Fatca must await lo­cal leg­is­la­tion to be bind­ing

Tech­ni­cally, the agree­ment cur­rently has no legal force

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - AN­DREW KNIGHT

IF ANY fi­nan­cial in­sti­tu­tions still have delu­sions that Fatca may not yet ap­ply or may be a prob­lem for gov­ern­ments only, th­ese should be very quickly aban­doned. Along with more than 100 other coun­tries, SA is the sig­na­tory to an in­ter­gov­ern­men­tal agree­ment with the US gov­ern­ment that pro­vides the ba­sis for mak­ing the au­to­matic ex­change of in­for­ma­tion un­der the US For­eign Ac­count Tax Com­pli­ance Act (Fatca) ap­pli­ca­ble to South African en­ti­ties.

Although the South African gov­ern­ment has taken the nec­es­sary steps to put the agree­ment into ef­fect, it would ap­pear that the US has not com­pleted its own pro­cesses.

Tech­ni­cally, there­fore, there is the small mat­ter of the agree­ment hav­ing no legal force cur­rently.

How­ever, even if the agree­ment was fully in place (and this is cer­tain to hap­pen), it would have no di­rect bind­ing ef­fect on South African fi­nan­cial in­sti­tu­tions as they would only be legally obliged to carry out the due dili­gence and re­port­ing re­quire­ments set out in the agree­ment once the South African gov­ern­ment had in­tro­duced the nec­es­sary do­mes­tic reg­u­la­tions. It would nor­mally be ex­pected that, as in coun­tries like the UK and Canada and to a lesser ex­tent Australia, there would be a de­tailed set of reg­u­la­tions that would largely mir­ror the in­ter­gov­ern­men­tal agree­ment. This has so far not been the case and in­di­ca­tions are that South African fi­nan­cial in­sti­tu­tions re­main in some­thing of a legal vac­uum.

How­ever, be­fore any­one starts to ar­gue (or con­tin­ues to ar­gue as there were signs of such an ar­gu­ment in the pan­icked run-up to the 31 De­cem­ber 2014 dead­line for the reg­is­tra­tion of en­ti­ties with the US In­ter­nal Rev­enue Ser­vice) that this means that a South African fi­nan­cial in­sti­tu­tion need do noth­ing un­til a long set of reg­u­la­tions is in place, the fol­low­ing points need to be borne in mind:

Un­der the in­ter­gov­ern­men­tal agree­ment, SA is un­der a duty to make sure that its fi­nan­cial in­sti­tu­tions com­ply. It can­not do that un­til for­mal reg­u­la­tions are in­tro­duced. Thus, un­til that is the case, SA is tech­ni­cally in breach. If the South African gov­ern­ment is in breach, then so are its fi­nan­cial in­sti­tu­tions. Thus, there is no merit in a fi­nan­cial in­sti­tu­tion ar­gu­ing that it is the gov­ern­ment’s prob­lem and not the fi­nan­cial in­sti­tu­tion’s. But clearly the gov­ern­ment has an im­por­tant role to play in en­sur­ing that South African fi­nan­cial in­sti­tu­tions are com­pli­ant.

Breach in this con­text means that the in­ter­gov­ern­men­tal agree­ment would be ig­nored and the fi­nan­cial in­sti­tu­tions would be sub­ject to the full set of US reg­u­la­tions and would be re­quired to re­port di­rectly to the In­ter­nal Rev­enue Ser­vice.

The US gov­ern­ment is dis­play­ing (with­out say­ing it) a re­mark­able de­gree of tol­er­ance in not mak­ing a song and dance about in­ter­gov­ern­men­tal agree­ment gov­ern­ments not hav­ing passed the nec­es­sary laws to make Fatca bind­ing on their lo­cal fi­nan­cial com­mu­nity.

This is per­haps be­cause it is it­self be­hind in its im­ple­men­ta­tion pro­cesses but it is also con­sis­tent with the prag­matic line it took on get­ting in­ter­gov­ern­men­tal agree­ments ne­go­ti­ated, signed and rat­i­fied where it was pre­pared to ac­cept that coun­tries had made suf­fi­cient progress to be treated as hav­ing signed an in­ter­gov­ern­men­tal agree­ment,

In fact, the South African gov­ern­ment, with very lit­tle fan­fare, in­tro­duced two no­tices in June 2014 that pur­port to re­quire a South African fi­nan­cial in­sti­tu­tion to:

Keep the nec­es­sary records to show that it has com­plied with the due dili­gence re­quire­ments un­der the in­ter­gov­ern­men­tal agree­ment; and

Sub­mit to SARS a re­turn con­tain­ing the in­for­ma­tion re­quired by the in­ter­gov­ern­men­tal agree­ment.

There may be some le­git­i­mate ques­tions to be raised as to the legal ef­fec­tive­ness of th­ese no­tices. In­di­ca­tions are that a new set of sec­ondary leg­is­la­tion is be­ing pre­pared. How­ever, the no­tices com­prise a clear state­ment of in­tent from SARS that they ex­pect the nec­es­sary com­pli­ance work to be done and re­turns sub­mit­ted, all on pain of sig­nif­i­cant crim­i­nal sanc­tions in the event of non­com­pli­ance.

In any event, any new leg­is­la­tion will be with ef­fect from 1 July 2014 and so there will be a lot of catch­ing up to do for fi­nan­cial in­sti­tu­tions that have done noth­ing.

The fi­nan­cial com­mu­nity, in par­tic­u­lar banks and in­vest­ment funds, is gen­er­ally be­hav­ing as though Fatca ap­plies. There­fore, tech­ni­cal ar­gu­ments, whether or not cor­rect, will fall on deaf ears of those fi­nan­cial in­sti­tu­tions that are ob­du­rately ap­ply­ing the Fatca regime and that will not do busi­ness, and in­deed cease to do busi­ness, with an­other per­son that they con­sider to be non-Fatca com­pli­ant.

So the bot­tom line is that, if any

The bot­tom line is that, if any fi­nan­cial in­sti­tu­tions still have delu­sions that Fatca may not yet ap­ply or may be a prob­lem for gov­ern­ments only, th­ese should very quickly be aban­doned The agree­ment would have no di­rect bind­ing ef­fect on South African fi­nan­cial in­sti­tu­tions as they would only be legally obliged to carry out the due dili­gence and re­port­ing re­quire­ments once the gov­ern­ment had in­tro­duced the nec­es­sary do­mes­tic reg­u­la­tions

sa­tion for Eco­nomic Co-op­er­a­tion and Devel­op­ment ver­sion of Fatca, will be in play for those gov­ern­ments that have com­mit­ted to so-called early adop­tion. There are over 50 early adopters (in­clud­ing SA) and this num­ber is likely to in­crease. At the mo­ment, South African fi­nan­cial in­sti­tu­tions only need to worry about re­port­ing to SARS on US tax­pay­ers for whom they hold ac­counts ei­ther di­rectly or in­di­rectly. As from 1 Jan­uary 2016, the full range of CRS due dili­gence and re­port­ing will ap­ply in re­la­tion to ac­counts main­tained for tax res­i­dents in all of the early adopter coun­tries. And SARS will need to pack­age all of those re­ports and ex­change the rel­e­vant in­for­ma­tion on an au­to­matic ba­sis with the rel­e­vant coun­tries, hope­fully in a safe way.

Not only is Fatca here to stay, its im­pact will soon criss-cross the globe. While parts of the South African fi­nan­cial com­mu­nity have been proac­tive in deal­ing with Fatca, there would ap­pear to be a num­ber of fi­nan­cial in­sti­tu­tions that are not fully en­gaged and are there­fore at risk of be­ing non-com­pli­ant with the se­ri­ous con­se­quences that can re­sult.

Although SARS has it­self been pro-ac­tive, the con­tin­ued lack of clar­ity in the legal po­si­tion, in­clud­ing in the form of de­fin­i­tive guid­ance, is mak­ing an al­ready dif­fi­cult sit­u­a­tion more dif­fi­cult to man­age. It may also be the cause of some en­ti­ties re­main­ing de­tached from the re­al­ity of the new Fatca en­vi­ron­ment in which the en­tire world is now living.



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