Approved FATCA legislation raises concerns

Prime Minister Dr. Timothy Harris, who introduced the bill this morning, described the bill as, “time-bound and time sensitive, with consequences if we do not proceed”. By 6:15 p.m., parliament had completed the debate, conducted the last reading and held the vote that confirmed its passage into law.

The US legislation FATCA, as it is commonly known, was enacted by the 111th US Congress in an effort to reduce tax evasion by US tax payers who used accounts held in financial institutions outside of the United States. The US Government believes that it loses substantial revenue when its citizens use such accounts and escape paying their full taxes.

Explaining the FATCA relevance to St. Kitts, Harris said, “Although FATCA is a piece of US legislation, its effects are global. They go well beyond the shores of the United States of America impacting all countries around the world, including all member states of the Eastern Caribbean Currency Union.”

FATCA will require St. Kitts and Nevis based Foreign Financial Institutions (FFI) to identify and report to the US Internal Revenue Service (IRS) “information on financial accounts, with balances of US$50,000 or more that are held by US tax payers, or by foreign entities in which US tax payers hold ownership greater than 10 percent”, described by the prime minister in his presentation.

FATCA-SessionThe mechanism involves the financial institutions, the ‘Government’s Competent Authority’ (GCA) and the United States IRS. FFIs are required to register using a portal and to submit the relevant information through that portal. Several financial institutions were in session today in the John Gumbs Building on the Bay Road, learning about the specific requirements to successfully provide the information. The session was conducted by staff of the Inland Revenue Department. Once the GCA gathers the information, it will be turned over to the United States IRS on an annual basis.

Harris disclosed that the Government’s Competent Authority is the Financial Secretary. He said, “She will designate the duties of exchanging information for FATCA purposes to the Comptroller of Inland Revenue.” Under the agreement the GCA is to submit its first set of information on September 30, 2015.

Non-compliance attracts certain consequences. For example, for FFIs that refuse to comply, the US Government will impose a 30 percent withholding tax on certain payments that originate in the United States that are due to any of the offending FFI. Non-compliance also has implications for correspondent banking relationships that enable overseas transactions to be done on behalf of the local banks and their clients, and as a consequence could impact international trade facilitations and the use of personal funds for payments of goods and services.

The Government did not disclose in parliament what it would cost to implement FATCA. It was a matter addressed by opposition representative for Constituency #3 Konris Maynard, as he referred specifically to the nation’s indigenous banks. He asked parliament how much it would cost the banks or government to implement FATCA, indicating it was information needed.

However, experiences in other countries suggest that the cost could be substantial. An article in The Wall Street Journal examined Canada’s experience. It revealed that FATCA cost Canada’s five biggest banks US$693.5 million in initial compliance expenses. Another article points to the United Kingdom’s costs to business of 1.1 to 2 billion Pounds Sterling for the first five years and an annual cost of 50 million Pounds Sterling thereafter.

Opposition member Marcella Liburd believes that implementing FATCA will impact every person opening accounts, as banks will have to implement new application procedures. “They will now have to put you through a process to know whether or not you are a US person. That never happened before,” Liburd said.

She continued in support of the cost of implementing FATCA. She said, “This makes it difficult for resident and non-resident US persons to have financial assets that are not located in the United States… It captures a wider global population of US persons and their partners at the expense of non-US banks. National Bank, all our banks here, they have to go through this onerous reporting annually at their own expense. They have to find the costs, find the money for all of the measures they would have to take.”

Liburd said those costs will be passed on to clients and constomers of the financial institutions. “It will impact ordinary people one way or the other, because the banks need to finance the implementation of this particular bill,” she stated.

Other issues raised by opposition parliamentarians include issues of confidentiality and security of information, the impact FATCA could have on persons who have joint US accounts, as well as the implications for capital flight.

Some individuals expressed the view that FATCA could influence decisions to invest in the country and might impact the offshore financial sector of Nevis.

Countries around the world have signed the FATCA agreement with the United States. These include Bermuda, Spain, Switzerland, Norway, Mexico, British Virgin Islands, Jamaica, Japan, Germany, France, Barbados, Bahamas, Cayman Islands, Mauritius, United Kingdom, Malta, Canada and Honduras among others.

FATCA is not without its critics, however, even within the United States. Writing for Forbes, Andrew Quinlan believes that FATCA will do more harm than good. “FATCA, which, in pursuit of what even government estimates acknowledge to be a paltry increase in tax revenue, threatens to drive billions in foreign investment from the U.S.,” he wrote.

Quinlan acknowledges that the legislation was enacted to prevent illegal tax evasion. But he indicated that FATCA puts “heavy financial burdens” on both law-abiding U.S. citizens living abroad, as well as the foreign financial institutions that service them.

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