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Living With FATCA Uncertainty: What Should A Foreign Financial Institution Do Until A Bilateral Agreement Is Signed?

On Behalf of | Jan 28, 2013 | Firm News

I will be chairing an international conference in Miami this week on FATCA compliance. Here is an advance read on some of the issues I plan to discuss with the people who will be coming from all over the Caribbean and Latin America.

With the publication of the Final FATCA Regulations last week, we learn the next big FATCA timeline date is July 15, 2013—the date the IRS is opening its aptly called FATCA Registration Portal—the door to the Byzantine world of compliance with the myriad duties of an IRS withholding agent. This summer starts the long awaited beginning of the creation of a virtual international banking data base by which the names and account details of American depositors in foreign banks and financial institutions are automatically updated and reported to the IRS. If things work out the way the IRS counterparts in each FATCA-friendly jurisdiction hopes, that data base will also include the names and detailed account information for people who may be avoiding taxes in their own homelands once the home countries sign a FATCA bilateral agreement with the US Department of Treasury.

For the client, the foreign financial institution whose managers are wondering what to do about FATCA, the stakes are huge. With the publication of the Final Regulations and the policy statements in the preliminary texts, it is now overwhelmingly obvious that the best interests of every government whose people do business with Americans, is to save them and their financial institutions from having to maintain an “up close and personal” relationship with the hulking IRS.

In most cases, once the bilateral agreements take effect, individual FFI agreements will become superfluous as foreign banks cough up the names of their Americans to the IRS through their respective governments and existing Competent Authority offices.

Yet despite the recent Treasury announcement that 50 countries want to talk to the US about a bilateral agreement, the Treasury website which was updated last week, only shows three countries who have signed so far (Denmark, the U.K. and Mexico) and six others who have agreed to FATCA–friendly press releases.

If every foreign financial institution abroad with American customers were to sign up on July 15 for their fair share of FATCA abuse, the IRS FATCA Portal computers would pop their fuses. Even the IRS realizes it would be a daunting challenge to manage an ongoing reporting relationship with every bank in the world and that it would be a lot easier if the IRS could collect the data it wants on Americans from one source in each country as opposed to thousands of banks all over the world.

But the reality is, for most countries, this is unlikely to happen in time for the FATCA effective dates. Once they kick in, the IRS will have no choice but follow the law and start demanding a 30% haircut from all US source income flowing out of the United States, until each country signs up. Until they do, both the impending FATCA effective dates and the inaction or delays of foreign governments are in effect, leaving foreign financial institutions no choice but to enter the Portal to Mordor.

Bank and financial managers all over the world are now in a very tough spot. What to do by July 15 if their governments have yet to sign on to FATCA?

One could easily argue that whatever you think of FATCA or your position on the debate over US overreaching, if you have American clients and plan to do business with Americans in the future, the smart business decision is to enter the menacing Portal this summer.

Here’s why:

1. Simply registering as an FFI now does not irrevocably commit an institution to the full rigors of the Regulations. It is better to establish a pattern of cooperation with the IRS from the beginning. The rules on FFI withholding are likely to change in some ways, a dozen times between now and full implementation. Signing up in July is only the beginning. It is a long way off before there will be any withholding despite the well expressed intentions of the Final Regulations.

2. Each country’s FATCA dynamic is changing almost daily. It could be argued that a good defensive position is to start the registration process, if bilateral goals fall through. The name of the game is to take measures to mitigate FATCA uncertainty as we speed toward the FATCA implementation dates. The chances of a repeal of FATCA right now are next to nothing. Every modern financial institution in the world has a present duty to its shareholders and stakeholders to find out what FATCA compliance demands.

3. If there is uncertainty in a country about whether there is going to be a bilateral deal, or whether the deal can be made on time, it would not be hard to imagine that disgruntled shareholders of foreign financial institutions might bring legal action against current bank managers who sat on their hands while their government’s bilateral deal fell through and the IRS started withholding. One could easily envision a shareholder suit claiming damages in the amount of the 30% profits the IRS was taking from funds foreign financial institution shareholders thought was coming to them.

The great irony over the FATCA menace is while everyone is worrying about the details of withholding on pass thru payments and whether an individual company might somehow be considered “deemed compliant,” the U.S. Treasury has pulled off something like a “bait and switch” public relations coup! Consider what has happened in the last 12 months: on the very same day the IRS announced Proposed Regulations previewing some of the most invasive, horrendous, and burdensome provisions of the Internal Revenue Code, (February 8, 2012) it also announced with great fanfare, a pledge of cooperation from the G-5 who are eager to get a piece of the action. In effect the US is saying to the world, “here is a preview of how miserable we are going to make your lives once FATCA kicks in. Want to avoid this pain? Just get your governments moving on a bilateral agreement and we will leave you alone.”

The IRS is as frightened of FATCA as we are. Top level IRS managers and worker bees are sweating out twelve to fifteen hour days, seven days a week trying to figure out how they are going to administer this thing.

For the foreign financial institutions the stakes are far too high to wait for an elected government or their own IRS bureaucracies to come to the rescue. In the Darwinian world of international finance, the survivors are going to be measured by their foresight, initiative and action well in advance of the coming new regime.

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