FATCA: Where are we now?

Business World (09/21/2015)

SUITS THE C-SUITE

By Jay A. Ballesteros

On July 13, 2015, the Philippines signed a reciprocal Intergovernmental Agreement (IGA) with the United States to implement the provisions of the Foreign Account Tax Compliance Act (FATCA).

Signed into law in 2010 by US President Barack Obama as part of the US Hiring Incentives to Restore Employment (HIRE) Act, the FATCA aims to obtain information on US persons with offshore income and/or assets to increase compliance with US tax laws.

For this purpose, financial institutions outside the US — i.e., foreign financial institutions (FFIs) were made responsible for periodically reporting to the US Internal Revenue Service (IRS) information on financial accounts held by US persons. Non-participating FFIs and non-compliant account holders (known as recalcitrant account holders) will have to face a 30% withholding tax, not only on their US revenues (e.g., interest or dividends received) but also on all sales proceeds from instruments which yield revenues from US sources.

There are more than 230 Philippine FIs that have registered and have been assigned Global Intermediary Identification Numbers (GIINs) by the IRS. These include banks, insurance companies, investment houses, stock brokers, mutual funds entities, asset management and leasing companies, and even holding companies. This number is still expected to grow.

The reporting regime adopted in 2013 by the FATCA regulations consisted of the FFIs signing individual agreements to disclose information about their US clients to the IRS. This regime was subsequently modified by introducing inter-governmental agreements (IGAs) to increase compliance by removing legal impediments that could prevent disclosure of US accounts and reducing implementation burdens for FFIs.

Two model IGAs were implemented, namely:

· Model 1 IGA, which involves the reporting of information to the FATCA Partner Government followed by a government-to-government exchange of information; and,
· Model 2 IGA, which involves the direct reporting of information by the FFI to the IRS.

To date, the FATCA information-sharing regime has grown to include at least 73 countries that have formally signed an IGA with the US, 39 countries that have reached agreements in substance to sign the IGAs, and several others are still under discussion.

The Philippines and the US also have an existing double taxation treaty which outlines the basis for the exchange of financial information between the IRS and the Bureau of Internal Revenue (BIR). The new IGA, therefore, enhances the effectiveness of this framework.

The Philippines has negotiated a Model 1 IGA, under which Philippine FIs will report information on US accounts to the BIR. As a matter of fact, the BIR included FATCA as a priority program under Revenue Memorandum Circular No. 3-2015 last Jan. 13.

The Philippines’ Model 1 IGA consists of three parts: the main agreement and supporting annexes. The main agreement deals with the information exchange process between the IRS and the BIR, and details the specific information on US persons, including controlling persons of passive non-financial foreign entities, and/or recalcitrant account holders, to be obtained and exchanged by Philippine FIs on an annual basis (starting with 2014):

· Account holder’s name, address, and US TIN;
· Account number;
· Account balance or value; and
· Number of accounts and aggregate account balance of recalcitrant account holders.

In Annex I of the IGA, Philippine FIs need to perform due diligence procedures for new and pre-existing individual and entity account holders with balances exceeding $50,000 and $250,000, respectively, as of Nov. 30, 2014 (determination date). These procedures include the electronic searching of US indicia, obtaining self-certifications and other documentary evidence and performing enhanced review procedures (i.e., paper search and inquiry with the relationship manager) in the case of accounts with balances that exceed $1,000,000 as of the determination date.

In Annex II, certain Philippine FIs can be treated as deemed-compliant FFIs and are exempt from reporting. These include FIs that have a local base with 98% of their accounts held by Philippine individuals and/or entities. Likewise, certain local banks and FIs with only low-value accounts are exempted.

With respect to 2015 information and onwards, Philippine FIs also need to report the US persons’ and recalcitrant account holders’ total amount of gross income paid or credited to their accounts (including aggregate amount of gross proceeds from the sale or redemption of property). They also need to report the name of each Non-Participating FFI to which they have made payments and the aggregate amount of such payments.

Just recently, the BIR issued an advisory postponing the first reporting period by Philippine FIs to the second quarter of 2016, months after the initial target date of Sept. 30, 2015. The BIR also mentioned that the first batch of reports to be submitted will include information relating to 2014 and 2015 US reportable accounts.

The main agreement also makes it clear that although the IGA has been signed, it is a part of a longer negotiation process. The IGA shall enter into force on the date of the Philippines’ written notification to the US that the country has completed its necessary internal procedures for implementation. This includes being satisfied that the US has established safeguards and infrastructure on information that will be exchanged. The agreement can also be amended any time before Dec. 31, 2016.

Indeed, the signing of the Model 1 IGA provides welcome clarity on a number of issues. Philippine FIs can now further improve their plans for the FATCA implementation, resolve apparent conflicts on certain domestic data privacy laws, and reduce the scope of the reporting requirements by excluding certain categories of accounts. With the reciprocity clause in the Model 1 IGA, the IRS will disclose information relating to Philippine residents in the US to the BIR, to help validate whether correct Philippine income taxes have been settled, thereby increasing tax collections in the long run.

Had the Philippines not concluded an IGA, Philippine FIs would have incurred costs, including the massive 30% withholding tax penalty. There would also have been reputational or other practical limitations in dealing with FFIs abroad due to the withholding obligations under FATCA.

Since the FATCA negotiations between the Philippines and the US remain an ongoing process, Philippine FIs should remain persistent, flexible, and watchful of developments. The Philippine government is still expected to ratify the Model 1 IGA into law in the coming months. Only then can the BIR issue the implementing rules and regulations which should provide more guidance on some practical implications, such as: issues on products and counterparties scoping; validation of reportable accounts and documents provided by account holders; reporting and withholding responsibilities; reporting formats and submission mechanisms to use; monitoring of FIs’ compliance; and imposition of penalties, among others.

The BIR should also continue conducting public consultation, including coordination with the Association of Bank Compliance Officers, Inc. (ABCOMP), which has been tasked by the Bangko Sentral ng Pilipinas to review and address FATCA-related questions or concerns of Philippine banks and other nonbank FIs performing quasi-banking functions. Collaboration with these institutions and other regulatory bodies directly affected by FATCA can provide the BIR with relevant inputs to help with drafting its implementing guidance.

At the same time, Philippine FIs should keep up to date and actively participate in these developments so that their FATCA compliance programs remain robust.

Jay A. Ballesteros is a Tax Senior Director at SGV & Co.