ABA Position Paper on FATCA Compliance

ABA Position Paper on FATCA Compliance


  1. Foreign Account Tax Compliance Act (FATCA) was enacted by the US in March 2010 with a view to assisting the effort to improve US tax compliance. Foreign financial institutions are entrusted upon with a duty to report to the US Internal Revenue Service, accounts held by US nationals in exchange for being exempt from a thirty percent tax on US –sourced income.


  1. Since then a series of changes has been made to the draft rules which have yet to be finalized. Comments have been received by the US Treasury from worldwide trade associations, including ASEAN bankers associations’ members. Although those changes have to some extent reduced the rigidity of some requirements, major legal impediments still remain.  The US Treasury has recently announced another postponement of a phased-in requirement of a customer on-boarding procedure; consideration may have been made to those unresolved impediments.


  1. Another proposal also introduced by the US is an intergovernmental approach where FATCA compliance can be achieved if a foreign country enters into an agreement with the US and has its national tax authority obtain required US account information from its own financial institutions and share them with the US Internal Revenue Service (IRS). The US has already moved forward with joint statements with large economies and also released two draft model agreements, paving the way for such intergovernmental approach. It seems the US has currently engaged many countries in the  discussion with a view to assessing their interest in taking the intergovernmental approach to help the US fulfill FATCA objective and to reduce compliance cost of those countries’ financial institutions. However, on July 12, 2013, the IRS proposed the extension of FATCA Implementation from original effective date starting January 1, 2014 to July 1, 2014 (IRS Notice 2013-43), though, foreign financial institutions (FFIs) will need to finalise their negotiation with IRS by April 25, 2014 to ensure inclusion in the June 2014 IRS FFI List.


Brief details of FATCA

  1. The purpose of FATCA is to increase transparency regarding U.S. Persons that may be investing and earning income through non-U.S. financial institutions. The new legislation seeks to prevent tax evasion by U.S. Persons that may hold accounts and investments in foreign financial institutions (“FFIs”) or other financial intermediaries, but fail to declare and pay tax on that income in the United States.


  1. Generally, FATCA requires an entity recipient of a “withholdable payment” (typically, U.S.-source investment income) to report on certain U.S. account holders and interest holders, or demonstrate that there are none. A FFI does this by reporting these account holders annually to the IRS. A non financial foreign entity (“NFFE”) does this by reporting on certain U.S. Persons that are substantial owners of the beneficiaries of the payment. If the payee cannot establish that it has properly reported this information, the 30% FATCA withholding tax will apply and must be withheld by the withholding agent making the payment. FATCA provides many exclusions for entities and situations deemed to be at low-risk for evasion of U.S. tax. In countries that have signed an intergovernmental agreement (“IGA”) with the United States, reporting may be directed through the local government instead of the IRS.


  1. FATCA affects U.S. Persons who are individuals in a number of ways. As intended, FATCA will make it more difficult for U.S. Persons to maintain accounts with FFIs without declaring the assets held in such accounts to the IRS and paying appropriate tax on such assets. Incentivizing FFIs with the threat of withholding on their U.S.-sourced income if they do not require such reporting is the basic framework of FATCA. If a U.S. Person is a recalcitrant account holder and does not provide required information to a PFFI or Reporting Model 1 FFI, the U.S. Person faces the possibility of withholding on income connected to his account and later withholding on gross proceeds from the sale of assets in his account. Further, the U.S. Person faces the threat of closure of the account, since a PFFI will be required to close the account if possible. These measures will leave U.S. Persons with few options if they wish to maintain undeclared overseas assets. Further, certain entities may decide not to work with U.S. Persons at all as a result of FATCA, closing an existing account or refusing to open a new account. This may result in fewer investment options for U.S. Persons investing overseas, where FFIs respond to the financial burden of FATCA compliance by freezing out U.S. account holders.


  1. Under FATCA, the “Specified U.S. Person” is any U.S. Person with certain exceptions. The exceptions from Specified U.S. Person status represent categories the IRS believes are at lower risk for participating in tax evasion. Accounts and beneficial interests held by U.S. Persons that can demonstrate that they are not Specified U.S. Persond are not subject to FATCA’s withholding.


  1. 2013 Policy Adocacy1 700 x 466A U.S. entity is a person that is not an individual, where that person is organized in, governed by, or taxable in the United States. A U.S. Person is a citizen or resident of the United States; a domestic partnership; a domestic corporation; any non-foreign estate; and any trust if both (i) U.S. courts exercise primary supervision over the administration of the trust, and (ii) one or more U.S. Persons have the authority to control all substantial decisions of the trust.


  1. A substantial U.S. owner of an entity is a Specified U.S. Person owning, generally, more than 10% of that entity. For a non-U.S. corporation, this means owning more than 10% of either the vote or the value of the entity. For a non-U.S. partnership, this means owning more than 10% of either the profits interests or the capital interests in the partnership. For a trust, this means holding more than 10% of the beneficial interests of the trust or, where applicable, any level of ownership of the trust (even if owning less than 10% interest).


  1. There are two types of withholdable payments:
  • FDAP income: any payment of U.S.-sourced income that is fixed or determinable, annual or periodic (“FDAP income”); and
  • Gross Proceeds: the gross proceeds from any dispositions occurring after December 31, 2016, of any property that can produce U.S.- sourced interest or dividends (“Gross Proceeds”).


  1. The most common types of FDAP income (though subject to exceptions) are interest, dividends, rents, royalties, and capital gains. A payment of FDAP income will be a withholdable payment if such income is from sources within the United States and is not effectively connected with the U.S. trade or business of the payment’s beneficial owner. FDAP income generally includes all U.S. source income that is not effectively connected to a trade of business in the United States. FDAP income does not include gains from the sale of investments or gains from the sale of U.S. real estate.


  1. The second type of withholdable payment is Gross Proceeds. Generally, withholding on Gross Proceeds will apply to the proceeds from the sale of an equity or debt instrument issued by a U.S. Person. Gross Proceeds withholding is notable because the capital gains of Non-U.S. Persons on the sale of equity or debt investments are generally non-U.S.-sourced income that is not subject to U.S. federal income tax. In addition, Gross Proceeds withholding applies to the gross payment and therefore applies even when an investment is sold for a loss.


  1. In conjunction with the issuance of the Proposed Regulations, the Treasury released a joint statement with the government of France, Germany, Italy, Spain and the United Kingdom (the “Joint Statement”) stipulating the intentions of these countries to intensify their co-operation in combating international tax evasion and to explore common approaches to implementing FATCA. The Joint Statement outlined the possible framework for FATCA implementation based on reciprocal reporting between the U.S. and the 5 FATCA partner countries. On 21 June 2012, the Treasury released two separate joint statements with the governments of Switzerland and Japan. Under these joint statements, FFIs in Japan and Switzerland will be able to report directly to the IRS the information on U.S. accounts as required under FATCA. However, the U.S. tax authorities may from time to time request additional information from the Swiss or Japanese governments through existing tax treaties or information exchange agreements. The joint statements also provide that FFIs in Japan will be required to register with the IRS and that FFIs in Switzerland will be required to enter into agreements with the IRS.


  1. On 26 July 2012, the U.S. Treasury published two FATCA model intergovernmental agreements (one is “Reciprocal Agreement” and the other is “Non-reciprocal Agreement”, collectively called the “Model Agreements”) that provide for alternative means of complying with FATCA. The two Model Agreements reflect the intergovernmental approach set forth in the Joint Statement and were developed cooperatively with France, Germany, Italy, Spain and the UK. The Treasury also released a joint communiqué with these same countries, endorsing the model agreements and announcing the parties’ expectation that bilateral agreements based on the model will shortly be concluded.


  1. It is expected that the Model Agreements should eliminate or substantially reduce concerns about conflicts between FATCA and domestic bank secrecy, data protection and privacy laws. In addition, the Model Agreements would simplify the FATCA implementation and ease the compliance burdens for the FFIs.


  1. The basic framework of the Model Agreements is consistent with the Joint Statement. The Model Agreements establish a framework for bilateral agreements with other countries (each a “FATCA Partner”) under which FFIs operating in FATCA Partner jurisdictions will be able to report the required information about U.S. account holders to the relevant tax authorities of their home countries instead of reporting to the IRS. The FATCA Partner tax authority will then transmit this information to the IRS under the existing tax treaty or tax information exchange agreements between the FATCA Partner and the U.S. FFIs in the FATCA Partner would be deemed to be in compliance with FATCA and therefore not subject to FATCA withholding and requirement to close accounts.


  1. 2013 Policy Advocacy3 700 x 466Each of the Model Agreements specifies details of the obligations of the FATCA Partner to obtain and exchange information with respect to accounts held by FFIs in the FATCA Partner by U.S. persons. The Model Agreements (i) set out the time and manner of exchanging information and provide for collaboration between the countries on compliance and enforcement, (ii) describe the treatment the U.S. will give to the FFIs in the FATCA Partner and (iii) include a substantial commitment to continue to enhance the effectiveness of information exchange and transparency. The significant difference between the two Model Agreements is that the Reciprocal Agreement sets out the obligations for the U.S. to report to the FATCA Partner information regarding certain accounts held in the U.S. financial institutions by the residents of the FATCA Partner, while the Non-reciprocal Agreement does not. To put it another way, under the Non-reciprocal Agreement, the FATCA Partner is the only party to obtain and share the required information.


Implications of FATCA

  1. FATCA creates extensive new reporting and withholding requirements intended to prevent tax evasion by U.S. persons, but affecting payment flows, investors, and financial institutions that may have little to do with the U.S. It covers those who invest, hold assets or earn U.S. source income outside the U.S., either directly or through non-U.S. entities. Financial institutions including banks, insurance companies, investment managers, and securities firms will find themselves with FATCA-generated U.S. procedural and compliance obligations, as will custodians and clearing houses. The withholding mechanism is unprecedented and will affect many payments between non-U.S. persons because of the complex enforcement provisions. There are also good reasons for believing that provisions of FATCA contravene, or at least are at odds with the spirit and intent of, the existing network of international tax treaties. Its scope is therefore extremely wide and its implications for the global financial system potentially profound and disruptive.


  1. Special attention in particular to the issues below, given the Association’s possible concern with the stability and health of the Asian, as well as, international financial system:-
  • The likely consequences for global payment systems are becoming a top concern. FATCA requires financial institutions to withhold on payments to clients who have not confirmed their non-U.S. status and are therefore considered potential U.S. persons, and to withhold on ‘passthru’ payments to institutions that have not entered into an agreement to report information on U.S. persons to the U.S. Internal Revenue Service (IRS). Global payment systems do not currently have the capability to deal with withholding payments under FATCA, or to calculate the ‘passthru’ payments that may be channeled through many tiers of intermediaries. It is not clear that there is a ready solution to this problem. Until and unless one can be found, the global payments system will be rendered less efficient and effective, with potentially serious consequences for financial flows and international trade.
  • The due diligence required of financial institutions to determine whether a pre-existing or new client is a U.S. person or a foreign entity which has one or more substantial U.S. owners, and the subsequent reporting requirements, place a very large compliance burden and cost on financial firms. This comes at a time when they are already being required to use scarce resources to make extensive IT and other systems changes to meet a wide array of pressing regulatory requirements arising out of measures such as Basel III, Dodd-Frank and insurance solvency modernization measures, along with national initiatives. The FATCA requirements are adding to the considerable operational strains resulting from these regulatory changes, creating serious additional risks for the firms concerned.
  • As it stands, FATCA presents intractable legal problems in many jurisdictions owing to its extra-territorial reach. Among other requirements for compliance with FATCA, financial institutions are required to pass client information on U.S. persons directly to the IRS. Complying with FATCA will put financial institutions in many countries in conflict with local data privacy (and bank-client confidentiality) laws. The withholding requirements of FATCA will also raise conflicts with local laws and may make it difficult for financial institutions to enter into required FATCA agreements with the IRS.


Issues for consideration

  1. Since the US FATCA Regulation had already been passed and becoming effective soon, there is little if anything much that member Asian or international financial institutions can do to change it. Therefore, the following approaches are suggested for member Asian banks to consider:


  1. The intergovernmental approach addresses a very sensitive issue of FATCA which is the perceived extraterritoriality. Under FATCA, Asian financial institutions are urged to enter into an agreement with the US Internal Revenue Service in exchange for being exempt from the new withhold tax. They will be deemed a US withholding agent when dealing with recalcitrant accounts.   In this context, FATCA seems to have a far reaching impact, subjecting foreign entities to onerous obligations which in some cases clash with domestic regulations.  Liability may thus loom for those foreign entities if they have to comply with FATCA.


  1. The intergovernmental approach will keep most of the implementation domestically, presumably shielding financial institutions from transnational legal difficulty. If adopted, the intergovernmental approach will leave it to the national tax authority to deal with the information reporting from financial institutions. Though this may expand the role of tax authority, it is far better for the foreign entities to deal directly with their own authority than the US Internal Revenue Service.


  1. Certain concessions can be expected from the intergovernmental proposal, although its mechanic is still in draft stage. The US has shown its willingness to work with foreign countries interested in this route. Certain needs and requirements of each country can be raised and discussed with the US when concluding the country agreement. Flexibility makes this approach worth pursuing.


  1. Referring to the information in Annex B and C, there are many financial institutions, especially Asian banks, who had already started the dialogues and/or made the necessary steps in implementing the FATCA process within their institutions. Therefore, it would of great benefit for members of ABA to invite those banks, including non-ABA members, to share their valuable experiences in order to jump start with the necessary steps and tentative issues or obstacles they might face if they improperly handle the FATCA.



  1. For all of the above reasons, FATCA and the proposed regulations that are being considered by the U.S. Treasury Department to implement it are raising deep concerns among financial institutions throughout the world, especially to Asian Banks where most of the above obstacles apply. The Proposed Regulations have raised significant concerns regarding domestic legal impediments, complexity and compliance costs with respect to FATCA rules. The Model Agreements have been developed by related parties as an alternative means for complying with FATCA and with expectations to cope with or ultimately to simplify and eliminate considerable hurdles. Two versions of the Model Agreements generally contain the same contents. However, the Reciprocal Agreement is likely to be a favorable option for FATCA Partner countries since it sets out certain burdens for the U.S. to undertake in terms of exchange of information on the similar nature. Alternatively, the Non-reciprocal Agreement provides that the FATCA Partner is the only party to obtain and report information about U.S. account holders. It is, therefore, suggested that ABA’s member banks start its dialogue with its own government as soon as possible and where each country’s legal framework apply, IGA Reciprocal Agreement approach is recommended.


  1. Also, it is strongly suggested that ABA invite those banks listed in Annexes B and C, especially those who are already ABA members, to share their experience and how they resolve tentative problems or issues that may arise in implementing the FATCA process both in terms of making dialogues with their respective regulators as well as in preparing their internal process to comply with FATCA which should align well with ABA’s objectives to induce our member banks to share and or provide whatever information possible and to be appropriated to other members.


13 September 2013, Ulaanbaatar


Annex A

Notice 2013-43, formally released by US IRS on June 12, 2013, highlights:


Topic Prior Deadline New Deadline
FATCA Registration Portal opens July 15, 2013 August 19, 2013
IRS electronically posting IRS FFI List December 2, 2013 June 2, 2014
FFI finalize registration October 25, 2013 April 25, 2014
Earliest effective date of FFI Agreement January 1, 2014 June 30, 2014
Model 1 FFIs obtain GIIN January 1, 2015 Same
Pre-existing account due diligence
Prima facie FFIs documentation June 30, 2014 December 31, 2014
Pre-existing account testing US financial institutions: Accounts in existence on December 31, 2013 PFFIs/RDCFFIs: December 31, 2013 or as of effective date of FFI Agreement US financial institutions: Accounts in existence on June 30, 2014 PFFIs/RDCFFIs: June 30, 2014 or as of effective date of FFI Agreement
Due diligence for pre-existing high value accounts December 31, 2014 July 1, 2015
Due diligence for pre-existing other accounts December 31, 2014 July 1, 2016
New account due diligence
New account opening procedures January 1, 2014 July 1, 2014
FATCA withholding on new accounts begins January 1, 2014 July 1, 2014
Other provisions
Expiration qualified intermediary/foreign withholding partnership and foreign withholding trust agreements December 31, 2013 June 30, 2014
Grandfathered obligations date outstanding January 1, 2014 July 1, 2014
Reporting US accounts under US Registrations March 31, 2015 (for calendar years 2013 and 2014) March 31, 2015 (for calendar year 2014 only)
Reporting US accounts by local tax authorities (under Model 1 IGA) September 30, 2015 (for calendar years 2013 and 2014) September 30, 2015 (for calendar year 2014 only)
Chapter 3 documentation expiring December 31, 2013 June 30, 2014



From “http://www.pwc.be/en/financial-services-newsalert/2013/us-gov-announces-six-month-extension-to-fatca-dates.jhtml”


Annex B

Asian countries’ FATCA progress, as of May 15, 2013, is internally surveyed by Deloitte.


Country Expected Compliance Best Guess signed in 2013 Earliest Expected
Australia Model 1 IGA 100% Q2/2013
China Model 1 IGA 75% Q3/2013
India Model 1 IGA 60% Q3/2013
Korea Model 1 IGA 75% Q2/2013
New Zealand Model 1 IGA 100% Q2/2013
Taiwan Model 1 or Model 2 IGA 60% Q3/2013
Hong Kong Model 1 IGA 75% Q3/2013
Japan Model 1 IGA 100% Q2/2013
Singapore Model 1 IGA 75% Q3/2013 or Q1/2014
Cambodia Regulations 0% N/A
Indonesia Unknown 50% Unknown
Laos Regulations 0% N/A
Malaysia Model 1 or Model 2 IGA 50% Unknown
Myanmar Regulations 0% N/A
Philippines Unknown 50% Unknown
Thailand Unknown 50% Unknown
Vietnam Regulations 0% N/A



Annex C

 A Global picture of FATCA progress at a glance.


No Region Country As of date IGA Model/

Target IGA Model

Date signed Observation
1 Asia-Pacific Australia Nov 8, 2012 Actively engaged in a dialogue
2 Asia-Pacific India Nov 8, 2012 Working to explore options
3 Asia-Pacific Japan Jun 11, 2013 Model 2 IGA Jun 11, 2013 Agreement signed and released
4 Asia-Pacific Korea Nov 8, 2012 Actively engaged in a dialogue
5 Asia-Pacific Malaysia Nov 8, 2012 Actively engaged in a dialogue
6 Asia-Pacific New Zealand Oct 3, 2012 Actively engaged in a dialogue
7 Asia-Pacific Singapore Nov 8, 2012 Actively engaged in a dialogue
8 Asia-Pacific Taiwan* Apr 2, 2013 Actively engaged in a dialogue
9 Africa Seychelles Nov 8, 2012 Working to explore options
10 Africa South Africa Feb 8, 2013 Actively engaged in a dialogue
11 Americas Argentina Nov 8, 2012 Actively engaged in a dialogue
12 Americas Brazil Nov 8, 2012 Working to explore options
13 Americas Canada Nov 8, 2012 Final negotiations underway
14 Americas Chile Nov 8, 2012 Working to explore options
15 Americas Mexico Nov 19, 2012 Model 1A IGA Nov 19, 2012 Agreement signed and released
16 Caribbean Bahamas* Aug 13, 2013 Model 1 IGA Final negotiations underway
17 Carribean Bermuda Aug 4, 2013 Model 2 IGA Agreement signed or initialed but text not officially released
18 Carribean British Virgin Islands Nov 8, 2012 Working to explore options
19 Carribean Cayman Islands Aug 13, 2013 Model 1 IGA Agreement signed or initialed but text not officially released
20 Carribean Jamaica* May 29, 2013 Final negotiations underway
21 Carribean Sint Maarten Nov 8, 2012 Working to explore options
22 Europe Belgium Nov 8, 2012 Actively engaged in a dialogue
23 Europe Cyprus Nov 8, 2012 Actively engaged in a dialogue
24 Europe Czech Republic Nov 8, 2012 Working to explore options
25 Europe Denmark Feb 22, 2013 Model 1A IGA Nov 19, 2012 Agreement signed and released
26 Europe Estonia Nov 8, 2012 Actively engaged in a dialogue
27 Europe Finland Apr 29, 2013 Final negotiations underway
28 Europe France Nov 8, 2012 Final negotiations underway
29 Europe Germany May 31, 2013 Model 1A IGA May 31, 2013 Agreement signed and released
30 Europe Gibraltar Nov 8, 2012 Working to explore options
31 Europe Guernsey Nov 8, 2012 Final negotiations underway
32 Europe Hungary Nov 8, 2012 Actively engaged in a dialogue
33 Europe Ireland Jan 23, 2013 Model 1A IGA Jan 23, 2013 Agreement signed and released
34 Europe Isle of Man Feb 19, 2013 Final negotiations underway
35 Europe Italy Nov 8, 2012 Final negotiations underway
36 Europe Jersey Nov 8, 2012 Final negotiations underway
37 Europe Liechtenstein Nov 8, 2012 Actively engaged in a dialogue
38 Europe Luxembourg May 21, 2013 Model 1 IGA Actively engaged in a dialogue
39 Europe Malta Jul 18, 2013 Model 1A IGA Final negotiations underway
40 Europe Netherlands Nov 8, 2012 Final negotiations underway
41 Europe Norway Apr 15, 2013 Model 1A IGA Apr 15, 2013 Agreement signed and released
42 Europe Romania Nov 8, 2012 Working to explore options
43 Europe Russia Nov 8, 2012 Working to explore options
44 Europe Slovak Republic Nov 8, 2012 Actively engaged in a dialogue
45 Europe Slovenia Nov 8, 2012 Working to explore options
46 Europe Spain May 14, 2013 Model 1A IGA May 14, 2013 Agreement signed and released
47 Europe Sweden Nov 8, 2012 Actively engaged in a dialogue
48 Europe Switzerland Feb 14, 2013 Model 2 IGA Feb 14, 2013 Agreement signed and released
49 Europe United Kingdom Sep 12, 2012 Model 1A IGA Sep 12, 2012 Actively signed and released
50 Middle East Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates) Nov 8, 2012 Preliminary meeting
51 Middle East Israel Nov 8, 2012 Actively engaged in a dialogue
52 Middle East Lebanon Nov 8, 2012 Working to explore options