If your head hurts when someone mentions FATCA, you’re not alone.
Even the tax and legal experts you’ll hire to help prepare for the new rules are having a hard time, mainly because Uncle Sam and Canada’s Department of Finance have yet to finalize the deal.
And FATCA is just the first step in a broader plan to nix tax evasion, explained Jillian Nicolson, Canadian Operational Tax leader at EY, during IFIC’s Operations Day conference in Toronto.
What was originally a U.S. initiative is morphing into a global regime that will likely see the Canadian government forge information-sharing agreements with multiple jurisdictions. Nicolson points to a recent OECD policy paper as a step toward such a regime.
But who will be responsible for implementing FATCA’s requirements on customer classification, reporting and withholding?
Under Canada’s current regime, dealers and fund companies share responsibility. “The dealer generally assists with AML [anti-money-laundering] and KYC documentation, as well as with NR301 forms; the fund manufacturer [is] generally the party doing the withholding and information reporting,” Nicolson notes.
FATCA requires that one party be responsible for all three requirements. But the agreement with the IRS doesn’t say who that should be. The U.K. has issued guidance notes detailing their interpretation of how the agreement should be implemented. But Canadians shouldn’t assume the Department of Finance will reach the same conclusions, Nicolson suggests.
Dealers typically have the best knowledge of the client. “And from a practical perspective [they] will likely have some involvement with the FATCA documentation and due diligence process regardless of where we end up on the question of who’s going to be liable for all FATCA responsibilities,” she explains.
Nicolson notes that under the U.K.’s rules, “if the dealer screws up, the fund manufacturer […] is still on the hook, which means the fund manager is the one who gets kicked out of the program, effectively, and will not be able to access treaty rates under withholding tax rules in the U.S.”
We’ll have to wait for CRA’s guidance.
Nicolson says American W-8 and W-9 forms are changing, “so your process and procedures around vetting those forms likely have to change as well.”
She also notes Canada and the U.S. are close to finalizing the deal. The U.S. shutdown slowed the process down; so did the OECD’s policy paper, “because the industry wanted to talk to [the Department of] Finance about how we could merge those two regimes effectively to have a reduced burden going forward.”
Finance aims to have the deal wrapped up by year’s end, but Nicolson suggests discussions could trickle into 2014. This would “leave little time to adjust for any unexpected content.” Guidance notes from CRA will come within a couple weeks of the deal’s signing, and this is “the important part because [they’ll] tell you how to interpret the [agreement].”
So it’s possible we won’t see CRA guidance until the end of the first quarter of 2014, “which would only give you about three months to get everything in place,” Nicolson concludes.