FOREIGN ACCOUNT TAX COMPLIANCE ACT (“FATCA”): THE BIG BAD WOLF? MAURITIUS BECOMES FATCA COMPLIANT
FATCA is a piece of United States (“US”) legislation which was enacted in 2010 with the aim of reducing tax evasion by US citizens and residents holding assets through non-US financial institutions. The most controversial aspect of this legislation is that, despite being US legislation, it imposes obligations to withhold tax on behalf of, and report and disclose information to, the US Internal Revenue Service (“IRS”) on every foreign financial institution (“FFI”) established outside the US. In other words, foreign institutions within the scope of FATCA are technically required to comply with US tax rules even if they are incorporated and tax resident outside the US. This has, unsurprisingly, created havoc across the financial services sector in the world. Mauritius has set up a special technical committee to examine the impact of FATCA on the operations of the financial sector and to determine how to adapt the local laws, regulations and internal policies so that FFIs based in Mauritius can become FATCA compliant. Saying ‘no’ to FATCA seemed out of question as it would mean saying ‘no’ to the US and potentially crippling financial transactions globally . In view of the legal concerns raised by FATCA (i.e how FFIs would be able to comply with US law), a number of countries have entered into Intergovernmental Agreements (“IGAs”) in order to enact the principles of FATCA into their domestic law. The United Kingdom and Ireland amongst the firsts in 2012 to enter into IGAs with the US, leading the way for other countries, like Mauritius, to follow.
What is FATCA?
Broadly speaking, FATCA imposes a 30% withholding tax on payments of US source income made to any “non-participant” FFI (i.e a non-FATCA compliant FFI) save when the FFI has entered into an agreement with the IRS (the “FFI Agreement”) and reports directly to the IRS information about their US accounts holders.
FATCA is very far reaching in its application. For instance, payments made by a non-US bank to another non-US bank under a transaction between the two parties could potentially be subject to FATCA withholding if the recipient is not FATCA compliant and the underlying payment is treated as US source income. For example, a payment by a Mauritian bank to a Mauritian insurance company under collateral arrangements between the two parties where the collateral is US corporate bonds may be subject to FATCA withholding if the Mauritian insurance company is not FATCA compliant.
However, entering into an FFI Agreement raises a few issues in relation to domestic laws, such as data protection, confidentiality and bank secrecy. In this context, the governments of various jurisdictions have opted to sign bilateral agreements with the US resulting in the enactment of the principles of FATCA into their domestic law. This means that, depending on what type of IGA is signed, the FFIs will be required by their domestic law to either directly report certain information to the relevant government agency in charge of taxes, which will in turn supply the information received to the IRS, or to report such information directly to the IRS.
What is an FFI?
An FFI is very broadly defined under FATCA. FFIs are non-US entities that take deposits in the ordinary course of a banking or similar business, hold financial assets for the account of others as a substantial portion of their business, engage primarily in the business of investing, reinvesting, or trading in securities, partnership interests or commodities, or conduct certain business as insurance companies. Under this extensive list, not only banks, but also custodians, insurance companies, broker-dealers, clearing organisations, trust companies, hedge funds, private equity funds and pension funds (except the exempt entities as seen below under the IGA) are included.
What information should a FATCA compliant FFI furnish?
Under FATCA (and in the absence of an IGA), all FFIs have to provide certain information about their US account holders to the IRS in accordance with FFI Agreement. The FII having signed the agreement is referred to as a “participant FFI” as compared with a “non-participating FFI”.
The main obligation is to disclose information of all “financial accounts” maintained by a FFI for US persons, that is, any individual who is citizen or resident of the US. This duty to disclose also captures indirect account holders – substantial US owners of account holders, such as US shareholders in a Mauritian entity, whether corporate or incorporate. Financial accounts would include depository and custodial accounts, any equity or debenture holders (excluding shares or debt regularly traded on an established securities exchange) and cash value insurance contracts.
The two models of IGA
The US treasury has issued two models of IGAs. The first, known as the Model 1 IGA, would require FFIs to report all FATCA-related information to their own governmental tax agencies, which would then report same to the IRS. The Model 1 is generally reciprocal. A FFI covered by a Model 1 IGA will not need to sign a FFI Agreement but will, generally, still need to register on the IRS’s FATCA registration portal. The second, the Model 2 IGA, would require FFIs to report information directly to the IRS. Countries such as Japan and Switzerland have signed the Model 2 IGA.
On 27 December 2013, Mauritius and the US signed a Tax Information Exchange Agreement (TIEA) and an IGA in respect of FATCA . The agreement is based on the Model 1 agreement and includes the deadlines consistent with Notice 2013-43.
From the Mauritius standpoint, the banks, management companies, global business companies, including insurers, custodians, brokers and other financial institutions will need to undergo a series of due diligence, reporting and withholding obligations.
Annex II to the TIEA provides a listing of certain exempt beneficial owners, and deemed compliant entities, such as Governmental entities, international organisations, central bank, certain retirement funds, certain local banks with local client base, qualified credit card issuers, controlled foreign corporations, investment advisers and investment managers and certain collective investment schemes. This Annex also provides for some exempt products, including certain retirement and pension accounts, term life insurance contracts, accounts held by an estate, certain escrow account in connection with a court order or judgment.
The reason behind the above exemptions seems to be that those entities or products are perceived as presenting low risk of tax evasion.
It is interesting to note that Mauritius has signed the Model I. As such, the entities caught by FATCA’s definition of FFIs will report directly to the Mauritius Revenue Authority (“MRA”), which will then pass the information to the IRS.
The Mauritius –US IGA will need to be ratified by the Mauritius Parliament and FFIs will have to put in place rigorous systems of monitoring and control to be able to collect the information. Ultimately being FATCA compliant will encourage a higher level of tax transparency, not just in the context of US legislation but also more broadly.
Mauritius is not a tax haven as some regulators, professionals and operators in the financial services of the developed world would seem to assume. Its international financial centre is sound, clean, robust and is one of substance. It imposes on its licensees compliance with the international requirements and legislation, the latest being FATCA.