July 4 is US Independence Day; July 1 is most definitely not.
The first day of the month brings the first hard deadline for the Foreign Account Tax Compliance Act (FATCA), which seeks to identify the American customers of financial institutions globally.
FATCA is effectively the latest US effort to clamp down on tax havens and tax evasion, which costs countries billions of dollars each year – the US alone is estimated to have lost $3 trillion in the past 10 years.
Much has been written as to the merits or otherwise of the scheme, which financial institutions must comply with or face large penalties in the world’s biggest financial marketplace.
But now that this US tax deadline is upon us, the question is whether Asia is ready. The answer, predictably, is yes and no.
“For smaller players, and those less sophisticated institutions, I believe some still don’t understand the full impact of registration,” Charles Kinsley, principle, tax, at KPMG told FinanceAsia.
FATCA is being implemented in stages. From July 1, foreign financial institutions (FFIs) will need to start onboarding new customers differently and specifically ask them whether they are US citizens.
They will also need to begin poring over existing customers’ records and determine whether they, too, are American citizens.
For FFIs not signed up to the scheme, a 30% withholding tax on US-sourced income will now need to be factored in.
On the face of it not much has to change within the industry. However, behind the scenes it's a different story.
IT systems must be upgraded to process new-look customer forms and handle the increased flow of documentation and data between departments, the local regulator, and the US Internal Revenue Service (IRS).
“We have experienced major changes prior to the July 1 deadline. Many of our clients’ onboarding procedures have gone live over the last few weeks with additional information being collected and analysed from customers,” Florence Carr, an APAC FATCA lead at Ernst & Young who advises groups on FATCA compliance, told FinanceAsia.
A taxing question
All this has been dependent on communication from Washington, which has been hammering out Inter-governmental Agreements (IGAs) with countries, which gives them varying levels of access to the information.
In short, a Model One IGA requires an American citizen in, say Hong Kong, to report to the local regulator as if it was local law; whereas a Model 2 IGA requires the citizen or entity to report directly to the IRS.
Many banks have been waiting for these agreements to be finalised before proceeding, and this is where problems have arisen as the quality of communication from Washington has drawn criticism.
“Asia is not ready for FATCA. Hong Kong, for example, only agreed a Model 2 IGA a month ago so how can its banks truly be ready with the appropriate IT systems in place?” Toine Knipping, chief executive of Amicorp, a global financial services group that advises clients on tax compliance, told FinanceAsia.
The Financial Services and the Treasury Bureau, the Hong Kong body responsible for negotiating the city’s IGA, said in May that the city and IRS would sign a Model 2 IGA later this year.
“Under the IGA, financial institutions in Hong Kong will need to register and conclude separate individual agreements with the US IRS. Under these agreements, these institutions will seek consent of their account holders who are US taxpayers for reporting their account information to the US IRS annually,” the FSTB said in a statement.
Still taxiing for takeoff
As of June 27, only three countries – Australia, New Zealand and Japan – have signed IGAs with Washington, although 8 more have agreed in principle, according to the US Treasury.
Kinsley said that, in China, only 212 FFIs had registered with the IRS up to June 2. However, the country on Thursday night was added to the "in principle" list.
Elsewhere, Hong Kong financial institutions are by and large ready for onboarding new customers in a FATCA-compliant manner but most other markets are not, Carr said.
“In the rest of Asia there are still wide differences between respective countries and groups. Some are ready and some are waiting for local guidance and have not started to prepare yet,” she said.
A common theme is that developed banking markets such as Hong Kong or Singapore have dealt with FATCA well, while developing countries such as the Philippines and Indonesia have struggled.
Kinsley said that it was harder for FATCA to get traction in such developing markets and therefore much more difficult to get governments involved in finding solutions.
“Thailand and Taiwan were declared 'in principle' IGA countries this week, so these are causing financial institutions to rethink some of their plans re these countries and/or revisit their forms,” he said.
When one considers that FATCA was proposed two years ago and is effectively the precursor to a global scheme, GATCA, due to come in next year, the lack of readiness is surprising.
“Washington is making things deliberately vague to see how things shake out but it doesn’t help,” Knipping said.
The level and quality of communication from Washington has been a consistent source of ire from financial institutions, and the build-up to FATCA has raised some important questions for the next stage in the fight against tax evasion.
GATCA, which is being pushed by the 34-country Organisation for Economic Co-operation and Development, is set to become the next hot topic for FFIs of all sizes in the coming months. Carr said that global FFIs had started to study in detail the requirements and implications for their systems, processes and clients.
“For those who think that [GATCA] is merely a slight medication to FATCA, they have a bit to learn,” Kinsley said.
At the end of the day, said Carr, the critical thing that will change on July 1 2014 is that FATCA will become ‘business as usual’ for financial institutions in Asia-Pacific.
