Global Tax Alert | 25 July 2013

Update on Russia's actions to implement FATCA

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Currently FATCA (the Foreign Account Tax Compliance Act), a US law designed to counter tax avoidance by US taxpayers, is one of the most widely discussed matters among the global business community, including in Russia. One of the main questions facing Russian financial institutions is the fact that current legal barriers do not allow them to comply with FATCA in Russia by entering into direct agreements with the Internal Revenue Service (IRS). Therefore, Russia may implement FATCA through the intergovernmental approach.

When FATCA was signed in 2010, the business community submitted requests to various Russian authorities asking them to clarify the country's position with respect to the application of FATCA by financial institutions in Russia. On 24 April 2012, the Russian Ministry of Finance issued a letter in which it confirmed that it was ready to start consultations with the IRS on FATCA implementation once implementation arrangements and the technical details of the intergovernmental approach had been worked out. The Russian Ministry of Finance has since started negotiations with the US Treasury and the IRS. The Russian Finance Minister, Anton Siluanov, has on several occasions confirmed that the plan is to sign an intergovernmental agreement (IGA) between Russia and the United States by the end of this year. When the agreement has been signed, Russian legislation would have to be enacted to bring it into force in Russia.

It is noteworthy that the above-mentioned letter of the Ministry of Finance includes a firm statement that the possibility of introducing amendments to the Russian legislation for the sake of compliance with FATCA requirements has been ruled out. Notwithstanding the above, as early as a year ago, legislative changes were introduced by Federal law No. 97-FZ of 29 June 2012, which could be viewed as a first step towards enactment of FATCA in Russia. Specifically, according to the law, the Russian tax authorities could seek information about bank accounts and account balances of individuals and legal entities from Russian banks based on a request of a competent authority of a foreign state in cases envisaged by international agreements concluded by Russia. These provisions could be viewed as reducing the legal barriers for Russian banks to comply with FATCA if and when Russia enters into an IGA with the United States using the Model 1 IGA, which assumes the reporting of information on certain account holders by financial institutions to their national tax authorities, which in turn will provide such information to the United States under an automatic exchange of information.

Recent changes to the Russian legislation introduced by Federal law No. 134-FZ of 28 June 2013 do not directly address issues related to FATCA implementation in Russia, but reflect a worldwide tendency to tackle money laundering. The purpose of this law was to introduce provisions which would allow the creation of conditions aimed at the prevention of illegal financial transactions, money laundering, and tax and custom duties avoidance. Although certain amendments introduced by the law, such as the identification of beneficiaries of legal entities by financial institutions in Russia for anti-money laundering purposes, should allow the authorities to get a better picture of the account holders, such changes do not comply with FATCA requirements and would not bring the respective IGA into force, if and when such IGA is signed by Russia and the United States, without subsequent changes to Russian law.

Notwithstanding the above, Russia is making progress concerning preparation for FATCA and negotiation of an IGA. Considering the impact that FATCA has on the legal, accounting, technology, tax and investor relations areas of financial institutions, much remains to be done by financial institutions in order to be able to comply with FATCA requirements by the time FATCA becomes effective under Russian legislation. In this respect, Russian financial institutions and the government should benefit from the additional six-months' delay in the key timeline for implementation of many FATCA provisions (moving the first date of implementation of FATCA requirements to 1 July 2014), which was announced by the US Treasury and the IRS on 12 July 2013 in Notice 2013-43.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (CIS) B.V., Moscow
  • Irina Bykhovskaya
    +7 495 755 9886
  • Maria Frolova
    +7 495 641 2997
  • Sergei Safonov
    +7 495 641 2942
Ernst & Young LLP, Russia Tax Desk, New York
  • Julia Samoletova
    +1 212 773 8088

EYG no. CM3675