FATCA self-certification could cause headaches for financial institutions

Sovos
August 25, 2015

The 2015 reporting deadline for the U.S. Foreign Account Tax Compliance Act is Sept. 30, and governments around the globe are doing what they can to gather information of U.S. citizens who have accounts in their financial institutions and report it back to the U.S. government.

FATCA, as it is commonly known, requires foreign financial institutions to report information about accounts held with them by U.S. citizens. It's an attempt to prevent U.S. citizens from offshoring assets to avoid paying taxes on them.

"Self-certification is when individuals declare they are citizens of the U.S. for tax purposes"

Self-certification and opening new accounts
If a U.S. resident opens a new account in another country, FATCA requires certain procedures to be followed. Nations, such as the British Virgin Islands, are developing what's called self-certification forms for U.S. residents to fill out when they open new accounts abroad, according to SKNVibes.com. Essentially, self-certification is when individuals declare they are citizens of the U.S. for tax purposes. For entities trying to open a new account abroad, they are required to self-certify if a significant portion of ownership is located in the U.S. The financial institution must then do its due diligence to further verify U.S. citizenship.

However, parts of FATCA aren't uniform in their application. The U.S. has developed different types of intergovernmental agreements to address issues of privacy raised by individual governments. Self-certification is a source of some ambiguity.

What happens when an individual or an entity tries to open a new account in a foreign financial institution and either doesn't provide self-certification, or it seems vague?

The intergovernmental agreements the U.S. has developed with the U.K. and Canada illustrate just such a lack of uniformity.

A matter of interpretation
Bloomberg BNA wrote that the guidance that U.K. officials have given to their financial institutions states that if the institution cannot obtain the self-certification at the time it is opened, the account should be treated as reportable. A reportable account means that the financial institution reports information on the account to the IRS, including name, address, Tax Identification Number and balance. The minimum balance for an individual's account to be reported to the IRS is $50,000.

"If the self-certification isn't provided, the IRS states that the account shouldn't be opened."

The guidance given by the Canadian government to its financial institutions is similar, Bloomberg BNA wrote. If self-certification is not complete or is completely absent, the account is treated as reportable. However, the Canadian guidance goes a step further and states that in no way should the institution refuse to open an account or deny service if the account holder doesn't provide the requisite self-certification.

Bloomberg BNA writes that if the self-certification isn't provided, the IRS states that the account shouldn't be opened, per the intergovernmental agreements.

"…if a Reporting Model 1 FFI [foreign financial institution] or a Reporting Model 2 FFI, in applying the due diligence procedures in Section III(B) of Annex 1 of the IGA, cannot obtain the self-certification upon the opening of new individual accounts, can the financial institution, nevertheless, open the account and treat it as a U.S. reportable account?" wrote Edward Tanenbaum for Bloomberg BNA. "The IRS responds 'no,' stating that, pursuant to Section III(B) of Annex 1 of the IGA, the financial institution must obtain the self-certification at account opening, failing which the financial institution cannot open the account."

Tanenbaum wrote that the intergovernmental agreements' annex pertaining to self-certification is ambiguous. According to Bloomberg BNA, the IRS's position is that it does not make sense to allow the account to be opened and have it reported on when it hasn't been verified that the account holder isn't a U.S. resident.

Financial institutions need clarity on the issue to prevent unnecessary reporting. And there are other issues regarding the interpretation of intergovernmental agreements. FATCA itself includes holding companies and treasury centers as examples of foreign financial institutions. However, agreements do not, reported Bloomberg BNA.

With the deadline for 2015 reporting fast approaching, governments and the U.S. Dept. of the Treasury may need to work to solve some of the discord. The guidance that governments give to their financial institutions for compliance with the U.S. law seems to differ, in certain situations, with what is in the intergovernmental agreements.

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Sovos

Sovos is a global leader in tax compliance and business-to-government reporting software, safeguarding businesses from the burden and risk of compliance around the world. As governments go digital, businesses face increased risk and complexity. The Sovos Intelligent Compliance Cloud combines world-class regulatory analysis with a global cloud software platform to create an adaptable, connected and global compliance solution that keeps businesses ahead of the ever-changing regulatory environment. Sovos supports 4,500 companies, including half of the Fortune 500, and integrates with a wide variety of business applications. Based in Boston, Sovos has offices throughout North America, Latin America and Europe. For more information visit and follow us on LinkedIn and Twitter.
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