The high cost of Fatca

By Julian Richardson Assistant Business Co-ordinator

Wednesday, April 18, 2012    

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Jamaican financial institutions face a cost-crunching dilemma in the form of a new US tax compliance rule requiring them to release personal financial information of clients to American authorities.

It could cost banks tens of millions of dollars if they choose to comply or not with the Foreign Account Tax Compliance Act (Fatca), which becomes effective next January.

The act requires financial institutions around the world to report the names and tax identification numbers of "US persons" with balances above US$50,000 ($4.3 million) to the Internal Revenue Service (IRS).

Implementation costs of Fatca alone - if financial institutions choose to comply - are expected to run from US$100,000 to upwards of US$1 million.

This is the price tag put on the due diligence that fims will have to exercise to find out whether clients are "US persons" - a definition used by the Act that is so broad it could catch people who have a green card or even just a mailing address in America.

"We do not have this information on our customers now," said Courtney Campbell, the CEO of GraceKennedy Financial Group, at this week's Observer Monday Exchange.

"There will be a heavy burden on local financial institutions. The due diligence that we will have to do on all our customer accounts," he said.

What's worse is that Fatca, if agreed upon, could create more burdensome expenses beyond implementation costs as "US persons" possibly attempt to shelter their funds from the reach of 'Uncle Sam'.

There were six million self-identified members of the Caribbean diaspora living in America in 2009, according to official US data. At least one million Jamaicans live in New York state and another 750,000 in Fort Lauderdale alone.

Members of the diaspora contribute significantly to the Jamaican economy in the form of remittances - inflows amounted to just under US$1.7 billion for the first 10 months (April to January) of the 2011-12 fiscal year, according to recent Government statistics - and a considerable amount of funds they remit are channelled into the formal sector.

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.

"It could actually have significant implications for savings flows to institutions in Jamaica, as well as remittance flows to Jamaica, as some Jamaicans and others may shy away from the potential implications of the reporting," he said.

The JNBS boss added that Fatca could have a significant impact on the wider economy in the form of flight of capital to countries where there are no requirements for compliance, or in a proliferation of illegal and unregistered financial providers.

"Depending on how persons perceive this will impact their own lives, we could see a flight of capital or an increased tendency for underground activities - pass your funds to a 'John Brown' who will shelter it here in Jamaica," he said.

While local financial institutions have an option whether or not to sign the Fatca, non-compliance would result in serious consequences that could cripple their businesses.

Foreign institutions that do not enter into an agreement with America's tax agency, the IRS, will be subjected to 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.

Non-compliance with Fatca could result in the termination of correspondent banking relationships in the US and internationally.

"In principle, financial institutions have a choice whether or not to sign the Fatca agreement. however, the negative consequences of not signing suggest that, in reality, there may not be an option," said the JNBS boss.





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