as a business for and on behalf of customers (or is managed by an entity that conducts as a business) trading, portfolio management, investing, administering or managing funds.  Accordingly, passive entities such as passive investment corporations (PICs) or family trusts that are not professionally managed are treated as passive non-financial foreign entities (NFFEs). 

On July 12, 2013, the IRS released Notice 2013-43, revising the timelines for FATCA implementation, including updated dates for initial FATCA withholding, the initiation of new onboarding procedures, and deadlines for pre-existing account remediation.  The revised timelines are also applicable to FIs located in jurisdictions that have signed IGAs for the implementation of FATCA but not yet brought those IGAs into force.  Basically, the revised FATCA timeframes have been moved back six months from the initial dates outlined in the final regulations issued in January 2013.

On September 10, 2013 the IRS also made corrections to the final regulations issued in January 2013 concerning information reporting by FFIs of US accounts and withholding on certain payments to FFIs and other foreign entities.  The corrections also included corrected or clarified regulatory language, and additions, deletions or modifications so that the FATCA rules are appropriately coordinated with the rules under other relevant regulations of the Inland Revenue Code.

The Bahamas’ route towards Model 1 IGA

In July 2013, The Government of The Bahamas (the Government) agreed to pursue Model 1, non-reciprocal, IGA with the Treasury in order to comply with FATCA.  However, prior to reaching this milestone decision the Ministry of Financial Services held various workshops to educate and obtain feedback from FIs as to the route that The Bahamas should pursue.  The Ministry of Financial Services also led a delegation to meet with the Treasury and the IRS officials in March 2013 and hosted a regional FATCA workshop with government and private sector officials from various Caribbean countries in The Bahamas in April 2013, facilitated by the Treasury and the IRS.  The Ministry of Financial Services’ main concern discussed with the representatives from the Treasury and the IRS related to the inclusion of trusts, PICs and master feeder funds as FFIs, which was of concern to the financial services sector in The Bahamas.  The Minister of Financial Services, Minister Ryan Pinder, was able to secure the ‘sponsored exemptions’ for these entities, whereby the use of a sponsored entity, such as a professional trustee or manager, is a reporting Model 1 FFI that will undertake on behalf of the FI all due diligence, withholding, reporting and other requirements that the FI may be required to perform if it was a reporting FI under the IGA. 

Annex II of the Model 1 IGA has since addressed this concern to include those entities and accounts that present a low risk of being used by US persons to evade US tax.  In May 2013, the Ministry of Financial Services held a closed-door consultation session with key personnel within the financial services sector and the overall consensus of pursuing a Model 1 IGA was agreed.

Since then an inter-ministerial committee (Committee) on FATCA has been set up with the Ministry of Financial Services to lead the Government’s mandate as follows:

•    To prepare an implementation strategy for FATCA, inclusive of the draft intergovernmental agreement;

•    To prepare and issue a request for proposal for the development and implementation of a FATCA reporting system; and

•    To direct and manage the drafting of legislations to implement the FATCA regulations under the IGA.

The Committee also includes the Ministry of Finance, identified as the Competent Authority under the IGA and the Office of the Attorney General.  The Committee is now charged with the task of drafting ‘FATCA legislation’ to implement FATCA, taking into consideration confidentiality, compliance and reporting issues which will help to reduce the burdens imposed on the FIs.  The IGA will have to be linked to the FATCA legislation and therefore the completion of the legislation is of top priority.  The Ministry of Financial Services intends to release a draft of the legislation by December 2013 for the industry’s feedback.

Other areas for consideration by the Committee in finalising the IGA should include:

•    Defining the categories of FIs, including their subsidiaries and branches, in alignment with the FATCA regulations and the criteria for being either a reporting FI or a non-reporting FI.

•    Defining financial accounts that would be referred to as US reportable accounts.

•    Inclusion of any additional definitions within the IGA to align with the ‘FATCA legislation’ and the FATCA regulations.

•    Amendments to Annex II will have to be undertaken by mutual agreement between the Competent Authority and the Treasury and the IRS.

•    Inclusion of any provisions in the IGA using the ‘most favoured nation’ provision where the jurisdiction is entitled to the benefit of any more favourable provision agreed to in a comparable IGA with another partner jurisdiction.

•    The determination of the due diligence procedures that should be applied to establish the status of account holders and payees by the FIs. Consideration should also be given as to whether the local legislation will permit FFIs to opt into the due diligence procedures set forth under the Treasury Regulations in lieu of the procedures set forth in the IGA, and whether certification of such procedures will be required by the FIs to the Component Authority.

•    Inclusion in the IGA of the timetable for reporting by the FIs to the Competent Authority and the information to be reported.

•    Inclusion of penalties within the legislation where a reporting FI fails to provide the required information and where it provides inaccurate information.

•    Inclusion in the IGA of the measures and procedures for compliance or non-compliance by the reporting FIs.

•    Inclusion of an anti-avoidance measure which is aimed at arrangements taken by any person to avoid the obligations placed upon them by the regulations.

•    Obtaining a comprehensive list of FIs that would be subjected to FATCA.

•    Infrastructure to be put in place to assist with the reporting of the required information from the FIs, for the automatic submission to the IRS on an annual basis.  There is presently no central reporting system for collecting and reporting information of this magnitude in The Bahamas and as such, the cost of implementation, including the acquisition of the appropriate computer hardware and software, manpower and training of personnel, is likely to be a significant outlay by the Government.

•    To ensure that the IGA is executed within a reasonable period of time so as to prevent the jurisdiction from being removed from the list of jurisdictions that are treated as having an IGA in effect, and from removing the status entitled to the FIs under the IGA

The Bahamian financial services sector welcomed the announcement of the Government’s decision to pursue a Model 1 IGA with the Treasury.  The IGA route produces a number of advantages to the sector as highlighted below but it also brings additional costs similar to those that will have to be incurred by the Government with respect to the infrastructure, information systems and personnel.  In addition, for the FIs that do not comply with the requirements of the ‘FATCA legislation’ and the IGA there will be additional penalties imposed locally, above the 30 per cent withholding tax imposed by the US IRS.  In addition to the advantages highlighted above, other notable advantages are:

•    With the  six months extension and if the Government signs an IGA by April 25, 2014, then the FIs will have additional time beyond July 1, 2014 (date when the Treasury and the IRS intend to provide a list of jurisdictions that will be treated as having in effect an IGA) to register and obtain a Global Intermediary Identification Number and be included in the IRS FFI list on January 1, 2015.

•    FIs will be permitted to register on the FATCA registration website as a registered deemed-compliant FFI.  In addition, a branch located within The Bahamas may be designated as not a limited branch.

FIs will not be required to enter into a FFI agreement as all reporting will be done through the Government. There will be no responsible officer required unless specified and no consent/ waivers will be required.  There will also be no exiting of recalcitrants. 

Disclaimer

The views expressed are those of the author and do not necessarily reflect the views of KPMG.