Implications of Foreign Account Tax Compliance Act for financial institutions

BY: Samuel K. Obour

When the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued final Foreign Account Tax Compliance Act (FATCA) regulations in January, there was a sigh of relief that the financial services industry in Africa could begin to digest FATCA's obligations.

 However, experience suggests that compliance remains a challenge.

As FATCA is already law in the US, negotiations are underway with over 80 countries thus far to enshrine it into national law of countries around the world via intergovernmental agreements (IGAs) with the U.S.

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While African jurisdictions may each face unique obstacles with FATCA compliance, many in the industry share a general uneasiness with FATCA's scope, as well as scepticism that FATCA's rewards justify its expenses.

Generally, FATCA attempts to combat US tax evasion by requiring that non-US financial institutions report the identities of U.S. shareholders or customers, or otherwise face a 30 per cent withholding tax on their US source payments of income and/or gross proceeds.

Overwhelmingly, FATCA compliance obligations apply even where there is very little risk of US tax evasion and it impacts all payers, including foreign payers of “withholdable payments” made to any foreign entities affecting deposit accounts, custody and investments.

Concerns about privacy and withholding abound. FATCA requires that financial institutions report to the IRS certain information about U.S. persons and withhold money from non-compliant customers.

For this reason, IGAs are being put in place so that institutions could instead report information to their local tax authority rather than the IRS and potentially avoid withholding obligations. The process to make necessary changes locally, if it comes to that, will involve time and effort by local regulators.

Financial institutions will have to consider what steps to take to prepare for FATCA compliance and take into account FATCA obligations, such as account due diligence, reporting U.S. reportable accounts and withholding against non-compliant customers and financial institutions.

The core of FATCA is the process of reviewing customer records to search for "U.S. indicia" — that is, evidence that a customer might be a U.S. taxpayer. Under certain circumstances, FATCA requires financial institutions to look through their customers and counterparties' ownership to find "substantial U.S. owners" (generally, certain US persons holding more than 10 per cent of an entity).

In Ghana and most other countries, existing anti-money laundering legislation generally requires that financial institutions look through entities only when there is a 25 per cent owner, leaving a gap between information that may be needed for FATCA compliance and existing procedures.

Financial institutions choosing to comply with FATCA will first need to appoint a FATCA responsible officer and register with the IRS, then identify and categorise all customers, and eventually report US persons to the IRS or local tax authorities in the case of IGA jurisdictions.

Institutions will also need to consider implementing a host of other time-consuming operational tasks, including revamping certain electronic systems to capture applicable accountholder information and/or to accommodate the new reporting and withholding requirements, enhancing customer on-boarding processes, and educating both customers and staff on the new regulations.

Where possible, financial institutions should seek to achieve these tasks through enhancing existing initiations so as to minimise the cost and disruption to the business.

Although the FATCA regulations are undoubtedly complex, many regional and global financial institutions are already getting grip with what this means for them. African institutions face strict compliance timelines with limited budgets, resources, time, and expertise available.

This is coupled with having to fulfil multiple other regulatory requirements. To add to the burden, FATCA has given stimulus to several countries in the European Union and the Organisation for Economic Co-operation and Development (OECD) to start engaging in a multilateral effort against tax evasion.

The support of other countries in the IGA process indicates that some of these countries will follow with their own FATCA-equivalent legislation in an attempt to increase their tax revenues at a time when economies around the world are under unprecedented pressure.

Evidently, it is in the best interest of financial institutions in Ghana to mobilise compliance activities in order to adequately address FATCA and its far-reaching obligations.

Written by Nii Teiko-Aryee, Advisory Services EY Ghana

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