FATCA – implications for financial institutions
Introduction to FATCA
On December 16 2013 Malta and the United States entered into an intergovernmental agreement (IGA) to implement rules and regulations under the Foreign Account Tax Compliance Act (FATCA). FATCA, enacted in 2010 by the United States, requires US taxpayers and financial institutions to report financial information to the Internal Revenue Service (IRS) with regard to accounts held by US persons or non-US entities in which US persons hold a substantial ownership interest, generally greater than 10%.
FATCA imposes a 30% withholding tax on any withholdable payment made to a foreign financial institution (FFI), unless the FFI enters into an agreement with the IRS to comply with FATCA rules requiring the disclosure of financial information related to US accounts. ‘FFI’ is defined as any foreign entity that:
• accepts deposits in the ordinary course of business;
• engages in the business of holding financial assets for others; and
• is primarily engaged in the business of investing, reinvesting or trading securities, partnership interests, commodities or any interest in these instruments.
Thus, the definition of ‘FFI’ includes banks, funds, brokers, dealers, wealth and asset managers and certain insurance companies.
To facilitate the implementation of FATCA regulations – and to simplify compliance – the United States has entered into IGAs with multiple nations worldwide. There are two types of IGA: Model 1 and Model 2. Model 1 agreements are reciprocal in nature, whereby financial institutions report the required information to the relevant authorities in their countries, which in turn will automatically exchange this information on an annual basis. The exchanged information will be used by tax authorities to ensure compliance with the tax laws in both countries, thereby curbing tax evasion by those holding financial assets in offshore accounts or companies.
US-Malta: Model 1 IGA
Under the IGA, financial institutions in Malta and the United States must comply with certain due diligence, reporting and withholding requirements under FATCA. The term ‘Malta financial institution’ (MFI) refers to financial institutions resident in Malta (with the exclusion of any branch of a financial institution located outside Malta) and any branches of non-resident financial institutions located in Malta. These obligations have been simplified due to the implementation of the IGA. FFIs that comply with the terms of the IGA are not subject to the 30% withholding tax on US source payments. The IGA also simplifies and reduces the administrative burden of complying with FATCA rules and regulations and, most importantly, allows MFIs to comply with FATCA without breaching domestic privacy and data protection laws.
Investment funds, banks and insurers in Malta can register and report information directly to the Maltese tax authorities regarding US shareholders or beneficial owners. Once an MFI is registered, it may be exempt from US withholding tax on income received from US investments and from withholding tax on payments made to the US resident beneficial owners and shareholders.
Annex II of the IGA includes a list of certain exempt beneficial owners, products and deemed compliant entities which have no reporting obligations under FATCA. As per the IGA, a financial institution will incur a withholding tax only if the United States considers the institution to be a non-participating FFI.
Requirements under US-Malta IGA
The US-Malta IGA requires that MFIs identify all account holders (regardless of whether they are US owned) in order to identify accounts that are considered US reportable accounts and those held by non-participating FFIs. Annex I of the IGA details the documentation requirements and specific procedures involved in account identification. The account information to be reported to the Maltese competent authority covers US accounts, non-compliant (also known as recalcitrant) account holders and all payments made to non-participating FFIs during the 2015 and 2016.
MFIs must disclose information regarding their US accounts to the Maltese competent authority, which will then forward the information to the US competent authority on an annual basis and within nine months of the end of the applicable calendar year. The Malta Investment Registration Scheme will give Maltese citizens the opportunity to comply voluntary with tax regulations and FATCA provisions and disclose their previously undeclared funds, stocks and investments before domestic tax authorities act based on information received from abroad.
The punitive withholding tax will be imposed on a non-participating FFI if it fails to resolve identified instances of non-compliance within 18 months of receiving a notice of non-compliance from the United States. Under the IGA, a reporting MFI that makes a payment of a US source withholdable payment to any non-participating FFI need not effect withholding at this level; rather, the MFI must provide the information necessary for withholding and reporting to occur with respect to that payment to all immediate payors of the withholdable payment. Additionally, a reporting MFI need not withhold tax in relation to a recalcitrant account holder if it reports the required account information under the IGA to the Maltese competent authority.
