The last two months have seen the three Gulf Cooperation Council (GCC) countries of the United Arab Emirates (UAE), Qatar, and Kuwait go into force based on agreements in principle to an Intergovernmental Agreement (IGA) with the United States Department of the Treasury regarding the US Foreign Account Tax Compliance Act (FATCA). This dovetails a number of similar agreements the United States has entered into with other countries in its attempt to counter US taxpayers maintaining secret, unreported financial assets overseas.
What is FATCA?
Although the United States has maintained the Foreign Bank Account Report (commonly referred to as the “FBAR”) for many years, it is now requiring foreign financial institutions (“FFIs”) provide reporting to the Department of the Treasury on accounts maintained on the FFIs’ books belonging to US taxpayers (or accounts in which the taxpayers have an interest). To motivate compliance with the FATCA, Treasury has announced that it will impose significant withholding on non-complying FFI’s banking activities in the United States. FFIs that do not comply with FATCA can face 30% withholding on US-sourced payments.
How is FATCA being Enforced by and through Non-US States?
The US Treasury has entered into agreements with a number of foreign countries such as Switzerland, Canada, Japan, Mexico, Spain and the United Kingdom. By executing an IGA with the United States, the foreign state agrees to require its financial institutions to report specified financial accounts involving (through whole or partial ownership) US taxpayers to the US Treasury.
How does this Impact GCC Financial Institutions?
The United States’s agreements with Qatar took effect in April, and more recently in the case of Kuwait (May 1) and the UAE (May 23). The agreements between the United States and the UAE, Qatar and Kuwait are based on the “Model 1” IGAs (notably, there are two types of Model IGAs). The Model 1 allows for an upward reporting requirement from the FFI to the partner country (say, the UAE central government), which will then report the relevant financial information to the US Department of the Treasury’s Internal Revenue Service (IRS).
The large number of foreign nationals living in or otherwise having financial accounts in the Persian Gulf make FATCA compliance a pressing need, particularly given that many of these people have U.S. citizenship or permanent residency status. GCC-based FFIs (which include investment funds) should take care to know the full scope of their responsibilities under FATCA, which can be very nuanced. Given the wide variety of banks in the region and the fact that many of them have subsidiaries overseas, understanding the breadth of their compliance obligations is critical. Although Qatar, Kuwait and UAE have “agreed in substance” on the IGAs for FATCA, there are still unilateral requirements by the actual FFI. First and foremost, they should be registered with the Treasury Department and obtain what is called a Global Intermediary Identification Number (GIIN). This entails coordination with any affiliate, parent, subsidiary or otherwise related financial institution as there are various subcategories of registration under FATCA. Furthermore, FFIs should naturally ensure compliance with reporting requirements.
Overall, FATCA represents the United States’ attempt to crack down on tax non-compliance and any benefits by hiding money offshore. Although there is already the FBAR/FinCen 114 forms, the FATCA pushes the burden on foreign financial institutions to help the US government identify US taxpayers who maintain certain foreign financial assets. Given the steep financial penalties for non-compliance by the United States (not to mention potential penalties by their own countries), foreign financial institutions should ensure compliance and diligence in meeting the requirements placed on them under this very nascent law .