14 May 2014 by Finance and Banking Alert

Foreign Account Tax Compliance Act (FATCA) – practical implications for South African entities

FATCA was enacted in 2010 by the United States (US) to improve tax compliance with regard to offshore accounts of US citizens. Generally speaking, FATCA imposes a 30% withholding tax on certain payments to foreign financial institutions (FFI's), unless the FFI has complied with FATCA's reporting requirements with regard to US accounts handled by it. The 30% withholding applies to USsourced income and sales proceeds paid to a FFI for its own account or in respect of any financial account, which it maintains for others.

In terms of FATCA, the term FFI has been given a wide definition, and includes (subject to exceptions) amongst others, financial institutions, brokers, dealers, custodians, hedge funds, private equity funds and pension funds. FATCA also extends to non-financial foreign entities (NFFE's) as payments to such entities may also be subject to a 30% withholding tax.

The 30% withholding tax imposed under FATCA shall not apply in the event that FFI's enter into an agreement with the US Internal Revenue Service (IRS), in terms of which the FFI agrees to obtain, verify and report on certain information regarding accounts held by it, and in terms of which it agrees to deduct and withhold a tax equal to 30% of any pass thru payment which is made by such FFI to a recalcitrant account holder (being an account holder who fails to comply with requests for information required under FATCA).

It is clear that FATCA has a worldwide reach and that the implementation thereof has far-reaching consequences for entities falling within its ambit. Such entities will have to consider the level of change which is required in order to comply with FATCA and consider whether the benefits of complying with such legislation outweighs the costs involved in undergoing the necessary changes, as well as any costs associated with non-compliance. The South African and US governments are in the process of developing an intergovernmental agreement, which will regulate the implementation of FATCA. The sharing of information under such agreement may be on a reciprocal or nonreciprocal basis.

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