The Foreign Account Tax Compliance Act (FATCA), which was approved by the United States government in March 2010, will come into effect in July 2014 to address the issue of offshore tax evasion by US citizens and permanent residents.
While experts confirmed to Zawya that the act will not pose major implications on banks and the volume of US investments in the MENA region, it does conflict with the secrecy acts of certain financial institutions.
According to a study by the Union of Arab Banks (UAB), the FATCA aims to limit tax evasions by Americans buying assets and opening bank accounts outside the US, costing the US Department of Treasury annual loses of about USD 100 billion. The law requires financial institutions within and outside of the US to sign an agreement with the Internal Revenue Service (IRS) to declare the accounts of all American clients owning more than USD 100,000 and those owning more than 10% of the shares of companies and institutions outside the US.
RISKS AND CHALLENGES
According to Nayel Faleh Aljawabrah, a financial analyst and regional manager-Middle East and Africa of LANCE Bank in Dubai, FATCA will have a negative impact on companies trading in the US. He also expects that some might avoid doing business with the US to escape the implications of this act.
FATCA also presents multiple challenges to Arabic financial institutions as identified by Mohsen Adel, chairman of the Egyptian Society for the Study of Financing and Investment. These challenges include the timeline given to banks to provide data on US clients, the ability of the IT infrastructure and the financial means of Arab institutions to create and allocate new circuits to implement the technical and legal mechanisms of the act, in addition to the availability of experts to do so.
Adel confirmed that there is a risk certain Arabic or foreign banks would refrain from opening bank accounts for American clients, which will affect the distribution of American clients in the MENA region and drive some investments away.
He added that abiding by the act is not against the secrecy of the clients' financial information. Banks and financial institutions will sign an agreement with IRS, under which financial institutions have to declare information about their American clients so that the bureau can deduct the payable taxes as required under FATCA. Adel clarified that American clients would have already declared their citizenship and agreed to declare their taxable accounts. If a bank refuses to declare their American clients, IRS will be allowed under FATCA to cut 30% of the bank's accounts in American banks.
According to Adel, UAB developed a roadmap to support banks preparing to comply with this act, while preserving the secrecy of their client's financial information and maintaining the purpose of the act that is beneficial for the banks and their transactions with the US. He said that the UAB is planning a meeting with the US Treasury next September in Washington to assess the potential risks and implications of implementing FATCA.
UNJUSTIFIED CONCERNS
Salwa Hazin, director of the Washington Center for Strategic and Economic Studies, said that the implementation of FATCA does not present a major risk to Arabic financial institutions and their refusal to comply will lead to local deflation since they will lose business with foreign and local organizations that comply with the act.
FATCA will be implemented worldwide and has already been approved by some countries, hence its negative implications, if any, will be applicable to all countries, said Tarek Helmy, former chairman of the United Bank. He added that the US aims to reduce tax evasions and other countries should follow their lead.
PREPARING FOR COMPLIANCE
Amr Alantably, chair of the Compliance Unit in the National Bank of Egypt and a trainer for FATCA, says Arabic financial institutions need to be fully prepared to enforce the act by training their staff and updating the clients' data to identify those with dual citizenships.
He added that the act can be implemented through three methods. The first is a direct agreement between the financial institution and IRS, without any governmental intervention. The second is between the United States and the state represented by a financial institution such as the central bank or the local revenue service that will compile all the statements and notify the US. The third is an agreement between two sides through international cooperation, where the government would pass a legislation to allow financial institutions to declare their clients' information to IRS. According to Alantably, the first option is preferred because it is quick and does not impose many restrictions on the country.
He added that the institutions affected by FATCA are banks, investment funds, brokerage firms, custodian banks and insurance companies. The act, which has a registration deadline set to July 2014, requires financial institutions to provide five endorsements. One endorsement is about large American clients with accounts over USD 1 million, a second stating that the institution has not taken any steps towards its American clients since August 6, 2011. A third includes all American individuals whose accounts are over USD 50,000 or companies with accounts over USD 250,000. The fourth endorsement includes all recent accounts for American clients as of the end of 2013 and the final includes data required from the client by the act such as name, address, account number, total balance and a tally of all the money deposited and withdrawn from the account.
(With additional reporting from Asmaa Abdulzaher and Fatima Gamal.)
© Zawya 2013
