A CLOSER LOOK AT FATCA …Part 3 The impact of non-compliance

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The TTWhistleblower continues with the final part of this series on taking a closer look at the Foreign Account Tax Compliance Act (FATCA) Bill that is currently the subject of controversy and widespread public debate.

For the third part in this series, the TTWhistleblower looks at implications of compliance and more so, NON-COMPLIANCE with FATCA regulations and analyses the impact on some countries.

The requirements of compliance

As of 01 July 2014, FATCA compliance required new registration, due diligence reviews, information reporting, and tax withholding obligations according to a PriceWaterhouseCoopers (PWC) publication The Widespread Reach of FATCA, How It Will Affect Your Business.

The publication noted that obligations are imposed on “payers of US fixed or determinable annual or periodical income (FDAP) and this includes multinational corporations”.

However, despite the many obligations created by the US law, there are exemptions that, ironically, can create even further complexities in achieving compliance.

One such exemption is that FATCA withholding should not apply where the payee provides to the withholding agent the appropriate documentation that demonstrates that the payee is not subject to withholding.

But even if withholding does not apply under the legislation, reporting remains a requirement.

There are also particular non-financial foreign entities who are exempted from the law. These entities are deemed to be at low risk of US tax evasion such as publicly traded companies and their affiliates those engaged in active trades or businesses. These entities have no substantial US owners, or identify these owners to withholders agents should not bear withholding.

Bottom line though is that inter-Governmental agreements enforce factor regulations in compliant countries.

Implications of non-compliance

According to the US Treasury online source, as at June 2014, there were 30 FATCA compliant countries, 25 countries with FATCA agreements in principle, and 17 countries with negotiations under way. Trinidad and Tobago was listed in the 17 countries in negotiation.

A common example of the impact of non-compliance is Belize, which has since suffered some consequential impacts.

An Escape Artist article in April 2016 put the total banking assets of Belize around US$750 million and attempted to explain the level of burden that would have to be borne by Belize as a nation, and its financial services sector.

The article stated: “Belize simply cannot afford to pay such fines, meaning of course they are aiming to comply, since it is the only stated practical option. In fact, a unique, creative solution may be necessary, including corresponding elsewhere besides the United States.”

“This is problematic too. However, the new obligation does not even end there for non-U.S. jurisdictions. It is now the responsibility of all jurisdictions to monitor the compliance of any other jurisdictions worldwide with whom they may do business.”

The article explored a number of criticisms of the FATCA law and even questioned why offshore wealth was being taxed despite the US not having a wealth tax.

Quoting from The Economist magazine, the article recounted speculation that its primary mechanism of enforcement, a withholding levy on U.S. assets, would likely create an incentive for foreign banks to divest in U.S. assets.

It further speculated that such a scenario could spur a trend of capital flight that would be the opposite of the intention of the law.

Capital flight has been an underlying fear here in Trinidad and Tobago because of the supply issues of USD access through commercial banks, as was noted in this article quoting UWI Economist, Vaalmikki Arjoon.

A more recent report stated: “Economists’ analysis in documents by the International Monetary Fund (IMF), the Central Bank of Belize, the US Treasury Department, and Standard & Poor’s Global Ratings (S&P) showed that only three of the five banks in Belize remain directly affected by FATCA non-compliance.”

The report questioned Standard and Poors’ Analyst Livia Honsel on her forecast rating for Belize which was downgraded on 14 November into non-investment grade or “junk” status to “CCC+”. Just over a week later, another downgrade came pushing the nation’s crediting rating closer into junk, to ‘CC’.

The S&P sting in the tail for Trinidad and Tobago came when this country was classified with Belize among countries in Latin America and the Caribbean with deteriorating “negative outlooks”.

Countries with negative economic outlooks in the region include Brazil, Belize, Mexico, Venezuela, Colombia, Costa Rica, El Salvador, Guatemala, Suriname, Barbados, Trinidad and Tobago, Uruguay, and The Bahamas.

Together with other implications for the Financial Services and Real Estate sector of Trinidad and Tobago and impact on daily banking, this very important outlook rating is yet another hook in the treacherous line that connects to the implications of non-compliance with FATCA.

FATCA? No thank you

Around the same time in 2014, the Russian Government responded to FATCA that the US law would contravene home laws and contested its implementation.

Russia is in fact more interested in doing business with China, where the Chinese Government took a stance of not wanting to be pushed around and made beholden to the laws of other jurisdictions.

Around that time in 2014, it looked likely that China would tell the US “no, thank you” to implementing FATCA. In addition, while that nation initiated moves to develop its own FATCA like laws, it is worth noting that Hong Kong has signed on to FATCA.

Other countries deemed to be unlikely to sign on to FATCA around that time included Cuba, Laos, Iran and North Korea.

The current status of FATCA implementation in Trinidad and Tobago, as reported, is that the Foreign Account Tax Compliance Act (FATCA) Bill has been sent to a Joint Select Committee of Parliament a reporting deadline of 03 February 2017.

The US Treasury has set a deadline date of 28 February 2017 for implementation of the law.

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