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Foreign Account Tax Compliance Act (FATCA) – practical implications for South African entities

Friday, 30 May 2014   (0 Comments)
Posted by: Author: Deon Wilken
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Authors: Deon Wilken and Hoffman Van Zyl (DLA Cliffe Dekker Hofmeyr)

FATCA was enacted in 2010 by the United States (US) to improve tax compliance with regard to  offshore  accounts  of  US  citizens.  Generally speaking,  FATCA  imposes  a  30%  withholding  tax on certain payments to  foreign financial institutions (FFI's), unless the FFI has complied with FATCA's reporting  requirements  with  regard  to  US  accounts handled  by  it.  The  30%  withholding  applies  to  US- sourced income and sales proceeds paid to a FFI for its own account or in respect of any financial account  which  it  maintains  for  others.

In terms of FATCA, the term FFI has been given  a wide definition, and includes (subject to exceptions) amongst others, financial institutions, brokers, dealers, custodians, hedge funds, private equity funds and pension funds. FATCA also extends to non-financial foreign entities (NFFE's) as payments to such entities may also be subject to a 30% withholding tax.

The 30% withholding tax imposed under FATCA shall not apply in the event that FFI's enter into an agreement with the US Internal Revenue Service (IRS), in terms of which the FFI agrees to obtain, verify and report on certain information regarding accounts held by it, and in terms of which it agrees to deduct and withhold a tax equal to 30% of any passthru payment which is made by such FFI to a recalcitrant account holder (being an account holder who fails to comply with requests for information required under FATCA).

The following diagrams illustrate which payments will be subject to a 30% withholding tax under FATCA:

Click here to view diagram.

Example 1

A South African bank (which does not comply with the reporting requirements set out in FATCA) lends an amount of USD1 000 to a US company, which amount will accrue interest at a rate of 10% per annum. The amount of interest to be paid by the US company to the South African bank, being USD100 per annum,   will be dealt with as follows:

Click here to view diagram.

Example 2

A US company which is 50% owned by a South African company, declares a dividend to its shareholders. The South African company, in its capacity as shareholder in the US company, becomes entitled to a dividend of USD100, which dividend is to be paid into such company's bank account held with a South African bank (the South African bank complies with the reporting requirements set out in FATCA whilst the account holder, being the SA company, has failed to comply with requests for information required under FATCA). The dividend to be paid by the US company to the South African company will be dealt with as follows:

Click here to view diagram.

From the above, it is clear that FATCA has a worldwide reach and that the implementation thereof has far-reaching consequences for entities falling within its ambit. Such entities will have to consider the level of change which is required in order to comply with FATCA and consider whether the benefits of complying with such legislation outweighs the costs involved in undergoing the necessary changes, as well as any costs associated with non-compliance. The South African and US governments are in the process of developing an intergovernmental agreement which will regulate the implementation of FATCA. The sharing of information under such agreement may be on a reciprocal or nonreciprocal basis.

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