Prepare for FATCA compliance: K&W Mallesons
The Australian financial services industry had better begin preparations for the US Foreign Account Tax Compliance Act (FATCA), effective from 1 January 2013, commercial law firm King & Wood Mallesons (KWM) has warned.
"Everyone working in the financial services industry needs to be aware of FATCA and exactly what their compliance requirements are," KWM senior associate Suzanne Gibson said. "Non-compliance could have a significant impact on returns."
The legislation aims to crack down on tax evasion by US citizens or account holders abroad, imposing reporting requirements on foreign financial institutions (FFIs), whereby due diligence must be performed on all US-based accounts and US-sourced income and details forwarded to the US Inland Revenue Service.
Non-compliance carries with it a substantial penalty - a 30 per cent withholding tax for receipts on US-source income and on gross proceeds that produce US-source interest or dividends.
The definition of FFIs under the Act is quite broad, Gibson said, applying to "the majority of players in the financial services industry worldwide," including banks, custodians, trustees, investment funds, superannuation funds and certain insurance companies.
In order to avoid FATCA compliance requirements, financial institutions including Deutsche Bank, HSBC, ING, Commerzbank and Credit Suisse began closing brokerage accounts for US customers in 2011, according to Germany's Der Spiegel newspaper.
In August, Australian Treasury announced it was seeking submissions from industry and the public on the advantages and disadvantages of establishing an inter-governmental agreement (IGA) with the US on FATCA in order to make compliance enforceable under Australian law, akin to the IGA already implemented in the United Kingdom.
"The general market expectation is that [Treasury] will proceed with [an IGA] in the near future," said Gibson. "The key question is, who will be exempted under Annex II of the IGA, and therefore won't need to conduct the due diligence and reporting obligations?"
Gibson suggests that financial advisers and fund managers should consider FATCA compliance and requirements when making assessments of whether an investment is sound.
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