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FATCA legislation to dramatically impact SA financial services sector

20 October 2015   (1 Comments)
Posted by: Author: Eva Crouwel
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Author: Eva Crouwel (Deloitte)

South African companies who do direct and indirect business with US organisations, whether in South Africa, Africa, Europe or further afield, must comply with the United States Foreign Account Tax and Compliance Act (FATCA), or risk being excluded from lucrative markets the world over.
 
Since the introduction of the Act in South Africa in 2014, many SA companies in the financial services sector have been ill prepared for its impact, yet, compliancy with a similar Act will also be a requirement starting 2016 by the Organisation of Economic Co-operation and Development (OECD), giving companies very little time to become compliant.
 
FATCA is poorly understood and adopted by companies in South Africa, mostly because it is perceived that the expertise level required for compliance is low and compliance measures are expensive. Yet, the irony is, not complying with FATCA will cost companies greatly and possibly even more. 
 
FATCA is a series of US-led tax compliance rules for financial institutions to collect, verify and report information on US customers, especially those with offshore accounts and investments. The South African Revenue Service (SARS) has an agreement with the US tax body, the Internal Revenue Service (IRS) that requires South African companies to disclose specific information on their customers and employees with respect to their offshore accounts and investments. Should financial institutions default on providing this, they will be liable to pay both local and international tax penalties, with the ultimate level of non-compliance being market exclusion.
 
SARS’ most recent proposal will result in the possibility to penalise companies as much as R16 000 per month per non-compliance issue, and businesses may risk removal from the IRS compliant participants list as well as potential IRS penalties. In the case of non-compliance, the IRS can withhold 30 per cent tax on all US-sourced payments received, meaning that any company in South Africa that declares dividends, or has indirect business ties with the US even from another country, will be affected. 
 
If a South African company does business with a financial institution in Europe, but this financial institution is listed on the New York Stock Exchange, then the South African company will be asked to comply with FATCA. We have also already witnessed an increase in refusal from financial institutions to do business with non-compliant financial institutions across financial markets. Developed countries are already compliant with FATCA and are requiring the same from companies that do business with them, yet our financial services industry has been slow to implement the regulation. The problem is compounded by the fact that SARS retrospectively announced in 2015 that it requires FATCA compliance from 2014, giving institutions very little time to become compliant.  
 
In addition, the OECD, the progressive economic policy body of which South Africa is also a member, will rigorously enforce their own version of FATCA which will have implications as from next year. The OECD recognises the crippling effect that tax evasion has on emerging markets, and as such, is adamant that global financial markets will have to prepare themselves for an increase in compliance requirements as a result of FATCA. South Africa has claimed to be the first country to be OECD-ready, yet the stark reality is that FATCA is an administrative and tax challenge for firms, due to the multi-level requirements from the IRS, SARS and the OECD. 
 
To better prepare for the impending legislations, it is recommended that companies ramp up their compliance measures in the short time that is left. Companies should seek appropriate advice, prioritise the requirements and consider implementing measurements and using tools to categorise the important considerations of FATCA. Such measurements include analytic tools for client identification, automated compliance, and an auditable framework for reporting.
 
While the administrative burden of compliance may seem onerous, it also brings opportunities and opens doors to discuss new ways for governance and best practice. This is necessary to not only propel the financial services industry forward, but also to avoid being excluded from doing business with international financial markets. 
 
Nazrien Kader, Managing Partner in Taxation Services Africa and Lead in Financial Services Taxation comments on FATCA 
 
"The OECD, the progressive economic policy body comprising 63 member countries, including South Africa, will rigorously enforce FATCA from next year. The OECD recognises the crippling effect that tax evasion has on emerging markets, and as such, is adamant that global financial markets will have to prepare themselves for an increase in compliance requirements as a result of FATCA. South Africa has claimed to be the first country to be FATCA-ready, yet the stark reality is that this is an administrative and tax challenge for firms, due to the multi-level requirements from the IRS, SARS and the OECD.” 
 
Eva Crouwel provides additional insight into FATCA 
 
Q: What is FATCA and why it is such a big issue in SA?
 
A: FATCA is the acronym of the "Foreign Account Tax Compliance Act”, which forms part of the United States H.I.R.E –act. Enacted in 2010, FATCA is part of the United States Tax legislation (Chapter 4) and aims to combat overseas tax evasion by Unites States tax residents. FATCA is currently the only piece of national tax regulation that is for sole object non-national financial institutions. FATCA enforces the identification of US tax resident clients by non-US financial institutions as well as reporting on the value of certain assets held by those clients. To enforce this, FATCA also contains a 30 per cent withholding tax on certain US source payments. In addition, FATCA contains tax enforcement measures that are native to US tax regulations, enabling the United States Internal Revenue Service (IRS) to impose penalties for non-compliance to both US tax residents and non-national financial institutions.
 
As a result of the FATCA regulations, South African companies who do direct and indirect business with US organizations and/or have US tax residents as clients, whether in South Africa, Africa, Europe or further afield, must comply with the United States Foreign Account Tax and Compliance Act (FATCA), or risk being financially excluded from lucrative markets the world over.
 
Q: Why SA is lagging with regards to FATCA compliance, especially when compared with other international markets?
 
A: FATCA is largely perceived as consisting of the identification of a client and reporting to the local tax authority or IRS. In fact, there is more to FATCA than just that and institutions often struggle to comply with the complex requirements of FATCA. Compared to international markets and internationally operating institutions, the actual impact of FATCA on organisational processes and procedures as well as non-compliance repercussions are poorly understood and adopted by companies in South Africa. This is mostly the case because it is perceived that the expertise level required for compliance is low and compliance measures are expensive. 
 
To add to that, the South African industry has had a relatively long wait from the announcement of FATCA in 2010 until the actual ratification of the agreement with the IRS (in October 2014) and the actual definite interpretation guidance from the local tax authority (SARS) in end of June 2015. This is often a trigger event for "compliance fatigue” within organizations.
 
Q: Who will FATCA affect and what the repercussions are for non-compliance?
 
A: SARS has concluded an agreement with the United States Internal Revenue Service (IRS) that requires certain type of SA companies to disclose specific information on their customers and employees with respect to their offshore accounts and investments. 
 
Because of the wide range of types of institutions and businesses that are defined as a "Financial Institution” or have certification obligations towards counter parties, FATCA  impacts the financial services industry as a whole, not only those financial institutions that have US tax resident clients. For example; if a South African company does business with a financial institution in Europe, but this financial institution is listed on the New York Stock Exchange, then the South African company can be asked to prove its entity status for FATCA purposes.
 
As a result of the agreement between South Africa and the United States, an amended version of FATCA has been implemented in the South African tax law. Non-compliance therefore constitutes a breach with local tax law. SARS’s most recent proposal, issued end of June, will result in the possibility to penalize companies as much as R16 000 per month per non-compliance issue.  In addition to that, a 30 per cent withholding of tax is the minimum cost for non-compliance from a US perspective, while additional (exclusion from the IRS list of "compliant financial institutions” (Deemed compliant FFI) is the greater consequence of repeated, incorrect reporting or long-term incompliance.

The inability of a financial institution to prove their compliant FATCA status to a third party can result in reputational damage in the market as well as a refusal from market players to transact with that institution, effectively shutting out non-compliant entities from market spaces.
 
Q: Why the OECD requires its member countries to be compliant with FATCA?
 
A: As mentioned before, FATCA is a US tax regulation, which is enforced by the United States, not by The Organization of Economic Co-operation and Development (OECD). However, the ‘bigger picture’ belying this US legislation is its precursory role driving the Automatic Exchange of Information; an integral portion of much broader-scale initiatives from the OECD. Although the OECD does not require its member countries to enforce FATCA, FATCA’s effects are dwarfed by the potential of those emanating from the future OECD program for tax information exchange across global markets in future.   
 
The OECD is adamant that global financial markets will have to prepare themselves for an increase in compliance requirements. As a start, the OECD has determined a common reporting standard for financial institutions, worldwide. The standard facilitates the agreed exchange of data relating to actual vs. reported resident income streams. In a nutshell, this comes down to the wide range of information requirements (wider than the current FATCA requirements) being adopted into a global standard for tax information exchange. It also extends to countries underwriting the OECD standard. 
 
Q: What can South African companies do to ensure that they comply with FATCA?
 
A: Taking into consideration the potential damages companies face, both from a tax and reputational/ market conduct perspective, it is well advised to understand and employ reasonable mitigating actions in the wake of FATCA. 
 
South African companies that are not yet up to speed need to ramp up their compliance measures by seeking appropriate advice and by obtaining knowledge of the requirements. Companies need to start ensuring proper client due diligence, implementing adequate tooling and processes for each FATCA deployment phase and having robust auditable frameworks for reporting in place. 
 
Companies also need to gear up for the future world in which, with the coming of OECD’s Common Reporting Standard, we can expect a steep increase in compliance requirements.  Although the administrative burden of compliance may seem onerous it also brings opportunities and opens doors to discuss new ways for governance and best practice within organizations.  
 
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This article first appeared on the September/October 2015 edition on Tax Talk.   

Comments...

Amanda M. Marume says...
Posted 05 November 2015
A very informative article

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