Fatca delay simply “smoke and mirrors”

Moves by US authorities to delay implementation of portions of Fatca provide little relief for institutions

The US tax authorities' decision to delay the start dates of key parts of the Foreign Account Tax Compliance Act (Fatca) is nothing more than "smoke and mirrors", as the timetable for imposing penalties for non-compliance remains relatively unchanged, says Tim Clough, partner, risk and controls solutions at PricewaterhouseCoopers in Hong Kong.

The Internal Revenue Service (IRS) had originally required foreign financial institutions (FFIs) to sign agreements from January 1, 2013, and to withhold on non-compliant account holders from January 1, 2014. This deadline was subsequently pushed back to July 1, 2013.

The IRS announced on October 24 that it has opted to delay the start date of Fatca until January 1, 2014, effectively giving firms an extra six months to comply with the regulations.

"Originally, FFIs had to enter into a contract with the IRS from July 1, 2013. If you didn't enter on that date, the repercussions for withholding did not kick in until January 1, 2014. So in reality you could have entered that contract in that six-month period from July 2013 to January 2014 and you would have been fine. It feels they have given you an additional six months, but in reality it is smoke and mirrors because the date for repercussions for non-compliance has not changed," says Clough.

"What has changed is some of the dates for due diligence and reporting, and one of the key withholding dates on gross proceeds of US assets has shifted by a couple of years to 2017," he adds.

According to Clough, institutions in Asia should not see this delay as an excuse to relax, but instead take a measured and cost-effective approach. "My concern is that institutions will see this and take their foot off the pedal, when in reality under the old timeline it was going to be incredibly challenging, and under the new timeline it is still going to be quite tough to meet the requirements given the level of change required. Our view is that the delay is welcome, however, financial institutions should use this opportunity to make sure they have a measured and cost-effective approach to compliance when under the previous timelines it was perhaps too rushed," he says.

Charles Kinsley, tax principal at KPMG in Hong Kong, views the delay as a result of the IRS looking to frame agreements at country level, rather than with FFIs. "The focus over the past couple of months from the US Treasury was getting more countries interested in the inter-governmental agreements [IGA] process. The result of this is that it has not been putting as much time into final regulations, so they have been delayed."

According to Kinsley, officials from the US Treasury held meetings in Singapore and Korea in late September with FFIs and foreign governments to discuss Fatca.

"There are clearly some benefits from a US standpoint in pushing for an IGA, including streamlining of administration in signing up a whole country rather than individual financial institutions in that country. It also shifts some of the burden on the counterparty country to collect and pass the relevant information on," he says.

There are also benefits for counterparty countries in pursuing an IGA, the first of which was signed by the UK.

"In the UK, there were specific carve-outs for some retirement funds. This could also be the case in Hong Kong, for example, where MPF funds could be exempted from Fatca under an IGA. What you are trying to do under an IGA is negotiate some benefits or exemptions for your country that may not be available under Fatca regulations," he says.