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FATCA: How can it affect you?

By Sana Ragbir, CFA Securities Dealers Association of Trinidad and Tobago (SDATT)

as we approach the start of 2013, FATCA will become even more prominent in the headlines. Until now, the term has been used among financial institutions and governments, but soon enough the wider public will need to understand the implications of this Act that will affect the world of investing and banking.

FATCA is the Foreign Account Tax Compliance Act which was enacted by US Congress in March 2010. The goal of this Act is to identify US taxpayers to the US IRS and to ultimately prevent tax evasion by US taxpayers who may "hide" their US assets outside of the United States in international institutions. It is estimated that the United States loses some 7.5 per cent of its total Government revenue through tax evasion. As the United States struggles to reduce its growing fiscal deficit, FATCA was created to potentially increase the tax revenues of the US government and thus reduce the deficit.

FATCA will affect US persons. The definition of a "US person" by the IRS is very broad and can include green card holders and US citizens who are not necessarily residents of the United States. The Caribbean region and indeed Trinidad and Tobago have many persons who are green card holders and US citizens who do not reside in the US. If any of these persons have any US assets or forms of US income they could be subject to FATCA rules. In order for the IRS to detect these US persons, Foreign Financial Institutions such as local banks, broker-dealers, investment management firms and insurance companies who possess US accounts and who deal with US assets and currency will have to report to the IRS their US customer accounts.

The main objective of FATCA is reporting and disclosure of the US source income of US persons to avoid tax evasion. In order to ensure that Foreign Financial Institutions (FFIs) comply with the requirement of disclosure and reporting, the FFI must either enter a signed agreement with the IRS to become a participating FFI or, be considered a deemed compliant FFI. If a FFI does not meet either of those two requirements then all US source income of the FFI regardless of whether it is for the own account of the FFI, the accounts of non-US persons or US persons will be subject to 30 per cent withholding tax.

Many of the financial institutions in Trinidad & Tobago, if not all, have some source of US income and US assets especially for their own accounts. Therefore all of the financial institutions will be working to become a participating FFI in 2013 in order to avoid the 30 per cent withholding tax on their US income. A participating FFI will have to perform extra due diligence and anti-money laundering and "Know Your Customer" processes in order to identify a customer as a US person or non-US person. This will apply not only to new customers but also to all existing customers of the FFI. The participating FFI will then have to report all US persons to the IRS. Where there are customers of the FFI who do not participate or refuse to provide the required documentation to identify their status as a US or non-US person, the participating FFI will also have to withhold 30 per cent tax on all US source income of those customers. These customers will be known as "recalcitrant accounts".

Of course we cannot ignore the issue of confidentiality laws of the financial institutions in Trinidad and Tobago and the obligations of confidentiality and privacy to the customers. FATCA has insisted that participating FFIs should make all attempts to obtain a waiver of secrecy and other privacy laws from the US person in order for the information to be disclosed to the IRS. If the US person refuses then the account must be closed. This places the financial institutions of T&T in a problematic position in that based on the laws of T&T, and in the best interest of good customer service, they do not want to breach the customer's confidentiality and trust, but at the same time the financial institution does not want to be faced with a 30 per cent withholding tax on all of its US income.

Furthermore, even if the financial institutions agree to withhold the 30 per cent tax on all US source income of recalcitrant accounts, does T&T have the required tax and regulatory framework to collect this US tax on behalf of the US government? These are a few of the many difficult challenges and unanswered questions which the financial institutions of T&T are dealing with in FATCA.

The financial institutions of T&T will need to sign an agreement with the IRS by June 30 2013 in order to become a participating FFI and avoid the penalty of 30 per cent withholding tax on all of its US source income, which will become effective in January 2014.

In his opening remarks at the meeting of Council of Securities Regulators of the Americas (COSRA) 29 October 29, 2012, the Governor of the Central Bank of Trinidad and Tobago, Jwala Rambarran, indicated that all of the local banks are "ready to respond to, and comply with, FATCA requirements." He did indicate however that there are varying levels of preparedness among the financial institutions. In that same speech, Governor Rambarran proposed the establishment of a Joint Working Group which could possibly consist of members of SDATT, Bankers Association of Trinidad and Tobago (BATT), the Central Bank of Trinidad and Tobago, the Board of Inland Revenue, the Ministry of Finance and other key stakeholders to ensure that T&T will be ready for FATCA in 2013.

FATCA will have implications for all customers as the "Know Your Customer" processes and requirements will become even more administrative and time consuming as financial institutions seek to identify US persons and non-US persons. As already indicated the incentives are high for local financial institutions to cooperate with the US IRS and comply with FATCA as many of them possess US assets and earn US source income for their own company portfolios. Therefore they will not want to subject their income to a 30 per cent withholding tax which will further diminish returns in an already low yielding global market.

There is a tremendous work programme that has begun globally for FATCA and the local customers can expect to hear more about FATCA in 2013 as the different stakeholders work together to achieve the ultimate objective of FATCA which is to prevent and discourage tax evasion globally. However we encourage the investing public to learn more about FATCA and to look out for public awareness campaigns and marketing material so that you, the investor will better understand the consequences.

Sana Ragbir is a Director of the Securities Dealers Association of Trinidad and Tobago.

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