All wealth managers in Asia will be affected by FATCA. Some effects will be small, others large, all will be complex. The challenge in Asia will be finding enough experts in the region – for so short a period of time.

All wealth managers in Asia
will be affected by FATCA. Some effects will be small, others large, all will
be complex. The challenge in Asia will be finding enough experts in the region
– for so short a period of time – to implement the changes, saysJim Calvin,
global tax managing director at theDeloitte asset management practice in
Singapore.  

We expect universal compliance
with FATCA by all major Asian financial institutions. FATCA enforces its
requirements through a withholding tax on US-source income and assets. This
means that any institution or account having direct or indirect interests in
such assets will be forced to comply in order to meaningfully transact in the
capital markets.

Managers of high-value accounts
will be most affected. They may be called upon to perform more due diligence
for FATCA, and respond to internal inquiries regarding the US status of their
clients. Wealth managers must implement documentation safeguards for new
accounts, review account documentation for preexisting accounts, and eventually
may need to report and withhold tax.

Most of what is required must
be completed by June 30, 2015, and very major aspects must be completed as soon
as June 30, 2013. This will require major wealth managers to make significant
and immediate commitments in highly specialized resources from now into 2015.
Undoubtedly, for an Asian wealth manager, locating and retaining such highly
specialized teams of people for this period of time will be the most
significant challenge to successful execution.

Wealth managers should
immediately consider each of the new exceptions provided in the proposed
regulations as these will drive the level of effort required to comply. Absent
an exception applying, the regulations provide a detailed roadmap to the
implementation of procedures for new accounts and the remediation of
preexisting accounts in a manner which will meet the requirements of FATCA
regardless of progress made or not made towards intergovernmental agreements.

Exceptions to the rule

Wealth managers that are licensed
and regulated under their local laws as a bank, broker, financial planner or
investment adviser may be deemed to be FATCA compliant. This generally requires
the wealth manager and its affiliates to have no place of business outside its
home country, solicit customers only in its home country, be subject to
domestic withholding and reporting rules for residents, and have at least 98
per cent of accounts held by residents.

There will also be investment
funds which are deemed to be FATCA compliant with one type depending heavily on
agreements with distributors. The agreements must prohibit sales of fund
interests to certain types of investors, including US persons. Generally, a
distributor is not required to otherwise comply with FATCA as long as it meets certain
requirements and limitations regarding size, customers, operations and marketing,
and agrees to limited procedures and agreement modifications.

There are additional exceptions
which may reduce the scope of FATCA for firms depending on circumstances,
including wealth managers which are subsidiaries of larger financial
institutions. The retirement plan exception has also been expanded and this means
that more will be deemed to be FATCA compliant.

Dates for your diary

The effective date of FATCA is 1
January 2013; however, the Treasury and IRS have provided much-called for
transition relief in the new regulations. The most important transition relief
gives firms until 30 June 2013, to implement new account onboarding safeguards
and then sign an agreement with the IRS. The rules also give firms two years
after signing their agreement to remediate preexisting accounts.

Reporting is phased in and must
be completed by 2016. Withholding on US-source amounts begins in 2014, while
the controversial foreign passthru payment withholding regime is pushed back to
2017. (There are several reasons for the foreign passthru payment delay with
one being the hope that near universal compliance with FATCA may allow the
Treasury and IRS to radically simplify the foreign passthru payment
requirements.)

We recommend that all Asian wealth
managers begin the process of determining the scope of impact immediately so
that they can begin to execute on these projects. Some wealth managers may find
their requirements limited; however, global, regional and multi-national Asian wealth
managers should expect to be subject to almost all the major requirements of
FATCA. After the release of the regulations, there is no longer any reason to
delay detailed scoping and implementation.

Wealth managers have only until
30 June 2013, to implement new procedures and then sign their agreement with
the IRS. At the same time, they will need to begin the remediation of
preexisting high-value accounts in order to certify compliance within one year
of their agreement, and then certify within two years that remaining accounts
subject to remediation are in compliance.

The major challenge will be the
very tight deadlines combined with the need for highly specialized resources
combined and the one-offness of the effort. The people needed to accomplish
this project are rare in Asia and elsewhere. The right people will have
specific expertise and training on a highly technical subject. The proposed
regulations are almost 400 pages long, filled with technical terms and
cross-references and references to other areas of the Internal Revenue Code and
US tax regulations, and include many terms of art.

And, we expect more rules, many
more pages, and more complexity in the future. Finding the right types of people
to interpret and operationalize these rules, manage and execute the projects on
time, and having access to credible and experienced US tax advice who can
properly train people will be extremely difficult. The search for these types
of people and teams should begin now before the market is depleted. One way
forward is that Asian wealth managers outsource this difficult resource problem.

What do Asian wealth managers need to know about FATCA?

Under FATCA, foreign financial
institutions are required to report information about offshore accounts and
investments held by US taxpayers to the IRS annually. These institutions
include banks, custodians and brokers, insurance and real estate companies, wealth
managers, hedge funds, mutual funds, and private equity firms. FFIs must enter
into agreements with the IRS. If they fail to enter into such agreements to
report US accounts, they will face a 30 per cent withholding tax on US-source
income and sales proceeds.

Below are the main points and
changes that Asian wealth managers should note from the new proposed
regulations:

1. The
rules simplify due diligence procedures for certain accounts

The Treasury Department has
modified due diligence procedures for pre-existing accounts to permit FFIs to
rely on electronic searches for accounts ranging from $50,000 to $1 million.
For accounts with a balance of more than $1 million, FFIs will have to do paper
searches that would be limited to documentation, current account files, and
certain correspondence. FFIs would also be required to question any
relationship managers associated with these accounts to confirm that they don't
have any knowledge that the client is a US person. Searches are not required
for accounts of less than $50,000 or for certain insurance contracts or entity
accounts of less than $250,000. In many cases, including most instances of new
account onboarding, banks would be able to rely on know your customer and
anti-money laundering rules they already have in place.

2. The
rules provide some relief around reporting

The proposed rules give FFIs
additional time to make adjustments to their systems for reporting US income.
Through 2014, FFIs would only have to provide identifying information (name,
address, taxpayer identifying number, and account number) and the account
balance or value of the US accounts. Beginning in 2016, they will be required
to report income. By 2017, the full transactional reporting will be required.

4. The rules give members of expanded affiliated groups more time to
comply

These rules would add a
three-year transition period to the expanded affiliated group requirement to
comply with FATCA. The rules previously required that each FFI in an expanded
affiliate group needed to sign up either as a participating or deemed compliant
FFI in order for all FFIs in the group to be in compliance - meaning no one
could participate if even one affiliate could not satisfy the requirement. The
new rules now provide additional time for affiliates that are in restricted
countries to enter into agreements. However, these restricted FFIs will still
have to go through due diligence requirements with respect to their accounts.
And, if they receive 'withholdable' payments, then they will be subject to
withholding during this transition period.

5. The
treatment of foreign passthru payments remains uncertain

Participating FFIs are required
to deduct and withhold 30 per cent of any passthru payment made to a
recalcitrant account holder or non-participating FFI. Under previous Treasury
and IRS guidance, payments were 'deemed' to be attributable to a withholdable
payment based on the percentage of the participating FFI's total assets that
are US assets. As a result of concerns raised about the practical difficulties
with this approach, there will be further consultation on foreign pass thru
payments with the objective of reducing the compliance burden. To facilitate
this, withholding on foreign pass thru payments has been deferred to 2017.

6. These are proposed regulations, not
final ones

The rules released by the Treasury
Department and IRS are not yet finalised. Industry can still submit written or
electronic comments to the Treasury Department and IRS by 30 April. A public hearing
is scheduled for 15 May.