FATCA: No Flexibility, but No Retreat

The US government is to get all information on capital held anywhere in the world by people liable to pay American taxes. Caribbean governments are committed to signing the Foreign Account Tax Compliance Act (FATCA) Agreement, and there is no retreat.  

FATCA, which was enacted in 2010 by the US Government as part of provisions under the Hiring Incentives to Restore Employment Act, targets non-compliance by US taxpayers using foreign accounts. FATCA requires foreign financial institutions to report to the Internal Revenue Service (IRS) information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest, specifically as it relates to US-sourced income. The IRS requires financial institutions and firms in international business to report information on accounts with balances over US$50,000 held by US citizens and residents.

Foreign Financial Institutions (FFIs) include commercial banks, merchant banks, mutual funds, credit unions, co-operative banking institutions, building societies, broker dealers, trust companies, custodian with respect to assets of employee benefit plan, pension funds, national insurance schemes, investment funds, various investment vehicles, life insurance that issue cash products, off-banks and all service providers that transact with non-residents.

Institutions or service providers that have a low inherent risk of US tax evasion and are not required to enter into an FFI Agreement with the IRS would be deemed compliant. Given that credit unions are essentially village banks supplying the demands of primarily residents, most small scales credit unions would have low-inherent-risk of US tax evasion.

What is the US interest? According to the US Ambassador Larry Palmer to Barbados, the Eastern Caribbean, and the Organization of Eastern Caribbean States (OECS), “The FATCA introduces reporting requirements for foreign financial institutions with respect to certain accounts held by US taxpayers. Because access to information from other countries is critically important to the full and fair enforcement of domestic tax laws, information exchange is a top priority for the United States.”

Continuing, “By working together to detect, deter and discourage offshore tax abuses through increased transparency and enhanced reporting, we can help to build a stronger, more stable and accountable global financial system… Every year, tax evasion deprives governments of all sizes of much-needed resources to fund public services and investments” (Nations News, 18 November 2014).

What are the arguments put forward? The stability of the world economy demands adherence to global standards for the regulation and supervision of international business. The openness of economies, the interconnectedness of financial systems, the need for real-time transactions and payment and settlement, and the reality of threats to the smooth operation of the global financial system posed by tax evasion, terrorism and money laundering, demand the collective commitment of all countries or jurisdictions to adhere to principles of transparency, openness and due diligence in all areas of relationship (an application of the WTO agreement).

The net is cast and the big fishes are already caught. Some countries are developing their own FATCA-like laws to go after their own citizens evading taxes.  These countries include France, Germany, Italy, the UK and Spain. England and its former colonies and territories have agreed to exchange of bank information, including tax havens like Cayman Islands, Bermuda, British Virgin Islands, Guernsey, Jersey and the Isle of Man.

In our global society, social, political and economic cohesion is assured through compliance – adherence to established or accepted policies and procedures.  Global stability demands our collective conformity to shared practices. Obedience, however, usually speaks to our “heart” motive that informs an action. And this, we give unreservedly to God and not man. Jesus Christ teaches that our obedience is a demonstration of our love for God (John 14:15).

Becoming FATCA-compliant is indeed painful for Caribbean domestic financial institutions, which generally lack economies of scale and scope; are unable to attract and maintain highly technically equipped workers; lack the profit level to make the necessary investment in hardware and software to operate seamlessly with the rest of the world; do not attract high net-worth investors and clients because they cannot supply the suite of services that class of patrons demand. Hence, these local banks have perennial problems operating in accordance with industry standards and accessing the services of correspondence banks in the international marketplace. Making reference to the Bahamian experience, the Bahamas Financial Services Minister Ryan Pinder described the preparatory process as a “baptism by fire”. (Caribbean News Now, 26 November 2014)

The preparation is costly and resource intensive. At the governmental level, appropriate legislation must be passed to allow for reporting under FATCA.  But the adjustment pain is really being felt by the financial institutions, particularly, those entities that are not well inserted into the global system or whose portfolio is so small that they are not seamlessly integrated into international business and finance – this include small local banks, finance companies, insurance companies and accounting firms.

Few countries have the appropriate systems in place to effect the collection of data. This heightens insecurity for small operators. This creates uncertainty and operational challenges for many Caribbean financial institutions, as ultimately it is the financial institutions that must face the repercussions for non-compliance. Failure of an FFI to submit information could result in a 30 per cent withholding tax levied on withholdable payments and may result in the potential loss of correspondent banking relationships which Caribbean banks cannot do without, because they do not operate in our major trading markets.

In the legislation, ‘Withholdable Payments’ are any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the US; or any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the US.

FATCA could mean a fall in banking business for some jurisdictions. The Barbados Minister of Industry, International Business, Commerce and Small Business Development, Honorable Donville Inniss, after signing the agreement, stroke the nail on the head: “Businesses and investment must be allowed the flexibility to thrive”. FATCA-compliant means the end of the tradition of banking secrecy. Banking and finance in the Caribbean region becomes an extension of the US Internal Revenue Service (IRS).  But with the precedent set by Swiss Banks on July 1, 2014, what is left for the defenders of banking secrecy?

While the loss of many high net-worth patrons could impact negatively on the bank assets, liquidity and credit, the openness and transparency in doing business will definitely be a deterrent to illegal drug and terrorist financing and, money laundering. The adjustment has been painfully longer for Caribbean countries, having requested a grace period, but they are slowly but surely making the transition, following the lead of Jamaica and St Kitts and Nevis.

Couldn’t the transition have been much less painful for CARICOM countries if they had approached this development, as they did the international trade matters? Remember, “I can do all things through Christ who gives me strength” Philippians 4:13, NIV.

Peter Adrien is an author, business coach, financial counselor, economic adviser and columnist. Visit: www.goadriens.com. Contact him via email: ipeter@goadriens.com” target=”_blank”>peter@goadriens.com; phone: (869) 668-9752 (St Kitts & Nevis) or (305) 848-7604 (USA); twitter: @goadriens; facebook: http://www.facebook.com/Goadriens 

















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