FATCA legislation to dramatically impact SA financial services sector
20 October 2015
Posted by: Author: Eva Crouwel
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.
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
Crouwel provides additional insight into FATCA
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
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.
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
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
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
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
Q: What can
South African companies do to ensure that they comply with FATCA?
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.
This article first appeared on the September/October 2015 edition on Tax Talk.