Foreign Account Tax Compliance Act | KPMG | CN

Foreign Account Tax Compliance Act (FATCA)

Foreign Account Tax Compliance Act (FATCA)

FATCA introduces a new withholding regime that is designed to compel foreign financial institutions to disclose certain details of their U.S.

FATCA compels foreign financial institutions to disclose certain details of their U.S.

On 18 March 2010, President Obama signed the Foreign Account Tax Compliance Act (FATCA) into law. This legislation, enacted to prevent offshore tax abuses by U.S. persons, includes a new withholding regime that is designed to achieve intent by imposing a 30 percent withholding tax on certain foreign entities that refuse to disclose the identities of these U.S. persons.

The Act, which will come into effect on 1 January 2013, introduces a new withholding regime that is designed to compel foreign financial institutions to disclose certain details of their U.S. customers by imposing a 30 percent withholding tax on entities that that do not comply with reporting and enhanced Know Your Client (KYC) requirements.

The implications of FATCA, and in particular its withholding and reporting regimes, are wide-ranging for financial institutions, investment entities, and many other global organisations.

 

Who is impacted?

Foreign financial institutions, including Hong Kong based financial institutions and Hong Kong branches of international financial institutions, are all subject to the impending FATCA regime. Equally impacted are all residents in Hong Kong with U.S. citizenship or U.S. residency status, as the FATCA rules will require compliant financial institutions to disclose their account information to the Internal Revenue Service (IRS). Additionally, certain non-U.S. account holders will be required to comply with requests from their financial institutions for additional documentation in order to avoid being subject to the 30 percent withholding tax.

Under FATCA, "Foreign financial institutions" (FFIs) include:

  • Banks
  • Private equity funds
  • Hedge funds
  • Institutional investment funds
  • Retirement funds & trusts
  • Insurance companies
  • Securities brokers and dealers.

In essence, any non-U.S. organisation that holds or manages customers' money is considered an FFI subject to FATCA, irrespective of where it is headquartered or whether or not the shareholding structure is American.

 

What effect will FATCA have on your business?

Organisations will need to rapidly determine the potential business implications of FATCA and define their compliance strategy accordingly. Although the deadline of 1st of January 2013 may seem to be a long way off, FFIs will need to consider the overall complexity induced by addressing the elements required by FATCA.

Executives should make it a priority to increase their organisation's FATCA knowledge. Some people seem to think that since FATCA is an IRS regulation, that it is a "tax issue" and only tax departments need to be cognisant of it. However, in reality, FATCA implications are pervasive across Operations, IT Risk and Tax; therefore, at a minimum, these departments should be well-informed and prepared for whatever action the organisation takes regarding FATCA.

Many organisations will have to significantly revamp their KYC & Anti Money Laundering (AML) procedures; they will also need to adjust their underlying IT infrastructure in accordance with those changes, which is a potentially difficult, time consuming and expensive process.

Some organisations are also considering the possibility of entering into negotiations with the IRS in order to receive an exemption from having to comply with FATCA, in cases where the business model of the organisation would clearly have nothing to do with U.S. customers or possible U.S. tax evasion (e.g. non-life insurance companies, mandatory provident funds).  

 

How KPMG can help

KPMG is uniquely positioned to assist your organisation with all facets of FATCA compliance and can provide a cross-functional team to address the various components of a FATCA implementation project. Specific to this, we have, over the past decade, built a highly successful global U.S. withholding tax network. Capitalising on our well-established model for meeting client needs with respect to the existing U.S. withholding regime and, in particular, the rules relating to qualified intermediaries, we have an established network dedicated personnel specialising in U.S. withholding tax matters, including FATCA, in Hong Kong and China.

Tax Advisory Team

Our Tax Advisory team is well versed in the new legislation and can provide advice on the technical complexities of implementing FATCA in an organisation. This includes:

  • Interpreting the impact of the legislation
  • Working with the business divisions to understand the effect on processes and systems.

Business Performance and Technology Team

Our Business Performance team has business process and change management experience and can assist with the interpretation of the impact on processes and systems. This includes:

  • Developing new target processes
  • Gap analysis
  • Remediation and implementation planning
  • Business requirements development
  • IT architecture roadmap design
  • Project and change management to ensure that initiatives are implemented in the most cost efficient but effective way.

Regulatory Compliance Team

Our Regulatory Compliance team has significant experience in working with financial institutions on:

  • Regulatory reporting
  • Regulatory compliance
  • The implementation of AML and KYC programmes.

 

They will help re-design the target processes for these specific areas that are impacted by FATCA.

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