Mon | Jun 21, 2021

FATCA readiness to cost billions

Published:Friday | June 15, 2012 | 12:00 AM

A senior manager with Ernst & Young has quoted a price tag of US$30 million per financial institution to implement the requirements of the Foreign Account Tax Compliance Act or FATCA, a new US law meant to snag Americans in the tax net wherever they reside.

The estimate, according to Chris Larkin, is from the United States government.

"The money is being spent on getting their systems up to speed and educating internally," said Larkin, at a seminar on the law co-hosted by the auditing firm and the Jamaica Stock Exchange in Kingston on Wednesday.

"Most of it is going into due diligence," said Larkin, who is attached to Ernst & Young in the Cayman Islands.

The law is expected to affect all local financial institutions, including those under the supervision of the Financial Services Commission - approximately 614 firms of which more than 4,800 are in the business of pensions, securities and insurance - as well as the Bank of Jamaica-regulated deposit-taking institutions, and some 42 credit unions or community banks currently supervised by the Superintendent of Co-operative Societies.

Using the US$30 million estimate, the price tag for central bank-regulated institu-tions alone - seven commercial banks, two near banks, and two stand-alone building societies - could run as high as US$330 million or J$29 billion.

E&Y's Everton Ferguson said the US$30 million was a ballpark estimate and could vary widely according to the size of the financial institution.

Financial Gleaner checks indicate that two banking groups - the Institute of International Bankers and the European Bankers Association - have estimated that the very large financial institutions may need to spend as much as US$250 million over a two-year period on FATCA readiness.

The final version of the US Treasury regulations for FATCA is expected in midsummer. The law affects persons with more than US$50,000 in savings or investment in Jamaica or any non-US territory.

Larkin said the cost of non-compliance will be equally great should institutions fail to sign agreements with the IRS.

FATCA requires foreign financial institutions (FFIs) worldwide to sign an agreement to identify, document and report savings, investment and life insurance on "US Persons" with accounts.

US persons are defined as dual citizens, those born in the US, American citizens residing outside the US, American passport holders, and green card holders.

The law also applies to non-US citizens who stay as long as 183 days or six months in the US. Their taxes will be estimated from the first day they enter the country.

The FFIs are required to sign agreements with the IRS by January 30, 2013, with reporting to begin in June of the same year.

Under the regulations as proposed, banks, investment houses, insurance companies and other financial institutions defined under the law are treated as withholding agents for the IRS, and should be currently involved in identifying account holders who fit the criteria and who are required to pay taxes of 30 per cent.

"They will take 30 per cent off the top if they (the FFIs) do not sign the agreement," Larkin said.

But: "The goal is not so much to get the money; the goal is to get the information," he adds.

The US law requires all financial institutions to withhold 30 per cent of accounts where a person refuses to provide information to allow the institution to determine whether or not they are a 'US person'.

Larkin foresees problems for Jamaican financial institutions due to the absence of "a lot of good information on who their account holders are and systems to track them down."

Allison Peart, managing partner with Ernst & Young in Jamaica, said the required due diligence and changes by FFIs - in addition to knowing the affected account holders - includes the appointment of a 'responsible officer' who will sign off and certify that the due diligence has been done.

FFIs will also need to put systems in place to report to the IRS; and to withhold the tax.

Companies which fail to comply with FATCA will lose 30 per cent of investment income from US assets and 30 per cent of trade proceeds on US assets - inclusive of both company assets and assets held for customers.

Additional US tax penalties may apply, starting in 2017, when FATCA's new 30 per cent US tax is no longer limited to payments on US assets.

The FFIs will need to train and sensitise employees in divisions dealing with finance, operations, compliance, tax, legal, and IT, as well as hire an external US tax adviser.

The deadline for provision of information to the IRS on account holders varies between one and two years dating from July 2013, depending on the age of the accounts.

FFIs that enter into agreements with the IRS will need to report the name, address, and taxpayer identification number, or TIN, of each affected account holder, the account number and the account balance, as well as gross inflows and outflows from the account.

In the case of an account holder that is a US-owned foreign entity, the name, address, and account information will be required.

Larkin said entities with 10 per cent or more shares held by US persons will be classified as US-owned.

Queries to local banks on what the process is costing them were unanswered up to press time.