Photograph of Richard Cassell, Withers LLPLast week
the US Internal Revenue Service (IRS) issued another notice under
the Foreign Accounts Tax Compliance Act (FATCA) provisions.

It provides us with a little
further guidance but not the comprehensive rules that bankers,
accountants and lawyers will need in order to ensure
compliance.

The new super Qualified
Intermediary (QI) rules will impact all Foreign Financial
Institutions (FFIs).

 

FATCA
myth-busting

There are a number of myths
surrounding the FATCA legislation. Until full guidance is
forthcoming, those of us who work in this area will not be able to
lighten the fog that has descended upon the international financial
community.

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Before getting into the details of
the new notice it is important to dispel the two main myths. The
first myth is that you can avoid FATCA by getting rid of your US
clients.

All that FATCA does is to say that
you have to report your US clients – its enforcement mechanism
however is keyed to a punitive withholding mechanism, which applies
to US investments, not US clients. So getting rid of your US
clients will not significantly affect your FATCA compliance.

The second myth is that it is only
going to apply to US direct investments. Certainly, the withholding
tax will only apply to US source income and sale proceeds, but we
will be entering a world where most financial institutions do
comply and the condition of doing business with them will be for
other financial institutions to comply as well.

 

New implications for
private banking

Turning to the key provisions of
the new notice, there is a new private banking category, which
mandates disclosure of US citizen and green card account holders
where the financial institution has actual knowledge of the account
holder’s US status.

We think it should still be
sufficient to avoid liability on the part of the FFI, if it has
FATCA compliant know-your-customer procedures which must be
followed.

In particular, FFIs must ensure
that the private banking relationship managers identify any client
where the manager knows of the US status of the client.

This also requires a “diligent
review” of all the files and records to determine whether there is
knowledge of a client’s US status.

It remains unclear whether these
requirements will apply to trustees. However, it appears likely
that trust companies might also be subject to these heightened due
diligence and certification requirements .

This is because the definition of
the term “private banking department” for these purposes includes
any department, unit, division or part of an FFI that has employees
who “ordinarily provide personalised services to individual clients
[or their families], such as banking, investment advisory, trust
and fiduciary, estate planning, philanthropic, or other
services…”

The IRS has requested comments on
the implementation of this new “private banking test” and
additional guidance should be released in response to those
comments.

 

‘Passthru’
payments

The IRS has refused to limit the
application of the ‘Passthru’ payment rules to directly received
withholdable payments or payments directly traceable to such
payments, and has instead adopted an approach based on the ratio of
the FFI’s US assets to that FFI’s total assets.

This means any recalcitrant account
holder (any individual or entity refusing to provide any FFI
information about their US or non-US status where required) and any
non-participating FFI investing via a participating FFI would
generally be subject to withholding on any payment by the FFI to
such account holder in proportion to the ratio of the FFI’s US
investments vs its non-US investments.

The withholding would apply
regardless of whether such account holder itself invests into the
US through this account.

We look forward to further guidance
from the IRS on the FATCA rules so that wealth managers and bankers
can make progress with planning in this critical area.

 

Richard Cassell is joint group
leader of Wealth Planning at Withers LLP