Foreign Accounts Tax Compliance Act was put in place to clamp down on the amount of tax evasion by individual who have US status. The FATCA will mostly have an impact on foreign financial businesses. FATCA allows Foreign Financial Institution to divulge customers' information to the IRS. If the banks in Jamaica just do not comply, the US authorities will withhold thirty percent (30%) of US source income, including gross assets sale proceeds.
Foreign Accounts Tax Compliance Act
Background
According to DLA Piper (2012), the Foreign Accounts Tax Compliance Act (FATCA) enacted by Hiring Incentives to Restore Employment (HIRE) Act on March 18, 2010. The HIRE Act is aimed at providing hiring incentives to restore some of the jobs lost in the latest economic recession in the United States. The goal is to help put Americans back to work as soon as possible. FATCA was enacted at a time when G-20 countries were pressuring offshore financial centers and tax havens to end bank secrecy and become more transparent. The FATCA requires non-US foreign financial institutions (FFIs) and non-US non-financial entities to identify and disclose their US account holders and members or become subject to a new 30% US withholding tax with respect to any payment of US source income and proceeds from the sale of equity or debt instruments of US issuers. DLA Piper (2012) mentioned that this legislation is a direct result of United States in combating offshore tax evasion and recouping much needed tax revenues. The legislation was proposed to remedy perceived deficiencies in the current methods used by the Internal Revenue Service (IRS) and the United States Department to identify US persons who utilize foreign financial accounts or foreign entities and thereby provide more information to the IRS to enforce compliance. The legislation was also prompted by the well-publicized prosecution of a large and well-known Swiss bank that facilitated US tax evasion (DLA Piper, 2012).
According DLA Piper (2012), FATCA will come into effect with respect to payments after December 31, 2012. Piper (2012) explained that the reason for the delayed date was to permit FFIs to adapt internal procedures and information technology systems to transition into this new reporting and compliance system regime.
FATCA defines FFIs are entities which perform certain function like accepts deposits in the ordinary course of a banking or similar business, are engaged in the business of holding financial assets for the account of others, are engaged primarily in the business of investing or reinvesting or trading in securities, partnership interests or commodities and FFIs include non-US banks, custodians, brokers, wealth managers, insurance companies and investment funds. According to the FATCA, FFIs should report the name, address and taxpayer identification number (TIN) of each. In addition, account holder that is a Specified US Person and, in the case of any holder that is a US Owned Foreign Entity, the name, address and TIN of each Substantial US Owner of such entity, the account number, the account balance or value determined at such time and in such manner as the IRS may prescribe; and except to the extent provided by the IRS, the gross receipts and gross withdrawals or payments from the account (DLA, 2012).
Information released during the last US general elections, indicated that up to twenty thousand US citizens and Green Card Holders reside in Jamaica. Many are Jamaican citizens who have acquired US residency or citizenship status but have chosen to continue living and working in Jamaica. Others commute between Jamaica and the US, often operating businesses in both jurisdictions. Most of these individuals either work or do business in Jamaica and pay their taxes to the Jamaican government by way of PAYE or through annual returns to Inland Revenue. What some may not know is under US tax law; they are also required to file a United States tax return. The US requires that all its citizens and residents file a tax return irrespective of their place of actual residency. The same tax requirements that apply to US citizens and residents living in the US, apply to those living outside the US. Specifically, US tax filers are required to report their "worldwide income" which would include any income earned in Jamaica. The income is reportable whether or not it has been taxed in Jamaica. Jamaican resident US tax filers are subject to the same penalties and interest for late filing, under reporting of income and underpayment of taxes.
Fortunately, Jamaica, like it does with several countries, has a bilateral double taxation treaty with the US. Under the treaty, citizens of both countries are relieved from double taxation on income earned in either country. The net effect of this treaty allowance is that the taxpayer pays taxes at the higher of the tax rates prevailing in the two countries but does not pay taxes on the same income in both countries. Tax rates in the US, unlike in Jamaica where it is a flat percentage, depends on the individuals level of income, so whether or not a US citizen or resident living in Jamaica pays at the US rate or the Jamaican rate will depend on the level of their worldwide income (DLA Piper, 2012).
Over the couple of years, there will be an implementation of certain payment systems. In January 1, 2014 there will an income payments. This withholding obligation encompasses not only U.S. withholding agents but also FFIs, who will be required to withhold on passthru payments that are withholdable payments. In January 1, 2015 there will be withholding on gross proceed payments. Gross proceed payments are any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from U.S. sources.
In January 1, 2017, there will be a withholding on foreign passthru payments. The proposed regulations reserve on the definition of a foreign passthru payment refers to a payment that would be foreign source under U.S. source of income rules but attributable to a withholdable payment. Participating FFIs will be required to report annually on the aggregate amount of foreign passthru payments to each nonparticipating FFI for the 2015 and 2016 calendar years (DLA Piper, 2012).
The Implication of Jamaican Businesses
According to Ernst & Young (2011) stated that the Foreign Account Tax Compliance Act ( FATCA) was enacted as part of the Hire Incentive to Restore Employment (HIRE) Act of 2010 which require financial institution to use enhanced due diligence procedures to identify US persons who have invested in either non-US financial accounts or non-US financial entities. The intent of FATCA is to keep US persons from hiding income and assets overseas. The FATCA is one of the measures that the United States is using to clamp down on tax evasion.
There are many implications on the Jamaican Business as it related to the Act. Ernst and Young (2011) explained that foreign financial institutions such as the ones based in Jamaica faces significant consequences if it fails to enter into agreement with the Internal Revenue Services (IRS). One of the penalties is a 30 per cent gross withholding penalty on certain types of payments from US-sourced income, such as gross proceeds from the disposition on US securities, dividends and pass-through payments. Not only that, many Jamaican businesses had to face the burdensome implementation costs and an outflow of funds from the formal banking system. According to Jackson (2012), many banks will be facing an implementation cost US 100,000 to 1 billion dollars to fully comply with the US regulations. Jackson (2012) further states that the current procedures and forms are not updated to comply with the today are inadequate to provide the IRS with the data required by FATCA. In addition, the training cost associated compliance officers, relationship managers and staff in the middle and back office which is an essential task.
According to Jackson (2012) mentioned that banks have a legal obligation not to disclose information concerning their customer's affairs. Addition to that, courts have long accepted the duty of secrecy as an implied term in the contract between banker and customer. They have recognized that this duty is not just limited to the state of the customer's account, but also extends to all the transactions passing through it.
Courts have also recognized that the duty of secrecy is not absolute, but qualified in the sense that certain disclosures are permissible. The qualifications as outlined in seminal cases include: where the disclosure is made with the express or implied consent of the customer; where the interests of the bank require disclosure; where disclosure is under compulsion of law; and where there is a duty to the public to disclose. Under the Common Law, the breach of a duty of secrecy gives rise to a claim for damages (Jackson, 2012).
The Jamaican legislature has given statutory effect to the Common Law duty of secrecy by virtue of the Banking Act and Financial Institutions Act. Under these statutes, bank officials are prohibited from giving, divulging, or revealing any information regarding the money or other relevant particulars of a customer's account. This prohibition extends to any person who, by reason of his capacity or office, has by any means access to the records of the bank, or any material concerning a customer's account (Jackson, 2012).
Being aware of certain Banking Acts, the US Authority has asked the banks to formally ask the account holders for consent to divulge the information to the US Authority. If they refuse to give consent then then the bank is required to close their accounts. The customer could argue that the financial institution has no basis on which to close the account and seek legal redress locally.
A number of banks are currently in dialogue with the local regulator, Bank of Jamaica (BOJ), as well as US authorities and North America-based banking associations on the matter. BOJ will carry out its risk assessment on its licensees to determine the readiness of these entities (Phillips, 2012). Some banks such as the Scotia bank Jamaica which is owned by the Canadian operations have endowed profoundly in addressing the FATCA concerns. The vast majority of Jamaican banks are either subsidiaries or branches of North American banks. The parent banks of these local banks have invested significant resources in examining FATCA and its potential impact on their global operations, Jamaica included (Bowen, 2012).This will require the U.S. entities to maintain documentation on those non-U.S. persons and also track how those persons are classified under FATCA.
Members of the diaspora contribute significantly to the Jamaican economy in the form of remittances. If these persons decide that they need to shelter their money they will stop putting money into these accounts and will lead to an outflow of funds from the formal banking system. Earl Jarrett, the general manager of Jamaica National Building Society (JNBS), which provides financial services such as money transfers and mortgages to thousands of persons in the diaspora, said FATCA could result in an outflow of funds from the formal banking system (Richardson, 2012). Richardson (2012) further explained any non-compliance with FATCA could also result in the termination of correspondent banking relationships in the US and internationally. Critics of FATCA argue that it represents increased US hegemony to collect information on its citizens and non-citizens (Jackson, 2012).
In preparing for FATCA, financial institutions will need to make significant process and technology changes to comply with FATCA. While most FATCA provisions don't take effect until the middle of 2013, many financial institutions have already begun to prepare. Financial institutions should consider steps such as performing a current state assessment of your systems and operations, conducting gap analyses against your identified requirements and developing action plans to implement changes required for FATCA compliance.
Implication on the citizens
Thousands of Jamaicans will have their personal financial information released to American authorities if local banks sign on to a new tax compliance agreement. The US Foreign Account Tax Compliance Act (FATCA) becomes effective in January; it requires financial institutions around the world to identify whether their customers are US person. The definition of US person by the Act is very broad it is defined as someone having a US citizenship, a US green card, a US birthplace, a US residence address, or US correspondence address, a US passport among other things.
According to the Internal Revenue Service (IRS) web site, FATCA has two main requirements. US taxpayers holding financial assets outside the United States must report those assets to the IRS. This means that a US citizen, dual US and Jamaican citizen or a US green-card holder living in Jamaica would be required to report information to the IRS about financial assets that they hold in Jamaica with an aggregate value over US$50,000 on a new form (Form 8938) that must be attached to the taxpayer's annual tax return.
This also means that the failure by the US citizen, dual US and Jamaican citizen or a US green-card holder to report their foreign financial assets on Form 8938 will result in a penalty of US$10,000 (and a penalty up to $50,000 for continued failure after IRS notification). Section 6038D (b) defines foreign financial assets and ownership as any financial account maintained by a foreign financial institution, any stock or security issued by a non-U.S. person, any financial interest or contract held for investment that has a non-U.S. issuer or counter party and any interest in a foreign entity (Peart, 2012).
The US citizen, dual US Jamaican citizen or a US green-card holder who underpays the IRS because of non-disclosure would be subject to an additional substantial understatement penalty of 40 per cent. If the US taxpayer believes that he can escape the long arms of the American tax collector by simply stay under the radar, the US law places an obligation on ALL non-US financial institutions to report directly to the IRS information about financial accounts held by US taxpayers (Phillip, 2012).
The aim of the law is to clamp down on tax dodgers who hide hundreds of millions of US dollars in off shore accounts annually in order to avoid from paying tax to America. Once this law is implemented it means that the US will have more information than the Jamaican Government on the financial and spending patterns of numerous Jamaicans who are not even green card holders. A normal Jamaican without a US green card is subject to the measure provided they travel to the US for about two months each year. If the individual spend over 183 days over a three-year period in the US, he or she will be caught under FATCA, which means he or she must report to the US their income (Phillip, 2012).
Recommendation and Conclusion
Many banks locally and regionally are faced with a decision to comply with the FATCA and sign the agreement with the IRS. This agreement could further improve the relationship between US and Jamaica. Many institutions are fearful that such decision to comply will result in a bank run. A bank run will cause a massive amount of outflow of money throughout the banking system. Looking at the totally benefits of such a system the researchers would recommend that the banks comply with FATCA. Furthermore, the researchers would recommend that the financial institutions (Scotia bank, BOJ) should comply with the laws of the FATCA so as to avoid 30% of US withholding tax. Compliance with the law will result in angry customers but 30% of source of income being withheld would put majority of institutions a greater disadvantage.
Jamaican citizens affected by FATCA should give the bank permission to divulge their information to the IRS so that the financial institution can comply with fully with FATCA.
Individuals that are affected and which not to comply should give up their citizenship or green card. The country on a hold should make the necessary preparation for the Act to come into place. FATCA will lead to greater compliance by green card holders and US Citizens in Jamaica. Many will give up their green cards rather than face the reality of imposed taxation.
