The US Treasury Department pushing back the deadline for the Foreign Account Tax Compliance Act (Fatca) has taken some pressure off Asian fund houses, but they must not get complacent, argues consulting firm PwC.
Asset managers have been overwhelmed by the amount of operational changes they need to adopt to comply with the rules implemented by the US in order to combat tax avoidance and/or evasion.
Fatca requires Asian and other non-US financial institutions to report to American tax authorities details of their US account holders and investors worth more than $50,000. Financial institutions that fail to comply face a 30% withholding tax on US-sourced income.
Initially set to be implemented in January 2014, last week the US Treasury Department and the Internal Revenue Service (IRS) pushed the date back by six months.
Hong Kong-based Timothy Clough, risk and assurance partner at PwC, notes his surprise at the deadline extension, but adds it will give Asian and US government officials more time to agree on potential intergovernmental agreements (IGAs).
Fatca states that Asian and other non-US financial institutions must report their US account holders’ information directly to the IRS, though under an IGA, this could be amended so that institutions file directly with local authorities instead.
Although very few Asian governments have discussed Fatca publicly – Japan and Singapore have agreed to comply – Clough believes quite a lot is going on behind the scenes.
“Given the sensitivity of the discussions, many governments may have chosen not to disclose them to the market," he tells AsianInvestor. “The lack of noise in Asia in relation to IGAs shouldn’t be taken as an indication that these countries are not actively engaged with the US on these matters.”
Negotiations between Asian countries and US tax authorities will eventually provide clarity, but this will take time, he says, and Asian institutions must not become complacent as a result of Friday's time extension.
“My worry with this announcement is that clients will look at the headline and take their foot off the pedal with their priorities shifting to another high-priority matter," says Clough. "In six months’ time, we could back to where we were a few days ago, with institutions under the gun to comply within a limited time."
Up until the extension, Asian asset managers were rushing to work through their compliance programme to ensure they were up to speed.
Clough says Asian fund houses and other institutions should use this extra time to review their compliance programmes and make sure the impact on their customer is minimal. For example, they should ensure their customers have adequate time to receive and fill out additional US tax documentation.