Foreign Account Tax Compliance Act (FATCA)

by admin on March 2, 2012

New U.S. Regulations | Wide-Ranging Implications for Banks Operating in Latin America and the Caribbean

The U.S. Internal Revenue Service and the Treasury Department recently released much-anticipated proposed regulations for implementing the Foreign Account Tax Compliance Act (FATCA). Wide-ranging implications for banks operating in Latin America and the Caribbean are expected.

According the U.S. IRS website,

“…the FATCA is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts. Under FATCA, U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS.  In addition, FATCA will require foreign financial institutions to report directly to the IRS information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.”

InterAmerican Dialogue’s Latin Finance Advisor-Financial Services interviewed Diaz Reus & Targ attorney, Sumeet Chugani, in their February 16-19, 2012 edition:

IADLFA asks:

  • What do the proposed new regulations mean for banks in the region?
  • Are there any surprises in the new regulations?
  • Are concerns over sovereignty and privacy going to be sorted out in time for the scheduled implementation of FATCA next year?

Sumeet Chugani explains:

“Given its extremely broad scope, the proposed new FATCA regulations will apply to all non-U.S. businesses with U.S.-based investments, including banks and foreign financial institutions (FFIs) that serve only a very nominal amount of U.S. clientele. Expanding upon ‘FATCA 2011,’ the proposed regulations now require amplified due diligence— pegged to the value and risk profile of each FFI account. FATCA will also require FFIs to ‘withhold’ on ‘pass-thru payments’ from FFI account holders or other financial institutions that fail to comply with FATCA. In practice, this would require all FFIs to effectively act as a tentacle of the IRS, scrutinizing each transaction that flows through their accounts. Banks in Latin America and the Caribbean must then make a tough choice of whether to comply with the proposed rules, or risk noncompliance under their protectionist local laws, which may prohibit such dissemination of an account holder’s private information. This could cause banks in the region to stop doing business with U.S. citizens or dual-status taxpayers who, if holding any form of U.S. residency status, will be treated as U.S. account holders for FATCA purposes. The proposed rules also require financial institutions to implement an enhanced due diligence policy, including a step-by-step process for obtaining U.S. account holder identification and personal information. This new level of diligence will require banks and FFIs that continue to do business with U.S. clients to overhaul their current anti money-laundering and know-your-customer procedures to include the new, enhanced information. With the deadline of less than one year looming close, Latin American and Caribbean banks will need to rapidly undertake operational modifications, which may include austerity measures that reduce certain business prospects, for the sake of correctly applying FATCA. This may require terminating certain FFIs’ ‘tax haven’ status, and the removal of certain attractive privacy features.”

Email Sumeet Chugani

Excerpted from InterAmerican Dialogue’s Latin Finance Advisor-Financial Services, February 16-19, 2012 Edition.

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