As the financial sector continues to adjust to the US FATCA Act (Foreign Account Taxation Compliance Act), this publication carries this short comment from Dion, the financial software solutions firm.

Editor’s
note: As the international financial industry continues to adjust – or tries to
adjust – to the provisions of the US FATCA Act (Foreign Account
Taxation Compliance Act), this publication carries this short comment from
Dion, the financial software solutions firm. It is written by Colin Camp,
managing director, products and strategy, at the firm. The opinions here are
not necessarily shared by this publication but it is pleased to add them to
the debate about this important issue.

Even though the final regulations have been
published, the sheer volume of “noise” around FATCA and the “will they, won’t
they?” stories regarding the signing of inter-governmental agreements are
creating a great deal of uncertainty in the market. This is added to, in no
short measure, by the anti-FATCA lobbyists who are succeeding in raising
questions about the integrity of the US
legislation - particularly following rumours of China
refusing to consider an IGA unless they receive more tax information on their
citizens with US assets, and Russia
becoming the latest state to attack the reach of the regulations.

In reality, the basic fact is that no-one
knows what is going on behind closed doors between the US and other
countries - and firms shouldn’t use IGAs as an excuse to hold off on FATCA
compliance.

The intention
of the IGAs is to ease the burden of the regulations on a country’s financial
industry, and enhance existing tax cooperation
arrangements with the US. Whether or not your country has signed an
IGA has no bearing on FATCA compliance.

On the
table

For many countries - especially those with
major financial centres -  an IGA is
already on the table. But given the detail in the final regulations, the two
templates for IGAs and the missing information that the industry is still
waiting on from the US Internal Revenue Service, it will take time for
government departments to digest everything, identify the local products and
businesses that can be excluded and ensure the correct model agreement is in
place. Working out the specifics will require liaison with local industry
bodies and market participants, as well as input from the IRS and US Treasury. Even
when countries are confident they have identified the correct model, the IGAs
may require changes to or implementation of new local laws. This won’t happen
overnight. 

As the FATCA regulations stand today, foreign
financial institutions need to register or sign an agreement with the IRS
before October 2013 or they will not be included in its first list of
participating FFIs due to be published in December this year. If they aren’t on
this list, they not only face the risk of withholding tax on their US sourced transactions,
but also the reality that some of their counterparties may refuse to engage
with them going forward.  It remains down
to each individual FFI to get its own house in order in terms of implementing a
FATCA compliance programme. And while this is on the agenda of many, it’s
surprisingly only being actioned by a few.

The only thing financial institutions can
do is put a programme in place to comply with the regulations as they stand now
to ensure they avoid any potential repercussions down the line. That said, institutions
must ensure their systems are flexible enough to cater for any last minute
changes and be able to incorporate the subtleties contained within local IGAs
where relevant. This is particularly important for institutions operating
across multiple jurisdictions where IGAs may be signed at any point in their
compliance programme.

When it comes to FATCA the advice is
simple. Despite all the uncertainties, FFIs must ensure they are ready for the
regulations. It’s not going to disappear any time soon and the clock is
ticking.