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US tax initiative to bring widespread change in accounting protocol

FATCA comes into effect January 1, 2013, and will have an impact on all foreign institutions that have any dealings with US clients directly or indirectly 

Wednesday, January 26, 2011
Wednesday, January 26, 2011

As the US continues its global initiative for greater transparency and compliance in regards to the financial dealings of its citizens, increased regulations are becoming an occupational hazard for financial services providers in offshore jurisdictions. The latest raft of compliance measures addresses operational accounting methods and will come into force on January 1, 2013.

The Foreign Account Tax Compliance Act (FATCA) is to ensure that there is no gap in the ability of the US government to determine the ownership of US assets in foreign accounts.

According to international accounting firm Deloitte, effective for payments after December 31, 2012, all foreign financial institutions (FFIs) will be required to enter into disclosure compliance agreements with the US Treasury, and all non-financial foreign entities (NFFEs) must report and/or certify their ownership or be subject to a 30 percent withholding (on gross proceeds).

This new reporting and withholding regime will ultimately impact current account opening processes, transaction processing systems and “know your customer” procedures utilized by foreign banks. Chief compliance officers, tax reporting heads and other key players will need to evaluate the potential impact of these regulations and develop a plan for managing and remediating any potential risk associated with FATCA non-compliance.

Speaking at a round-table discussion held in Nassau last week, Deloitte (Bahamas) partner Lawrence Lewis emphasized the far-reaching ramifications of the initiative. “The impact of this is much greater than just a tax issue. It really becomes an organizational issue, a strategic issue and an issue of operational performance. FATCA is wide sweeping change and marks an extension of the reporting regime that will impact all financial entities that have some touch point with the US markets.”

According to Melinda Schmidt, director at KPMG LLP, details on the regulation are presently still sketchy, but she expects that proposed regulations will be put forward in early summer this year, with another round of proposals or even final guidelines available by year-end. “Although it is hard to envision exactly what needs to be done without the final regulations, it is important that you try to anticipate the changes and prepare your company’s infrastructure ahead of time. It is important to be known as an institution that has the solution.”

Joy Tegtmeyer, director in the international tax services practice, PricewaterhouseCoopers LLP also urged immediate action. “The responsibilities for for tax compliance is really being pushed toward the FFI, which has a wide reaching definition. All banks, for example, will likely be affected. FATCA goes well beyond what QI (Qualified Intermediary) regulation required, and is much more work intensive. There is a lot of work to be done, so now is the time to start.”

Lewis at Deloitte adds: “For most of us, opting out of the US market is not an option, so it is imperative we understand the changes and what it means to your business in order to be able to survive the FATCA regime.”

Last year had its challenges, but Bahamas Realty founder, Robin Brownrigg, is optimistic signs of growth will start to show in 2011. The veteran realtor says that prudent lending by Canadian banks insulated the island nation from the worst of the crash.

Deputy Prime Minister and Japanese Ambassador sign Tax Information Exchange Agreement in Nassau last week, bringing the total number of TIEAs inked by the Bahamian government to 23. This is the second agreement finalized with a major Asian economy, following one with China.

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