This article looks at the latest adjustments of the FATCA legislation that continues to affect the compliance functions of banks around the world.

What happens if there is no intergovernmental agreement?

The Hire Act of 2010, of which FATCA is a part, allows the US Treasury, acting in tandem with the IRS, to waive certain requirements and this discretion forms the basis for intergovernmental agreements. The US authorities prosper from these agreements by receiving the active co-operation of foreign governments in their tax-collecting drive; the partner-countries benefit by obtaining a few meagre exemptions. In the case of non-signatory nations, however, foreign financial institutions are expected to co-operate directly with the IRS. If they have a presence or any resources in the US, dire consequences will follow if they fail in this regard.

Withholding taxes are common in the tax world. One example of them is the money that an employer automatically takes out of an employee’s monthly wage and gives to the tax authority without any permission from – or involvement by – the employee in the process. Under the new regime, if a non-compliant foreign bank has an American customer who wishes to make a transfer from the US to it, the sending bank in the US will deduct the 30 per cent and the IRS will keep it for itself.

Things do not necessarily improve if the foreign bank dismisses all its American customers. If it receives a payment from a firm in its own country that is owned by Americans, or has a substantial American ownership, any holdings it may have in the US will be subject to the 30 per cent withholding tax. FACTA is designed to make it unprofitable for such a bank to hold any assets in the US.

If the non-participating foreign financial institution or private bank has an American affiliate or subsidiary, the tax will have an even more drastic effect. In nearly all cases, 30 per cent of monies coming into its coffers or the accounts under its care from American or other participating institutions will be deducted before it reaches it. If the institution's turnover is of any size, it will lose its assets quickly. If it tries to repatriate all its assets home, it will lose 30 per cent of everything it sells even before it can do so because the assets' buyers will pay through accounts at their own banks, which will deduct the 30 per cent automatically. No bank or other business can prosper under such circumstances.

Lastly, withholding taxes traditionally attempt to capture money for underlying taxes. The Hire Act does not do this; the 30 per cent, with a few possible exceptions, is totally punitive for the purposes of the US campaign against tax-evaders. The IRS is about to replace the Office of Foreign Assets Control as the US regulator that banks around the world fear the most.