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The U.S. government just an- nounced the delay of effective date of Foreign Account Tax Compliance Act （FATCA） by half a year， promising the later arrival of “surveillance storm” of the tax initiated by the United States.
In spite of that， the Chinese financial institutions are far from getting ready.
Terry Tam， Partner of PricewaterhouseCoopers China in the U.S. Taxation， and Wang Hua， Partner of PwC China in risk management and internal control services， said that Chinese financial institutions are going to take three steps to prepare for the FATCA. Presently， most of them are still in the initial phase.
The Later Arrival of FATCA
In 2010， the U.S. Council passed the FATCA， which required all U.S. taxpayers and foreign financial institutions（FFI） to report the account information of their U.S. clients to the U.S. Internal Revenue Service （IRS）. Any uncooperative financial institutions will have to withhold 30% of their income from the U.S.， if any， as the income tax. The income covers the revenue from invest- ment disposal， the interest and dividends of assets in the U.S.
In mid-July of 2013， the IRS and the Treasury Department of the United States made an announcement of delaying the date of carrying out various requirements of FATCA. Banks， insurance companies， investment funds and others that are termed as FFI by the IRS were told that the effective date of FATCA was delayed from January 1， 2014 by six months to July 1， 2014. Simultaneously， the deadline for the registration of first batch of FFIs is no longer October 25 of this year.
The delay of FATCA for six months gives the Asian financial institutions more time to prepare for the compliance. Meanwhile the IRS has more time to draft and issue tables， guidelines，illustrations and explanations about FATCA. The U.S. government is also given the time to negotiate with countries having the will of compliance and to reach the agreement between nations， known as IGA
The U.S. Treasury Department said that the U.S. government had signed agreements with nine national governments and are holding negotiations with over 80 countries and regions around the globe.
“The original time for the FATCA to take effect did not give financial institutions in Asia to do any jobs about compliance， including the newlyinvolved systems and business procedures. Apart from the improvement in systems and procedures， every nation needs to change their relevant domestic laws before reaching the agreement with the U.S. This also takes a lot of time. In addition， which countries will sign on the IGA and when will they sign remain unknown， which will further prevent FFIs from fulfilling the requirements of FATCA，” Wang Hua said. This is not the first that FATCA delayed its effective date. Originally， the act should take effect on January 1， 2013， but was delayed by one year.
“Three-Step”Preparation
FATCA was called the “Imparity Clauses” at the very start， because FFIs have to invest more in regulation， control and management – a burden in the finance and operation – upon the IRS’s survey into tax problems of U.S. citizens and companies.
It is a very complicated and systematic project for financial institutions to meet the requirements of FATCA. They have to make their management system efficiently cover several regions， businessmen， companies and projects. They also need to tackle problems involving privacy and contract laws. Those things are also related with the benefits of different departments. Moreover， the compliance of FATCA also need the communications between financial institutions and clients， service suppliers， third-party partners and so on.
According to Terry Tam and Wang Hua， the financial institutions in China are mainly following a “three-step”strategy to get ready for the FATCA， which are analyzing the gap， designing the blueprint and implementing the plan. “The analysis of the gap is the most important step， which means that the financial institutions look into the gap between the data their current systems could provide now and the requirements of FATCA and detect any changes needed for the procedures and structural frame，” Wang Hua said.
The five countries in Western European are the earliest ones to sign the IGA with the United States. A part of their financial institutions have already prepared enough for this， such as the large-sized banks in Great Britain. The other financial institutions in Western Europe which have not fully prepared are already in the third phase of preparation. “From their experiences， the preparation usually takes one or two years，” Terry Tam said.
As Terry Tam and Wang Hua said，financial institutions in China changed their method of last year that they only talked about the preparation without taking any substantial measures. Real actions have been taken. The large-sized banks， which are the most influenced， have already been in the first phase of preparation.
“At first， the internal professional team was founded to study the rules and clauses of FATCA and analyze the gap. Then the preparative work will by promoted step by step，” said Wang Hua.
As for the cost， PwC forecasted that the FATCA is going to bring additional US$30 million as the compliance cost to FFIs. But it is hard to estimate the cost of China’s financial institutions. “Compared with foreign companies， the financial institutions in China are different in both the products and customers. The procedures of opening accounts are also different. For example， some foreign banks require the customers to provide telephone numbers， addresses and three months’ addressable bills when opening accounts. Presently， there are no such requirements in China. In addition， many financial institutions in China have yet found the gap between their systems and the FATCA， so the cost is hard to estimate，” said Terry Tam.
According to Wang Hua， the reconstruction and upgrade of system is the most difficult part among all preparative work. Presently， domestic banks are thinking of making some alterations to the current system to keep the compliance cost at bay. In spite of this， some banks might be forced to reconstruct its system， which will take a lot of time and money.
“The feedback we collected from banks in China showed that most of them still have the problem to get ready for the U.S. rule even though it has been delayed twice，” Wang Hua said.
Apart from banks， the other financial institutions， such as insurance companies and assets management organizations， are also slow in prepar- ing for the FATCA. On one hand， they have quite a few U.S. clients， have few overseas branches or rarely invest in the U.S. assets. On the other hand， there are no clear guidelines for how insurance companies and assets management organizations should prepare for the FATCA.
Notable is the bilateral tax agreement between China and the U.S.， which requires a 10% rate to collect income tax paid to each other. Does this collide with the FATCA？ Terry Tam has no answers for that. He could only say that the U.S. government should return 20% of tax if a Chinese financial institution has to withhold 30% of its income as the tax. But the U.S. authority said nothing about this.
“For financial institutions， changing to meet the requirements of FATCA will no doubt increase the compliance cost. This is inevitable，” said Wang Hua. As shown in the cases that the five European countries signed the IGA with the U.S.， the cooperation is more than FFIs’ providing convenience for the U.S. The U.S. government also promises to help countries nodding to FATCA collect the information about their citizens in the U.S. Maybe the FATCA will enhance the cooperation between nations in fighting against tax evasion.
In spite of that， the Chinese financial institutions are far from getting ready.
Terry Tam， Partner of PricewaterhouseCoopers China in the U.S. Taxation， and Wang Hua， Partner of PwC China in risk management and internal control services， said that Chinese financial institutions are going to take three steps to prepare for the FATCA. Presently， most of them are still in the initial phase.
The Later Arrival of FATCA
In 2010， the U.S. Council passed the FATCA， which required all U.S. taxpayers and foreign financial institutions（FFI） to report the account information of their U.S. clients to the U.S. Internal Revenue Service （IRS）. Any uncooperative financial institutions will have to withhold 30% of their income from the U.S.， if any， as the income tax. The income covers the revenue from invest- ment disposal， the interest and dividends of assets in the U.S.
In mid-July of 2013， the IRS and the Treasury Department of the United States made an announcement of delaying the date of carrying out various requirements of FATCA. Banks， insurance companies， investment funds and others that are termed as FFI by the IRS were told that the effective date of FATCA was delayed from January 1， 2014 by six months to July 1， 2014. Simultaneously， the deadline for the registration of first batch of FFIs is no longer October 25 of this year.
The delay of FATCA for six months gives the Asian financial institutions more time to prepare for the compliance. Meanwhile the IRS has more time to draft and issue tables， guidelines，illustrations and explanations about FATCA. The U.S. government is also given the time to negotiate with countries having the will of compliance and to reach the agreement between nations， known as IGA
The U.S. Treasury Department said that the U.S. government had signed agreements with nine national governments and are holding negotiations with over 80 countries and regions around the globe.
“The original time for the FATCA to take effect did not give financial institutions in Asia to do any jobs about compliance， including the newlyinvolved systems and business procedures. Apart from the improvement in systems and procedures， every nation needs to change their relevant domestic laws before reaching the agreement with the U.S. This also takes a lot of time. In addition， which countries will sign on the IGA and when will they sign remain unknown， which will further prevent FFIs from fulfilling the requirements of FATCA，” Wang Hua said. This is not the first that FATCA delayed its effective date. Originally， the act should take effect on January 1， 2013， but was delayed by one year.
“Three-Step”Preparation
FATCA was called the “Imparity Clauses” at the very start， because FFIs have to invest more in regulation， control and management – a burden in the finance and operation – upon the IRS’s survey into tax problems of U.S. citizens and companies.
It is a very complicated and systematic project for financial institutions to meet the requirements of FATCA. They have to make their management system efficiently cover several regions， businessmen， companies and projects. They also need to tackle problems involving privacy and contract laws. Those things are also related with the benefits of different departments. Moreover， the compliance of FATCA also need the communications between financial institutions and clients， service suppliers， third-party partners and so on.
According to Terry Tam and Wang Hua， the financial institutions in China are mainly following a “three-step”strategy to get ready for the FATCA， which are analyzing the gap， designing the blueprint and implementing the plan. “The analysis of the gap is the most important step， which means that the financial institutions look into the gap between the data their current systems could provide now and the requirements of FATCA and detect any changes needed for the procedures and structural frame，” Wang Hua said.
The five countries in Western European are the earliest ones to sign the IGA with the United States. A part of their financial institutions have already prepared enough for this， such as the large-sized banks in Great Britain. The other financial institutions in Western Europe which have not fully prepared are already in the third phase of preparation. “From their experiences， the preparation usually takes one or two years，” Terry Tam said.
As Terry Tam and Wang Hua said，financial institutions in China changed their method of last year that they only talked about the preparation without taking any substantial measures. Real actions have been taken. The large-sized banks， which are the most influenced， have already been in the first phase of preparation.
“At first， the internal professional team was founded to study the rules and clauses of FATCA and analyze the gap. Then the preparative work will by promoted step by step，” said Wang Hua.
As for the cost， PwC forecasted that the FATCA is going to bring additional US$30 million as the compliance cost to FFIs. But it is hard to estimate the cost of China’s financial institutions. “Compared with foreign companies， the financial institutions in China are different in both the products and customers. The procedures of opening accounts are also different. For example， some foreign banks require the customers to provide telephone numbers， addresses and three months’ addressable bills when opening accounts. Presently， there are no such requirements in China. In addition， many financial institutions in China have yet found the gap between their systems and the FATCA， so the cost is hard to estimate，” said Terry Tam.
According to Wang Hua， the reconstruction and upgrade of system is the most difficult part among all preparative work. Presently， domestic banks are thinking of making some alterations to the current system to keep the compliance cost at bay. In spite of this， some banks might be forced to reconstruct its system， which will take a lot of time and money.
“The feedback we collected from banks in China showed that most of them still have the problem to get ready for the U.S. rule even though it has been delayed twice，” Wang Hua said.
Apart from banks， the other financial institutions， such as insurance companies and assets management organizations， are also slow in prepar- ing for the FATCA. On one hand， they have quite a few U.S. clients， have few overseas branches or rarely invest in the U.S. assets. On the other hand， there are no clear guidelines for how insurance companies and assets management organizations should prepare for the FATCA.
Notable is the bilateral tax agreement between China and the U.S.， which requires a 10% rate to collect income tax paid to each other. Does this collide with the FATCA？ Terry Tam has no answers for that. He could only say that the U.S. government should return 20% of tax if a Chinese financial institution has to withhold 30% of its income as the tax. But the U.S. authority said nothing about this.
“For financial institutions， changing to meet the requirements of FATCA will no doubt increase the compliance cost. This is inevitable，” said Wang Hua. As shown in the cases that the five European countries signed the IGA with the U.S.， the cooperation is more than FFIs’ providing convenience for the U.S. The U.S. government also promises to help countries nodding to FATCA collect the information about their citizens in the U.S. Maybe the FATCA will enhance the cooperation between nations in fighting against tax evasion.