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FATCA

Published: 7th September 2017

Author: Helen Robinson, DG Law

Published in: Commerical e.Speaking | #47

Many New Zealand businesses and trusts must complete registration and understand their reporting obligations

With the United States Foreign Account Tax Compliance Act (FATCA) regime now in effect, it’s important that all New Zealand entities ensure they are aware of their obligations.

FATCA came into effect in New Zealand on 1 July 2014 – with little fanfare at the time. From 1 April 2017, however, the compliance obligations of the FATCA regime are now live. The FATCA regime classifies all entities (companies, trusts, associations and partnerships) as either a ‘financial institution’, an ‘active non-financial foreign entity’ (active NFFE) or a ‘passive non-financial foreign entity’ (passive NFFE).

The reason for FATCA

The ultimate goal of the FATCA regime is to find US offshore persons or entities who have been avoiding their US tax obligations. This is done by gathering information on any US persons or entities controlled by US persons holding accounts outside of the US.

A ‘US controlling person’ is someone who exercises control of an entity. Potentially it includes a settlor or protector of a trust, a trustee, a beneficiary of a trust, and a director or shareholder of a company.

Criteria for FATCA

It’s important that any entity in New Zealand determines whether it is a financial institution, an active NFFE or a passive NFFE under the FATCA regime. If the entity is determined to be a financial institution it must register with the US Inland Revenue Service (IRS) and complete reporting obligations. Both types of NFFEs may also have reporting obligations.

The criteria for classifying an entity under the FATCA regime are complex and some entities (such as family trusts with a portfolio managed by a sharebroker) could find they are unexpectedly treated as financial institutions.

A financial institution is required to complete due diligence on any accounts maintained by them to ascertain whether the account holder shows any ‘US indicia.’ US indicia includes US citizenship or residency, a US mailing address or telephone number and any instructions to forward funds to a US account.

The financial institution is then required to report accounts showing US indicia to the New Zealand IRD which will, in turn, report to the IRS. There are penalties (including a fine of up to $50,000) if a financial institution does not comply with its FATCA reporting obligations.

Even active NFFEs may have FATCA obligations enforced on them. For example, most law firms with a trust account will elect to be active NFFEs and they will now be required to obtain certificates from any individual or entity placing funds on interest bearing deposit. The certificates require the person or entity to advise whether the person or someone with ‘control’ of the entity, ie: trustees, directors, shareholders, settlors of trusts and so on, is a US citizen or resident. This data will then be provided to the law firm’s bank (being a financial institution) that will, in turn, advise our Inland Revenue of any customers showing US indicia.

GATCA sign-up for New Zealand

New Zealand has also signed up to a global tax reporting system (or GATCA) with 101 other countries. The first exchanges of information under that regime are expected to take place in late 2018.

Interestingly, while the USA has forced many countries to sign up to the FATCA regime due to the potential penalties if a country does not implement the regime, it has not yet signed up to the GATCA regime. This means that while New Zealand must provide information to the US, to date, the US has not agreed to collect and provide that same data back to New Zealand authorities.

Tax evasion has become unpopular globally. New Zealand entities have obligations to report to the US and, in the near future, will be required to report to many other countries.

For now, it’s important all entities take steps to determine their status under the FATCA regime and what reporting obligations they may have. In the near future, those reporting obligations will extend to many more countries than the US.

If you’re unsure how to deal with the FATCA regime and/or how to fulfil your obligations, please contact us for some help.

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