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30 November 2023

Big brother FATCA begins watching bank transactions

By Majorie van Leijen

For the past months, the Foreign Account Tax Compliance Act (FATCA) has gradually set foot on UAE shore. The UAE Central Bank has agreed to adopt the Model 1 IGA, an agreement stating that all financial institutions in the UAE will answer to the FATCA request of sharing information about any US accounts, assets, or transactions channelled through.

Together with the rest of the world, the UAE has until June this year to commence disclosing basic information about accounts with transactions linked to the US.

However, all transactions made in 2014 will be mirrored in the reports that are due to be delivered from March 15, 2015 onwards. The first steps of monitoring, therefore, have begun.

In 2010 the Internal Revenue Services (IRS) announced it would soon start taking measures in an attempt to tackle tax evasion. Other than the voluntary commitment of US residents to report income on foreign accounts to the service, it urged Foreign Financial Institutions (FFI) to report details of such accounts to the IRS.

Nearly three years of negotiation, regulation, and time framing followed, with a final regulation and timeline formed in October last year. According to these agreements, FFIs are subjected from July 1, 2014 to due diligence of all accounts except grandfathered accounts. From March 15, detailed reporting of accounts is required.

The July 1 deadline

“Withholding agents generally will be required to begin withholding on withholdable payments made after June 30, 2014, to payees that are FFIs or NFFEs (non-financial foreign entity) with respect to obligations that are not grandfathered obligations, unless the payments can be reliably associated with documentation on which the withholding agent can rely to treat the payments as exempt from withholding,” states the IRS in its latest regulatory statement.

Grandfathered accounts are obligations that are outstanding on January 1, 2014.

Sean Abreu, financial consultant at Mondial, an immigration consultancy firm in Dubai, explains: “The term “Withholding” normally refers to the IRS giving instructions to hold back 30 per cent of any money that a non-compliant FFI receives in dollars passing through the US and Participating FFI (PFFI).

“If an FFI has not registered as intending to become compliant or has a national agreement (IGA) in place ‘withholding’ will have already started.”

In the case of the banks in the UAE, this agreement has been made, and thus withholding should be already in place. However, due diligence on all accounts will begin on this date.

“All pre-existing accounts will have to be identified with basic information as per 1 July 2014. Basic information includes name, social security number/TIN, address, account number, current value etc.

“The requirement is more than just reporting the accounts that the FFI know as being linked to US ‘persons’ – the FFI also has to do a manual search of all their files where the account has a value of $1,000,000 or more to check if there are links to the US. If the FFI has not complied by this date they will suffer withholding tax of 30 per cent,” explains Sean.

FFIs over the next couple of months will be registering the data required, as the FATCA registration website has opened on January 1, 2014.

It is important to note that by July 1, 2014, if not already, banks may adopt new rules regarding the opening of new accounts with US –linked transactions.

The March 15, 2015 deadline

“Annual reporting by PFFIs would be phased in starting in 2015 (with respect to information related to the 2014 calendar year), with reporting of the full scope of FATCA information required no later than March, 2017,” stated the IRS.

The information reporting will have to include full details of the accounts, such as the underlying investments of funds, all transactions, interest earned etc., explains Sean.

“The phasing in starts with “recalcitrant” (known or suspected offenders) accounts, large value accounts, pre-existing accounts and works its way down to the mass volume accounts with smaller sums.”

“There is a lot of confusion about what is to be reported as there are different rules for new accounts, for “recalcitrant” accounts (naughty accounts) and for pre-existing accounts,” he continues.

However, important is that the information reported must be backdated to include information relating to the year 2014, and therefore January 1, 2014, is a very important date, he concludes.