The countdown begins for FATCA…

Executive summary

The deadline to register as a participating insitution for compliance to the United States government’s Foreign Account Tax Compliance Act (FATCA) is looming. This therefore heightens the urgency for the management of financial institutions that conduct business with US individuals and/or entities to know what the FATCA law is all about in order to avoid the harsh consequences that may ensue. 

Will the Philippines be affected by FATCA? If so, how will non-compliance to FATCA affect the local banking and financial community?

The countdown begins for FATCA...

The Foreign Account Tax Compliance Act (FATCA) provisions go into effect on July 1, 2014.  FATCA is a US law designed to curb tax evasion among US persons hiding income and assets overseas.  So why should Juan or our Philippine banks even bother with FATCA?

The country’s long history under US rule as well as the presence of US troops conducting joint military exercise on our shores may be good reasons why we may have US  persons ( defined to include US citizens and resident individuals (natural persons) as well as US entities (legal persons) amongst us.  Plus, it is possible that some of our own relatives and friends hold US passports (or ‘green cards’) while keeping their Philippine passports.  These are balikbayan kababayans who enjoy the fruits of their hard earned labor from the US and then come back home to spend the winter months in our tropical shores.  Some of them have since retired and have built new homes and stayed permanently.  While enjoying retirement, some may have also made arrangements to receive their US source dividend and/or interest income through their designated local banks here.  

Because the local banks hold the deposits of our balikbayan kababayans, bank compliance officers, or others in authority who are tasked to ensure their banks understand what FATCA requires and what its implications are to their banks’ operations should worry if their institutions have not yet signed up as FATCA participants at this eleventh hour.
FATCA was enacted on March 2010.  After four years, the US Treasury and Internal Revenue Service (IRS) have provided several rounds of clarifications and additional guidance , which show that they have considered the concerns of the various stakeholders and have made the necessary amendments.  On February 20, 2014, the Treasury and IRS released more than 560 pages of legal parlance that is guaranteed to make your nose bleed and give you a good night’s sleep.  The law was written by American tax experts, so it is possible that, without appropriate assistance from experts, our local banks may not be able to fully interpret FATCA.

The penalty for non-participation is a hefty 30% withholding on the bank’s own investment from the US capital markets (as well as the investments of its customers).  On top of this, the potential reputational risk of not being part of the group of financial institutions that have signed up with the US government as a participating foreign financial institution (PFFI) may hold even more weight.  Once you’ve done your math and realized that both the potential reputational risk and withholding may amount to a huge loss, it can only make sense for a bank to register immediately as a PFFI and get a Global Intermediary Identification Number (GIIN).

Does it end there?  Do you really know what you have signed your bank into?  Is it just the compliance officers who should be concerned?  What about the board and senior management?  What role do they play?

Let’s step back a bit.  The international banking community was initially outraged at the onset of FATCA because of the potential interference of US tax authorities in their countries’ banking system.  Imagine Uncle Sam telling our local banks to report on its US citizens living in the Philippines or else Uncle Sam withholds 30% of the bank’s investments in the US capital market.  Isn’t Uncle Sam asking our banks to violate the Philippines’ bank secrecy law?  If you were following the Corona impeachment you will recall that his lawyers were using the bank secrecy law as a reason to keep his bank deposits cloaked.  We all know what ensued from that. The impeachment court decided to subpoena Corona’s bank records, including his foreign currency deposits, in order to prove that the Chief Justice misdeclared his statements of assets, liabilities and net worth.

Going bank to FATCA, the impossible became possible when the countries finally came around and understood that they too can track their own citizens trying to evade taxes under a quid pro quo tax information exchange agreement with the US.  The resistance started to collapse.  At least 24 countries have now signed bilateral inter-government agreements (IGAs) and around 19 more countries have substantially agreed IGAs with the US.  Many are in serious discussions and are expected to sign soon.  The Philippine government is included among them.  Given the limited time until July 1, 2014, can all the IGAs be completed and made effective?  

IGA or no IGA, Philippine banks (which are by now inundated with an alphabet soup of jargons from FATCA to FFI, NFFE, PFFI, and DCFFI, among others):  Are your processes and systems all set to identify US persons and entities at onboarding?  What about your existing accounts? Have you done your due diligence?  Waivers obtained? Do you have the right internal and external communications? Do you have branches where there is an obvious concentration of US citizens like Subic, Clark, Sangley, General Santos, etc.? Does your bank’s staff know how to handle recalcitrant taxpayers or those who refuse to cooperate?

After the long “wait and see” attitude of the Philippine banking community,  we expect most banks with exposure to US  persons and heavy investments in US capital markets would proceed with FATCA compliance.  Thus, despite the initial reluctance of banks, the prudence to stay in that market would most likely have prevailed.

We also expect that those who chose to participate would have initiated the registration of their organizations and received their GIIN.  In an announcement last April 3, 2014, the registration deadline for the first IRS FATCA list (to be published on June 2) was extended from April 25 to May 5.  Although June 30 is the official cut-off, a public announcement on June 2 will be made on which institutions have already registered as PFFIs as of May 5.  It is expected that PFFIs will check whether their counterparties are also participating.  The reputational risk of losing business with these PFFIs (assuming the local bank did not participate) should determine whether it was worth participating in the first place.

For those who have decided to register, the continuing cost of compliance should also be a concern.  What processes and technology support need to change?  Has there been enough thinking and planning around these changes? Who is responsible for ensuring proper monitoring and continuing compliance? What internal controls are in place to provide reasonable assurance that the banks will be able to provide accurate and timely reports under FATCA? What internal and external communication plans are in place to announce the bank’s compliance with FATCA?  Are the board and senior management aware of what it takes to comply? Does the responsibility for FATCA rest solely upon the compliance officer?  

The worldwide implementation of FATCA is a test case. Expect that there will be more FATCA type cousins from around the globe since several countries are seriously looking at implementing something similar to curb tax evasion.  Specifically, the global Common Reporting Standard (CRS) was released by the Organisation for Economic Co-operation and Development or OECD in February 2014.

Can the bank’s processes and systems handle a multiple FATCA implementation, for instance, not just US indicia but also UK, China, European requirements?

There are myriad of things to do before July 1 and registration is just one of them.  Banks must check what needs to be done before June 30 and beyond.  Technically, remediation of pre-existing accounts need not be completed until 1 January 2015 (prima facie FFIs), 1 July 2015 (high-value pre-existing individual accounts), and 1 July 2016 (all other accounts).

The threat of false representation, perjury and being an accomplice to would-be tax evaders of US tax law are very real, not just for the compliance officer but for the bank’s senior management and its Board as well.  Bear in mind that ignorance of the law excuses no one.  So before you sign up for FATCA, make sure you have appropriate assistance to help you interpret and comply with the law.

The author is the Managing Partner of PricewaterhouseCoopers Consulting (Philippines) Inc., a member firm of the PricewaterhouseCoopers global network.