The effects of US tax avoidance legislation will be wider than many believe, tax experts from K&L Gates have warned.
It has been suggestion that financial institutions may prefer to avoid US investments rather than bear the cost of instituting FATCA compliant record-keeping. However, Baker believes that US capital markets will prove sufficiently tempting to ensure international compliance, calling such warnings “empty threats”.
The current proposals will have to overcome certain legal barriers, including a ban on account closure in some jurisdictions. The framework for intergovernmental implementation was released simultaneously with the proposed legislation. The UK, French, German, Italian and Spanish governments responded to the proposals, suggesting that FATCA information might be submitted to their own revenues, to be shared with the IRS in exchange for reciprocal information on foreign accounts in the US.
Rules for determining when payments made by an FFI are “attributable” to withholdable payments received are complex. These rules, which Baker and Wise describe as a “first attempt”, will determine how much US tax an FFI must withhold when it receives withholdable payments and makes payments to its account holders.
The current legal barriers to FATCA compliance and the complexity of identifying passthrough payments, leaves considerable uncertainty for FFIs. Baker and Wise advised it will be “up to institutions” to make moves toward compliance, or to wait for further developments.