FATCA: A Taxing Affair

Today (30 June 2016) marks the end of the two year ‘grace period’ for compliance with the Foreign Account Tax Compliance Act (FATCA), granted by the Internal Revenue Service of the United States (IRS). In this time, Financial Institutions (FIs) should have reviewed and classified all of their pre-existing customer accounts, and have recorded the relevant FATCA classification code for each in their internal systems. However, with the industry bombarded by a myriad of regulations (both tax related and otherwise) it’s little wonder that some institutions have struggled to meet this deadline. So, now what?

For FATCA, the cost of non-compliance is high. From today, foreign financial institutions (FFIs) without a validated FATCA classification will default to a ‘withholding’ status. FFIs that carry this burdensome label will be subject to a 30% withholding tax (payable to the IRS) on any U.S.-sourced income (e.g. interest, dividends, royalties, premiums) paid on or after 1 July 2014. The burden increases from 1 January 2017 when the tax will also be applied to gross proceeds on the sale of dividends or interest generating U.S. securities. Firms will also be required to withhold income payments from FFIs to foreign individuals or entities that are not compliant with FATCA from this date. The ever present threat of regulatory fines for firms that fail to comply with the above is also of concern.

The glimmer of hope here is that, given the complexity and scale of the regulation, there is likely to be a degree of leniency where institutions are able to demonstrate that all reasonable efforts have been made to meet the classification deadline, and that there is a remediation plan in place for the completion of the exercise. However, this should not be relied upon. Given the political nature of this regulation and the increasing trend in high profile banking fines, the coming months could wield some nasty surprises for non-compliant firms. These organisations should aim to complete their FATCA classification programmes as soon as possible, no matter how taxing this may be.