In two weeks, the “headache of the decade” starts when the US Internal Revenue Service unveils its online registration service, giving every financial services institution in the world 90 days to sign up to global tax collection.
The collection efforts do not target US citizens alone, but involve anyone with a Green Card; a US bank account; responsibility for a US bank account; instructions to pay money into a US bank account; anyone with a US address or telephone number or who has granted power of attorney to someone with a US address; or owners of property, businesses, stocks and securities.
While the list of those liable to the Foreign Account Tax Compliance Act is not limited to those categories, banks, fund operators and other financial services handling most of their money face the 15 July launch of the IRS’s registration portal. The online registry obliges all “foreign financial institutions” to register by 25 October. Five weeks later, the IRS will publish the names of the organisations that have complied with the deadline.
Among the speakers at last Thursday’s FATCA seminar at the Westin Grand Cayman Seven Mile Beach Resort & Spa, Maples and Calder’s Martin Livingston described the tax legislation as “the headache of the decade”, affecting not only financial institutions, but also individuals, calling it “unpleasant”, and predicting it will “advance the ageing process and affect your livelihood”.
Michelle Bahadur, director of the Financial Services Secretariat at the Cayman Islands Ministry of Finance, feared local financial institutions would suffer significant costs to process and report records, while Paul Eldridge of PricewaterhouseCoopers in Bermuda, discouraged hopes the IRS would ultimately drop their efforts.
Tax lawyer Steven Cantor was refreshingly cynical, if realistic, saying Washington needed tax revenue “so the US government could squander it away doing various things”, characterising much of the IRS effort as “fear-mongering”.
Capping summaries of FATCA legislation was the additional observation that UK efforts to crack down similarly on British-affiliated persons and businesses in UK overseas territories and crown dependencies were also likely to come to fruition in the immediate future, making tax liabilities nearly universal.
“FATCA is here to stay,” said Cayman Finance CEO Gonzalo Jalles, opening Thursday’s colloquy, and observing the legislation was expanding multi-nationally. “It’s becoming global for tax information.”
Ms Bahadur echoed the conclusion, saying governments “had seen a shift in the global agenda on tax issues”, citing G-20 calls to standardise regulations, ultimately creating a “multilateral, automatic exchange of tax information in all jurisdictions”.
In April, she said, Cayman joined the UK, France, Germany, Italy and Spain in the G-5 pilot for automatic exchange of tax information, based on model agreements the five nations earlier negotiated for FATCA.
In June, she said, Cayman further agreed to the Mutual Administrative Assistance on Tax Matters, developed by the Council of Europe and the Organisation for Economic Cooperation and Development, combating tax evasion worldwide and mandating global exchange of tax information.
Cayman Islands Financial Services Minister Wayne Panton told the packed ballroom that standardising tax information would help control costs.
Hoping FATCA might collapse under its own weight, critics have predicted overwhelming personnel costs for IRS collection, processing and storage of global tax information. Similarly, Mr. Panton indicated local compliance was also likely to require significant resources.
“We are committed to G-5 standards for exchange of tax information,” he said, “because they will keep costs down and enhance the stability of our financial services industry.”
Both he and Ms Bahadur declined to predict the start of UK tax collections, citing “lack of clarity” in “intergovernmental agreements”, but answers would likely be built on resolution of similar questions about American IGAs, including the issue of “base erosion”, companies shifting profits to other jurisdictions to reduce tax exposure.
Seeking “greater consistency between US and UK intergovernmental agreements”, Ms Bahadur hoped current meetings in Paris would “move things forward. We’ve been prodding them,” she said.
Mr. Livingston hoped to see the US IGA completed by August, “giving Cayman financial services a certainty of approach, while Mr. Eldridge suggested further delays were likely: “Will the portal open on 15 July? We’ll see. The IRS has not hit a deadline yet, and there is still no [foreign financial institution] agreement.”
Both speakers, joined by Mr. Cantor, detailed FATCA’s complex technical provisions for financial services operators, but warned the industry of the simple 30 per cent withholding penalty on all US assets should institutions fail to comply.
Mr. Eldridge cautioned individuals about their own obligations to register certain documents, and liabilities for failure. “The penalties are up to $10,000 per [neglected] form,” he said, although citing allowances of between $200,000 and $600,000 for bank deposits.
He discouraged individuals, however, from pursuing a personal version of “base erosion”, saying the IRS would punish anyone dividing large bank deposits into a series of smaller accounts spread among various institutions.
“Compliance means you cannot assist account holders to avoid [FATCA], to advise them to break down accounts into smaller ones, assuming that our systems are so crappy that there will be material failures,” Mr. Eldridge said.