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eportFATCAand its implications forthe financial servicesNews&ViewsBy Dženet Garibović,Manager, PricewaterhouseCoopersThe Foreign Account Tax Compliance Act (“FATCA”) was enacted underthe Hiring Incentives to Restore Employment (“HIRE”) Act of 2010 toprevent tax evasion by US persons through foreign financial institutions.On February 8, 2012, the U.S. Treasury and the Internal Revenue Serviceissued proposed regulations that provide details of the provisions containedunder FATCA. The regulations will significantly affect many financialinstitutions worldwide and in this region as well. The US Internal RevenueService (“IRS”) believe that many US citizens are evading US taxes by hidingtheir assets overseas through Foreign Financial Institutions (“FFIs”).FFIs are financial institutions outside the US, who hold financialinstruments for investments which benefit another person. Thisgenerally includes banks, insurance companies, investment funds, likehedge funds, and some other asset managers and custodians. In orderto avoid FATCA imposing 30% US withholding tax on certain payments,FFIs must comply with due diligence procedures. These proceduresare designed to identify and report information on US investors whohave invested in either non-US financial accounts or non-US entities,and withhold on certain investors who do not provide information. Inessence FATCA determines that all financial institutions worldwide willhave to pass information about US clients to the US tax authorities.The due diligence, withholding tax and information reportingrequirements pursuant to FATCA implementation are expected to significantlyaffect the business practices, policies and procedures, andsystems of foreign financial institutions. FATCA compliance poses substantialbusiness and operational challenges from the identification anddocumentation of customers, to the FFI’s on-boarding and IT systems.It will have impact on tax, legal, back-office administration, operations,and other functions in the FFI and take substantial time and resources toaddress. FATCA will come into force on 1 January 2013.The governments of the US, France, Germany, Italy, Spain andthe United Kingdom (“the FATCA partners”) released a Joint Statementin February 2012. The Joint Statement’s purpose is to ensure betterinternational tax compliance and faster and easier implementation ofFATCA. This can be achieved by automatic exchange of information ona reciprocal basis under the existing bilateral tax treaties and by using ajoint approach with regard to the supply of data to the authorities of theFATCA partner country. FFIs in the FATCA partner countries will be ableto report the information required to be compliant under FATCA to theirlocal government agencies, as opposed to the IRS directly. Other countriesare expected to follow suit and seek to become FATCA partnersin the near future. However, it remains to be seen whether this bilateralapproach will significantly reduce the burden of FATCA compliance forFFIs or whether it may make compliance by FFIs more challenging. TheIRS is expected to issue a final regulation on FATCA this summer.2/2012 ISSUE 19