FFIs facing legal conflict with Fatca compliance, experts warn

Jurisdictions with an intergovernmental agreement in place may find foreign financial institutions facing a legal conflict with Foreign Account Tax Compliance Act compliance

James Siswick, KPMG

Jurisdictions without an intergovernmental agreement (IGA) in place under the Foreign Account Tax Compliance Act (Fatca) will face a legal conflict in complying with the US tax law, industry experts warn.

Following the announcement this week that Jersey, Guernsey and the Isle of Man intend to pursue a model agreement with the US Internal Revenue Service (IRS), experts warn that national governments will have to hurry to put IGAs in place, or see their banks forced to choose between breaking local law or non-compliance with Fatca.

There have been concerns about how the data-collection aspect of Fatca may force foreign financial institutions (FFIs) to choose between complying with Fatca or local data privacy laws. IGAs deal with this issue by allowing FFIs to report US account-holder information to their domestic tax authority – assuming legislation has been passed to allow this – rather than directly to the IRS and so breaking local data privacy laws.

"The whole point of the IGAs is to make Fatca less complex to comply with," says Jayne Newton, tax investigations director at law firm DLA Piper in Leeds. "But more importantly, the IGAs are intended to overcome the wider legal and jurisdictional issues in compliance with Fatca because before the IGAs, FFIs were faced with having to decide whether to comply with Fatca or whether to breach local law. To be honest, it's not acceptable to breach local because that risks losing your banking licence."

Newton explains that while an IGA itself will not supersede local law, it will allow for jurisdictions to enact the laws necessary to comply with Fatca. And this explains the rush to get IGAs signed. "The whole point of the IGA is that a government will try and get domestic legislation in place so you won't breach jurisdictional rules by complying with Fatca. So for countries that don't have an IGA, it's going to be a rush between now and July 2013."

James Siswick, Fatca director at KPMG UK in London, expresses concerns about the number of jurisdictions seeking to sign an IGA with the IRS. "There's a challenge for the US authorities in negotiating the IGAs with each of the countries," he says. "And with rumours that there could be a large number of countries looking at IGAs, there's a volume issue."

He also questions what will happen to jurisdictions that are seeking an IGA but don't have it signed in time for the July 2013 deadline, when institutions are expected to have their client on-boarding systems in place ready to comply with Fatca. "It remains to be seen what will happen [after July 2013] if you're in a jurisdiction that's looking to enter into an IGA, or your IGA has not yet come into effect. Do you need to comply with Fatca first and then comply with the IGA? How do you manage any legal conflicts, particularly in that first phase? Once Fatca's gone live with the IGAs not yet in place, how do you manage that conflict?"

Even if jurisdictions are able to get an IGA signed soon, they still face tight deadlines for banks to effect the necessary changes to client on-boarding systems, he says. He also points out the need for legislation is a country-specific question. "The UK was the first to enter into an IGA and is looking to progress quickly with enacting the legislation. It remains to be seen how that will work in different countries and how easy it is in different countries to execute the necessary legislation."

FFIs in jurisdictions without an IGA in place will be expected to sign up to individual agreements with the IRS in January 2013 and have their client on-boarding systems ready for Fatca compliance by July 2013. The IGA signed between the UK and the US means UK FFIs now have to have their client on-boarding systems ready by January 2014, once local law has been passed allowing for reporting to the UK tax authorities.