IA ANALYSIS: FATCA is stranger than fiction
FATCA was implemented worldwide at the beginning of this month, but the impact (and costs) are only now just beginning to filter through to the financial services community.
Part of the US Hiring Incentives to Restore Employment Act (HIRE), FATCA aims to ensure Americans, wherever they are and whatever investments they have, are paying the correct level of US tax.
The UK Government estimates it will cost UK financial institutions up to £1.6bn to implement FATCA in this country, with ongoing costs of up to £90m per year. But, as far as wealth managers are concerned, this is more than just about spending money.
Sleepless nights
The ongoing compliance burden facing intermediaries is well known, with the FCA’s requirements on suitability of advice, its wholesale sector competition review and AIFMD among the issues causing more than a few sleepless nights. FATCA could be toughest of the lot in terms of keeping client data in order.
Andy Thompson, director of operations at the Wealth Management Association, stresses that understanding the purpose of FATCA and what is required is difficult, particularly for small firms.
“While the registration process is relatively straightforward, the due diligence for all pre-existing accounts and every new account is a huge undertaking for any firm, big or small as is the amount of information that will have to be reported for relevant accounts,” he says.
“Tax residency will now be one of the most important questions when learning about new clients. The requirement to educate and explain to clients what FATCA is and why it impacts them cannot be underestimated, particularly to entities such as trusts who may struggle to understand why they are required to provide so much detailed information when they have no connection to or investments in the US.”
It’s fair to say that FATCA has not been wholly welcomed with open arms, globally or indeed in the US itself. One leading US tax lawyer memorably compared the regime to “exterminating ands with a nuclear bomb” which would not have the right effect on offshore tax avoidance.
Tax burden
Still, rules are rules and firms that do not disclose relevant information about their client base to the US Internal Revenue Service (IRS) risk facing 30% withholding tax.
This will rumble on, with the UK also implementing its own ‘son of FATCA’ with enhanced automatic exchange of information (AEI) agreements in the crown dependencies Jersey, Guernsey and the Isle of Man, and overseas in Anguilla, Bermuda, BVI, the Cayman Islands, Gibraltar, Monserrat and the Turks and Caicos Islands.
