The US Foreign Account Tax Compliance Act is an established feature of the global regulatory and tax landscape, but another deadline is looming. Gross proceeds withholding is set to commence from January next year, and this may pose additional administrative and economic problems for the finance industry.
FATCA In Brief
Enacted by the US Congress in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, FATCA is intended to ensure that the US obtains information on accounts held abroad at foreign financial institutions (FFIs) by US persons. As from 1 July 2014, failure by an FFI to disclose information on their US clients will result in a requirement to withhold 30% tax on payments of US-sourced income.
In addition, individual taxpayers with specified foreign financial assets that meet a certain dollar threshold are required to report this information to the US Internal Revenue Service (IRS).
To address situations where foreign law would prevent an FFI from complying with the terms of an FFI agreement, the US Treasury Department has developed three model intergovernmental agreements (IGAs) providing the framework for information to be transmitted from FFIs to the IRS. IGAs with 113 jurisdictions had been signed, were in force, or had been agreed to in principle as of 11 April 2018.
Gross Proceeds Withholding
Beginning in 2019, a withholding tax of 30% is scheduled to apply to gross proceeds from the sale or other disposition of any property of a type that can produce interest or dividends that are US-source fixed or determinable, annual or periodical (FDAP) income. US withholding agents and participating FFIs will then generally be required to withhold on payments of gross proceeds made to non-compliant account holders and non-participating FFIs.
This requirement was originally due to become effective from 1 January 2017 but was postponed by the Treasury to give more time to financial institutions to prepare for the measure.
FATCA compliance has already cost the global financial services industry billions of dollars in additional compliance costs. The gross proceeds withholding requirements is expected to add considerably to the regulatory burden, according to the US securities industry.
The US Securities Industry and Financial Markets Association (SIFMA) has been particularly vocal about this issue, saying recently that the new withholding requirement “represents a fundamental change for brokers and other financial institutions,” and one that could have a disruptive effect on financial markets.
In a letter to the US Treasury on 9 May 2018, SIFMA warned that withholding agents could in particular be seriously affected due to the need to have in place complex reimbursement and set-off procedures on withholdable payments for payees who verify FATCA compliance after the payment date.
SIFMA also noted several other issues, including a lack of consistency between FATCA and other existing US reporting rules on the definition of gross proceeds, which could complicate matters further for the industry.
What’s more, additional withholding may also increase IRS administration burdens by triggering an increase in the number of attempted refund claims filed, the association pointed out.
SIFMA urged the US Treasury to further delay the deadline for gross proceeds withholding. It remains to be seen whether the Government will agree this is necessary.