By Gareth Vaughan
The New Zealand Bankers' Association (NZBA) is working with its Australian, Canadian and British counterparts as it battles to get the United States government to alter tax proposals that the New Zealand bank lobby group fears could cost the industry here NZ$100 million to comply with.
The US law in question is the Foreign Account Tax Compliance Act (FATCA), which is due to come into effect from 2013. It proposes that all foreign financial institutions be required to enter into disclosure compliance agreements with the US Treasury, and all non-financial foreign companies report and/or certify their ownership or be subject to the same 30% withholding tax.
"The legislative intent of FATCA is to ensure there is no gap in the ability of the US government to determine the ownership of US assets in foreign accounts," accounting firm Deloitte says.
"As such, this revenue raising provision is expected to significantly impact the systems and operations of both US and non-US companies. While the regulations have not been finalised to date, companies will likely need to make modifications to their internal systems, control frameworks, processes and procedures for timely compliance with these regulations on or before their effective date of January 1, 2013."
Deloitte expects the FATCA regime to impact current account opening processes, transaction processing systems and “know your customer” procedures utilised by non-US banks.
NZBA acting chief executive and regulatory director Karen Scott-Howman says her organisation is deeply concerned by the impact of the FATCA with its concerns coming in three areas, - compliance costs, conflicts with New Zealand laws, and risks to financial stability, both globally and domestically.
"This is a big issue for New Zealand," Scott-Howman says. "It’s difficult to estimate the cost of complying with the Foreign Account Tax Compliance Act because many of the details of the regime are still being worked out. (But) New Zealand estimates are that it may be up to NZ$100 million for the industry," says Scott-Howman.
She says the NZ$100 million estimate is based on what the big financial institutions expect the cost of implementing the new anti-money laundering regime in New Zealand will be. Scott-Howman says such costs are "totally disproportionate" to the benefit for the US government.
"FATCA is projected to raise US$8 billion world-wide over 10 years for the US Internal Revenue Service (IRS). The cost of compliance world-wide has been estimated at between US$10 and US$20 for every single dollar the IRS retrieves."
'Use existing tax treaty reporting'
NZBA, whose members include ANZ, ASB, BNZ, Westpac, Kiwibank, TSB Bank SBS Bank and Rabobank, is working with the Australian Bankers’ Association on this issue, plus Canadian and British industry groups.
"Most of this is focused on working out a solution with the IRS to address the withholding requirements, which seem unworkable at the moment," adds Scott-Howman.
"On the issue of US account reporting, we would like to see existing taxation treaty reporting between New Zealand and the United States used, instead of having to build a new reporting framework as currently contemplated by FATCA."
The costs for New Zealand banks of implementing systems to identify, verify and report on all US accounts to the IRS would be very high, Scott-Howman says, given this information isn't currently collected and the reporting proposed goes well beyond existing requirements.
'Severe consequences' of not complying
Aside from the costs to local banks of complying with FATCA, doing so could contravene New Zealand privacy and anti-discrimination laws, Scott-Howman suggests, although non-compliance isn't a viable option given the "severe consequences" for the New Zealand financial sector.
"US financial institutions would potentially avoid doing business with New Zealand institutions, which would have a significant negative impact on the economy as a whole," she says.
Furthermore, FATCA will cause a risk to financial stability due to compliant financial institutions having to withhold money from payments to non-compliant institutions or customers who do not consent to provide the information FATCA demands. The non-compliant will be subject to a withholding tax on US-sourced earnings and income derived from US income the financial institution holds on behalf of others.
Scott-Howman says this must be collected by compliant financial institutions but settlement systems generally have no provision for withholding tax to be applied to settlement proceeds.
"Potentially there are serious settlement and liquidity issues created."
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