FATCA Throws Up More Advice Problems For Banks

Financial institutions reeling from the regulatory pressures of having to conform to the Foreign Account Tax Compliance Act (FATCA) have to consider another unforeseen issue.

Tax experts have flagged up a scenario of foreign financial institutions pointing their US clients at which declaration forms the US Internal Revenue Service (IRS) requires.

This, say the experts, could be construed as giving tax advice and then leave them liable to a compensation claim from the client should there be an issue further down the line.

FATCA is American legislation compelling foreign financial institutions (FFIs) to hand over account details of any US taxpaying client. To understand more iExpats has written a great piece about the basics of FATCA

Failure to register with the IRS and submitting client information would see the FFI facing a hefty 30% withholding penalty on all financial transaction between it and the US.

Tax advice problems

Financial institutions in the UK have already highlighted problems with their data banks and many will struggle to locate which of their clients are US taxpayers.

Many are now installing software to link their data to help find which of their clients are potentially US taxpaying citizens.

Experts believe that as part of the process many will make their job easier, and for that of the client, to use that information to help point their client to which FATCA paperwork the IRS is looking to receive.

This giving of advice is a potentially huge problem, say the tax experts.

Essentially, FATCA uses a system of self-certification from US citizens who are either living or working abroad or have foreign accounts with the IRS demanding they fill in either the W-9 or the W-8BEN forms.

The fear is that with their software updates, British firms could point their client towards filling in the wrong form for their clients to self-certify for FATCA purposes.

Which forms?

Having a client fail to complete a form at all could also lead to sanctions from the US for non-compliance.

One US-based tax expert says: “The self-certification process provides for US taxpayers to fill in the W-9 or W-8 forms but they aren’t mandatory for compliance with FATCA.

“However, I believe that banks will err on the side of caution and instruct the customer as to which form they should complete.

“Is this not inadvertently giving tax advice to the customer? And is it the responsibility of the bank concerned to tell them which form to fill in based on the data they hold?”

He said that a potential solution being provided by software engineers is to ask a series of dynamic questions which will guide the customer to the correct form to be submitted – rather than the bank deciding for them.