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Taxation
Thursday, October 22, 2015 - 02:16
Facts on FATCA

South African companies that conduct both direct and indirect business with US organisations must comply with the principles in the United States Foreign Account Tax and Compliance Act (FATCA), or risk heavy fines, and potentially find themselves excluded from lucrative markets the world over.
This is the view of Eva Crouwel, Manager in Risk Advisory at Deloitte Cape Town. She says that, despite the adoption of the FATCA rules within South African tax legislation since 2014 many SA companies remain ill prepared. But they need to get a move on because similar compliance principles, under the so-called ‘Common Reporting Standard’, are being introduced by the Organisation of Economic Co-operation and Development (OECD) come 2016.
FATCA is poorly understood and inadequately adopted by companies in South Africa, mostly because they unjustly believe they require only a low level of expertise to be compliant, while the opposite is true: a high level is required so compliance measures will be expensive. Yet, the irony is, failing to comply with FATCA will cost companies far more in the long run, and lose them future business.
Crouwel explains that FATCA is a series of US-led tax compliance rules for financial institutions to collect, verify and report information on US customers, especially those with high value offshore accounts and investments. The South African government has an agreement with the US government that requires SA companies that are regarded as ‘Financial Institutions’, to disclose specific information on their US customers and employees with respect to their SA accounts and investments. Should financial institutions fail to provide this, they will be liable to pay both local and international tax penalties and, in serious cases of non-compliance, face market exclusion.
The South African adoption of the FATCA principles means errant companies could face fines of as much as R16 000 per month for each non-compliance issue. Such companies also risk removal from the Internal Revenue Services’ (IRS) compliant financial institution list, as well as face additional penalties enforced by US tax authorities, the IRS. For example, the US can withhold up to 30% tax on all US-sourced payments headed for SA company accounts.
“This means that any company in South Africa that declares dividends, or has indirect business ties with the US, even from another country, will be affected,” she says.
The net can reach far and wide. For example, suppose a South African company does business with a financial institution in Europe, but this financial institution is listed on the New York Stock Exchange. The South African company will still be asked to comply with FATCA and supply proof of this.
“We have already witnessed an increase in refusal from financial institutions to do business with non-compliant financial institutions across financial markets. Developed countries are already compliant with FATCA and are requiring the same from companies that do business with them. Yet our financial services industry has been slow to implement the regulations. The problem is compounded by the fact that the South African Revenue Service (SARS) retrospectively announced in 2015 that it required FATCA compliance from 2014, giving institutions very little time to become compliant,” notes Crouwel.
In addition, the OECD will rigorously enforce its own version of FATCA, which will have implications as from next year.  “The OECD recognises the crippling effect tax evasion can have on emerging markets.” So it is determined to ensure global financial markets meet their compliance requirements in terms of FATCA.
Comments Nazrien Kader, head of tax at Deloitte, “South Africa has claimed to be the first country to be OECD-ready. Yet the stark reality is that it isn’t.”
This new regulatory landscape is complex administratively because it draws businesses into the multi-level requirements of the IRS, SARS and the OECD, to say little of the usual challenges of transacting globally in terms of shipping regulations, import/export terms and conditions and foreign exchange risks. 
Crouwel warns local businesses they have little time left to address these complex challenges. She urges them to seek appropriate advice, and prioritise consideration of FATCA and its implications for foreign trade as soon as possible, otherwise they will not be ready to tackle the next challenge: the OECD Common Reporting Standard next year.
“While the administrative burden of compliance may seem onerous, it also brings opportunities and opens doors to consider new ways to manage governance and best practice. This is necessary not only to propel the financial services industry forward, but also to avoid being excluded from doing business with international financial markets.”
 

Copyright © Insurance Times and Investments® Vol:28.10 1st October, 2015
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