Cross Border Taxation: FATCA and the Modern Trojan Horse

The global business world has seen dramatic strides in its approach towards and frameworks of direct taxation in the last few decades. This is especially true in the last few years when the importance of cross border tax income for governments have grown significantly because of the bludgeoning fiscal deficits faced by most nations.

Investment income is primarily the financial income from dividends, interest and capital gains. The taxation of cross border investment income varies between nations for each type of investment income. In addition, the process is made more complex because of the intermediate investment structures used by various entities and individuals. Now there is a consensus among nations that every investment income ought to be subject to tax only once. This means taxing the income either at the entity level or the final investor recipient level. The taxation is therefore based on the residency or nationality status of the individual and the entity. In the past few decades, many of the developed nations have been attempting to bring a structured approach to cross border taxation through bilateral tax treaties. The tax treaties, however, have not been very effective and face various challenges.

The US FATCA (Foreign Account Tax Compliance Act) is a new regulatory paradigm which emerged in the last few years & is paving new roads in the area of cross border tax compliance. FATCA was signed into law on March 18, 2010, as part of the Hiring Incentives to Restore Employment Act. The Foreign Financial Institutions (FFIs) that fall under the ambit of FATCA would include commercial and private banks, credit unions, building societies, financial intermediaries, brokers, investment companies, investment banks, asset management companies, mutual funds, wealth management, securities houses, insurance companies and possibly even hedge funds. Granted, the degree of FATCA impact on various institutions will vary based on the IRS and Treasury perceived risk factors associated primarily with the likelihood of utilizing them as vehicles of hiding assets and evading US tax reporting regulations. The legislation is expected to impact around 50,000 to 100,000 institutions worldwide.

The implementation of FATCA could be a key milestone in furthering the standards of corporate governance globally. The FATCA information could be a key ingredient in unlocking the maze of cross-holdings and ownership chains which constrain the effective identification of beneficial ownerships, key to effective corporate control and supervision.

In its essence, FATCA is designed to lift the veil of privacy in the banking world across all jurisdictions and make use of financial institutions to become reporting and enforcement agents of the US tax authorities.

The developments of the last few years bear tremendous significance to the global tax compliance landscape. Banks and Financial Institutions would have to soon start considering cost optimization measures to be able to not only comply with these regulatory regimes but also meet their financial objectives. With the world economy still reeling from the aftermath of the slowdown that jilted the fundamentals of the business and operational model of financial institutes, it is of utmost importance that the systems and processes adopted by FIs are scalable and designed to meet the needs of future compliance regulations. In conclusion, FATCA has spearheaded a global movement towards a paradigm shift with respect to tax information exchange agreements. Admittedly, the next wave of FATCA like regimes is being introduced amongst countries that intend to curb tax avoidance of individual tax residents and corporates.

About the Author

Lukas Macioszek is a Tax Reporting and Compliance Professional with multi-functional experience of more than 12 years across clearing and custody, investment banking, fixed income, derivatives and syndicate loans. Lukas has worked on multiple consulting assignments in tax reporting and compliance with various global banks like BNYM, Barclays Capital, UBS IB and BofA. He has led complex tax operations projects on Qualified Intermediaries, Syndicate Loans, Prime Brokerage Asset Servicing and several tax reporting vendors customizations. He is pursuing the IRS Enrolled Agent certification.

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