“FATCA – Should Philippine financial institutions be concerned? (1st of 2 parts)” by Jay A. Ballesteros (August 15, 2011)

SUITS THE C-SUITE By Jay A. Ballesteros
Business World (08/15/2011)

(First of two parts)

The Foreign Account Tax Compliance Act (FATCA) was signed into law on March 18 last year by US President Barack Obama as part of the US Hiring Incentives to Restore Employment (HIRE) Act.

The FATCA may alter the way foreign financial institutions (FFIs) do business globally.

FATCA subjects FFIs to a 30% withholding tax on certain income unless they enter into an “FFI Agreement” with the US Internal Revenue Service (IRS) to identify and provide tax information on US customers and clients.

While the implementing rules and regulations have yet to be finalized, significant guidance has already been issued on the FATCA information reporting and withholding regime (the latest of which was Notice 2011-53, released last month).

FATCA involves not only a tax compliance issue; it affects the whole value chain and in many cases will require extended, or completely new, information-gathering, reporting and withholding systems.

In this two-part article, we aim to clarify what FATCA is about and to outline provisions of the act that need action.


FATCA provisions are designed to discourage alleged offshore tax abuses by strengthening information reporting on offshore accounts held by US persons.

The IRS is concerned that US taxpayers have opportunities to evade taxes when investing money in FFIs, either directly or through other foreign entities.

By requiring all FFIs to enter into an FFI Agreement with the IRS to comply with the FATCA rules by June 30, 2013 — or else be subject to a 30% withholding tax on certain payments — FATCA provides the IRS with a new, global information acquisition tool.

Affected FFIs include banks, brokers, asset managers, trust companies, investment companies, fund structures, and companies that issue cash value life insurance and annuity products.

The purpose of the FFI Agreement is to ensure that an FFI thoroughly documents its accounts in order to (a) identify US persons (both individuals and legal entities) directly or indirectly holding offshore accounts; (b) issue annual reports on US account holders to the IRS; and (c) withhold on account holders that do not comply with requests for identifying information.


When it comes to identifying US individual accounts, a participating FFI will need to distinguish among the following categories of account holders based on the latter’s deposit account relationship as well as, in certain cases, investments in the FFI:

• documented US accounts;

• accounts of $50,000 or less, which can be treated by the FFI as non-US accounts;

• “private banking” accounts;

• accounts with US indicia in electronically searchable account information; and

• non-private-banking accounts with a balance of at least 500,000.

The search aims to find US indicia, with a focus on electronically searchable information except for “private banking” accounts, for which a paper search is required.

Depending on the type of indicia found, the FFI must request various documents within one year of entering into the FFI Agreement, and must have actually received it within another year. Otherwise, the customer is considered a recalcitrant account holder or one who does not provide adequate information or sign a waiver to allow the FFI to provide information to the IRS, which results in the imposition of the 30% withholding tax.

The identification of individual US account holders will be a challenge because one’s status as a green card holder or long-term resident must be taken into consideration.

This may also pose problems for local banks, because although customers of Philippine banks need to show a driver’s license and a supporting document to verify residency, they do not necessarily need to prove their citizenship or immigration status. If FFIs do not have detailed information on the citizenship of their customers, their legal grounds to demand such proof may be limited — unless local banking and privacy laws are changed.


For legal entity accounts, identifying the account holders is far more complex. In general, participating FFIs must decide if the entity accounts will be classified as:

• another participating FFI;

• a “deemed-compliant” FFI that is not required to enter into an FFI Agreement (certain local banks, local FFI members of participating FFI groups, and other yet-to-be-identified “low risk” entities);

• a non-participating FFI;

• an exempt Non-Financial Foreign Entity (NFFE); or

• a non-exempt NFFE.

Due diligence rules apply depending on the type of account holder, and whether the account is a new account (one opened after the FFI Agreement comes into effect) or a pre-existing account that pre-dates the FFI Agreement’s effective date.


Any FFI that does not enter into an FFI Agreement is considered a non-participating FFI and faces severe consequences. US withholding agents are required to deduct a 30% withholding tax from US-source payments (e.g., interest or dividends) made to non-cooperative institutions as of January 1, 2014 as well as from all gross (not net) sales proceeds from property that yields US-source interest or dividends effective 1 January 2015.

FFIs must also withhold 30% on “pass-thru payments” made to a recalcitrant account holder or non-participating FFIs. The withholding of tax does not relieve an FFI from compliance with the disclosure obligations. If a customer does not provide requested information, the guidance contemplates that the customer’s account will be closed.

It can already be deduced that complying with FATCA may require dramatic process and system changes. FFIs will need to address these issues quickly, otherwise, there will not be enough time to assess and adjust current operating models.

In next week’s column, we will discuss specific FFI action items and strategic options.

(Jay A. Ballesteros is a Tax Senior Director of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.