The UAE earlier announced it is gearing up to sign on to FATCA compliance. For anyone not “in the know”, FATCA stands for the “Foreign Account Tax Compliance Act,” a draconian United States law enacted in 2010 and being implemented in stages. FATCA is designed to carefully monitor the financial transactions of US persons with non-US financial assets. Under FATCA, as enacted, foreign (non-US) financial institutions are generally required to provide directly to the US Internal Revenue Service (IRS) information about accounts held by Americans. Reporting will include the name, address and taxpayer identification number of each US account holder; the account number; account balance and value; the account’s gross receipts and gross withdrawals or payments; and other account related information requested by the IRS. If the institutions do not comply, they will be hit with a 30% withholding tax on payments from US-sources, including proceeds on sales of US stocks and securities (effectively cutting the institution off from any profitable US investment opportunities).
The UAE Central Bank Governor, Sultan bin Nasser Al Suwaidi, has said that the country is considering signing a so-called “Intergovernmental Agreement” (IGA) with the United States in order to facilitate compliance with FATCA. Governor Al Suwaidi stressed the need for the regulatory authorities in the UAE to prepare procedures to facilitate FATCA compliance and set clear instructions for financial institutions under their supervision. In response, the US Treasury Department Assistant Secretary for Tax Policy, Mark Mazur, said that the US Treasury appreciated the UAE Central Bank’s leadership on FATCA. The Department of the Treasury added that it was pleased to have reached this important milestone with the UAE. “We look forward to beginning negotiations on an intergovernmental agreement in order to implement FATCA effectively and efficiently in the UAE”, he added. The US Treasury has publicly acknowledged its expectation that the UAE will live up to its stated commitment and sign on to FATCA compliance.
Signing an IGA Indicates the Country is Serious and its Financial Institutions Will Have Clear Mandates of a High Standard of Compliance
The FATCA reporting requirements mean that the institution could be put in a Catch-22 position. For instance, by complying with FATCA’s requirements to provide customer information to the IRS, the financial institution could be violating local data privacy laws. When a country signs on to an IGA, the dilemma is resolved because the local financial institutions must provide all of the information instead to the relevant local country authority, which in turn, will provide that information to the IRS under a previously executed information-exchange agreement signed between the US and that country. Other compliance burdens are also addressed by the signing of an IGA. For example, as enacted, FATCA requires foreign financial institutions to close the accounts of so-called “recalcitrant account holders”. These are the accounts of clients who refuse to provide certain information demanded by FATCA. Mandating that the foreign institution close such a customer’s account, could result in a violation of local law or a violation of the institution’s contractual obligations to its customers, or both. Signing on to an IGA generally eliminates this account-closing requirement once the individual’s account is subject to reporting requirements under the IGA. An IGA also often simplifies the requirements that financial institutions must follow to determine if an account is maintained by a US person. For example, an IGA permits increased reliance on information gathered by the foreign financial institution pursuant to local anti–money laundering laws and “know-your-customer” rules.
What Does this Mean for You?
In a nutshell, FATCA, is a time bomb ready to explode for any US person having undeclared foreign financial assets or accounts. On July 12, 2013, the IRS announced a general six month extension to the commencement of compliance with FATCA’s withholding and account due diligence rules. Pursuant to this announcement, foreign financial institutions must generally implement new account opening procedures on or before July 1, 2014. The deadlines for completing due diligence on preexisting obligations (generally an account outstanding on June 30, 2014) is generally by December 31, 2014 (but documentation of high-value individual accounts must be undertaken by June 30, 2014).
In time, those who are ‘hiding’ will be caught out. By then, it will be too late to enter the IRS Offshore Voluntary Disclosure Program (OVDP). If you are not in compliance and have unreported income or assets, you must act now. The best advice is to consult a US tax attorney and obtain a full understanding of the possible civil and/or criminal implications you are facing. Learn about the latest OVDP and other options that you can consider. With the attorney examine the possible penalties and risks under each option.
The Importance of Attorney-Client Privilege
Only by consulting an attorney can the information and documentation you reveal be given protection from disclosure to the US tax authorities pursuant to the attorney-client privilege. Accountants and financial advisors do not have this privilege. If your matter must be worked on with such third parties, it is best if your attorney works under a so-called Kovel agreement which generally tries to extend the attorney-client privilege to information revealed to these persons.