Stressing its desire to help the US in targeting non-compliance of tax laws by US persons using foreign accounts, Singapore has recently signed the Foreign Account Tax Compliance Act (FATCA) Model 1 Intergovernmental Agreement. This will help in easing the FATCA compliance burden for Singapore-based financial institutions (FIs), noted Singapore’s tax regulator Inland Revenue Authority of Singapore (IRAS) in a release.
IRAS, along with the country’s ministry of finance and Monetary Authority of Singapore (MAS), will be releasing further notes by January next year about the FATCA compliance requirements for FIs in Singapore. This subsidiary legislation to be issued pursuant to the Income Tax Act (Cap. 134) will be binding on all FIs in Singapore.
The first submission to IRAS in the prevailing FATCA XML Schema by FIs will be due on May 31, 2015.
Impact of FATCA on Singapore-based Financial Institutions
Generally, the Act enacted by US Congress in March, 2010, affects FIs worldwide. And, the Model 1 clause for compliance, which Singapore became a signatory to, establishes a framework of FIs outside the US to report account information of US persons to their relevant domestic authority, which in this case is Singapore’s IRAS.
IRAS will then share this information with the US Internal Revenue Service (IRS).
Non-compliance by Singapore-based FIs will result in 30 percent FATCA-related withholding tax on certain payments made from the US to these non-compliant FIs. If there’s a failure in deducting this tax on the part of the payer, it will be liable for 100 percent of the amount not withheld as well as related interest and penalties. This is consistent with other US information reporting regimes.
Furthermore, FIs in Singapore will need to establish the operational capabilities to track and maintain the FATCA-required data on all their US clients.
How much compliance to this new US Act will cost the world economy was ascertained by a US House Ways and Means Committee, which had put the figure at US$8 billion annually. Whereas the IRS is expected to gain just US$800 million every year.
Notably, the Agreement between Singapore and US, allows FIs in Singapore to use third-party service providers to fulfil their FATCA-reporting obligations. In this context, Rikvin is fully equipped to help.
Who is affected by FATCA?
Under the FATCA reporting regulations, foreign financial institutions (FFIs) include primarily banks, insurance companies, investment managers and custodians. Thus, any non-US entity that:
- is an insurance company or the holding company of an insurance company that issues cash value insurance/annuity contracts
- holds financial assets of others as part of its substantial business
- trades in money market instruments, foreign currency, foreign exchange, interest rate and index instruments, transferable securities, commodity futures, individual or collective portfolio management
- invests or manages funds on behalf of others
- accepts deposits in the ordinary course of banking or similar business
Impact of FATCA on Singapore-based US citizens
While the requirements of FATCA are not new in the sense that the Foreign Bank and Account Reporting (FBAR) is in place since years, the new Act’s definition of US persons is very broad, its exemptions are very few, and the penalties for non-compliance are much more.
FATCA is a part of Hiring Incentives to Restore Employment (HIRE) Act, commonly refereed to as the “Jobs Bill” in the US, which in sharp contrast to the intended affect, has made employing US expatriate citizens far less attractive overseas.
Initial reports indicate that the FIs worldwide have already begun to limit their investment services to the 13 million Greencard holders, 7.6 million US expatriates, and US businesses with overseas investments.
Overall Impact of FATCA on Singapore
In sum, while the signing of FATCA will ease the compliance burden of FIs in Singapore and usher in greater transparency, it will also go a long way in detecting money-laundering activities and clean-up Singapore’s image as a “tax-haven”. This, in turn, will ensure that only genuine and legitimate funds are attracted to the city-state, propelling it to become Asia’s wealth management hub.