Opinion: The Fatca effect

POSTED: 05/4/14 10:48 PM

The Foreign Account Tax Compliance Act (Fatca) is coming to a bank near you real soon. What the implementation of this American fiscal legislation means for account holders in St. Maarten, is explained in this article by Jorik Julsing,  a senior tax manager at PricewaterhouseCoopers in Curacao, who is also a member of the Pwc Fatca-team. Julsing’s insights were first published in the Antilliaans Dagblad.

“Banks, insurance companies and other financial institutions have a lot of obligations with respect to the identification of clients, and another obligation will soon follow. They must collect information for the American tax inspectorate and they will need even more information from their clients. Below is an explanation of the impact of Fatca.

Everybody has a bank account, insurance and maybe also an investment portfolio, pension, or loans. This means that everybody also has to do with financial institutions. Shortly, these institutions will possibly start sending you letters in which they ask you who you are, where you live, what your nationality is and whether you have a visa to live somewhere else.

That seems weird, because when you opened the bank account and when you signed up for the insurance, you already provided a lot of information to them. At least, at that moment you had to fill in a lot of forms that contain your data. Still, they will ask for more information and the reason for doing this is Fatca. It is unknown to most people, and very well known to those who are working in the financial sector.

Fatca is American legislation geared towards the prevention of tax evasion in the United States by people who are taxable under American fiscal law. So far there seems to be nothing to worry about, it seems to be all American business that has nothing to do with most people. But Fatca is special, because through this legislation the American tax inspectorate is using the data foreign institutions have to collect for them.

Fatca obliges foreign banks, insurers, investment funds and other financial institutions to let the American tax inspectorate know whether they have clients that are liable to pay taxes in the United States (US persons) and to report the income these US persons receive. If the client does not want that this information is provided , the financial institution has to withhold 30 percent in taxes from all income that is coming from the United States for this client; it also has to terminate its relationship with this client.

We often get the question what Fatca’s legal basis is and how it is possible that the American legislator is able to play boss over companies in Curacao (and in St. Maarten – ed.). The answer to this question is simple – there is no legal basis. But that has also been solved in the legislation. The institutions do not have to cooperate and they are certainly not obliged to cooperate, but in that case, the Americans will withhold from all payments to these institutions 30 percent in taxes. This does not only affect payments to the institutions themselves, but also payments that are transferred, for instance to a bank, for a client’s account.

It could therefore happen that a Curacaolenean (or St. Maarten) client of a bank that does not want to cooperate only receives 70 percent of a transfer from the United States to his account, because his bank is not cooperating, while the bank of the one who is making the transfer, does.

In that case, a financial institution has to explain to its clients how it is possible that they receive only 70 percent of their payment. It is to be expected that there will not be many clients left, and that keeps the economic pressure high to cooperate with this system.

Financial institutions will have to determine first whether they will be labeled as such under the Fatca-legislation. That seems easier than it is, because the definition alone takes dozens of pages with examples, explanations and exemptions. Still, practically all banks and insurers will fall under Fatca. For investment funds, pension funds and investments firms it is much more complicated. If the conclusion is that the institution is a financial institution according to the American definition, it will have to register with the IRS, the American tax inspectorate.

Financial institutions that register for Fatca with the IRS then have to identify the US persons in their client portfolio. A US person is not only a resident of the United States, but also someone with the American nationality, a green card, American companies and partnerships, trusts established under the management of an American entity, or any person or entity that cannot be considered a foreigner. This seems not all that important, but it implies that the financial entity has to prove that a person or entity is not a US person, but in fact a foreigner or a foreign entity.

This is where the questions begin. The American government has compiled a list of factors that indicate whether someone is possibly a US person. Top of the list is of course residence in the United States. If a person or an entity is a resident, has a visa or the American nationality, he is a US person under the Fatca-legislation no matter what. But the list also includes an American address, phone number, place of birth in the US, a proxy or someone authorized to sign in the US, a mail box or a hold mail address in the US and  regular transfers to an account in the US.

If one of these factors is present, or if a client manager could have reasonable known that this is so, he is obliged to do more research to establish that the client is not a US person. Part of this process is a form you will have to sign and in which you have to indicate whether you are taxable in the US. In some cases, the American authorities will ask for additional evidence.

This is why you will probably shortly receive a message from your bank, insurer, pension fund or other financial institution with the request to provide additional information and whether you want to sign a statement that you are (or you are not) liable for paying taxes in the US. If you decide not to cooperate, please be aware that many countries in Europe have already indicated that they are interested in this system of information gathering and that large industrial countries like Russia and China, already have stated officially that they will not frustrate the system. The expectation is therefore that few countries and institutions will not cooperate and that it will be very difficult to get away from the Fatca-legislation.

Finally, it is important to emphasize that banks, insurers of other financial institutions will only provide information to the American tax inspectorate about the earlier mentioned US persons. If you do not have any ties with the US, they will not provide your information to them. The impact of Fatca is significant, but big brother’s reach does not go so far yet that the US will receive all information.”

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