FATCA – Approaching the 30 June 2015 Reporting Deadline

taxation 6The United States of America (US) Congress enacted the Foreign Account Tax Compliance Act (FATCA) in 2010. FATCA aims to identify non-compliance by US taxpayers (including US taxpayers not residing in the US), which may previously have been concealed by using foreign financial accounts.

FATCA imposes reporting obligations on US individual taxpayers (and certain individuals who own predetermined foreign financial accounts or offshore assets) and Foreign Financial Institutions (FFIs). In terms of FATCA, FFIs include South African banks and custodians, brokers, asset managers, private equity funds, certain investment vehicles, long-term insurers and other participants in the financial system.

FATCA imposes reporting obligations on FFIs which can be onerous and requires FFIs to periodically report to the US Internal Revenue Service (IRS) on financial accounts held by US taxpayers or foreign entities in which US taxpayers hold a substantial ownership. On 9 June 2014 the US and South African Governments entered into an inter-governmental agreement (IGA) to improve international tax compliance and to implement FATCA. The IGA became effective on 28 October 2014 after ratification by Parliament.

FFIs are, in terms of the IGA, required to report to the South African Revenue Service (SARS) and SARS, in turn, exchanges relevant information with the IRS. The IGA also imposes an obligation on the IRS to provide certain information relating to South African taxpayers using US accounts, to SARS. FFIs that comply with the IGA are generally released from the 30% withholding tax that would have been imposed by FATCA on all forms of investment income earned directly or indirectly on US assets by the FFIs.

FFIs that comply with the IGA will generally be released from the 30% withholding tax that would have been imposed by FATCA on all forms of investment income earned directly or indirectly from US assets by those FFIs.

SARS has issued a draft guide on the implementation of the IGA, which can be accessed at www.sars.gov.za under Automatic Exchange of Information (AEOI) which provides an indication of the interpretation likely to be followed by SARS. South African financial institutions are required to submit AEIO returns to SARS by 30 June 2015 (in respect of the period commencing 1 July 2014 and ending 28 February 2015), and thereafter annually for every period commencing 1 March and ending February, by 31 May of every year. The financial institutions are also required to keep all records, books of account or documents demonstrating its compliance with the IGA.

The IGA and the Draft Guide discusses the information that should be obtained and exchanged between SARS and the IRS. The reporting requirements differ between custodial, depository and other accounts. The financial information portion to be reported will generally relate to interest, dividends, account balances, income from certain insurance products and sales proceeds from financial assets and other income generated with respect to assets.

The information to be obtained and exchanged between SARS and the IRS, and vice versa, is described in the IGA and discussed in the Draft Guide. The specific reporting requirements differ between custodial, depository and other accounts. The financial information portion to be reported will generally relate to interest, dividends, account balances, income from certain insurance products and sales proceeds from financial assets and other income generated with respect to assets.

Persons subject to FATCA and the IGA, and in particular, South African financial institutions, should ensure that they retain the necessary information to be compliant with the reporting requirements by 30 June 2015.