Moves by the US Internal Revenue Service to mitigate the impact of tough tax compliance laws on expats have been cautiously welcomed by a financial industry fearful of a surge in costs.
FATCA, which stands for Foreign Account Tax Compliance Act, requires foreign (non-US) financial institutions to identify their US account holders and annually report them to the IRS, along with details of the accounts held and any transactions made during the year. An FFI that does not agree to comply must pay a 30 per cent tax on all US "withholdable payments" it receives, including income, gross proceeds of sale and pass-through payments from other FFIs.
As recounted by this publication since the law was passed last year, financial institutions, law firms and technology companies have warned that FATCA will deter some firms from serving US expats at all, reducing the amount of choice expats have in obtaining financial services. Over a year ago, Pershing, part of BNY Mellon, adjusted some of its service offerings to UK clients as a result of anticipated FATCA costs, as this publication reported exclusively at the time. Societe Generale and RBC Wealth Management have, for example, stated that FATCA will substantially drive up costs on the industry. (However, some firms see FATCA as creating an opportunity to pursue US expats as a niche market).
However, guidance notes for FATCA that were issued late last week allow FFIs to delay entering an agreement with the IRS until June 2013, providing for effective reporting on US clients in 2014, which is a year later than the industry had previously expected.
Tony McLoughlin, a member of the US Family Office group and a director at the independent wealth manager London & Capital, said that “despite this reprieve, many companies - particularly larger organisations - will still struggle to develop systems, processes and procedures to be in compliance with the requirements in the next two years”.
“Clearly the most immediate impact will be to a company’s bottom line - its revenue due to the costs of implementation and resource allocation. Smaller organisations will be able to adapt systems far more quickly and at a much lower cost in relative terms, and as a result, are likely to benefit from picking up more US-linked business,” he said.
“Companies are having to completely re-engineer their business model - their distribution model and product range - to ensure they are US-compliant if they wish to undertake work with US citizens and green card holders. This is complex and time consuming, and many have decided to exit the market - whilst others are looking at ways in which they can remain involved,” said McLoughlin.
“We find ourselves talking at this time with some of the largest and best-known wealth management firms in the UK, investment platforms and networks - indeed businesses right across the financial services spectrum. Many of the firms who were looking to exit this market completely - which we would have hitherto considered competitors - are now looking to explore strategic alliances to retain a presence in this market,” he said, adding that he expects the IRS to provide further guidance as lobbying on the measures continues.
The guidance issued by the IRS, Notice 2011-53, provides transitional relief by delaying the implementation of certain aspects of the legislation and also tries to clarify other details.
“This additional guidance notice, and the transition relief it offers, will be welcomed by affected companies….Greater clarity - and additional time - will allow institutions to prioritise their FATCA implementation objectives, confident that these are the priorities shared by the IRS,” said Chris Tragheim, tax partner and leader of FATCA services for Europe, the Middle East and Africa at Deloitte.