Fatca must await local legislation to be binding
Technically, the agreement currently has no legal force
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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