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Inside Tax : Issue 19 - Foreign Account Tax Compliance Act (FATCA)

Why You Should Be Concerned


Transfer PricingThe financial services industry is one of the most regulated industries in the world. It is an industry that is exposed to both domestic and international regulations and the reason is not farfetched. Money, in whatever currency remains the primary consideration for exchange of goods and services. “Cash is King” is a common business lingo. Parallel to this is the obligation to pay the appropriate taxes due on those transactions.

In March 2010, the U.S. enacted the Foreign Account Tax Compliance Act (FATCA) with an effective date of 1 January 2013. The legislation covers all accounts and assets owned or held by US citizens in diaspora with the aim of ensuring that these accounts and account holders comply with the provisions of the tax laws of the U.S.

The Act mandates all foreign financial institutions (FFIs) and non-financial foreign institutions (NFFIs) who receive or make payment of any U.S. source income to disclose information to the Internal Revenue Service (IRS), (the U.S. agency responsible for tax assessment, collection and enforcement), about U.S. persons from which the income was received and/or payment made.

Non-compliance with the provisions of this Act results in withholding of 30% on fixed or determinable annual periodic (FDAP) payments and gross sale proceeds from U.S. investments.

In order to give a clear understanding of the entities that are required to comply with FATCA, the Act defines FFI as any non-U.S. entity that:

  • accepts deposits in the ordinary course of a banking or similar business;
  • as a substantial portion of its business, holds financial assets for the account of others; or
  • is engaged (or holding itself out as being engaged) primarily in the business of investing, re-investing, or trading in securities, partnership interests, commodities, or any interest in such securities, partnership interests, or commodities.

Generally, all non-U.S. banks, insurance companies, stock brokers and trustees etc. could be classified as FFIs. Entities exempted from complying with this legislation include publicly traded corporations, foreign governments, or wholly owned agency of any organization or foreign central banks.

In view of the above, Nigerian banks and other financial institutions that do business with U.S. banks and U.S. citizens are required to comply with FATCA effective 1 January 2013. In effect, Nigerian financial institutions are expected to begin new customer on-boarding and remediation of existing customers that meet FATCA criteria by 1 July, 2014.

FFIs are required to enter into an FFI agreement with the U.S. Treasury, which in turn confers the status of participating agents on the FFIs and consequently exempts payments in respect of US sourced income made to FFIs from being subjected to the 30% withholding. This agreement with the U.S. Treasury obligates the participating FFIs (PFFIs) to make absolute disclosure on U.S. source accounts, comply with verification and due diligence procedures and respond to additional IRS reporting requests and withholding of 30% on intractable account holders.

Financial institutions in Nigeria must therefore be prepared for the challenges that may be posed by complying with the Act by assessing the impact of the legislation on their business to enable them identify the required resources for compliance and channel them appropriately.

The registration website became accessible to FFIs from 15 July, 2013 and each PFFI and registered deemed-compliant FFI would be assigned a global intermediary identification number (GIIN) after approval of registration. The GIIN is required to be used both for reporting purposes and for identification of the FFI's status as withholding agent.

The IRS would electronically release the first list of PFFIs and registered deemed-compliant FFIs (IRS FFI List) on 2 December, 2013, and would update the list on a monthly basis. In order to ensure inclusion on the December 2013' IRS FFI List, FFIs would need to register by 25 October, 2013.

On the home front, the requirement to comply with FATCA has not been well publicized. The Central Bank of Nigeria has not provided guidance to the public with regards to compliance with the Act and even the Nigerian financial institutions surprisingly have not demonstrated good understanding of the compliance requirements. It is therefore expedient for Nigerian financial institutions to begin compliance with the Act to obviate the risk of their U.S. source payments being subjected to withholding of 30%. Also, countries such as Germany, Italy, Spain, United Kingdom and France have borrowed a leaf from the U.S.' playbook and recently announced an agreement to develop a multilateral information platform.

This agreement is expected to facilitate exchange of financial information amongst these countries for the purpose of tackling tax evasion and aggressive tax avoidance. The Federal Inland Revenue Service may also consider the possibility of entering into such agreement with IRS with the aim of deterring residents from evading local tax and promote cross border financial information reporting.

The table below shows the roadmap for complying with FATCA:

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