Pakistani financial institutions and banks are required to comply with Foreign Accounts Tax Compliance Act (FATCA) of United States before January 1, 2014. Sources told Business Recorder here on Thursday that the salient features/requirements of FATCA are: Foreign Financial Institutions (FFIs) need to enter into an agreement with the Internal Revenue Service (IRS), US tax authority and become participating FFIs (latest by January 1, 2014).
All participating FFIs would need to identify and document information on US accounts maintained with the FFI by US persons or US owned entities (initial review to be completed by January 1, 2014). Another requirement of FATCA is to report certain information on the identified US accounts (name, address, account number, Tax Identification Number-TIN, account balance, income and the gross proceeds) and the Recalcitrant accounts (aggregate number and value of accounts) to the IRS, on an annual basis (limited reporting to initiate from March 31, 2015 covering calendar years 2013 and 2014).
A key feature of the FATCA is to withhold 30 percent tax on withhold-able payments (US source income and gross proceeds from the sale of property) and any foreign pass-through payments made to Non-participating FFIs (First withholding to begin from January 1, 2014).
Sources said that the government is looking into the modalities of possibility of signing a bilateral treaty ie Inter Governmental Agreements (IGAs) with United States for implementation of the Foreign Accounts Tax Compliance Act (FATCA) for Pakistani financial institutions/banks. Ministry of Finance, State Bank of Pakistan (SBP), Securities and Exchange Commission of Pakistan (SECP), Federal Board of Revenue (FBR), Ministry of Foreign Affairs and Ministry of Law and Justice are co-ordinating for finalising the methodology to meet the requirements of the FATCA.
Details revealed that the Foreign Accounts Tax Compliance Act has been enacted by US Congress in March 2010 and will be implemented through certain Regulations to be issued by the US Treasury Department and the Internal Revenue Service (IRS), the US tax authority. Salient features/requirements of FATCA showed that the Foreign Financial Institutions (FFIs) need to enter into an agreement with the IRS and become participating FFIs (latest by January 1, 2014).
All participating FFIs would need to identify and document information on US accounts maintained with the FFI by US Persons or US owned entities (initial review to be completed by January 1, 2014). Secondly, report certain information on the identified US accounts (name, address, account number, Tax Identification Number - TIN, account balance, income and the gross proceeds) and the Recalcitrant accounts (aggregate number and value of accounts) to the IRS, on an annual basis (limited reporting to initiate from March 31, 2015 covering calendar years 2013 and 2014).
Thirdly, withhold 30 percent tax on withhold-able payments (US source income and gross proceeds from the sale of property) and any foreign pass-through payments made to Nonparticipating FFIs (1st withholding to begin from January 1, 2014). Sources said that to maintain international business and trade, Pakistani Financial institutions (FIs)/banks will have to comply with the FATCA requirements. FIs/banks can only provide information of account holders if it is required by law or the customers waive their confidentiality rights. However, apparently compliance to the requirements of FATCA seems unavoidable for Pakistani FIs/banks as non-compliance would expose them to 30% withholdings on US based earnings and also on the pass-through payments. Further, it may also harm the correspondent relationship of Pakistani FIs/banks with banks especially in the US and FIs may eventually be isolated from the global financial services, markets and face significant commercial, reputational and financial risk. Consequently, it may also harm our international trade. For compliance, banks will have to modify their core banking systems and there are also legal impediments, including secrecy laws, which may obstruct our FIs to sign any such agreement with a foreign agency and to provide such information thereof.
In view of global approach to FATCA compliance and to address legal issues including secrecy laws, Pakistan Banks Association (PBA) had suggested an Inter-Governmental approach under which an agreement can be signed at Governments level. The agreement will allow FIs/banks to report information of accounts of US Citizens directly to the local regulatory authority, rather than to the IRS, The local regulatory authority would then share that information with the IRS and vice versa receive information required by our tax authorities, sources said.
Currently, the US Department of the Treasury is engaged with more than 50 countries and jurisdictions around the world to improve international tax compliance and implement the information reporting and withholding tax provisions. The US Treasury has published model Inter Governmental Agreements (IGAs) for implementing FATCA. These models serve as the basis for concluding bilateral agreements with interested jurisdictions.
As per the available information and the model agreements, published by Office of the US Treasury, an inter Governmental approach can be adopted for sharing information on reciprocal basis. As laid down in the model IGAs there are two possible options for such approach.
Under Model-I, FIs will report information about accounts and beneficial ownership of US persons to their respective tax authorities, followed by automatic exchange of such information under existing bilateral tax treaties or tax information exchange agreements. There are two versions of Model-I Intergovernmental Agreements, ie, Reciprocal and Non-Reciprocal Agreements. Under Model-II, FIs will report information about accounts and beneficial ownership of US persons directly to the Internal Revenue Service (IRS) supplemented by information exchange between USA government and partner government on request.
From the forgoing, it is obvious that FATCA requirements seems imperative for Pakistani FIs/banks and they will have to share required information with IRS or else face a 30 percent withholding and other related risks. However, an IGA will not only facilitate FIs/banks in providing information rather it may also benefit Pakistan in terms of tax collection from Pakistani nationals having accounts with banks in US. Therefore, it would be appropriate if Government of Pakistan enters into similar arrangements with the US Government for sharing such information on a reciprocal basis. The US government has already welcomed signing IGAs with interested jurisdictions, sources added.
Comments
Comments are closed.