The Foreign Accounts Tax Compliance Act (“FATCA”) had a very controversial reception by the global financial services community, and saw a robust lobbying effort against its more onerous obligations. It is now, however, a reality and is set to impose itself on South Africa’s regulatory framework. It will have a substantial impact on the operations of all affected financial institutions, regardless of where these are situated. South African financial institutions are no different, and it will definitely be necessary for them to assess the impact, and where necessary to take the required steps to comply with the FATCA obligations.
Although FATCA has become common parlance in some circles, it remains shrouded in mystery in others. In order to combat FATCA’s many misunderstandings and interpretational challenges, it is necessary that South African financial institutions educate themselves on FATCA and its imperatives as well as the steps that will be taken to incorporate these into South African law.
FATCA is a piece of United States (“U.S”) legislation that introduces onerous identification and reporting obligations on foreign financial institutions in an effort to curb tax abuses by US citizens in foreign jurisdictions or those with offshore investments. A failure to comply with FATCA may result in a punitive withholding tax of 30% on U.S source income payable to non-compliant foreign financial institutions. The FATCA obligations are detailed in the FATCA Regulations.
The implementation of FATCA raised a number of concerns, with the foremost amongst these being that in certain jurisdictions local data privacy laws created local legal impediments to complying with FATCA, specifically, financial institutions in certain jurisdictions are prevented by their local data privacy laws from reporting on client confidential information directly to the US, as required by the FATCA Regulations. To their credit the US Department of Treasury recognized these concerns and developed an alternative means to complying with FATCA. They were of the view that an intergovernmental agreement approach would facilitate a more effective implementation of FATCA in a manner intended to address the domestic legal impediments to FATCA compliance. To this end, the U.S made the decision to draft two model intergovernmental agreements (being model 1 and model 2).
National Treasury and the South African Revenue Service (“SARS”) have expressed their intention to sign an intergovernmental agreement with the U.S and are currently in negotiations with the U.S Internal Revenue Service (“IRS”) with a view to concluding a proposed South African Intergovernmental Agreement (“SA IGA”).
The SA IGA is a treaty entered into between the governments of South Africa and the U.S and after its conclusion the SA IGA will be given force and effect by local South African enabling legislation (“the local FATCA laws”). This means that FATCA will be directly incorporated into South African law. The local FATCA laws will be phased in from June 2014, in order to comply with the timelines set out in the SA IGA.
While the SA IGA is not yet signed and accordingly that South Africa is not yet an IGA jurisdiction, considering the commitment made by SARS and National Treasury to sign the SA IGA, we consider it reasonable at this stage to focus only on the SA IGA obligations rather than also on the FATCA Regulations, on the basis that South Africa will become a IGA jurisdiction in due course.