Preparing for FATCA Registration, Reporting and Due Diligence Obligations

At the end of May 2014, a bill was introduced to the Australian Federal Parliament to give effect to the United States' Foreign Account Tax Compliance Act (FATCA) and the intergovernmental agreement which was executed by Australia and the United States in late April 2014 (Australian IGA).

The Australian IGA will have effect from 1 July 2014 and clarifies the reporting and due diligence requirements for a range of Australian Foreign Financial Institutions (FFIs) under FATCA. The Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014 (Bill) requires Australian entities to comply with FATCA and the Australian IGA. The Bill is currently before the Senate and is expected to receive royal asset shortly.

Australian financial institutions should now be making preparations to meet FATCA registration, reporting and due diligence obligations.

FATCA Overview

What is FATCA?

FATCA is a U.S. federal law which is intended to combat tax evasion by U.S. persons holding investments outside the United States. It imposes due diligence requirements on FFIs to identify U.S. account holders, and reporting requirements on FFIs with respect to such U.S.-held accounts. FFIs are financial institutions domiciled outside the United States. Although FFIs are not subject to the jurisdiction of the U.S. Internal Revenue Service (IRS), FFIs failing to comply with FATCA are subject to a 30 percent withholding tax on most types of U.S.source income. The IRS has indicated that FATCA implementation is its number one priority with respect to efforts to combat offshore tax evasion.

To address privacy and data protection concerns, FATCA will be predominately implemented through bi-lateral intergovernmental agreements between the United States and other jurisdictions, including Australia.

The Australian IGA provides that:

  • the Australian Taxation Office (ATO) and the IRS will provide certain reciprocal information in respect of account holdings 
  • unless an exemption applies, Australian Financial Institutions (FIs) must:
    • register with the IRS as a compliant FFI 
    • implement new account opening procedures to identify U.S. persons opening accounts with the FFI 
    • undertake due diligence procedures to identify U.S. persons holding existing accounts with the FFI
    • report annually to the Australian Tax Commissioner, through the ATO, on accounts with the FFI held by U.S. persons or FFIs which do not comply with the IGA.

Following the development of FATCA, similar systems of reciprocal tax information sharing are now being designed and implemented by a number of other countries and international bodies, including the United Kingdom, European Union and Organisation for Economic Co-operation and Development.

Who Will FATCA and the Australian IGA Affect?

An Australian FI is any legal person (including a trust) which is domiciled in Australia, or a branch of a financial institution which is located in Australia, which falls into one of the following categories:

  • Custodial institutions – entities which hold financial assets for others as a substantial part of their business. 
  • Depository institutions – entities which accept deposits in the ordinary course of banking or a similar business. This will include Authorised Deposit-taking Institutions (ADIs) such as banks and credit unions. 
  • Investment entities – entities which conduct as a business, or are managed by an entity which conducts as a business, at least one of the following activities:
    • trading money in market investments, foreign exchange, interest rates, commodity futures or transferrable securities 
    • individual and collective portfolio management 
    • investing, administering or managing funds or money on behalf of others.
      This will include entities such as hedge funds, managed investment schemes and platforms.
  • Specified insurance companies – entities which issue or make payments under insurance policies (other than for personal injury or illness protection) with a cash value of greater than US$50,000, or annuity contracts.

Australian FIs will not include branches of Australian domiciled entities which are not located in Australia. All Australian FIs who comply with the Australian IGA will be deemed to be compliant with FATCA obligations.

Unless an exemption applies, all Australian FIs will be 'Reporting Australian FIs'.

What Exemptions Apply?

A number of exemptions apply under Annexure II of the Australian IGA. Exempt Australian FIs for the purposes of FATCA and the IGA will include:

  • government authorities 
  • superannuation entities 
  • Australian FIs with a local client base only and which undertake due diligence procedures to ensure there are no U.S. persons holding accounts with the FFI 
  • Australian ADIs which only operate in Australia, do not solicit foreign clients and have assets less than US$175 million 
  • escrow accounts providers 
  • certain not-for-profit entities and entities which receive favourable tax status under the Income Tax Assessment Act 1997 (Cth).

Key Dates for Australian FIs

Pre July 2014

Develop procedures for FATCA reporting and account opening obligations

1 July 2014

Implement new account opening procedures for individual to identify whether account holders are U.S. persons

22 December 2014

Register as a compliant FFI with the IRS

1 January 2015

Implement new account opening procedures for entities to identify whether account holders are U.S. persons

1 January 2015

FATCA withholding tax implications begin for Australian FIs that are not registered with the IRS

30 June 2015

Finalise due diligence review of individual accounts that have a balance in excess of US$1 million

31 July 2015

Reporting for the 2014 calendar year to be submitted to the ATO

30 June 2016

Finalise due diligence review of individual accounts that have a balance between US$50,000 and US$1million and entity accounts that have a balance in excess of US$1 million

31 July 2016

Reporting for the 2015 calendar year to be submitted to the ATO (increased obligations)

FATCA Compliance Obligations Under the Terms of the Australian IGA

Registration

In order to encourage compliance with FATCA by foreign entities outside the jurisdiction of the IRS, FATCA imposes a 30 percent withholding tax on the receipt of most types of U.S.source income by FFIs

Unless an exemption applies, to avoid FATCA withholding tax implications, Australian FIs which receive U.S. source income must register with the IRS to be listed as an entity which is compliant with the FATCA reporting regime. All Australian FIs will be eligible to register with the IRS for listing on the publically available list of compliant FFIs (IRS FFI List).

Upon registration the Australian FI will be placed on the IRS FFI List and will receive a global intermediary identification number (GIIN) which will be used by the Australian FI to identify itself to any U.S. entities which would be required to withhold tax under FATCA.

U.S. entities will be required to obtain and verify an Australian FI's GIIN before making any payments of U.S. source income to the Australian FI. If an Australian FI's GIIN does not appear on the IRS FFI List, any payments of U.S. source income will be subject to the 30 percent withholding tax.

This verification and withholding requirement will apply from 1 January 2015 for Australian FIs. To ensure registration on the IRS FFI List before the 1 January 2015 withholding begins, Australian FIs must register with the IRS by 22 December 2014.

Any FFI which is subject to a FATCA exemption is not required to register but must provide evidence of their exemption to any U.S. entities which would be required to withhold FATCA tax.

Although the U.S. Treasury has indicated that initially FATCA withholding tax will only be 'lightly' enforced, provided FFIs are making 'good faith efforts' to comply with FATCA requirements, registration will be required under the Australian IGA and will likely be necessary to facilitate cross border transactions.

Due Diligence for New Accounts

Overview

From 1 July 2014, Australian FIs are required to implement new account opening procedures for individuals opening accounts to ensure that U.S. persons opening accounts are accurately identified for FATCA reporting obligations.

In May 2014, the U.S. Treasury announced a deferral of FATCA due diligence for new accounts opened by entities, which means Australian FIs are not required to implement new account opening procedures for entities until 1 January 2015 (instead of 1 July 2014). Accounts opened by entities between 1 July 2014 and 31 December 2014 will be treated as existing accounts and subject to the due diligence procedures discussed below.

The new account opening procedures will require Australian FIs to obtain a declaration from an entity or an individual opening a new account which allows the Australian FI to determine if the account holder is a U.S. person or controlled by a natural U.S. person, for the purpose of FATCA.

A U.S. person, for purpose of FATCA, includes:

  • a citizen or resident of the United States
  • a partnership domiciled in the United States 
  • a corporation incorporated or domiciled in the United States 
  • any trust if:
    • a court within the United States is able to exercise primary supervision over the administration of the trust, and 
    • one or more U.S. persons have the authority to control all substantial decisions of the trust.

What is Required?

Australian FIs are required to have in place a mechanism to obtain declarations from individuals opening new accounts from 1 July 2014 and for entities opening new accounts from 1 January 2015. The declaration may form part of the account opening procedures and should be consistent with any existing Anti-Money Laundering/Know Your Customer (AML/KYC) procedures the Australian FI has in place.

An Australian FI may rely on a declaration provided by an individual, or an entity, as to the account holder's status as a U.S. person, provided the declaration is supported by other documents which the Australian FI holds in relation to the account (certificates of incorporation, evidence of address, etc).

If a declaration indicates that the account holder is a U.S. person, or that an entity is controlled by a natural U.S. person, the Australian FI must retain and report information on the account in accordance with the Australian IGA.

Additional identification procedures will apply for accounts opened by other financial institutions.

If no declaration is received, the Australian FI must treat the account as if it is held by a U.S. person.

Timeline for New Account Opening Procedures

The new account opening procedures apply from:

  • 1 July 2014 for all individuals opening an account with an Australian FI where the account balance is in excess of US$50,000 
  • 1 January 2015 for all entities opening an account with an Australian FI regardless of account balance.

Due Diligence for Existing Accounts

Overview

In addition to new account due diligence, Australian FIs are required to undertake a due diligence review of their accounts which existed at 30 June 2014, as well as any entity accounts opened between 1 July 2014 and 31 December 2014.

What is Required?

Australian FIs are required to complete an electronic search of all accounts held by: 

  • individuals where the account balance at 30 June 2014 exceeds US$50,000 
  • entities where the account balance at 30 June 2014 exceeds US$250,000 
  • entities whose accounts were opened between 1 July 2014 and 31 December 2014 regardless of the account balance.

The search should review whether information held in relation to the account (including AML/KYC information) indicates one or more of the following: :

  • that the account holder is a U.S. citizen or resident, or is incorporated in the United States 
  • that the account holder has a U.S. place of birth 
  • a current U.S. mailing or residence address 
  • a current U.S. phone number 
  • standing instructions to transfer funds to a U.S. account
  • an entity is controlled (including through ownership or by organisational structure) by a natural U.S. person
  • current powers of attorney granted to a U.S. person.

For accounts held by individuals with a balance which exceeds US$1 million at 30 June 2014, Australian FIs may also be required to undertake a paper record search for the above information.

If the electronic or paper search identifies any of these criteria, then the Australian FI must treat the account as if it were held by a U.S. person, and will be required to retain and report information on the accounts, unless appropriate evidence that the account is not held by a U.S. person is obtained.

Timeline for Completion of Due Diligence Reviews

The due diligence review for accounts held by individuals that have a balance in excess of US$1 million must be completed by 30 June 2015.

The due diligence review for accounts held by individuals that have a balance of between US$50,000 and US$1 million must be completed by 30 June 2016.

The due diligence review for accounts held by entities that have a balance in excess of US$1 million must be completed by 30 June 2016. Although the account opening procedures for entities has been delayed, the timeframe for the completion of due diligence on existing accounts has not changed.

Reporting Obligations

Overview

All Australian FIs will be required to report annually to the ATO on certain account holder information in respect of their account holders who are U.S. persons. The information required will be progressively implemented over the course of the next three years.

The information which will eventually be required to be reported includes:

  • the name, address and U.S. Taxpayer Identification Number (TIN) details of any account holders who are U.S. persons 
  • the account number and the account balance and value of any accounts held by U.S. persons 
  • total gross amount paid or credited to an account held by a U.S. person during the calendar year 
  • interest payments made to an account held by a U.S. person during the calendar year.

Timeline for Reporting

The Bill provides that the first reports for Australian FIs must be submitted to the ATO by 31 July 2015.

The first report will include information collected on accounts held by U.S. persons for the period between 1 July 2014 and 31 December 2014. For this period, Australian FIs will need to provide the ATO information in relation to: 

  • U.S. individuals who open an account on or after 1 July 2014, and 
  • U.S. individuals and entities which are identified as holding an account through due diligence procedures before 31 December 2014.

From 2016 onwards, Australian FIs will need to report information in relation to all identified U.S. account holders for the preceding calendar year. These reports will need to be submitted to the ATO by 31 July each year, in the form prescribed by the Australian Tax Commissioner.

Preparing for FATCA

Australian FIs should already be in the process of preparing for reporting requirements for the 2014 calendar year and will at a minimum need to register with the IRS. Additionally, they should begin implementing policies and procedures to address the collection of U.S. account holder information and due diligence requirements of FATCA before 2015. These steps include:

  • registering with the IRS as a compliant FFI
  • establishing processes and procedures to conduct due diligence on existing accounts 
  • establishing new intake procedures for opening accounts
  • updating existing internal and external documents, policies and processes to reflect FATCA requirements.

 

Topics:  Australia, FATCA, FATCA Timeline, FFI, Intergovernmental Agreements, IRS

Published In: Finance & Banking Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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