Long-awaited draft FATCA regulations now issued

Friday 10 February 2012, 2:04PM
By PwC

New rules targeting US tax evaders are expected to significantly affect the entire New Zealand financial services industry.

The release yesterday of the Foreign Account Tax Compliant Act (FATCA) draft regulations by the US Department of Treasury and Internal Revenue Service represents the latest and one of the most far-reaching set of new rules for financial services globally.

FATCA places a significant regulatory burden on New Zealand and other global financial services companies to identify their US customers and provide details relating to those customers to the IRS. This is an effective outsourcing of the IRS’s attack on tax evasion to the industry.

According to PwC New Zealand FATCA Partner Mark Russell, a lot of detail remains to be worked through.

‘’What is clear is that any financial institution with a commercial relationship with a US person or other FATCA compliant financial institutions, wherever in the world that occurs, must be compliant with FATCA.

“Despite lobbying by organisations around the world, these rules continue to have significant ramifications for the global financial services industry. Having said that, there is some relief in the thresholds that apply for organisations to identify and report US persons.

“The regulations confirm much is still to be done before the New Zealand financial services industry will be seen by US authorities to be compliant with these new rules,” adds Mr Russell.

The regulations released on Thursday 9 February provide some relief in terms of extending the categories of foreign financial entities that will be deemed to be compliant with FATCA.

Building societies, credit unions and other non-bank deposit takers look to be the winners in the New Zealand context, if they can bring themselves within a class of ‘local foreign financial institutions (FFIs)’. Local FFIs must meet a number of conditions, including being regulated, having at least 98% of their accounts held by local customers, not soliciting business from outside New Zealand and not advertising US dollar denominated accounts or investments.

Mr Russell says “Although the costs of complying with the FATCA rules will be significantly reduced for such entities, they will still need to introduce new due diligence and customer on boarding processes to evidence their ‘deemed compliant’ status.

“The New Zealand Superannuation and KiwiSaver industries are likely to be disappointed that complying New Zealand superannuation funds and KiwiSaver accounts appear not to qualify for the exemption in the current draft regulations. Yet, we are hopeful with lobbying superannuation and KiwiSaver funds can be incorporated into the exemption prior to finalisation of the rules. Submissions on the rules must be provided to the IRS by 30 April 2012.”

For insurers there is clarification insurance accounts which include an investment component such as cash value insurance contracts and annuity contracts will be caught. Yet, insurance contracts that provide ‘pure insurance protection’ and don’t have an investment component will generally be excluded.

The US - in co-operation with five European nations (UK, France, Germany, Spain and Italy) - are collaborating on ways to report information on US account holders through their own government agencies rather than direct to the IRS.

At this time, New Zealand is not mentioned in these discussions, the outcome of which paves the way for FATCA to become a global blueprint for addressing tax evasion. The industry will be interested to see whether such inter-governmental agreements will pave the way to more flexible approached to some of the difficult issues, such as the rules relating to how payments passed through to non-compliant financial intuitions.

Mr Russell adds “One of the biggest headaches in the FATCA regulations, pass-thru payments, has been further deferred until 1 January 2017, allowing the IRS to consult further with industry on workable solutions.”

The deadlines for complying with various due diligence and reporting obligations have also been extended, in recognition of some of the difficulties raised by the industry, such as conflict of laws issues. For example, rules such as New Zealand’s Privacy Act can prohibit financial institutions from passing the required customer information to the IRS unless customers have contracted out of the restrictions.

Notes to editor:

A copy of the PwC Global’s Information reporting news brief is available at: