In a recent article first published in eTreasurer XXII – May 2014, Amanda Murphy, FATCA Solution Leader for Ireland, discussed the affect FATCA will have on non-financial entities, such as treasury centres, for which the FATCA rules have a less clear impact.
The US Foreign Account Tax Compliance Act (‘FATCA’) rules have imposed enormous costs and obligations on non-US banks and financial institutions. However, their impact on non-financial entities, such as treasury companies, is not so clear.
To the date of writing, unlike in the UK and the US, Irish Revenue’s draft Regulations and Guidance have not yet specifically referred to treasury companies. However, as it is understood that Revenue are currently considering this matter, it is an area that Treasurers should monitor over the coming weeks. In any event, there will be follow-on obligations for treasurers, even if it is just additional form filling.
FATCA was introduced by the US Government as an enhanced information reporting regime, designed to prevent US taxpayers from avoiding tax by investing through non-US financial institutions and offshore investment vehicles. The regime introduced a 30% withholding tax on specified payments to non-participating financial institutions.
In order to support worldwide compliance with FATCA and overall global tax transparency, many nations came out in support of the law and entered into intergovernmental agreements (IGAs) with the US to enforce compliance by financial institutions within their country. The IGAs require FATCA to be brought into local country law in these partner country jurisdictions, with consequent reporting to the IRS (in most IGA countries via the local tax authority).
The Ireland-US IGA was signed in December 2012 and has since been accompanied by draft Financial Accounts Reporting Regulations and draft Guidance Notes issued by Irish Revenue. FATCA’s “go live” date is 1 July 2014.
Who will be affected?
While FATCA may have an impact on almost anyone who deals with a financial institution, the main compliance burden will lie with Foreign (non-US) Financial Institutions (FFIs, as defined below). FFIs will be required to undertake significant due diligence to identify any US account holders and report annually on their accounts. In doing so they must ensure an appropriate audit trail is retained. A key point to remember is that even an FFI without US account holders, has obligations under FATCA. Ongoing due diligence is required even to prove that there may be no US account-holders.
Financial Institution Types
There are four categories of FFI defined under the Ireland-US IGA:
One of the main areas of uncertainty for clients that we have noted in recent months is the classification of treasury companies under the Irish IGA, Draft Regulations and Draft Guidance Notes.
It is not generally considered that treasury centres would fall within the definition of a Depository Institution. It could be contended that a treasury centre might fall under the definition of an Investment Entity on the basis that they are acting “for or on behalf of a customer” (i.e. another group company).
The US and UK Regulations specifically exclude treasury centres of non-financial groups from scope, subject to certain conditions. It is worth noting that the existence of just one in-scope financial institution (e.g. an in-scope securitisation company), within what is commercially a non-financial group, can render that whole group a financial group for UK FATCA purposes.
While Irish Revenue have not yet stated whether they will follow HMRC’s lead and include similar wordings regarding treasury companies in the draft Regulations and draft Guidance, we believe there is a possibility that this may occur. If so, the exact scope of any exemption for certain treasury centres would have to be examined carefully.
In order to provide some level of clarity when dealing with counterparties, a treasury company may decide to register on the IRS portal as an FI in advance of the new 5 May 2014 deadline for inclusion on the first list of registered FIs. The IRS registration portal can be updated continuously, as and when further guidance is provided by Revenue and the company’s status is clarified. Alternatively, treasury companies could wait for the final regulations and guidance to clarify the position, or indeed request approval from Revenue (on an individual basis) to achieve certainty on their FATCA status.
Where an entity concludes that it does not fall within the definition of an FI, it must go further and confirm its classification as an Active or Passive Non-Financial Foreign Entity. This exact entity classification will be necessary should it be required, by various financial institution counterparties, to complete a Form W-8BEN-E or equivalent self-certification form. The final Internal Revenue Service (IRS) form was released on 28 March 2013.
Going Forward – The Changing Landscape of Tax Information Reporting
While FATCA is the current tax reporting concern of the financial services industry, the concept of Information Tax Reporting will shortly expand further. In fact, the OECD on 13 February 2014 launched a detailed framework for a Global FATCA like regime – the Common Reporting Standard (CRS), which will include multilateral exchange of information. This is expected to be implemented in Ireland (and at least 43 other early adopter countries) 18 months after the equivalent FATCA dates, meaning an effective commencement on 1 January 2016. While the proposed CRS does not yet include any specific reference to treasury centres, developments will need to be monitored by Treasurers to ensure a clear position in the lead-up to commencement.