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The unintended consequences of Fatca

25 October 2011

Intended as a populist sop against tax evasion, Facta is unlikely to meet even modest revenue earning targets for the Inland Revenue Service – and risks affecting whole swathes of the global asset management industry. Annabelle Palmer reports

Read more: Facta IRS PWC KPMG

Negative feeling towards the financial sector is rife at the moment as a wave of occupation protests has spread across the US and over to the UK. At time like this, being accused of harbouring US tax evaders is the last thing asset managers need.

But that is exactly what the Foreign Account Tax Compliance Act (Fatca) - a subsection of the Hiring Incentives to Restore Employment Act of 2010 – implies.

This piece of US tax regulation is intended to enforce the disclosure of US taxpayers and therefore capture all potential tax revenue that is payable on the worldwide income of US citizens, and it requires all firms earning income on US assets to report on this fact, or else face a 30% withholding tax.

For asset managers across the globe, they have to know exactly when, where and how they are earning revenue on US assets.

The cost of compliance is a concern for asset managers globally. The general sentiment is Fatca is onerous and impacts many funds that have never before been associated with US tax evasion.

According to Jean-Michel Loehr, chief of industry and government relations at RBC Dexia, the burden of Fatca goes beyond what the US is aiming to achieve.

"Fatca’s scope is extremely large, which is why the costs will be disproportionate to the expected outcome," he says.

Additional revenue

During the 2008 campaign, US President Barack Obama predicted the introduction of Fatca would generate $100bn in additional revenue annually. But when the Joint Committee on Taxation investigated these claims, it slashed this projection to a mere extra $870m a year.

In these times of austerity every billion counts, even for a country which is projected to run a $1.6trn deficit in 2011, according to the White House’s Office of Management and Budget. But the billion dollars figure just counts increased tax receipts and not the compliant costs for companies.

And according to Kerry White, managing director, global product management at BNY Mellon Asset Servicing, these costs are significant.

"One would hope that when new rules like FACTA are being designed, there is a concern for the cost of compliance" says White, but instead she feels the rule makers are influenced by populism rather than economic reality.

"For better or worse, these are the kinds of the things that sometimes become popular legislation in the US when people think 'the rich are getting richer’ or that 'overseas US investments are escaping the tax code’", she says.

Moreover she fears Fatca could catch on in other parts of the world.

"When you see such a large number floating out there as potential tax leakage, it makes me think that there’s nothing to stop the EU or any other jurisdiction from bringing in their own type of similar legislation. In this day where many sovereign entities are struggling with their budgets and balance sheets, cracking down on current tax evaders may seem a lot more palatable than raising taxes on other classes," she says.

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  • The objective of FATCA was purported to be tracking down tax unpaid by US citizens. However as currently drafted one other impact is that if a non US worker is paid via a bank with US assets and the payment passes through a non-participating FFI then under Pass-through rules the bank will have to withhold some of those wages in proportion to their US assets.

    This could potentially affect millions of non US workers e.g. those working in South America; migrant workers remitting monies from the Middle East, etc.

    It seems barely credible that such a proposal could be made. Once this information is more widely known it is likely to engender considerable ill-will for the US.

    Web Sources: a) The Payments Market Practice Group White paper on the Foreign Account Tax Compliance Act (FATCA) (Version 4.0, September 2011) shows that wages are included in the list of witholdable payments. b) BBA submission to the US Treasury and IRS on the US Foreign Account Tax Compliance Act (FATCA) 15/08/2011 Page 10

    Alan Jones | 03 Nov 2011

  • This issue will have to be decided in an EU court - all EU citizens must be treated equally whether they are dual American citizens or not. It's up to the dual American EU citizen to report to the IRS, not EU financial institutions.

    Dual American EU Citizen | 27 Oct 2011

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