Bank, Insurance, Asset Management - FATCA

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The FATCA impact depends on the banking business lines.

Do you receive U.S.-source income to your bank account? Does your portfolio contain income from U.S. investments? Do you know who qualifies as a U.S. client? Under the FATCA regulations, all foreign financial institutions that receive or handle income from U.S. investments will have to implement a new, comprehensive due diligence and record-keeping system that will enable them to identify U.S. account holders and report any information requested by the Internal Revenue Service (IRS). Foreign financial institutions that have entered into an agreement with the IRS undertake to report the information they acquire about their U.S. account holders during due diligence each year, and to deduct the 30% withholding tax on payments made to accounts whose holders fail to provide the information requested by the IRS. The foreign financial institutions’ withholding obligation also covers passthru payments, i.e. U.S.-source payments made to foreign financial institutions that have not entered into an agreement with the IRS.



How the new rules will affect insurers, and why early action is the best policy?

Annuity products, insurance contracts with cash value?  Mutual funds and investment management operations? According to the current FATCA regulations these insurance products are in scope. As opposed to banking and brokerage, insurance is generally a “low touch” business- meaning insurers frequently do not have contact with heir policyholders except at the initial purchase of the product, or when there are policy changes and transactions during the lifetime of the policy. Bankers and brokers frequently make payments throughout the year (interest, dividend etc.) and consequently have several times within a year to communicate with their customers. Insurance companies may need to change how and how often they interact with their policyholders, therefore FATCA poses specific challenges to the insurance industry. Opening new accounts, purchase a policy may require more documentation, and insurance companies may have to follow up with customers to ensure that all required forms by FATCA are kept up-to-date. This is an area for which the insurance industry continues to seek more guidance, as achieving compliance in this area would require some fundamental administrative changes to processes.


Asset Management:

Why asset managers should prepare now?

FATCA carries important implications for asset management industry by significantly increasing the types of payments that could be subject to US withholding tax, such as direct or indirect payments of gross proceeds, or payments on certain swaps, and the number of entities that could be subject to US federal tax withholding on such payments, including exchange-trade funds, fund-of-funds and offshore distribution channel intermediaries that hold, or through which others hold, direct or indirect interests in US investments. In the highly intermediated world of cross border portfolio investment, it is often extremely difficult to identify the ultimate beneficial ownership. The 30% withholding tax is imposed on gross proceeds from the disposition of investments,  regardless of whether received directly through withholdable payments or deemed to have been received indirectly through passthru payments, will make most US investments uneconomical. If a fund has any material turnover, the tax could readily exceed the fund’s net asset value.  Asset managers should not delay in assessing FATCA’s impacts on their fund entities and operational functions. The FATCA agenda needs to be at the forefront of company and investment decisions: ranging from what trades to make, to what structure to embrace, to which investor to take on. Non-compliance may not only lead to unexpected tax costs, but also reputational risks.