Not just for FATCAts
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Not just for FATCAts


The US Foreign Account Tax Compliance Act will have implications for financial institutions around the world, including Aussie advisers.

When it comes to regulatory compliance in 2013, all eyes – understandably – will be on the changes brought about by the Future of Financial Advice (FOFA) reforms, set to take effect from July.

But despite FOFA’s significant impact on the industry, a new piece of tax legislation passed in the United States may actually have a greater impact on your client’s bottom line.

Enacted by Congress in March 2010 in an effort to thwart tax evasion by US citizens abroad, the Foreign Account Tax Compliance Act (FATCA) imposes new reporting requirements both on American taxpayers and on foreign financial institutions (FFIs).

Under the laws, details of US-based clients and US source income will be provided to the Inland Revenue Service (IRS).

Non-compliance will carry with it a substantial penalty: a 30 per cent withholding tax for receipts of US source income and on gross proceeds that produce US source interest or dividends, as well as FATCA withholding on foreign pass-thru payments.

The Act came into effect on January 1 and has already caused quite a stir. Major financial institutions, including Deutsche Bank, Credit Suisse, HSBC, ING and Commerzbank, began closing brokerage accounts for US-based customers as far back as 2011, according to Germany’s Der Spiegel newspaper.

Considering the broad definition of ‘FFIs’ in the Act – King & Wood Mallesons (KWM) associate Suzanne Gibson says “the majority of players in financial services worldwide” would qualify, including banks, custodians, trustees, super funds and investment funds – many other institutions are likely to be fretting.

The good news is that Australian independent financial advisers will almost certainly be exempt, at least from qualifying as FFIs and facing a direct tax penalty. But that doesn’t mean you should stop reading right here. Indeed, “everyone working in the financial services industry needs to be aware of FATCA and exactly what their compliance requirements are,” Gibson says.

More specifically, while planners are exempt, the products and funds you may be recommending are not. Regulation-savvy advisers are already taking FATCA compliance into consideration when making decisions about the worthiness of an investment.

“If you are recommending a product or structure that could be subject to FATCA withholding…this would be a significant issue in respect of assessing the proposed investment,” she advises. “The bottom line is that non-compliance could have a significant impact on returns.”

Gibson, who was an in-house lawyer at Vanguard before joining KWM’s investment funds and regulatory practice, is even starting to see FATCA provisions appear in Australian contracts for deals that don’t even have an obvious link to the United States or to US source income – an indication that the penny is dropping.

The Financial Services Council (FSC) has warned that while Australian advisers will probably avoid being considered FFIs, they will still be privy to the new reporting requirements. “Planners will be affected by FATCA because the requirements for data collection on clients will change as a result of FATCA,” an FSC spokesperson told ifa.

The extent to which planners face new data obligations will depend to a large extent on how legally binding FATCA is in Australia. “The difficulty for the US is that it has tried to legislate for the world, and it is difficult to draft for every different type of entity and structure in the world,” says Gibson.

Claire Wivell Plater, managing director of legal consultancy The Fold, says an inter-governmental agreement (IGA) between Australia and the United States on FATCA would make the legislation “more enforceable”.

Countries including the UK, France, Germany, Italy, Spain, Switzerland and Japan have already enacted such agreement – based on a model IGA released by the US Treasury – in order to co-operate with FATCA and make the legislation more enforceable in their respective jurisdictions.

The Australian Treasury has responded by seeking submissions from industry and relevant stakeholders about the “advantages and disadvantages of an [IGA] between Australia and the US, based on the published US Model IGA, as an alternative to individual agreements between Australian financial institutions and the US Internal Revenue Service”.

In November 2012, Treasurer Wayne Swan indicated the government had entered formal negotiations regarding FATCA with the United States, vindicating Gibson’s conclusion that the “general market expectation is that it will proceed with [an IGA] in the near future”.

Swan said the aim of the negotiations would be to “reduce the overall burden on Australian business.”

Perhaps something of a double-edged sword, on the one hand an IGA could be undesirable for many in the financial services industry since without it, the United States may struggle to enforce its intended new disclosure requirements.

On the other hand, the FSC suggests that an IGA is the “only guaranteed way that Australian superannuation funds can be exempted from FATCA”. Council CEO John Brogden led a delegation to Washington in May 2012 to lobby US policymakers, seeking exemptions for superannuation funds and others in the sector.

“Compliance for funds will be more manageable under an IGA than under the FATCA legislation,” Mr Brogden said.

However, as the FSC points out, “until an IGA is signed, or the final FATCA regulations are released, it is not possible to know what the final impact on planners will be.”

Watch this space...

Not just for FATCAts
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