The Foreign Account Tax Compliance Act will cause a sea change in the way in which financial institutions who deal with American persons operate. But how different will the provisions make the customer experience for investors, and will the provisions be workable for FFIs?
Despite significant resistance and lobbying from the financial services sector against FATCA, the provisions are set to stay, albeit in a clarified form since the draft regulations were produced by the IRS earlier this year. Reactions raged from outrage at this perceived American financial imperialism, to serious concern about the compliance costs the provisions will impose.
The IRS has listened to the international community’s pleas that mature, well regulated investments centres are low risk from the point of view of US tax evasion. A bank or building society that typically operates within its own jurisdiction and does not solicit customers from outside will be deemed compliant. For banks and building societies within the European Union, an institution based in one Member State can deal with investors in other Member States and still meet this requirement.
For those that are not deemed compliant, Foreign Financial Institutions (FFIs) claim that the operational costs involved in compliance will cause them significant loss – perhaps even costing more than the measures will net the IRS in extra revenues raised. The costs will not be so much in enhanced KYC (Know Your Customer) procedures – the IRS has conceded that established institutions already operate decent systems. But the real costs will come into play with the increased monitoring and reporting after a new client has been “onboarded”.
The “deemed compliant” concession mentioned above is unlikely to apply to any institution that is not a domestic bank with little international reach. It is also of limited use to those who offer any kind of complicated product. Financial institutions have been used to an increasing regulatory burden over the years. But FATCA has been viewed by some as the next step towards an international tax system – a concept that concerns all investors, whether they are American or not.