JOHANNESBURG – The regulatory compliance burden on South Africa’s financial institutions is set to increase.
Following the introduction of the Foreign Accounts Tax Compliance Act (FATCA), an US piece of legislation that aims to reduce US offshore tax evasion, foreign financial institutions will need to report account details of their American customers to the US Inland Revenue Service (IRS).
Finn Elliot, associate director, corporate law advisory practice at KPMG, says a failure to comply with FATCA may result in punitive withholding tax of 30% on US source income payable to non-compliant foreign financial institutions.
Laurence Kiddle, commercial director, FATCA at Thomson Reuters, says a failure to comply with FATCA could leave a company at a significant disadvantage and most jurisdictions around the world – including South Africa – have signaled their intention to comply.
However, there are often obstacles to compliance and South Africa is no exception, he says.
“In many jurisdictions the account information that is required to be gathered and reported conflicts with local laws around data privacy and protection. To mitigate this many jurisdictions are in discussion with the US Treasury to negotiate Inter-Governmental Agreements, under which FATCA will enter local law,” Kiddle says.
Elliot says National Treasury and the South African Revenue Service (Sars) have expressed their intention to sign an intergovernmental agreement with the US and are currently in negotiations with the US Department of the Treasury with a view to concluding a proposed South African FATCA Intergovernmental Agreement (SA IGA).
“The conclusion of the SA IGA will mean that FATCA is directly incorporated into South African law,” he says.
Who will be affected?
Kiddle says FATCA requires Foreign (non-US) Financial Institutions (FFIs) to report on financial accounts held by their American clients.
Financial institutions are defined very widely and include (but are not limited to) banks, brokers or dealers, hedge funds, private equity funds and insurance companies, he says.
“The affect may also be felt by the customers of these companies – both individuals and other institutions – who may be asked to provide additional information about their tax residence,” he says.
Elliot says some of the more significant obligations imposed by the SA IGA will broadly include the identification and classification of financial institutions – all entities are required to ascertain their SA IGA status and also to query the status of their contracting parties.
These institutions will also be required to register on the US IRS registration portal. A registration number will be issued which will serve as evidence of FATCA status, he notes.
Additionally, financial institutions will need to make sure that their systems, processes and procedures are updated to comply with enhanced SA IGA due diligence and reporting requirements. Systems may also have to be developed or adapted to allow for this reporting burden.
Kiddle says FATCA presents a significant data challenge to most companies – both in collecting and verifying information on customers, and in putting in place the appropriate processes and technologies to manage this on an on-going basis.
“For example, the existing account opening or customer on-boarding processes will include a lot of relevant information, but this is unlikely to be either complete, or a good match for FATCA requirements,” he says.
Kiddle says there is also likely to be a technology impact – information may be held in a number of different systems, and working with this may not be straightforward.
“FATCA impacts many different parts of an organisation. We generally see that FATCA lead as the tax function, but there is significant impact on compliance, business operations, IT and systems.”
Elliot says the SA IGA obligations must be performed in accordance with the timelines set by the US. These timelines were recently extended by 6 months through a notice that was published by the IRS.
In terms of the notice, the IRS Registration Portal will open on the 19th of August this year and financial institutions will be able to register on the portal to ensure inclusion on the first IRS list of Foreign Financial Institutions until 25 April next year.
“This 6 month extension will be welcomed by South African financial institutions, but it doesn’t provide too much breathing space, considering the extent of the SA IGA implementation obligations,” Elliot says.