Final FATCA regulations announced but full impact for Australian financial institutions remains uncertain
Friday 18 January 2013 — Today’s release of the final Foreign Account Tax Compliance Act (FATCA) regulations by the US Treasury and IRS has bought greater clarity about the steps financial institutions around the globe will need to take to comply with the new laws.
However, many Australian financial institutions are still anxiously awaiting the details of a potential Intergovernmental Agreement (IGA) between Australia and the US in order to assess the full impact of the new regulations on their business.
EY’s Oceania Banking and Capital Markets leader, Paul Siviour said IGAs were already proving to be a key element of FATCA compliance in many jurisdictions globally and, if implemented in Australia, are intended to alleviate some of the burden on our local banks and financial institutions.
“In November, the Australian government officially announced their intention to begin discussions with the US about the possibility of Australia entering into an IGA, a move that was welcomed by the local industry,” Siviour said.
“By allowing Australian financial institutions to report to the Australian Taxation Office rather than directly to the IRS, an IGA would help to avoid conflicts with local laws, such as data privacy. It would also go a long way to lessening the compliance burden on local financial institutions by substantially reducing withholding requirements.”
The FATCA laws have been developed to assist the US government in tracking down the overseas assets and income of US tax evaders.
Under the new regulations foreign financial institutions are required to identify all US customers, report back to the IRS and potentially withhold customer funds on certain types of income. Financial institutions that don’t comply face the prospect of incurring a 30% withholding tax on payments they receive from US sources.
“One key concession of the final regulations is the expanded definition of retirement funds. Funds that meet the definition under the double tax treaty between Australia and the US should also satisfy the definition of a retirement fund under the final regulations. This is good news as Australian superannuation funds that do meet the definition of a retirement fund as they do not have to comply with the various requirements under the regulations.
“The final regulations also provide for greater alignment with the IGAs especially in relation to the timelines for due diligence, reporting and withholding requirements,” Siviour said.
“However complying with the new requirements will still require substantial investment in three key areas: identifying and documenting US customers, withholding 30% on certain payments to recalcitrant account holders and financial institutions that can’t or don’t want to participate, and reporting information to the IRS.”
Siviour said that although the implementation date for the new regulations had been pushed back to 1 January 2014, Australian financial institutions should use that extra time to understand the impact of the changes and look for the best way to address the additional requirements within their business.
“Along with other recent reforms such as Basel III, Stronger Super and FOFA, the FATCA regulations are adding to an increasingly crowded regulatory landscape for our local banks and financial institutions.
“By preparing now, Australian financial institutions have the opportunity to lessen the effort and cost of FATCA compliance through better coordination of any required changes in their current processes and systems, which is particularly important in this environment,” he said.
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