US tax authorities released Notice 2010-60 in August and there have been several events and seminars since then trying to make sense of it all. 2010-60 is a set of guidance on how the industry needs to respond to the US HIRE Act Title V - also known as
Following on the heals of cases like UBS, the US wants all foreign financial institutions to do detailed documentary checks and disclose and report any US persons within their account base. These regulations are not intended to impose any new taxes - its
just that the penalty for non compliance will take the form of additional taxes in the form of a 30% withholding on dividends, interest and gross proceeds. The object is to give a big incentive (aka stick) to non-US financial firms to make the effort and
do the required monitoring and disclosure.
The issues for the industry - and there are a few, are not just the operational problems associated with different levels of documentation. There's risk here too. In many cases, if account holders fail to provide adequate documentation (reclaicltrant account
holders), the options are both the additional tax penalties noted above, but also closure of the account. In some countries and for some clients this may be a legal problem especially where the relationship between the financial institution and the customer
is fiduciary. In short, the US regulations may be breached if the institution fails to close the account, but the institution may equally be unable to close the account without breaching its fiduciary duty in its home country.
The regulations also have an operational side to risk. A foreign financial institution (FFI) that elects to be withheld upon rather than withhold must apparently obtain a "waiver of treaty benefits" from its customers. How this would work in practice is
unclear as is what happens if the customer refuses to sign away their entitlement under treaty.
The industry has less than 24 operational months to go before these new regulations come into force and already there is furious activity among many in the field to try to figure out what systems investment is necessary and what client facing impacts there
The EU and OECD, while taking a slightly different tack, are broadly in favour of measures to simplify withholding tax in order to cut costs for financial institutions and make more tax recovery available to smaller investors. If the US model is anything
to go by, there'll be plenty of available evidence in the coming 24 months about the impacts of some of the proposed methods. The risk here is that the OECD and EU models take many of their key elements of principle from those that the US model has had in
place since 2001. Hopefully the next decade in Europe will see us avoiding many of the pitfalls that are seen in the US model.
Many have suggested that a simpler way to achieve the same objective for the IRS would be not to use the withholding tax system to force disclosure, but to tighten up the already burgeoning raft of "information sharing" agreements between countries. The
current problem with these is that they are deliberately framed to stop one county going on a fishing expedition with another to find any investors hiding their assets. Calls under information sharing agreements must be targeted. However, compared to QI
and FATCA complexities, strengthening the information sharing principles would seem a much easier task and one which would leave financial institutions conducting their core businesses.
What is clear is that the financial crisis of 2008 is resulting in increased pressure on both making savings in governmental spending and also taxation systems. On the latter, cross border taxation may be seen as an easy target - which means that we'll
all need to be vigilant to maxmise the entitlements of investors within what will become, very complex and more rapidly changing tax environments than we have been used to before.
I've already heard many people at conferences talk about the need for new systems. The focus on STP will thus also be a pivotal discussion as document management volumes go up by over an order of magnitude and data volumes go off the scale.
The next two years are going to be very interesting.