Globalization has expanded trade, increased prosperity and raised global living standards but has also exposed the global financial system and financial institutions to abuse. In response, there has been a global proliferation of operational tax obligations imposed upon the financial services sector as governments seek to maximize tax revenues and effectively tackle tax evasion. At the core of these obligations are requirements to adequately identify customers from a tax perspective, to report tax related information on those customers to tax authorities and, where appropriate, to withhold tax from payments made to those customers. The Foreign Account Tax Compliance Act is the most recent example of this developing landscape and the growing momentum behind automatic exchange of information is another.
Alongside this, financial markets and products have grown more complex, particularly within the financial products area. New and innovative products develop at a relentless pace as do market structures, often more quickly than the associated operational tax obligations that may apply to them. This presents particular challenges and a need for sound judgment, excellent technical knowledge and strong commercial acumen. A solid understanding of a financial institutions product suite and the associated operational tax obligations is essential, as is an ability to translate complex, technical tax requirements into easy to understand guidance to the operational areas applying them in practice.
The HIRE Act implemented FATCA and was signed into law by the President on March 18, 2010. FATCA is intended to prevent U.S. persons from using offshore structures to evade U.S. taxation, and creates new anti-abuse measures designed to deter U.S. individuals from attempting to hide assets overseas. This provision has become the global standard for promoting tax transparency. FATCA adds a new chapter 4 to the Internal Revenue Code. It provides for withholding taxes to enforce new reporting requirements on specified foreign accounts owned by specified U.S. persons or by U.S. owned foreign entities. FATCA establishes rules for withholdable payments to foreign financial institutions (“FFIs”) and for withholdable payments to other foreign entities (non-financial foreign entities or “NFFEs”).
The U.S. Department of the Treasury and the Internal Revenue Service (IRS) recently announced that jurisdictions that have reached agreements in substance with the United States on the terms of intergovernmental agreements (IGAs) under the Foreign Account Tax Compliance Act (FATCA) can be treated as having agreements in effect until the end of 2014. This treatment will be available to jurisdictions that reach agreements in substance prior to July 1, 2014, and that consent to having the status of their agreements disclosed.
Governments have two options for complying with FATCA: They can either permit their financial institution’s to enter into agreements directly with the IRS or your financial institution may enter into an IGA with the United States. The final regulations generally provide that, in order for withholding not to apply, withholding agents must verify the status of FFIs beginning on July 1, 2014. This announcement allows jurisdictions that have reached agreements in substance on IGAs before July 1, 2014, and have consented to be included on the list, to be treated as having IGAs in effect until December 31, 2014, and allows FFIs to register on the FATCA registration website consistent with that treatment. After December 31, 2014, only signed IGAs will be considered to be in effect. By treating jurisdictions that have reached agreements in substance on the terms of IGAs as jurisdictions that have IGAs in effect, the notice provides.