Are you an American?

Yes, you are an American for US income tax purposes and subjected to global income and as well as financial asset reporting under Banker's Secrecy Act 1976 (BSA) and Foreign Account Tax Compliance Act 2010 (FATCA) to US authorities if you were born in the US or are its naturalized citizen or are a green card holder. Even though you may not have lived, earned income, owned assets and business or maintained residence in the US.
In an effort to curb hiding of income and assets by US persons and specified individuals outside of the country US Department of the Treasury by following congressional measure under chapter 4 of the United States code Title 26 IRC Section 1471 and 1472 requires Banks and financial institutions located outside of US to report on an yearly basis information related to accounts of US Indicia.
"Are you an American?" is a question that Banks and other financial institutions have to ask customers those who open a bank, brokerage and investment account with a Pakistani or foreign bank in the country or purchase an insurance policy starting from July 1, 2014. The question with a few exceptions is a part of the reporting requirements under the act and the customer's response is formally documented, whether he's opening a personal or business account, denominated in rupee, US dollars or any other currency.
Global implementation of the FATCA regime aims to improve US tax compliance by co-opting foreign banks in addition to US banks. The US government is expected to formally execute an overdue Inter-Governmental Agreement with Islamabad which will further mandate banks in Pakistan through Ministry of Finance and State Bank of Pakistan to collect detailed data supporting the customer's response and report the same to the US tax authorities.
The agreement will result in Pakistan being listed as a FATCA Partner Jurisdiction and local, foreign banks and specified financial institutions in the country will be titled as FATCA Partner Registered Deemed Compliant Foreign Financial Institutions (RDCFFI).
Additionally, even before implementing the terms of IGA at a future date, banks and other financial institutions in Pakistan were required to register individually and independent of Government of Pakistan instruction with the US tax agency, ie, Internal Revenue Service (IRS) before December 31, 2014 and agree to report new and pre-existing individual and entity accounts of US persons, specified individuals and businesses substantially owned by US citizens and green card holders. A large number of Pakistani banks have already complied with this requirement. After registration, these institutions have received a unique Global Intermediary Identification Number (GIIN) and become a Reporting (Pakistani) Financial Institution. Since June 2, 2014 the IRS has published list of participating, approved and reporting Pakistani banks and financial institutions (FFI list) and issues update to this list on a monthly basis.
While a standard clause under Model 1 IGA states that non-compliance by the customers does not authorise the closure of an existing or new recalcitrant account nor can an American person be denied a new account on such grounds, however these recalcitrant accounts will be subjected to aggregate reporting to the US tax authorities nonetheless.
Subsequent to their inclusion in the IRS's FFI list, Pakistani financial institutions will win a waiver on the 30 percent withholding tax applicable on their US-source income to which they will be subjected to in case of non-compliance. But this will be contingent on three years of ongoing implementation, continual compliance with the regulations, completion of periodic internal compliance certifications and renewal of the status by the IRS or as required under the IGA. And failure to do so could attract for the errant institution harsh administrative, economic and even criminal consequences apart from other legal ramifications (including the reinstatement of the 30 percent withholding tax). At their worst, the penalties could include the discontinuation of international clearing privileges for the institution, a ban on doing business in the US and blacklisting within the US government, entities and partner nations.
Further, under the IGA, domestic regulatory authorities in Pakistan such as the Ministry of Finance are responsible for implementation and compliance and are encouraged to adopt additional measures to ensure reporting as per the agreement.
Meanwhile, certain entities in Pakistan; namely the government, retirement funds, the central bank, banks with only local customers, international organisations and other exempted beneficial owners fall under chapter 4 of the US Code Title 26 IRC sections 1471 and 1472. Which means that these entities will be deemed compliant despite being non-reporting and depending on their classification and structure of operation may or may not be required to register with the IRS and obtain the GIIN. However, such exception will be partially determined by the contents of the favoured nation clause of the standard Model 1 agreement (if included in the IGA between the two countries) and based on determination by local authorities in Pakistan.
A close reading of the two main models of IGAs shows that of the five subsections, three clearly reveal references extracted from the pre-existing Tax Information Exchange Agreement and DTC (Double Tax Convention). Both sets of regulation are longstanding, uniquely country specific in nature and have been introduced, owned and globally promulgated by the US, with or without reciprocity with numerous nations. Interestingly, in 1957, Pakistan was the first nation of the subcontinent that agreed to a mutual income tax treaty with the US, which ensured avoidance of double taxation and was designed to prevent evasion of income tax by citizens of either country. After multiple ratifications, the agreement materialized into a full-fledged tax treaty in May 1959.
Since Pakistan is not formally a party to the TIEA, the tax treaty of1957/1959 will serve as a legal basis for exchange of specific information stipulated by the FATCA regulation. This is why the IGA pertaining to FATCA implementation and compliance in Pakistan is likely to refer to Article XVI (Mutual Assistance) of the existing treaty with a view to dispelling any possible resistance and enabling US authorities to avoid any conflict with Pakistan's sovereign law and internal regulations.
FATCA is an addition to the existing but similar US tax laws as well as global Anti-Money Laundering/Know Your Customer requirements. While the US Treasury has recently published the FATCA final regulations relating to reporting by foreign financial institutions and has stipulated the withholding of certain payments to non-participating foreign financial institutions and other foreign entities, the Pak-US IGA will primarily dictate the terms of the FATCA promulgation in Pakistan and will supersede even stipulations made in the final regulations.
(The writer, a New York based US Tax Advisor & FATCA specialist can be reached at [email protected])