Nation e-Edition

Barbados ready to ensure FATCA compliance

By Christopher Sambrano | Thu, January 03, 2013 - 12:00 AM

American law dictates that citizens pay tax on worldwide income regardless of where they live and work. Yet every year the United States loses an estimated $100 billion in tax revenues to what the Internal Revenue Service (IRS) considers “offshore tax evasion” by Americans using financial institutions mostly located in low-tax jurisdictions.

So what does the IRS consider to be examples of such tax? Well, it could simply be a Barbadian holding a green card and living in New York who does not declare the income earned from renting his family home in Barbados, or as complex as income from United States-sourced investments distributed to account holders by an international bank in the Cayman Islands.

To stem these revenue losses, the United States enacted the Foreign Account Tax Compliance Act (FATCA) in March 2010. Its purpose is to help the IRS identify American taxpayers with accounts in foreign financial institutions (FFI) or United States ownership interests in non-financial foreign entities (NFFE).

Furthermore, FATCA seeks to enforce information reporting through the threat of a withholding tax – not only on the monies of recalcitrant citizens, but where applicable on the funds earned by a financial institution as well.

An FFI is broadly defined by FATCA to include commercial banks, broker dealers, trust companies, investment funds and life insurance companies as well as many other entities. While there are exceptions to many of these categories, most Caribbean financial institutions will be caught in the net.

Primarily, FATCA requires an FFI to perform four key tasks:

• First, it must identify new United States customers.

• Second, it must examine existing customer information for certain criteria that will determine whether or not a customer must be treated as a United States citizen:

– United States citizenship or resident status (for example, green card);

– United States birthplace; United States residence or correspondence address (including a P.O. Box);

– Standing instructions to transfer funds to a United States account (for example, people with family members studying in the United States would unwittingly be lumped in this category);

– Care of or the holding of a United States mail address listed as sole address on an account;

– Power of Attorney with a United States address; and a United States telephone number.

• Third, it must report annually on the balances in these identified accounts.

• Fourth, if the account holder doesn’t comply with the request for information, the FFI must withhold 30 per cent of certain types of income received from the United States for the account holder’s benefit. These include interest on investments, dividends, and insurance annuity payments.

In essence, realising how difficult it could be to trace individuals, the IRS has put the burden on FFIs to track and report those clients who fit the bill. It has also established a phased timeline between 2013 and 2017 during which these four tasks must be performed.

The IRS is so serious about this, that banks which do not sign an agreement by July 1, 2013, indicating they intend to comply with the requirements of FATCA, will face stiff financial penalties. Put simply, if they won’t employ due diligence procedures to identify and report details on United States account holders to the IRS, the 30 per cent withholding could be applied to their own sources of income from the United States.

To appreciate the impact FATCA will have on the region, one only need look at how dependent Caribbean countries have become on their international financial services sectors. Through taxes, salaries and other forms of payment, international businesses, banks and insurance companies contribute significantly to the social and economic development in the region.

In Barbados alone a recent study of the island’s international financial services sector indicates that this sector contributed on average 60 per cent of corporate taxes between 2008 and 2010. It was also estimated that for each tax dollar paid, the sector spent an additional three dollars in the local economy. Imagine the potential loss of capital inflows that might occur if compliant FFIs overseas refuse to conduct business with non-compliant FFIs in the region.

Although the proposed regulations are tax based, the largest challenges for FFIs may be implementing the process and system changes needed for compliance, educating staff and communicating requests to customers within the required deadline – all while trying to minimize disruption to normal operations.

Additional challenges include the cost of changes to systems and technology and the time and expense of conducting reviews of paper records. Local regulations in some countries forbidding personal account information to be publicised could also hinder compliance because they conflict with FATCA regulations. Yet compliance is not optional as even the perception that a financial institution will not be FATCA compliant may lead to business flight and termination of key relationships.

So what are FFIs in the Caribbean doing? Many regional entities have started reviewing and amending their internal processes and procedures to assess and mitigate the impact FATCA will have on their operations. Additionally, the Caribbean Association of Banks has also sponsored FATCA awareness sessions in the territories where their members are located, to increase the understanding and awareness of FATCA among the population.

Barbados has a strong history of compliance, and with the heavy presence and influence of the Canadian banks and strong trade ties and treaties with Canada, our banking system should be compliant.

These international institutions will certainly ensure their banking network becomes compliant as most of these banks likely already have robust programs in place to ensure FATCA compliance and ultimately the continued stability and security of this vital sector.

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