Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act, or FATCA, is legislation that was passed by the United States government in 2010 and is intended to prevent tax evasion among U.S. persons using financial accounts held outside of the United States.
While a desirable goal, the banking industry around the world, including here in Canada, has significant concerns about this legislation, in particular that parts of FATCA may conflict with Canadian law and have highly complex procedures and requirements that will be very difficult and costly for Canadian financial institutions to comply with.
Beginning in July of 2014, under FATCA banks and other financial institutions will be required to identify which of their clients worldwide are U.S. persons or are businesses with substantial U.S. ownership. Banks must report the account information of these individuals or groups to the U.S. Internal Revenue Service (IRS). FATCA has created a host of challenges for banks in Canada and around the world. These include:
Conflicts in client documentation requirements – Most countries, including Canada, have domestic laws setting out the type of identification that is required to open a bank account. In Canada, banks follow federal know-your-client rules set out in anti-money-laundering legislation as well as the Access to Basic Banking Services (ABBS) regulations, which outline what type of identification is required to open a bank account. FATCA identification requirements may be inconsistent with those standards.
Conflicts in providing information – FATCA will require that financial institutions provide client account information on individuals that are identified as U.S. persons, even if they are also Canadian citizens and Canadian residents. This has raised significant privacy concerns in Canada and in other countries.
Conflicts in withholding funds – FATCA will require that institutions withhold on both U.S. and non-U.S. source income if the client cannot provide sufficient identification to meet FATCA standards. Financial institutions from many countries have indicated that some contracts and client agreements may not allow for this type of withholding.
FATCA is also enormously expensive and complex to implement.
The penalty for non-compliance with these complex rules is very severe for both banks and their clients. The penalty includes a 30 per cent withholding tax on all U.S. source income flowing to the bank and its customers, and a 30 per cent withholding tax on the gross proceeds of the sale of U.S. securities by the bank and its customers.
Some countries, including Canada, are negotiating intergovernmental agreements with the United States which will set out alternative requirements for their financial institutions. Therefore, the requirements outlined here may change.
Many groups, including the CBA, have raised their concerns with the IRS and the U.S. Treasury Department to make sure they understand the potential compliance challenges and consider them when drafting the final regulations. The CBA has also expressed the industry’s concerns with the workability of these rules to government officials in Canada and the U.S. and will continue its efforts to lessen the burden that FATCA will impose on both banks and their customers.