Companies doing business in the United Arab Emirates (UAE) may be affected by a number of recent developments, including:
– The new Intergovernmental Agreement between UAE and the United States under the US Foreign Account Tax Compliance Act (FATCA)
– UAE’s participation in the tax transparency forum of the Organisation for – Economic Co-operation and Development
– An increase in property transfer fees to 4 percent.
The UAE Central Bank has agreed to adopt the Model 1 IGA, an agreement stating that all financial institutions in the UAE will answer to the FATCA request of sharing information about any US accounts, assets, or transactions channelled through those banks.
The UAE has until June this year to commence disclosing basic information about accounts with transactions linked to the US.
After 3 three years of negotiation, regulation, and time framing followed, with a final regulation and timeline formed in October last year under these agreements, FFIs are subjected from July 1, 2014 to due diligence of all accounts except grandfathered accounts. From 15 March 2015, detailed reporting of accounts is required for transaction made in 2014.
The July 1 deadline: “Withholding agents generally will be required to begin withholding on withholdable payments made after June 30, 2014, to payees that are FFIs or NFFEs (non-financial foreign entity) with respect to obligations that are not grandfathered obligations, unless the payments can be reliably associated with documentation on which the withholding agent can rely to treat the payments as exempt from withholding,” states the IRS in its latest regulatory statement.
FATCA is aimed at identifying US taxpayers with bank accounts or investments worth more than $50,000 offshore. Taxpayers will have to report their cash and investments via tax filings, which will be compared to the figures supplied by up to 770,000 banks worldwide.
Grandfathered accounts are obligations that are outstanding on January 1, 2014.
The risk of an individual or financial institution failing to comply with FATCA is hefty fines, and for the financial organisation, including a 30% withholding tax on all transactions through US banks and even possible exclusion from the US banking system. Around 40 countries have already signed FATCA pacts with the US, while another 20 are negotiating inter-governmental agreements. Financial institutions in countries without inter-governmental agreements will have to deal directly with the IRS.
he term “Withholding” normally refers to the IRS giving instructions to hold back 30 per cent of any money that a non-compliant FFI receives in dollars passing through the US and Participating FFI (PFFI). If an FFI has not registered as intending to become compliant or has a national agreement (IGA) in place ‘withholding’ will have already started.
In the case of the banks in the UAE, this agreement has been made, and thus withholding should be already in place. All pre-existing accounts will have to be identified with basic information as per 1 July 2014. Basic information includes name, social security number/TIN, address, account number, current value etc.
The requirement is more than just reporting the accounts that the FFI know as being linked to US ‘persons’ – the FFI also has to do a manual search of all their files where the account has a value of $1,000,000 or more to check if there are links to the US. If the FFI has not complied by this date then they will suffer withholding tax of 30 per cent.
FFIs over the next couple of months will be registering the data required, as the FATCA registration website has opened on January 1, 2014.
It is important to note that by July 1, 2014, if not already, banks may adopt new rules regarding the opening of new accounts with US -linked transactions.
Annual reporting by PFFIs would be phased in starting in 2015 (with respect to information related to the 2014 calendar year), with reporting of the full scope of FATCA information required no later than March, 2017. stated the IRS.
The information reporting will have to include full details of the accounts, such as the underlying investments of funds, all transactions, interest earned etc.
The phasing in starts with “recalcitrant” (known or suspected offenders) accounts, large value accounts, pre-existing accounts and works its way down to the mass volume accounts with smaller sums.There is a lot of confusion about what is to be reported as there are different rules for new accounts, for “recalcitrant” accounts (naughty accounts) and for pre-existing accounts.
However, the information reported must be backdated to include information relating to the year 2014, and therefore January 1, 2014.
On February 20, 2014, the U.S. Department of Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) released temporary regulations that revise and clarify the final FATCA regulations (“Temporary Regulations”).
The U.S. government also released temporary regulations coordinating the final regulations under Chapters 3 and 61 of the Internal Revenue Code (“Code”) with the final FATCA (Chapter 4) regulations (“Coordination Regulations”).
The new rules do not provide any further extensions to the effective date of FATCA, or to the required timeframes in which an FFI that has entered into an FFI Agreement (a “participating FFI” or “PFFI”) must comply with the due diligence, withholding or reporting obligations under the that agreement. The effective date for FATCA compliance remains July 1, 2014.
According to a notice1 from the UAE Central Bank, banks and other financial institutions in the UAE must complete the following actions to facilitate the signing of the IGA:
1.Identify customer accounts that are a “US Reportable Account”, which is defined as a financial account maintained by a reporting UAE financial institution and held by one or more specified US persons or by a non-U.S. entity with one or more controlling persons that is a specified U.S. person (implementation date: 19 November 2013).
2.Adopt FATCA’s due diligence procedures for identifying and reporting on US Reportable Accounts and for payments to certain nonparticipating financial institutions (
).
3.Prepare relevant systems for establishing electronic connection to the Central Bank’s FATCA Reporting System, currently in development. All banks and other financial institutions should expect to be contacted for this purpose during the first quarter of 2014 (implementation date: 1 March 2014).
4.Be prepared to register via the IRS portal to obtain a “Global Intermediary Identification Number” (final registration date: 1 November 2014).
5.Adopt reporting procedures specified in the IGA (first report for 2014 must be sent to the Central Bank by 1 August 2015).
The Central Bank, with help from a US law firm, will provide legal support and conduct workshops to assist banks and other financial institutions in implementing the FATCA requirements.
Bankers expect all banks in the UAE will be forced to comply because they must rely on US correspondent banks to clear dollar denominated transactions. Non-compliance could invite sanctions that could include withdrawal of US dollar clearing rights with correspondent banks.
If you need assistance with regulatory reporting then please contact us: 009713365589
