A heavyweight piece of US banking legislation is set to land on global
banks to increase tax revenue back to the US. But, are Vietnamese banks ready
for this landmark move? Jeff Sea and
Steve Punch say local banks have an opportunity to use the Foreign Account Tax
Compliance Act (FATCA) to their advantage.
Banks and other financial
institutions (FIs) across the world are now preparing for the imminent
implementation of FATCA regulations.
Some have said that FATCA is “an
atomic bomb burden”, while others believe it may be an opportunity for them to
show their transparency, competitiveness and strong corporate governance focus
by complying with FATCA.
FATCA was enacted in 2010 to
prevent and detect offshore tax evasion by US taxpayers. To do so, FATCA sets
out a comprehensive and complex set of rules which will impact almost every
financial institution around the world. Banks, funds and other institutions
failing to comply with FATCA could effectively be forced out of US financial
markets, or investing in US assets. The crackdown on overseas tax evasion by US
“persons” is fast changing shape as officials move to implement it via
country-to-country agreements, rather than by enforcing a single law for all
financial institutions.
How does FATCA impact FIs in Vietnam?
With the enactment of FATCA,
foreign financial institutions (FFIs) generally must conduct due diligence on
their account holders and investors to determine whether their accounts are “US
accounts”. Additionally, FFIs will face a choice of whether they will sign an
FFI agreement and agreed to identify and report to the US tax authority, the
Internal Revenue Service (IRS), information about direct and indirect US
account holders, or be subject to 30 per cent withholding tax on all direct or
indirect US source income.
It should be noted that FATCA is
not designed as a tax collection by the IRS, but more toward forcing FFI around
the world to report its US accounts holders. Thus the implications on banking
processes in extracting required information for IRS reporting and identifying
existing US accounts holders, knowing on-boarding new customers are enormous.
So too are the annual reporting requirements a compliant FFI’s will need to
provide to the IRS. The question now is whether any Vietnamese bank is ready
for this or be excluded from US financial market?
Model of intergovernmental agreements
After first releasing its draft
FATCA regulation in February 2012, the IRS has attempted to ease the burden of
FATCA compliance for FI’s by introducing the draft model Intergovernmental
Agreement (IGA) on July 26, 2012.
There are two versions of the
model IGA — a reciprocal version and a nonreciprocal version. The former allows
FFIs report to a local government agency first and then to the US IRS, while
the latter allows FIs report directly to IRS. This respects potential local
privacy laws in overseas countries. When an IGA is signed, the FIs in that
participating country will then be governed by the local legislation, therefore
local domestic legislation will be likely required.
The “big guys”, UK, France,
Italy, Spain, and Germany, have agreed to the FATCA-principle and are entering
into agreement with the US as seeing that FATCA is a new opportunity. On
September 14, 2012, the UK and the US officially signed bilateral reciprocal
IGA. The UK plans to commence apply the new FATCA legislation in early 2013.
US Treasury is now negotiating with
at least 40 countries for FATCA tax information-sharing pacts. The OCED
recently stated that it welcomed the cooperation between the US and the pioneer
countries. In fact, OCED has expressed its intent to work closely with
interested countries and stakeholders to design a common model for automatic
exchange of information. This includes the development of reporting and due
diligence standards for financial institutions. In the Asia-Pacific region,
Japan has commenced negotiations with the US on IGA and other developed
countries (i.e. Australia, Hong Kong, Singapore and South Korea) are now
considering entering an IGA with the US.
The IGA significantly benefits
FIs by reducing reporting requirements and protecting the privacy of
individuals. However, it only applies to countries which have US double tax
agreements (DTA).
Vietnam and the US have not yet
signed an DTA. However, US officials have indicated that non-DTA countries will
soon be offered a similar arrangement as countries with which it has a DTA. As
of today, the final details are not yet available. The suggestion for Vietnam
is that the Vietnamese tax authority, General Department of Taxation (GDT)
could seek to initiate dialogue with the US to resolve any potential conflict
between FATCA and Vietnamese law. By announcing its intention on FATCA
compliance, Vietnam could then sell itself as an attractive jurisdiction that
is considered proactive, transparent, and competitive, whilst protecting the
rights of all investors.
Early planning is required
Even though the IRS has extended
the effective date to become a participating FFI until January 1, 2014, banks,
fund managers and insurers around the world have already commenced FATCA
projects designed to become compliant and sign an FFI agreement prior to the
IRS deadline in December, 2013.
FATCA compliant FIs may be able
to achieve a competitive advantage through enhanced customer relationship and
capital-raising capabilities. Prudent banks and other FIs will allow themselves
sufficient time to develop business requirements and IT capabilities to comply
with FATCA. A recent KPMG survey, “FATCA Readiness of Financial Institutions”
highlighted that 25 per cent of FI’s had commenced their FATCA compliance
programmes.
A further 25 per cent of respondents
think that they will not be able to comply with the deadline and 36 per cent
reported that they are uncertain whether they can meet the deadline even in the
light of potential commercial and reputational risk for non-compliance.
No doubt that FATCA is a
challenge for FIs, 54 per cent of respondents agree with this point.
Moreover, the respondents say
that the most challenging aspect of FATCA compliance is the actual reporting
and documentation requirements, rather than the customer account identification
and withholding scheme.
Already many of the foreign banks
and foreign bank branches in Vietnam have commenced their global FATCA
projects. While their task is much larger, the process and requirements are the
same. Irrespective of when or whether the Vietnamese authority makes comment on
FATCA, local FI’s will be affected from January 1, 2014. This means that FIs in
Vietnam should conduct a preliminary assessment of their ability to comply with
the FATCA framework and to evaluate necessary modifications to the existing
processes and systems. Vietnamese banks and other local financial institutions
should act now
Jeff Sea and Steve Punch
The views expressed by the authors here do not necessarily represent the
views and opinions of KPMG.
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