In recently issued proposed regulations regarding the Foreign Account Tax Compliance Act, the United States Treasury Department and the Internal Revenue Service appear to have listened to global stakeholder comments and made an effort to address their concerns to minimise the additional compliance costs imposed on financial services institutions, PricewaterhouseCoopers said in a news release.
“The proposed regulations clarify the far-reaching impact that FATCA will have on foreign financial institutions with US assets or clients, including those located here in the Cayman Islands,” said Ian Bridges, PwC Cayman Islands’ tax director. “Companies in the financial services industry such as banks, hedge funds, private equity funds, trust companies and insurance companies, will soon be compelled to gather certain financial information and report it to the IRS.”
The regulations have further grandfathered certain financial obligations from FATCA compliance and extended the overall exemption period until 1 January, 2013. Additional changes include simplified due diligence procedures and reporting requirements for certain individuals and entities, and extended transition periods for reporting financial account information to the IRS.
Paul Eldridge, managing director, tax services, PwC Bermuda, said “Despite these changes, most financial institutions in the Cayman Islands will need to make significant changes to their business practices over the next several years, including adapting their people, process, technology and internal governance systems to handle the increase of due diligence procedures – and ultimately comply with FATCA regulations.”
In a significant announcement relating to FATCA, a joint statement was also released by the governments of the United States, France, Germany, Italy, Spain and the United Kingdom, stating they are exploring a common approach to FATCA implementation through domestic reporting and reciprocal automatic information exchange.
“At this time, Cayman Islands is among a number of global financial services centres that are not included as a party to the joint statement. That’s not to say that other countries won’t be added to such an agreement at a later date,” Mr. Bridges said.
Once the FATCA withholding rules come into effect, institutions that fail to comply will be subject to a 30 per cent withholding tax on any US source income and gross security sale proceeds made to its proprietary account. In addition, account holders who do not provide the non-US financial institution with FATCA-required documentation would be deemed “recalcitrant”. The FFI would then be obligated to deduct a 30 per cent withholding tax on any withholdable payment credited to their accounts.
“It’s important for financial institutions to realise that FATCA is more than just a tax issue. It involves governance, compliance and process changes that will impact their entire business. By planning the work and starting now, businesses can minimise the disruption to their operations as the deadline approaches,” Mr. Eldridge said.