Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)
The following abbreviations and acronyms are used throughout this explanatory memorandum.
|ABA||Australian Bankers' Association|
|ABS||Australian Bureau of Statistics|
|ADI||Authorised Deposit-taking Institution|
|ATO||Australian Taxation Office|
|COBA||Customer Owned Banking Association|
|Commissioner||Commissioner of Taxation|
|CRS||Common Reporting Standard|
|FATCA||Foreign Account Tax Compliance Act|
|FATCA Agreement||Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA|
|FFI||Foreign Financial Institution|
|FHSA||First Home Saver Account|
|FSC||Financial Services Council|
|ICERD||International Convention on the Elimination of All Forms of Racial Discrimination|
|ICESCR||International Covenant on Economic, Social and Cultural Rights|
|ICCPR||International Covenant on Civil and Political Rights|
|IGA||Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA|
|IRC||Internal Revenue Code|
|IRS||Internal Revenue Service|
|OAIC||Office of the Australian Information Commissioner|
|OECD||Organisation for Economic Co-operation and Development|
|OVDP||Offshore Voluntary Disclosure Program|
|Privacy Act||Privacy Act 1988|
|RIS||Regulation Impact Statement|
|TAA 1953||Taxation Administration Act 1953|
|US||United States of America|
General outline and financial impact
Schedule 1 to this Bill amends Schedule 1 to the Taxation Administration Act 1953 to require Australian financial institutions to collect information about their customers that are likely to be taxpayers in the United States of America (US) and to provide that information to the Commissioner of Taxation (Commissioner) who will, in turn, provide that information to the US Internal Revenue Service.
These amendments give effect to the Australian Government's commitments as set out in the Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA, which was signed in Canberra on 28 April 2014.
Date of effect: 1 July 2014
Proposal announced: On 6 November 2013, the Government announced its intention to work towards signing and enacting a treaty-status intergovernmental agreement with the US to enable the financial sector to comply with Foreign Account Tax Compliance Act (FATCA) reporting rules (Treasurer's Media Release No. 17 of 6 November 2013).
This followed an earlier announcement on 7 November 2012 by the then Treasurer that Australia had commenced formal discussions with the US for an intergovernmental agreement on FATCA (Treasurer's Media Release No. 110 of 7 November 2012).
Financial impact: Nil
Human rights implications: This Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights - Chapter 2, paragraphs 2.1 to 2.54.
Compliance cost impact: High. Australian financial institutions will need to collect information about their customers that are likely to be taxpayers in the US and to provide that information to the Commissioner.
Summary of regulation impact statement
Regulation impact on business
Impact: These amendments will affect Australian financial institutions that have customers that may be taxpayers in the US.
- FATCA will commence on 1 July 2014, irrespective of any action taken by Australia.
- There are three options for responding to FATCA:
- option one - conclude a Model 1 Intergovernmental Agreement with the US;
- option two - conclude a Model 2 Intergovernmental Agreement with the US; or
- option 3 - maintain the status quo (that is, no Government intervention).
- All three options impose compliance costs on the Australian financial sector. Each option is estimated to impose the following compliance costs over ten years:
- option one - $482.68 million;
- option two - $565.44 million; or
- option three - $1,065.92 million.
- Option one enables Australian financial institutions to comply with FATCA with the lowest level of compliance costs. This option is also consistent with the Government's long standing support for international cooperation to prevent tax evasion.
Chapter 1 - FATCA
Outline of chapter
1.1 Schedule 1 to this Bill amends Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) to require Australian financial institutions to collect information about their customers that are likely to be taxpayers in the United States of America (US) and to provide that information to the Commissioner of Taxation (Commissioner) who will, in turn, provide that information to the US Internal Revenue Service (IRS).
1.2 These amendments give effect to the Australian Government's commitments as set out in the Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA (the FATCA Agreement).
Context of amendments
The Foreign Account Tax Compliance Act
1.3 The Foreign Account Tax Compliance Act (FATCA) is a unilateral anti-tax evasion regime enacted by the US Congress as part of the US Hiring Incentives to Restore Employment Act 2010. FATCA is aimed at detecting US taxpayers who use accounts with offshore financial institutions to conceal income and assets from the IRS. The relevant provisions are contained in the US Internal Revenue Code (IRC) 1986 and are supplemented by extensive US Treasury Regulations that were issued on 17 January 2013 (and have been subject to subsequent amendment).
1.4 The substantive FATCA requirements for financial institutions generally start on 1 July 2014.
1.5 From that date, FATCA will require all foreign (that is, non-US) financial institutions, including custodial institutions, depository institutions, investment entities and specified insurance companies, to conclude individual agreements with the IRS under which they will periodically report certain information about their account holders who are US citizens or US resident individuals (or individuals who fail to rebut a presumption of being a US citizen or US resident individual) or specified entities established in the US or controlled by US persons.
1.6 In order to comply with their reporting obligations, these financial institutions will need to follow specific due diligence procedures in identifying all relevant accounts.
- The level of due diligence required depends on whether the account is held by an individual or an entity and whether or not the account was opened prior to 1 July 2014.
- For example, the due diligence requirements generally do not apply to accounts held by individuals unless the aggregated account balances exceed USD 50,000.
1.7 Financial institutions that do not comply with FATCA will be subject to a 30 per cent US withholding tax on their US source income.
1.8 A broad range of Australian financial institutions, including banks, some building societies, some credit unions, specified life insurance companies, private equity funds, managed funds, exchange traded funds and some brokers (generally those brokers maintaining Custodial Accounts) will be subject to FATCA. As most major Australian financial institutions operate or otherwise invest in the US, the US withholding tax creates a strong commercial incentive for these entities to comply with FATCA.
1.9 This means that those Australian financial institutions that intend to comply with FATCA would need to commence relevant due diligence procedures from 1 July 2014 in anticipation of reporting to the IRS. However, Australian privacy laws generally prevent compliance with these US-based obligations and some Australian State and Territory anti-discrimination laws could also prevent the interrogation of customer accounts based on US citizenship.
1.10 In recognition of the fact that many countries' domestic laws would otherwise prevent foreign financial institutions from fully complying with FATCA, the US has developed an intergovernmental agreement approach to manage these legal impediments, simplify practical implementation, and reduce compliance costs for relevant financial institutions. The US has signed a number of intergovernmental agreements with a range of jurisdictions including Austria, Belgium, Bermuda, Canada, the Cayman Islands, Chile, Costa Rica, Denmark, Estonia, Finland, France, Germany, Gibraltar, Guernsey, Honduras, Hungary, Ireland, the Isle of Man, Italy, Jamaica, Japan, Jersey, Luxembourg, Malta, Mauritius, Mexico, the Netherlands, Norway, Spain, Switzerland and the United Kingdom of Great Britain. A complete list of countries with intergovernmental agreements with the US is available on the US Department of the Treasury's website.
Signing an intergovernmental agreement with the US
1.11 On 28 April 2014 the Treasurer, on behalf of the Australian Government, and the US Ambassador to Australia, on behalf of the US Government, signed the FATCA Agreement.
1.12 The text of the FATCA Agreement is set out in the Australian Treaty Series (currently  ATNIF 5) which is accessible through the Australian Treaties Library on the AustLII website ( www.austlii.edu.au ). A copy of the FATCA Agreement is also available online on the Australian Department of Foreign Affairs and Trade's Australian Treaties Database and on the Australian Treasury's website.
Summary of new law
1.13 These amendments insert a new Division, 'Division 396 - FATCA', into 'Part 5-25 - Record-keeping and other obligations of taxpayers' in Schedule 1 to the TAA 1953.
1.14 To ensure consistency with the FATCA Agreement, these amendments adopt meanings and concepts used in that agreement.
- This means the substantive amendments apply to 'Reporting Australian Financial Institutions' that maintain at least one 'U.S. Reportable Account' in a calendar year.
- In addition, transitional obligations apply to 'Reporting Australian Financial Institutions' that make payments to 'Nonparticipating Financial Institutions' in 2015 and 2016.
Comparison of key features of new law and current law
|New law||Current law|
|Reporting Australian Financial Institutions that maintain U.S. Reportable Accounts will need to follow specific due diligence procedures and provide information about those accounts as specified in the FATCA Agreement to the Commissioner.||No equivalent.|
|Reporting Australian Financial Institutions that make payments to account holders that are Nonparticipating Financial Institutions in 2015 and 2016 will need to follow specific due diligence procedures and provide information about those payments as specified in the FATCA Agreement to the Commissioner.||No equivalent.|
|Reporting Australian Financial Institutions that report information to the Commissioner will need to keep records for five years that explain the procedures used for determining the information reported.||No equivalent.|
Detailed explanation of new law
The FATCA Agreement with the US
1.15 The FATCA Agreement establishes a framework for reporting by Australian and US financial institutions of some financial account information to their respective tax authorities (the Australian Taxation Office (ATO) and the IRS). Article 25 (Exchange of Information) of the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income (which has the force of law under subsection 5(1) of the International Tax Agreements Act 1953) requires each country's tax authorities to automatically exchange that information.
1.16 The FATCA Agreement consists of four parts.
- (1) The Agreement that:
- defines specific concepts used in the Agreement - per Article 1;
- requires Australia to obtain information about 'Reportable Accounts' - per Article 2;
- sets out the process for exchanging information with the US - per Article 3;
- specifies how 'Reporting Australian Financial Institutions' will be treated under FATCA - per Article 4;
- provides for compliance and enforcement mechanisms - per Article 5;
- articulates a mutual commitment between Australia and the US to enhance the effectiveness of information exchange and transparency - per Article 6;
- grants Australia the benefit of more favourable terms under Article 4 or Annex I provided by the US to other jurisdictions - per Article 7;
- allows for consultation and amendment of the agreement and specifies the terms of the agreement - per Articles 8 and 10; and
- incorporates Annex I and Annex II as integral parts of the agreement - per Article 9.
- (2) Annex I that requires Reporting Australian Financial Institutions to apply specific due diligence procedures in identifying 'U.S. Reportable Accounts' and accounts held by 'Nonparticipating Financial Institutions'.
- (3) Annex II that deems specific Australian 'Entities' to be complying with or exempt from FATCA or specific Australian accounts to be excluded from the definition of 'Financial Accounts' for the purposes of FATCA.
- (4) The Memorandum of Understanding to the Agreement.
1.17 Paragraph 4 of Article 5 of the FATCA Agreement requires Australia to implement measures, as necessary, to prevent financial institutions from adopting practices designed to circumvent the relevant reporting obligations. Although the Australian Government does not propose to introduce a specific anti-avoidance rule at this stage, it has given an undertaking to the US that it will do so if it becomes apparent that Reporting Australian Financial Institutions are adopting practices designed to circumvent their reporting obligations.
1.18 It is important to note that a Reporting Australian Financial Institution that complies with all of its reporting obligations under these amendments will still need to comply with additional obligations directly imposed by the IRS to avoid becoming subject to a 30 per cent US withholding tax on its US source income. These additional obligations are contained in subparagraphs (1)(c), (d) and (e) of Article 4 of the FATCA Agreement.
1.19 How each Reporting Australian Financial Institution chooses to comply with these additional obligations will be a matter for that institution and the IRS. Although the ATO has a role in acting as an intermediary between Reporting Australian Financial Institutions and the IRS, the formal obligations on the ATO under Article 5 of the FATCA Agreement are limited to applying Australia's domestic taxation laws, where applicable, to resolve any non-compliance. Accordingly, these obligations on the ATO will only apply in situations where the non-compliance has led to a contravention of Australia's domestic taxation laws.
1.20 The FATCA Agreement permits Australia to allow Australian Financial Institutions to elect to apply alternative definitions as well as alternative procedures specified in the Agreement. The Government has prepared these amendments so that Australian Financial Institutions are permitted to make any of the elections contemplated by the FATCA Agreement.
The reporting obligation - U.S. Reportable Accounts
1.21 Reporting Australian Financial Institutions that maintain one or more U.S. Reportable Accounts at any time during a calendar year will need to give a statement to the Commissioner in relation to each of those accounts. This statement must contain all of the necessary information about those accounts that would allow the Australian Government to fulfil its obligations under the FATCA Agreement. [Schedule 1, item 2, subsections 396-5(1) and (2) of Schedule 1 to the TAA 1953]
1.22 Implicit in this obligation is the requirement that such a Reporting Australian Financial Institution will need to collect the relevant information. Of note, an entity subject to the Australian Privacy Principles in the Privacy Act 1988 that collects personal information about an individual must, under Australian Privacy Principle 5, take reasonable steps either to notify the individual about a range of matters relating to this personal information or otherwise ensure the individual is aware of these matters. These matters are set out in Australian Privacy Principle 5.2.
1.23 A Reporting Australian Financial Institution that does not maintain any U.S. Reportable Accounts in a calendar year does not need to provide such a statement to the Commissioner.
1.24 The concepts of Reporting Australian Financial Institutions and U.S. Reportable Accounts are defined in Article 1 of the FATCA Agreement. However, generally speaking:
- banks, some building societies, some credit unions, specified life insurance companies, private equity funds, managed funds, exchange traded funds and some brokers (generally those brokers maintaining Custodial Accounts) will typically be Reporting Australian Financial Institutions; and
- U.S. Reportable Accounts will typically include cheque and transaction accounts, savings accounts, term deposits, debt interests and equity interests (including derivatives), and certain annuity contracts.
1.25 Australian retirement funds, including superannuation entities (which includes self-managed superannuation funds), public sector superannuation schemes, constitutionally protected funds or pooled superannuation trusts, will generally not be Reporting Australian Financial Institutions as they are treated as Non-Reporting Australian Financial Institutions and as exempt beneficial owners for the purposes of sections 1471 and 1472 of the US IRC under Section II of Annex II of the FATCA Agreement. Government entities will also generally not be Reporting Australian Financial Institutions under Section I of Annex II of the FATCA Agreement.
1.26 Article 2 of the FATCA Agreement sets out Australia's obligations in relation to the collection of information about U.S. Reportable Accounts. This includes collecting the following information, for example, in relation to each U.S. Reportable Account:
- the name, address and U.S. Tax Identification Number of each Specified U.S. Person that is an Account Holder (or each Specified U.S. Person that is a Controlling Person, as well as the name, address and U.S. Tax Identification Number of the controlled Non-US Entity);
- the account number or equivalent;
- the name and identifying number of the Reporting Australian Financial Institution;
- the account balance or value at the end of the calendar year or other appropriate reporting period (or, if the account was closed during the year, immediately before its closure);
- the total amount of income generated by the account (such as interest or dividends) and paid into the account (or with respect to the account) - but only with respect to 2015 and subsequent years; and
- in some cases, the total gross proceeds from the sale or redemption of property paid or credited to the account during the calendar year - but only with respect to 2016 and subsequent years.
1.27 Further to paragraph 1.20, paragraph 7 of Article 4 of the FATCA Agreement allows Australia to permit Australian Financial Institutions to use a definition in the relevant US Treasury Regulations in lieu of a corresponding definition in the FATCA Agreement where the application of such a definition would not frustrate the purposes of the Agreement.
1.28 In complying with this reporting obligation, an Australian Financial Institution may elect to use such an alternative definition as it is within the meaning of the FATCA Agreement and its use allows the Australian Government to fulfil its obligations under the Agreement.
- Copies of US Treasury Regulations are available on the US Treasury website.
- In addition, the US Department of the Treasury typically publishes binding notices in anticipation of US Treasury Regulations.
[Schedule 1, item 2, section 396-20 of Schedule 1 to the TAA 1953]
1.29 An entity must have made any relevant elections by the time it gives the statement to the Commissioner. The way the entity has prepared the statement provides sufficient evidence of any elections it may have made. There is no need to provide the Commissioner with an additional, specific notification of any elections made.
- However, an entity that provides a statement to the Commissioner has an obligation to keep necessary records about the procedures used in determining the information given to the Commissioner (including any elections made).
- Paragraphs 1.50 to 1.53 provide further information about this obligation.
1.30 The statement to the Commissioner must be given in the 'approved form'. The concept of approved forms is used in the taxation laws to provide the Commissioner with administrative flexibility to specify the precise form of information required and the manner of providing it. [Schedule 1, item 2, subsection 396-5(4) of Schedule 1 to the TAA 1953]
1.31 Section 388-50 of Schedule 1 to the TAA 1953 provides the legislative basis for the use of approved forms. Subsection 388-50(2) allows the Commissioner to combine more than one statement in the one approved form and paragraph 388-50(1)(c) allows the Commissioner to require any necessary additional information. [Schedule 1, item 2, subsection 396-5(5) of Schedule 1 to the TAA 1953]
1.32 Each statement is due to the Commissioner by 31 July of the following year to which the information relates.
- However, section 388-55 of Schedule 1 to the TAA 1953 allows the Commissioner to defer the time that entities must lodge a statement in the approved form.
- This means Reporting Australian Financial Institutions may lodge these statements by a later date where that has been approved by the Commissioner.
[Schedule 1, item 2, subsection 396-5(6) of Schedule 1 to the TAA 1953]
1.33 The ATO has published a range of information and guidance about how the Commissioner administers the approved form provisions. In particular, practice statement PS LA 2005/19 provides information about the processes for approving an approved form and practice statement PS LA 2011/15 provides information about general lodgement obligations and the process for seeking to defer these obligations.
The requirement to follow specific due diligence procedures
1.34 In effect, complying with this reporting obligation will require all Reporting Australian Financial Institutions that maintain Financial Accounts (within the meaning of the FATCA Agreement) to determine if they maintain any U.S. Reportable Accounts. This requires applying the due diligence procedures specified in the FATCA Agreement to determine the information to be reported. [Schedule 1, item 2, subsection 396-5(3) of Schedule 1 to the TAA 1953]
1.35 Annex I to the FATCA Agreement specifies these due diligence procedures, including circumstances where Australia may permit a Reporting Australian Financial Institution to elect to apply alternative due diligence procedures. These include:
- Section I.C of Annex I which allows Reporting Australian Financial Institutions to rely on the procedures described in relevant US Treasury Regulations to establish whether an account is a US Reportable Account or an account held by a Nonparticipating Financial Institution;
- Sections II.A, III.A, IV.A and V.A of Annex I which allow Reporting Australian Financial Institutions to make elections in relation to different types of Accounts; and
- Section VI.F of Annex I which allows Reporting Australian Financial Institutions to rely on the due diligence procedures performed by third parties to the extent provided in relevant US Treasury Regulations.
1.36 Further to paragraph 1.20, a Reporting Australian Financial Institution may elect to use any of the alternative procedures allowed by the FATCA Agreement in complying with the due diligence obligations required under the Agreement. [Schedule 1, item 2, section 396-20 of Schedule 1 to the TAA 1953]
Consequences of not complying
1.37 Australia's domestic taxation laws contain a range of sanctions for entities that do not comply with their reporting obligations. Specifically:
- Division 284 of Schedule 1 to the TAA 1953 sets out the penalties that apply to entities that make false or misleading statements about tax-related matters; and
- Division 286 of Schedule 1 to the TAA 1953 sets out the penalties that apply to entities that fail to lodge statements on tax-related matters in time.
1.38 This means, for example, that:
- a Reporting Australian Financial Institution that makes a false or misleading statement because of an intentional disregard of the taxation laws may be liable to an administrative penalty of 60 penalty units - per table item 3A of subsection 284-90(1) of Schedule 1 to the TAA 1953;
- a Reporting Australian Financial Institution that makes a false or misleading statement through recklessness as to the operation of the taxation laws may be liable to an administrative penalty of 40 penalty units - per table item 3B of subsection 284-90(1); or
- a Reporting Australian Financial Institution that makes a false or misleading statement because of a failure to take reasonable care to comply with the taxation laws may be liable to a penalty of 20 penalty units - per table item 3C of subsection 284-90(1).
1.39 Similarly, a Reporting Australian Financial Institution that fails to provide a statement on time, or in the approved form, may be liable under subsection 286-80(2) of Schedule 1 to the TAA 1953 to a base administrative penalty of one penalty unit for each period of up to 28 days from when the document was due, up to a maximum of five penalty units (subsections 286-80(3) and (4) of Schedule 1 to the TAA 1953 increase these penalty amounts for some entities). This could include a Reporting Australia Financial Institution that fails to identify any U.S. Reportable Accounts that it maintains and lodge a statement with the Commissioner.
1.40 Section 4AA of the Crimes Act 1914 provides the value of a penalty unit. The current value is $170.
1.41 Division 298 of Schedule 1 to the TAA 1953 contains a range of machinery provisions relating to this penalty framework. This includes section 298-20 which allows the Commissioner to remit all, or part, of an administrative penalty and section 298-30 which allows entities to object to the Commissioner's penalty assessment.
1.42 The ATO has also published a wide range of information and guidance about the operation of this penalty regime. Relevant practice statements include PS LA 2012/4 which relates to false and misleading statements and PS LA 2011/19 which relates to failing to lodge.
1.43 It is important to note that a Reporting Australian Financial Institution that fails to comply with this reporting obligation may also be deemed by the IRS to be a Nonparticipating Financial Institution under subparagraph 2(b) of Article 5 of the FATCA Agreement regardless of any compliance action undertaken by the ATO using Australia's domestic taxation laws.
The reporting obligation - payments to Nonparticipating Financial Institutions
1.44 Reporting Australian Financial Institutions that make payments to Nonparticipating Financial Institutions in 2015 and 2016 will also need to provide information about these payments to the Commissioner.
1.45 Specifically, a Reporting Australian Financial Institution that makes a payment to a Nonparticipating Financial Institution holding financial accounts with the Reporting Australian Financial Institution in 2015 and 2016 will need to give a statement to the Commissioner in relation to each of these payments. Each statement must contain all of the necessary information about those payments that would allow the Australian Government to fulfil its obligations under the FATCA Agreement. [Schedule 1, item 2, subsections 396-10(1) and (2) of Schedule 1 to the TAA 1953]
1.46 Similar to paragraphs 1.27, 1.28 and 1.29, an Australian Financial Institution may elect to use any alternative definition in the relevant US Treasury Regulations in complying with this reporting obligation, provided the use of that definition does not frustrate the purposes of the FATCA Agreement. [Schedule 1, item 2, section 396-20 of Schedule 1 to the TAA 1953]
1.47 This statement is due to the Commissioner by 31 July of the year following the year to which the information relates and must be given in the approved form. Paragraphs 1.30 to 1.33 provide further information about approved forms. [Schedule 1, item 2, subsections 396-10(4), (5) and (6) of Schedule 1 to the TAA 1953]
1.48 Reporting Australian Financial Institutions that provide such a statement will need to apply the due diligence procedures required under the FATCA Agreement in determining the information to be contained in that statement. As noted in paragraphs 1.35 and 1.36 a Reporting Australian Financial Institution may elect to use any of the alternative procedures allowed by the FATCA Agreement in complying with this obligation. [Schedule 1, item 2, subsection 396-10(3) of Schedule 1 to the TAA 1953]
1.49 A Reporting Australian Financial Institution that does not comply with this obligation may be subject to specific sanctions under Australia's domestic taxation laws and may also be deemed by the IRS to be a Nonparticipating Financial Institution. Paragraphs 1.37 to 1.43 provide further details about these different sanctions.
The requirement to keep records of relevant procedures
1.50 Similar to Australia's income tax regime and the lodgement of income tax returns, the reporting obligations on Reporting Australian Financial Institutions will operate on a self-assessment basis. Under self-assessment, taxpayers typically perform certain functions and exercise some responsibilities that might otherwise be undertaken by the revenue authority. One consequence of a self-assessment approach is that whilst the Commissioner may initially accept an entity's statement at face value, the Commissioner may subsequently seek to verify the accuracy of that statement, particularly if there are potential compliance risks.
1.51 Accordingly, reporting entities will need to keep adequate records about the procedures they used in preparing the relevant statement to ensure the Commissioner can properly assess whether they have, in fact, complied with their reporting obligations. This record-keeping obligation is similar to other record keeping provisions in Australia's domestic taxation laws.
1.52 Specifically, a Reporting Australian Financial Institution that provides a statement to the Commissioner needs to keep records for five years (from the date of providing that statement to the Commissioner) that:
- correctly record the procedures by which it determined what information to include in the statement; and
- are in English, or are readily accessible and easily convertible into English.
[Schedule 1, item 2, section 396-25 of Schedule 1 to the TAA 1953]
1.53 This record-keeping obligation particularly applies in relation to the due diligence procedures followed by the Reporting Australian Financial Institution in identifying relevant accounts or payments as well as any elections made by the institution in relation to terms used in, or procedures required under, the FATCA Agreement. However, entities need not create specific records just to comply with this obligation. Internal guidelines or similar documents about the procedures relevant staff should follow, for example, may be sufficient, particularly if there is also evidence that staff do, in fact, routinely follow these guidelines.
Consequences of not complying
1.54 Section 288-25 of Schedule 1 to the TAA 1953 provides that an entity that fails to keep or retain records as required by the taxation laws is liable to an administrative penalty of 20 penalty units.
1.55 The ATO has published a practice statement, PS LA 2005/2, which provides further information about these record keeping obligations.
1.56 In addition, a Reporting Australian Financial Institution that fails to keep adequate records may be exposed to the possibility of being deemed by the IRS to be a Nonparticipating Financial Institution.
1.57 These amendments define the FATCA Agreement as the Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA. [Schedule 1, item 2, section 396-15 of Schedule 1 to the TAA 1953]
1.58 In addition, these amendments amend the definitions in section 995-1 of the Income Tax Assessment Act 1997 to incorporate a reference to the FATCA Agreement. [Schedule 1, item 1, subsection 995-1(1) of the ITAA 1997]
1.59 These amendments also insert relevant guide material for Division 396. [Schedule 1, item 2, section 396-1 of Schedule 1 to the TAA 1953]
Application and transitional provisions
1.60 These amendments commence on Royal Assent.
1.61 These amendments apply in relation to:
- all U.S. Reportable Accounts maintained by Reporting Australian Financial Institutions on or after 1 July 2014 [Schedule 1, item 3, paragraphs (1) and (3)]; and
- any payments made in 2015 or 2016 by Reporting Australian Financial Institutions to Nonparticipating Financial Institutions [Schedule 1, item 3, paragraphs (2) and (3)].
Chapter 2 - Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014
2.1 This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
2.2 The United States of America (US) Foreign Account Tax Compliance Act (FATCA) is a unilateral anti-tax evasion regime enacted by the US in March 2010 and is aimed at detecting US taxpayers who use accounts with offshore financial institutions to conceal income and assets from the US Internal Revenue Service (IRS). FATCA requires foreign (that is, non-US) financial institutions to periodically report details of accounts held by US taxpayers or by foreign entities controlled by US taxpayers to the IRS. Non-complying financial institutions face significant penalties, notably a 30 per cent withholding tax on US income.
2.3 Under the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income the US's taxing rights over income derived by US citizens is preserved.
2.4 This Bill amends Schedule 1 to the Taxation Administration Act 1953 and the Income Tax Assessment Act 1997 to give effect to Australia's obligations under the treaty-status Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA (the FATCA Agreement), which was signed on 28 April 2014.
2.5 This Bill requires Reporting Australian Financial Institutions to give the Commissioner of Taxation (Commissioner) certain information about U.S. Reportable Accounts that the Australian Government is required to obtain in order for the Government to fulfil its obligations under the FATCA Agreement in respect of U.S. Reportable Accounts. Under the FATCA Agreement, the Commissioner will transmit the information regarding U.S. Reportable Accounts to the IRS. The Bill also establishes ancillary record-keeping and due diligence obligations for reporting entities as well as transitional reporting obligations in relation to payments made to Nonparticipating Financial Institutions.
Human rights implications
2.6 The Bill engages the following rights and freedoms:
- the right to protection from arbitrary or unlawful interference with privacy under Article 17 of the International Covenant on Civil and Political Rights (ICCPR); and
- the right to protection from discrimination under Article 2(1) of the International Convention on the Elimination of All Forms of Racial Discrimination (ICERD), Articles 2(1) and 26 of the ICCPR, and Article 2(2) of the International Covenant on Economic, Social and Cultural Rights (ICESCR).
Prohibition against unlawful or arbitrary interference with privacy
2.7 The Bill engages Article 17 of the ICCPR, as it will interfere with the privacy of individuals.
2.8 Section 396-5 requires Reporting Australian Financial Institutions to report customer information to the Commissioner and section 396-20 requires reporting entities to conduct certain due diligence procedures on their financial accounts in order to identify those account holders that are likely to be US citizens or US taxpayers. To comply with these sections, Reporting Australian Financial Institutions will be required to collect certain personal information (such as a person's name, address, U.S. Tax Identification Number, the account number, the income credited to the account and the account balance) and provide the information to the Commissioner for onward transmission to the IRS.
2.9 Article 17 of the ICCPR provides that individuals shall not be subject to unlawful or arbitrary interference with their privacy.
2.10 In relation to privacy, the United Nations Human Rights Committee has made the following points.
- The term 'unlawful' means that no interference can take place except in cases envisaged by the law. Interference authorised by States can only take place on the basis of law, which itself must comply with the provisions, aims and objectives of the Covenant.
- The expression 'arbitrary interference' is also relevant to the protection of the right provided for in Article 17. In the Committee's view the expression arbitrary interference can also extend to interference provided for under the law. The introduction of the concept of arbitrariness is intended to guarantee that even interference provided for by law should be in accordance with the provisions, aims and objectives of the Covenant and should be, in any event, reasonable in the particular circumstances.
Discrimination on prohibited grounds
2.11 The Bill engages the right to protection from discrimination under international human rights law, on the grounds that it requires Reporting Australian Financial Institutions to report on accounts that are likely to be held by US citizens or US taxpayers based on the presence of specified US indicia in those institutions' records.
2.12 Article 2(1) of the ICERD imposes an obligation on State parties to undertake to pursue a policy of eliminating racial discrimination. The ICERD defines racial discrimination, in Article 1(1) as, 'any distinction, exclusion, restriction or preference based on race, colour, descent, or national or ethnic origin which has the purpose or effect of nullifying or impairing the recognition, enjoyment or exercise, on an equal footing, of human rights and fundamental freedoms in the political, economic, social, cultural or any other field of public life'.
2.13 Article 2(1) of the ICCPR prohibits discrimination in the exercise of rights under that treaty on a number of prohibited grounds, while Article 26 of the ICCPR is a stand-alone right which would be breached if a person did not enjoy equality before the law or equal protection of the law with others, on the basis of discrimination on a prohibited ground. Article 2(2) of the ICESCR also prohibits discrimination in the exercise of rights under that treaty.
2.14 Although the ICCPR does not contain a definition of discrimination, the United Nations Human Rights Committee has defined discrimination in similar terms to Article 1(1) of the ICERD.
2.15 As noted above, discrimination under the ICERD and ICCPR comprises differential treatment (a distinction, exclusion or restriction) on the basis of a prohibited ground, which nullifies or impairs the enjoyment of human rights.
2.16 In relation to this Bill, the relevant issue is whether differentiation on the basis of US citizenship or nationality constitutes discrimination on prohibited grounds.
2.17 Article 1(2) of the ICERD provides that, 'This Convention shall not apply to distinctions, exclusions, restrictions or preferences made by a State Party to this Convention between citizens and non-citizens.'
2.18 Therefore, on its face, a distinction between citizens and non-citizens would not amount to discrimination for the purposes of the ICERD.
2.19 However, in its General Recommendation No. 30, the Committee on the Elimination of Racial Discrimination (ICERD Committee) stated its view that, 'differential treatment based on citizenship or immigration status will constitute discrimination if the criteria for such differentiation, judged in the light of the objectives and purposes of the Convention, are not applied pursuant to a legitimate aim, and are not proportional to the achievement of this aim'.
2.20 In other words, differential treatment would not amount to discrimination under international human rights law if the different treatment meets the proportionate test for legitimate differential treatment.
Compatibility with human rights
2.21 This Bill's engagement with the right to privacy and the right to protection from discrimination is in the furtherance of a legitimate objective.
2.22 The principal objective of this Bill is to improve international tax compliance and to implement the US's FATCA rules in Australia.
2.23 Australia is a long-standing supporter of international cooperation to prevent tax evasion, and the Australian Taxation Office (ATO) currently provides taxpayer information - on an automatic basis - to more than 40 of Australia's tax treaty partners, including the US.
2.24 This Bill establishes a more effective bilateral framework to address international tax evasion. As a result, the Bill reinforces Australia's support for international tax transparency and cooperation between revenue authorities to help prevent tax evasion and improve global tax compliance. This is consistent with ongoing international efforts, supported by the G20, to improve tax system integrity.
2.25 As noted in paragraph 1.10, the US has entered into intergovernmental agreements for the implementation of FATCA, based on a common model, with a number of jurisdictions. The intergovernmental approach to FATCA has focussed international attention on automatic exchange of information for tax purposes.
2.26 On 6 May 2014, the Organisation for Economic Co-operation and Development (OECD) adopted the Standard for Automatic Exchange of Financial Account Information (also referred to as the Common Reporting Standard (CRS)), and called on jurisdictions to implement the standard without delay. The G20 endorsed the CRS in February 2014 and called for its early adoption by those jurisdictions that are able to do so. The CRS draws extensively from the intergovernmental approach to FATCA.
2.27 This Bill enhances the integrity of the Australian tax system by improving existing reciprocal tax information-sharing arrangements between Australia and the US.
2.28 Article 25 (Exchange of Information) of the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income enables the ATO to provide bulk taxpayer data to the IRS, and the IRS to reciprocate by providing corresponding data to the ATO.
2.29 The Bill builds on these arrangements by expanding the range, and improving the relevance, of financial account information currently exchanged. Any improvements in the scope and quality of information available to the ATO enhances its administration of Australia's taxation laws.
2.30 Improving tax compliance and enhancing the integrity of the Australian tax system are legitimate objectives of this Bill.
Reasonable and necessary
2.31 The Bill's engagement of the right to privacy and engagement of the right to protection from discrimination constitutes a reasonable and necessary measure in pursuit of the Bill's legitimate objective.
2.32 In order to be reasonable and necessary, a sufficient connection must be established between the terms of the FATCA Agreement in improving tax compliance and the engagement of the rights to privacy and protection from discrimination. The key terms of the FATCA Agreement are considered below.
Collection of personal information
2.33 The FATCA Agreement contemplates the collection of certain personal information, such as a person's name, address, U.S. Tax Identification Number, the account number, the income credited to the account and the account balance. These categories of information would assist in facilitating tax compliance as such information would enable Australia and the US to enhance their existing domestic data-matching programs to verify income reported by their respective taxpayers.
Due diligence requirements
2.34 The due diligence provisions of the FATCA Agreement require the identification and/or self-certification of account holders who are US citizens or taxpayers. This condition is connected to the collection of personal information. That is, the identification of such accounts ensures that the Australian Government is able to perform its obligations under the FATCA Agreement, for the purpose of facilitating the objective of international tax compliance.
Closure of accounts
2.35 Certain Non-Reporting Australian Financial Institutions may be required to close the accounts of US citizens or US taxpayers who are not Australian residents. The purpose of this requirement is to ensure that US citizens or taxpayers do not use these institutions for the purpose of avoiding being reported to the IRS.
2.36 Under the FATCA Agreement, certain Non-Reporting Australian Financial Institutions must not have policies or practices that discriminate against opening or maintaining financial accounts for US citizens or US taxpayers, who are residents of Australia. That is, Australian resident US citizens are not precluded from holding accounts in Australia.
Proportionate means of achieving a legitimate objective
2.37 The Bill's engagement of the right to privacy and the right to protection from discrimination is a proportionate means of achieving the Bill's legitimate objective.
2.38 To meet the proportionality criteria, it is necessary that the differential treatment be weighed against the objective which that treatment is seeking to achieve. In conducting this weighing exercise, it is necessary to take into account the importance of the objective.
2.39 The objective of facilitating tax compliance is sufficiently important to justify the Bill's engagement with privacy and the differential treatment on the basis of a prohibited ground. Moreover, the terms of the FATCA Agreement are the least intrusive, and would be effective in facilitating tax compliance.
2.40 The key terms of the FATCA Agreement, in the context of whether the interference constitutes a proportionate measure, are considered below.
Collection of personal information
2.41 The type of personal information required by the FATCA Agreement (a person's name, address, U.S. Tax Identification Number, the account number, the income credited to the account and the account balance) is relatively narrow for determining a person's potential tax obligations.
2.42 Further, this requirement only applies to U.S. Reportable Accounts, being accounts that exceed certain minimum thresholds. For example, the FATCA Agreement provides that accounts containing a balance less than USD 50,000 as at 30 June 2014 are not required to be reviewed, identified or reported as U.S. Reportable Accounts.
2.43 Given that the information required is relatively limited and such information must only be provided in respect of accounts with a relatively high threshold balance, this requirement is likely to amount to a proportionate means of facilitating tax compliance.
Due diligence requirements
2.44 In order for a Reporting Australian Financial Institution to provide the information contemplated by the FATCA Agreement, there has to be a mechanism to identify the relevant accounts. Conducting an electronic search of existing records, or seeking self-certification from clients is arguably the simplest means for a financial institution to identify whether it has accounts potentially held by US taxpayers.
2.45 The FATCA Agreement provides that a finding of US indicia by a Reporting Australian Financial Institution does not require the institution to treat an account as a U.S. Reportable Account if certain conditions apply (see Section II.4.(b) of Annex I).
2.46 Lastly, the obligation not to examine accounts that do not exceed USD 50,000, further supports the argument that the scope of the due diligence requirement is proportional to the Bill's legitimate objective.
Closure of accounts
2.47 As already discussed, under the FATCA Agreement, certain Non-Reporting Australian Financial Institutions are required to close the accounts of US citizens or US taxpayers who are not Australian residents. The FATCA Agreement provides Non-Reporting Australian Financial Institutions with an option to report on these accounts, as if the Non-Reporting Australian Financial Institutions were a Reporting Australian Financial Institution. In light of this, it is considered that the requirement to close accounts is a proportional means of ensuring that the Australian Government is able to collect the necessary information in respect of US citizens or US taxpayers, to facilitate tax compliance.
Protection of taxpayer privacy
2.48 These information exchanges are subject to strict treaty confidentiality rules which are consistent with Australia's domestic tax secrecy rules, and other safeguards contained in Article 25 of the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income. That is, any information provided by the Commissioner can only be used by the US for the purposes permitted by the treaty. In general, this means the information can only be used for tax administration purposes and may only be disclosed to persons (including courts and administrative bodies) concerned with the assessment, collection, administration or enforcement of, or with litigation with respect to, the taxes covered by the treaty.
2.49 The disclosure of taxpayer information by the Commissioner is allowed by section 355-50 of Schedule 1 to the Tax Administration Act 1953, which provides an exception to the general prohibition on the disclosure of taxpayer information by ATO officers.
Remedies available if privacy right is infringed
2.50 Under Australia's privacy law, a person can make a complaint about the handling of their personal information by Australian government agencies and private sector organisations covered by the Privacy Act 1988.
2.51 Also, the Office of the Australian Information Commissioner is responsible for the enforcement of Australia's privacy law, and the Information Commissioner has the power to investigate instances of non-compliance by agencies and organisations and to prescribe remedies to redress non-compliance. Depending on the particular complaint, some possible resolutions could include compensation for financial or non-financial loss, or change to the respondent's practices.
2.52 This Bill is consistent with Article 17 of the ICCPR on the basis that its engagement of the right to privacy will neither be unlawful (including by virtue of the amendments to Australia's taxation legislation set out in the Bill) nor arbitrary. To this extent, the Bill complies with the provisions, aims and objectives of the ICCPR.
2.53 This Bill meets the test for legitimate differential treatment, and does not contravene international human rights law protections against discrimination on the basis of a person's national origin, nationality or citizenship.
2.54 In light of the above, this Bill is compatible with human rights because to the extent that it may limit human rights, these limitations are reasonable, necessary and proportionate.
Chapter 3 - Regulation impact statement
3.1 This Regulation Impact Statement (RIS) was prepared by the Department of the Treasury at the decision making stage and was assessed as being compliant with the Government's requirements by the Office of Best Practice Regulation.
3.2 A RIS is a document prepared by departments and, as such, this RIS reflects the Department of the Treasury's assessment of the costs and benefits of each option at the decision making stage. Accordingly, this RIS does not reflect changes arising from further consultation during the legislative development of these amendments.
IMPLEMENTATION OF THE UNITED STATES FOREIGN ACCOUNT TAX COMPLIANCE ACT IN AUSTRALIA
3.3 This proposal is for Australia to conclude an intergovernmental agreement (IGA) with the United States (US) to facilitate the implementation of FATCA in Australia.
3.4 FATCA is a US anti-tax evasion regime aimed at detecting untaxed income and assets held in foreign (i.e. non-US) financial institutions by US taxpayers.
3.5 It will require foreign financial institutions (including Australian financial institutions) to report details of accounts held by their US customers to the US Internal Revenue Service (IRS). Non-compliant financial institutions will face a 30 per cent withholding tax on their US sourced income.
3.6 FATCA will commence on 1 July 2014, irrespective of any action taken by Australia.
3.7 Australia's regulatory environment does not permit Australian financial institutions to comply with FATCA. Industry has advised that non-compliance would generate significant economic costs and would damage its reputation and international competitiveness.
3.8 This proposal seeks to redress the inability of the current regulatory environment to support industry compliance with FATCA by establishing a legal framework that will enable financial institutions to comply.
3.9 The Government has announced its intention to sign and enact a treaty-status IGA with the US to facilitate industry compliance and to minimise the economic impacts of FATCA in Australia more broadly. An IGA would remove domestic legal impediments that currently prevent Australian financial institutions from complying with FATCA.
3.10 This Regulatory Impact Statement compares three options for responding to FATCA:
- Option 1 is to conclude a Model 1 IGA with the US;
- Option 2 is to conclude a Model 2 IGA with the US; and
- Option 3 is no government intervention (i.e. maintain the status quo).
3.11 (Model 1 and Model 2 IGAs are alternate US model treaties designed to provide a bilateral framework for foreign financial institutions to comply with FATCA.)
3.12 As with other major proposals of this kind, compliance burdens are likely to fall primarily on Australian financial institutions and their customers. Some customers will have to supply more information to financial institutions, and financial institutions will have to compile appropriate records and forward them either to the Australian Taxation Office (under option 1) or directly to the IRS (under option 2). In the case of no government intervention (under option 3), Australian financial institutions will bear the financial cost of the withholding tax on their US sourced income if the appropriate customer information cannot be supplied. However, customers would eventually bear the cost to the extent that it is passed onto them primarily in the form of higher account fees or higher borrowing costs.
3.13 All of the three options impose a compliance cost on the Australian financial sector. The details of how compliance costs are eventually borne by customers and their financial institutions is uncertain because industry-specific factors will play as much a part as overall capital market factors. The important distinctions between them is the amount of this cost and the degree to which financial institutions are exposed to wider market and legal risks.
3.14 In the event that Australia does not conclude an IGA, there is a real prospect that Australian financial institutions could face additional risks that would ultimately manifest as increased borrowing costs or the reduced availability of credit. The Australian Bankers' Association (ABA) has advised that in addition to bearing the financial cost of the US withholding tax, participation in the global markets by Australian banks and other financial institutions may be limited. Some financial institutions may decide to restructure their investments or reduce their reliance on US sourced funding so as to limit their exposure to FATCA withholding tax. In addition, FATCA compliant financial institutions in other countries may be reluctant to conduct transactions with Australian financial institutions because of the associated FATCA reporting and withholding obligations.
3.15 Together, these factors are likely to limit potential offshore income streams of Australian financial institutions and therefore their ability to develop and grow their business. Such impact would be greater for Australian financial institutions that derive a larger proportion of their income from the US financial markets but also for those who have significant participation in the US capital markets.
3.16 Option 1 is the preferred option. It would enable Australian financial institutions to comply with FATCA without breaching Australian law and entails the lowest level of compliance costs for industry. This option is consistent with the approach that many peer countries have taken to FATCA and is consistent with the Government's long standing support for international cooperation to prevent tax evasion. It also reduces the need for Australian financial institutions to engage with US authorities in relation to their FATCA reporting obligations, thereby reducing their compliance burden.
3.17 Option 2 would also achieve FATCA compliance for industry but would generate higher compliance costs for industry and lower overall benefits. The principal differences between Option 1 and 2 relate to the need for industry to comply directly with the US under the Model 2 IGA approach, and the lack of administrative reciprocity that would be provided to Australia by the US.
3.18 Option 3 is not supported. It would not meet the Government's policy objective of enabling industry to comply with FATCA and expose industry and consumers to the economic costs of non-compliance. Despite representing the least amount of regulation, Option 3 would be the most expensive option for industry (with an expected start-up cost of $477 million and ongoing annual costs of $58 million). Option 3 would also generate significant economic losses for industry reputational risks and decreased international competitiveness.
|Compliance Costs Comparison between Options|
|Option 1||Option 2||Option 3|
|Annual ($M)||Total (over 10 years) ($M)||Annual ($M)||Total (over 10 years) ($M)||Annual ($M)||Total (over 10 years) ($M)|
3.19 The relative merit of these options is reflected in other countries' responses to FATCA. To date, 20 countries have signed Model 1 IGAs with the US, and 4 countries have signed Model 2 IGAs. Other IGAs are under negotiation.
3.20 In addition, the Model 1 IGA format has now been adopted by the Organisation for Economic Cooperation and Development as the international standard for the automatic exchange of taxpayers' financial account information between revenue authorities, to help prevent tax evasion. The G20 has endorsed the standard and called for its early adoption by those jurisdictions that are able to do so.
1. INTRODUCTION TO FATCA
3.21 FATCA is a unilateral anti-tax evasion regime, enacted by the United States in March 2010, aimed at detecting US taxpayers who use accounts with offshore financial institutions to conceal income and assets from the US IRS. The relevant provisions are contained in the US Internal Revenue Code 1986 (IRC) and are supplemented by extensive US FATCA regulations. FATCA will commence on 1 July 2014.
3.22 In broad terms, FATCA will require foreign (that is, non-US) financial institutions - regardless of their country of location - to periodically report directly to the IRS certain information about financial accounts held by US individuals or US-controlled entities.
3.23 To comply with these reporting requirements, foreign financial institutions (FFIs) would have to conclude special agreements with the IRS which would oblige them to:
- Undertake specified identification and due diligence procedures with respect to their account holders;
- Report specified information annually to the IRS on their account holders who are US persons or US-controlled entities; and
- Withhold and pay to the IRS 30 per cent of any payments of US sourced income, as well as gross proceeds from the sale of securities that generate US sourced income, made to:
- Non-participating FFIs;
- Individual account holders that fail to provide sufficient information to determine whether or not they are a US person; or
- Foreign entity account holders that fail to provide sufficient information about the identity of their substantial US holders.
3.24 Compliance with FATCA is not mandatory but non-compliance will expose FFIs to a 30 per cent US withholding tax on their own US sourced income.
3.25 While FATCA is not extra territorial, the withholding tax rules make compliance very attractive from the commercial perspective of most affected Australian financial institutions. However, in the absence of Australian government intervention, Australia's privacy and anti-discrimination laws would generally preclude Australian financial institutions from fully complying with the FATCA requirements.
Australia's bilateral investment relationship with the US
3.26 The US remains an important bilateral investment partner for Australia in both direct and portfolio investment terms. In 2012, foreign direct investment from the US to Australia and from Australia to the US amounted to $131,255 million and $103,383 million respectively. Foreign portfolio investment from the US to Australia and from Australia to the US amounted to $486,312 million and $330,597 million respectively.
3.27 Notwithstanding the economic significance of the bilateral relationship, it is not possible to readily quantify the scale of assets held by the Australian financial sector that generates US sourced income.
Australia's financial and insurance services sector
3.28 Based on data available from the Australian Bureau of Statistics (ABS), the financial and insurance services sector is an important part of the Australian economy. It currently employs over 400,000 people and is the largest industry in Australia when measured by Industry Gross Value Added (a measure of the economic worth of the goods and services produced). As a share of national Industry Gross Value Added, the industry has grown from around 6 per cent in 1990, to 8.7 per cent in 2013.
3.29 FATCA will apply to a large part of the Australian financial services sector - particularly custodial institutions, depository institutions, investment entities and specified insurance companies. A broad range of Australian financial institutions, including banks, some building societies and credit unions, life insurance companies that offer insurance products that include an investment component, private equity funds, managed funds, exchange traded funds and some broker dealers are expected to comply with its requirements.
3.30 The Reserve Bank of Australia in its most recent published statistics report that there are approximately 4000 Authorised Deposit-taking Institutions (ADIs), Non-ADI Financial Institutions, Insurers and Funds Managers in Australia. Together these institutions hold at least $5,000 billion in assets. While certain entities are exempt from FATCA's reporting requirements, most entities will be exposed to its reporting requirements. The ABS publication of portfolio investment assets by country and sector also shows that in December 2013, Australian banks, insurance companies and mutual funds held approximately $70 billion of their assets in the US. As such, these figures are indicative of the potential scope and scale of FATCA's potential impacts on the Australian financial institutions.
3.31 In preparing this Regulation Impact Statement (RIS), the Treasury consulted, in particular with the ABA, Financial Services Council (FSC) and Customer Owned Banking Association (COBA). The compliance cost estimates contained in this RIS are based on data supplied by industry.
3.32 The ABA represents 25 member banks. The banking industry in Australia collectively serves over 16 million customers, holds $1.9 trillion of deposits and has assets of $3.2 trillion, including loans and advances to customers of $2.0 trillion.
3.33 The FSC represents Australia's retail and wholesale funds management businesses, superannuation funds, life insurers, financial advisory networks, trustee companies and public trustees. The FSC has over 125 members who are responsible for investing $2.2 trillion on behalf of 11 million Australians. The pool of funds under management is larger than Australia's GDP and the capitalisation of the Australian Securities Exchange and is the third largest pool of managed funds in the world.
3.34 COBA (formally ABACUS) represents Australia's mutual banking institutions, including credit unions, building societies and mutual banks. It has around 4.5 million customers and total assets of $85 billion.
The importance of US financial markets
3.35 The US capital markets are a significant source of funding for Australia's banking industry. Australian banks have traditionally relied on offshore markets, including the US market, as an important source of funding. As at December 2013, around 68 per cent of Australian bank bonds outstanding were issued offshore. Of these, 50 per cent were denominated in US dollars.
3.36 Offshore funding has been mainly utilised by the major banks as it is cost effective for them to raise wholesale funds offshore, and it enables them to achieve a high level of diversity in their funding. Smaller lenders in Australia rely more heavily on domestic deposits and securitisation to fund their lending.
3.37 Any difficulty for the major banks in accessing funding from the US market is unlikely to have a direct impact on these smaller lenders. However, these small lenders may face increased competition for funding and potentially higher funding costs if the major banks seek to substitute their offshore funding with domestic funding.
3.38 The following is an extract from the FATCA regulations.
U.S. taxpayers' investments have become increasingly global in scope. FFIs now provide a significant proportion of the investment opportunities for, and act as intermediaries with respect to the investments of, U.S. taxpayers. Like U.S. financial institutions, FFIs are generally in the best position to identify and report with respect to their U.S. customers. Absent such reporting by FFIs, some U.S. taxpayers may attempt to evade U.S. tax by hiding money in offshore accounts. To prevent this abuse of the U.S. voluntary tax compliance system and address the use of offshore accounts to facilitate tax evasion, it is essential in today's global investment climate that reporting be available with respect to both the onshore and offshore accounts of U.S. taxpayers. This information reporting strengthens the integrity of the U.S. voluntary tax compliance system by placing U.S. taxpayers that have access to international investment opportunities on an equal footing with U.S. taxpayers that do not have such access or otherwise choose to invest within the United States.
Australian financial institutions that may be affected
3.39 The term 'FFI' covers a broad range of financial institutions and includes any entity that falls within the FATCA definitions of:
- depository institution (being an entity which accepts deposits in the course of a banking or similar business);
- custodial institution (being an entity which holds financial assets for the account of others as a substantial portion of its business);
- investment entity (being an entity which is engaged in the business of trading or investing in a variety of financial instruments or assets); or
- specified insurance company (being an insurance company which makes payments under a 'cash value insurance contract' or an 'annuity contract' as defined in the FATCA regulations).
3.40 In Australia, this would include banks, building societies, credit unions, life insurance companies, private equity funds, managed funds, exchange traded funds and some broker dealers.
3.41 Certain classes of persons are treated as 'exempt beneficial owners' under FATCA, meaning that they are generally exempted from FATCA due diligence, reporting and withholding. This is because the FATCA requirements do not apply to an entity that falls within the FATCA definition of 'exempt beneficial owner'. The following classes of persons will be regarded as exempt beneficial owners provided that they meet all of the requirements prescribed for that class of exempt beneficial owner:
- any foreign government or its political subdivisions, or their wholly owned agencies or instrumentalities;
- any international organisation or its wholly owned agencies or instrumentalities;
- any foreign central bank;
- certain retirement funds;
- certain entities wholly owned by exempt beneficial owners.
3.42 FFIs are expected to conclude individual agreements with the IRS, which will follow a template 'FFI agreement', by 1 July 2014. The FFI is required to register with the IRS and to agree to comply with the terms of an FFI agreement. An FFI that enters into an FFI agreement is referred to as a 'participating FFI'.
3.43 Under an FFI agreement, participating FFIs are obliged to:
- Undertake specified identification and due diligence procedures with respect to their account holders.
- Broadly, a participating FFI must determine if the account is a US account or an account held by either a recalcitrant account holder or non participating FFI. The due diligence requirements vary depending on whether the financial account is a pre-existing individual account, new individual account, pre-existing entity account or new entity account and the size of the account. A pre-existing account is one maintained as at 30 June 2014. There are also strict rules regarding the documentation which can be relied on, the retention of records and the FFI's standard of knowledge.
- Report specified information annually to the IRS on their account holders who are US persons or US-controlled entities.
- This includes the account holder's name, address, account number, US tax identification number, account balances or values (on individual and aggregate bases), debits and credits to the account and total deposits and withdrawals.
- Some Australian financial institutions already report some of this information annually to the Australian Taxation Office (ATO), pursuant to existing Australian income tax requirements. Typically this includes: name, address, Australian tax file number(s), the amount of income derived and the amount of Australian tax withheld (if any).
- If foreign law would prevent the FFI from reporting the required information absent a waiver from the account holder, and the account holder fails to provide a waiver within a reasonable period of time, the FFI is required to close the account.
- Withhold and pay to the IRS 30 per cent of any payments of US sourced income, as well as gross proceeds from the sale of securities that generate US sourced income, made to:
- Non-participating foreign financial institutions; or
- Recalcitrant account holders (that is, individual account holders that fail to provide sufficient information to determine whether or not they are a US person, foreign entity account holders that fail to provide sufficient information about the identity of their substantial US holders, or account holders that fail to provide a waiver of a foreign law that would prevent reporting)
3.44 A participating FFI may elect not to withhold on 'passthru payments', and instead be subject to withholding on payments it receives, to the extent those payments are allocable to recalcitrant account holders or nonparticipating FFIs. A passthru payment includes any withholdable payment or other payment to the extent attributable to a withholdable payment. A participating FFI must also withhold on any passthru payments it makes to any other participating FFI that has made such an election.
Number of customers affected
3.45 Industry-wide data is not available because financial institutions do not routinely record the country of origin of their customers. However, the ABA has estimated that in Australia each of the major banks have at least 30,000 accounts that display some US indicia (based on an analysis of data reported regularly by banks to the ATO).
3.46 From 1 July 2014, financial institutions will be required to determine whether or not new accountholders (individuals and entities) are US persons, either at the time a new account is opened or if the account balance subsequently exceeds US$50,000.
3.47 For pre-existing accounts, some customers may be required to certify that they are not US persons, for example in cases where financial institutions' customer records display US indicia. Failure to certify could result in customers being deemed to be US persons, with the result that their account information will be reported.
3.48 Generally, and in the absence of changes in customer circumstances, these requirements will apply on a once-only basis.
3.49 These requirements will impose some additional burdens on customers of financial institutions but those burdens will vary depending on individual customer circumstances and between financial institutions. These burdens cannot be accurately quantified but are expected to be minimal for the majority of customers. These burdens will be greater for customers who are US persons or whose accounts display US indicia.
FATCA withholding tax
3.50 Relevant income to which FATCA withholding tax applies generally includes any payment of US-sourced interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits and income; and gross proceeds from the disposal of any property of a type which can produce interest or dividends from US sources (collectively defined as 'withholdable payments').
3.51 Bank interest paid with respect to US taxpayers' offshore accounts is deemed to have a US source, as is income the source of which cannot be determined by the relevant withholding agent at the time of payment. The FATCA regulations generally rely on, but also expand, detailed source of income rules contained in US tax law.
3.52 FATCA withholding tax also applies to 'passthru payments' that a participating FFI makes to a recalcitrant account holder or non-participating FFIs.
3.53 The US FATCA regulations are supplemented by the US IRS requiring payers of US sourced income ('withholding agents') to certify that payees are FATCA-compliant or deemed compliant by operation of the rules before payments can be released free of withholding tax. Withholding agents are therefore required to withhold tax and are made liable for it.
3.54 Figures are not readily available for the quantum of US sourced income derived directly or indirectly by Australian financial institutions. However, large Australian financial institutions (such as banks) are expected to directly or indirectly derive high levels of US sourced income. Whereas, smaller Australian financial institutions are expected to only directly or indirectly derive low levels of US sourced income.
Tax treaty relief from FATCA withholding tax
3.55 FFIs that are entitled to the benefits of a bilateral tax treaty between their home country and the US are generally entitled to relief from FATCA withholding tax, by way of a full or partial refund from the IRS, where the treaty limits the US's taxing rights over US sourced income.
3.56 The Australia-US tax treaty contains such limitations. For example, the treaty limits the US's taxing rights over US-sourced dividends and interest derived by Australian residents to a maximum rate of 15 per cent and 10 per cent respectively. It is permissible for the US to apply its domestic FATCA withholding tax rate at the time the US-sourced dividend or interest payment is made, however, Australian financial institutions may rely on the treaty to seek a refund from the IRS of any excess tax withheld in the US.
3.57 Australian financial institutions are only entitled to claim a foreign income tax offset in their Australia income tax returns for the amount of US withholding tax that has been paid in accordance with the tax treaty. They cannot therefore claim relief in Australia for the excess US tax withheld but must instead seek a refund or credit from the IRS. In seeking such a refund or credit, Australian financial institutions would be subjected to any relevant IRS procedures (including any waiting period for the refund).
3.58 FATCA specifies that no interest will be paid on FATCA withholding tax refunds of credits. Consequently, an Australian financial institution will not have the use of the overpaid amount until the refund is received, nor will it receive any recompense for the loss of the use of the amount during that period. The Australian financial institution will also need to bear any costs associated with claiming the refund.
Exchange of tax information under the Australia-US tax treaty
3.59 The Australia-US tax treaty aims to avoid double taxation and prevent fiscal evasion. Importantly, the treaty expressly allows the US to tax its citizens regardless of whether they are also citizens or Australian tax residents.
3.60 The treaty avoids double taxation by allocating taxing rights between the two countries over various categories of income. Where the treaty permits both countries to tax the same income, the country of residence of the relevant taxpayer is required to provide appropriate relief.
3.61 Article 25 (Exchange of Information) of the treaty authorises the exchange of taxpayer information in order to prevent tax evasion. Information exchange can take three forms:
- on request - where either country requests information about a specific taxpayer or transaction;
- automatically - where both countries voluntarily provide bulk taxpayer information periodically; and
- spontaneously - where both countries voluntarily provide information considered to be relevant to the other country's administration of its tax system.
3.62 While Article 25 would permit the ATO to provide 'FATCA information' to the IRS on a case-by-case basis on request, the ATO is currently unable to provide bulk FATCA data to the IRS. Such information is not readily available to the ATO because neither the treaty nor domestic law obliges Australian financial institutions to report bulk data.
US Citizens in Australia
3.63 According to the 2011 Australian Census of Population and Housing, approximately 77 000 US citizens live in Australia. Of these, approximately 54 per cent are dual Australian-US citizens.
Australian Privacy Law
3.64 Australia's privacy laws are broadly intended to provide a nationally consistent framework for the protection of privacy and the handling of personal information, and to implement Australia's international obligations in relation to privacy. In implementing these broad objectives, Australian privacy law recognises the need for the protection of the privacy of individuals to be balanced with the interests of entities in carrying out their functions or activities.
3.65 Australia's Privacy Act 1988 (the Privacy Act) generally prohibits the use of personal information for a purpose other than for which it was originally collected. Such personal information can only be used for another purpose if that other purpose is a related purpose and the individual would reasonably expect the information's disclosure for that related purpose, or if the use or disclosure is required or authorised by law (see Australian Privacy Principle 6).
3.66 Australian financial institutions' account holders would not have expected their personal information collected in respect of existing accounts to be used in the manner required by FATCA. It would also be impractical to expect every account holder to provide consent or respond to a request to provide consent. This means that unless the use or disclosure is required or authorised by Australian law, Australian financial institutions would not be able to fully comply with their FATCA obligations to examine and report on existing accounts.
3.67 From 12 March 2014, that is, upon commencement of the Australian Privacy Principles, an organisation will be prohibited from collecting personal information unless the information is reasonably necessary for one or more of the entity's functions or activities (see Australian Privacy Principle 3.2). There is uncertainty as to whether Australian financial institutions would be able to meet these tests in relation to FATCA requirements in relation to the opening of new financial accounts.
3.68 If Australian domestic law was implemented to require the disclosure for FATCA purposes, the Australian financial institutions would nevertheless be required to inform individuals as to why their personal information is being collected, to whom it may be disclosed, any law that requires the particular information to be collected, and the main consequences (if any) for the individual if all or part of the information is not provided (see Australian Privacy Principle 5).
3.69 The Privacy Act allows an Australian financial institution to transfer personal information about an individual to the US tax authorities only if the individual consents to the transfer, or the financial institution has a reasonable belief that the US tax authorities are subject to a law which effectively upholds principles for fair handling of the information, and which is substantially similar to Australia's privacy law (see Australian Privacy Principle 8).
3.70 Again, it would be impractical to expect every account holder to provide consent or respond to a request to provide such consent; and establishing a belief that relevant US law is substantially similar to Australian privacy law would require Australian financial institutions to incur compliance costs by obtaining legal advice. In light of this, Australian financial institutions would not be able to fully comply with their FATCA obligations.
Australian anti-discrimination law
3.71 Australian Commonwealth law governing discrimination on the grounds of race is broadly intended to give effect to Australia's obligations under the International Convention on the Elimination of All Forms of Racial Discrimination. These obligations are to promote equality before the law for all persons, regardless of their race, colour or national or ethnic origin, and to make discrimination against people on the basis of their race, colour, descent or national or ethnic origin unlawful.
3.72 FATCA requires the interrogation or closure of customer accounts based on US citizenship. A person's citizenship refers to their nationality. The fact that FATCA specifically targets US citizens means that it is specifically targeting certain persons, based on their nationality.
3.73 It is unlikely that this would be inconsistent with Commonwealth laws governing discrimination on the grounds of race. For the purposes of the Racial Discrimination Act 1975, and under Australian courts' jurisprudence in relation to that Act, a distinction made on the basis of a person's citizenship is not a distinction based on race, colour, descent or national or ethnic origin.
3.74 A distinction based on nationality may, however, be inconsistent with some Australian State and Territory laws governing discrimination on the grounds of race, on the basis that, race is defined in these laws as including nationality (which would refer to citizenship). This means that, in contrast to Commonwealth laws governing discrimination on the grounds of race, it is generally unlawful to discriminate on the basis of a person's nationality in certain Australian States and Territories.
2. PROBLEM TO BE ADDRESSED
3.75 FATCA will take effect from 1 July 2014, regardless of any action taken by Australia.
3.76 From that date, the US will expect Australian financial institutions to commence interrogating their customer records for US indicia for the purpose of reporting certain account data to the IRS.
3.77 Australian financial institutions have a strong desire to be classified by the US as FATCA-compliant. Being classified as non-compliant carries two significant risks:
- It would expose Australian financial institutions to the economic cost of the 30 per cent FATCA withholding tax on their US sourced income; and
- It would potentially exclude them from major international markets that restrict their dealings to FATCA-compliant financial institutions. This would result in reputational risks for Australian financial institutions and potentially increase their cost of capital.
3.78 In both cases, these risks could lead to Australian consumers of financial services bearing higher fees and/or higher interest rates.
3.79 The main problem for Australian financial institutions is that Australia's regulatory framework will not permit them to comply with FATCA directly. Australian privacy laws would prevent them from undertaking the relevant FATCA due diligence and reporting requirements, thereby rendering them FATCA non-compliant. Some Australian State and Territory anti-discrimination laws would also prevent the interrogation or closure of customer accounts based on US citizenship.
3.80 As most major Australian financial institutions operate in the US financial markets or otherwise invest in the US, the financial burden of being classified as FATCA non-compliant has created a strong incentive for industry to comply with FATCA.
3.81 As a result, Australia's financial industry has sought the Government's assistance in creating a legal framework in Australia which would enable it to become FATCA-compliant. Industry considers that an IGA based on the US Model 1 IGA would best address industry's FATCA needs.
3.82 Concluding a bilateral IGA with the US is expected to address the risks identified above and reduce the compliance costs for both Australian financial institutions and the broader Australian community significantly.
The intergovernmental agreement (IGA) solution
3.83 In recognition of the fact that legal restrictions in many countries would prevent financial institutions from complying with FATCA, the US - in conjunction with France, Germany, Italy, Spain and the United Kingdom - developed the IGA approach as an alternative to direct compliance with the FATCA regulations.
3.84 Broadly, an IGA is a bilateral treaty-status agreement designed to assist countries in their implementation of FATCA and ease the compliance burden for their financial institutions. In particular, an IGA is intended to provide the legal authority for countries to permit their financial institutions to comply with the FATCA due diligence and reporting obligations (thereby addressing any domestic law impediments), as well as providing greater FATCA treatment certainty for those countries' entities and their financial products.
3.85 Essentially there are two types of model IGA (although there are variants of each model for use depending on whether or not countries have pre-existing taxpayer information-sharing agreements with the US):
- Model 1 IGA - a country will direct its financial institutions to provide FATCA information directly to its own revenue authority, which would subsequently transmit it to the IRS.
- Model 2 IGA - a country will direct its financial institutions to conclude individual agreements with the IRS and enable them to report directly to the IRS consistent with the US FATCA regulations. That country would also agree to provide the US with further taxpayer information in response to IRS requests.
Australian Government responses to FATCA
3.86 On 7 November 2012, the previous Government announced the commencement of formal discussions between Australian and US officials for an IGA with the US to minimise the impact of FATCA in Australia. The key objectives of the proposed IGA would be to reduce the overall burden of FATCA on Australian business and to improve existing reciprocal tax information-sharing arrangements between Australia and the US.
- Industry welcomed this announcement and has prepared for FATCA on the understanding that a Model 1 IGA would be concluded with the US. In this regard, industry has already incurred significant irrecoverable costs.
- Negotiations with the US also proceeded on the understanding that a Model 1 IGA would be concluded.
3.87 On 6 November 2013, the Government affirmed this approach when it announced that it would proceed with signing and enacting an IGA to enable the financial sector to comply with US FATCA reporting rules.
3. Objectives of Government action
3.88 The objectives of the Government action are to establish a legal framework which would:
- Protect Australian financial institutions' international competitiveness:
- 24 countries have now entered into bilateral IGAs with the US to assist their financial institutions in complying with FATCA;
- Enable the financial sector to comply with FATCA in the most cost effective way;
- Provide greater FATCA treatment certainty for a range of Australian entities and their financial products; and
- Enhance the integrity of the Australian tax system by improving existing reciprocal tax information-sharing arrangements between Australia and the US.
Enhancing tax system integrity
3.89 Australia is a long-standing supporter of international cooperation to prevent tax evasion and the ATO currently provides taxpayer information - on an automatic basis - to more than 40 of Australia's tax treaty partners, including the US.
3.90 Article 25 (Exchange of Information) of the Australia-US tax treaty (and corresponding provisions in other treaties) enables the ATO to provide bulk taxpayer data to the IRS without breaching Australian privacy or anti-discrimination laws. The IRS reciprocates by providing corresponding data to the ATO. These exchanges are subject to confidentiality rules and other safeguards contained in Article 25 that are designed to protect the rights of taxpayers.
3.91 The IGA approach to FATCA, which would rely on Article 25, would build on these arrangements by expanding the range and improving the relevance of financial account information currently exchanged. While the potential revenue gains to Australia of the IGA approach are not possible to quantify at this stage, all improvements in the volume and quality of information available to the ATO can be expected to enhance its administration of Australia's tax laws.
3.92 The IGA approach to FATCA has focussed international attention on automatic exchange of information for tax purposes. In February 2014, the Organisation for Economic Cooperation and Development released the Common Reporting Standard (CRS) - that calls on jurisdictions to obtain information from their financial institutions and to automatically exchange that information with other jurisdictions annually. The CRS is essentially based on the FATCA Model 1 IGA.
3.93 The G20 endorsed the CRS in February 2014 and called for the early adoption of the standard by those jurisdictions that are able to do so.
4. OPTIONS TO ACHIEVE OBJECTIVES
3.94 There are three main options for dealing with FATCA in Australia:
- Regulate to require financial institutions to report customer information to the Australian Government, instead of to the US Government, pursuant to a Model 1 IGA.
- Regulate to require financial institutions to report customer information directly to the US Government, pursuant to a bilateral Model 2 IGA; or
- Take no government action with regard to FATCA compliance (no additional regulation).
3.95 Options 1 and 2 would formally require the Government to make regulatory change.
Option 1 - Require Australian financial institutions to report to the Australian Government (Model 1 IGA)
3.96 Under this option, Australia would conclude an intergovernmental agreement with the US and enact enabling legislation to require Australian financial institutions to collect and report account holder information to the ATO. The ATO would subsequently transmit the information to the IRS under existing information-exchange arrangements permitted by the Australia-US tax treaty.
Option 2 - Require Australian financial institutions to report directly to the US Government (Model 2 IGA)
3.97 Under this option, Australia would conclude an intergovernmental agreement with the US that would require Australia to direct and enable Australian financial institutions to collect and report accountholder information directly to the US IRS. The Government would need to remove the existing legal impediments (in particular, under Australian privacy and anti-discrimination laws) that currently prevent Australian financial institutions from complying with FATCA. This would require significant legislative change.
Option 3 - No Government Intervention
3.98 Under this option, the Government would not intervene and would expect Australian financial institutions to individually decide whether and to what extent they would comply with FATCA. The consequences of not complying would be borne by financial institutions. However, as explained below, Australian financial institutions would be expected to continue to press strongly for some regulatory change to enable them to fully comply with FATCA.
5. ANALYSIS OF OPTIONS
3.99 FATCA will impose significant compliance costs on Australian financial institutions and their customers regardless of any action taken by the Australian Government. This impact analysis considers each option in ascending order (of its compliance cost burden).
3.100 Options 1 and 2 are regulatory actions that the Government could implement to help limit those costs. The respective compliance cost savings produced by Options 1 and 2 represent the incremental change in avoided compliance costs under each option.
3.101 Option 3, is a non-regulatory option which will not resolve the fundamental problem faced by financial institutions, i.e. it will not assist them in legally complying with FATCA and avoiding the imposition of US withholding tax on their US sourced income. Option 3 would also expose financial institutions to reputational and other economic costs that are not strictly compliance costs.
3.102 Table 5.1 provides an overview of the impacts of each option in practice.
3.103 Parts 5.1, 5.2 and 5.3 consider the costs and benefits of each option individually, including up-front and ongoing costs. Further information about these compliance costs is provided in Part 6.
3.104 Table 5.2 summarises the relative costs and benefits in comparison with other options available. This should be read in conjunction with the individual option analysis and observations regarding compliance cost differences in Part 6.
|No IGA (Option 3)||With Model 1 IGA (Option 1)||With Model 2 IGA (Option 2)|
|Entry into FFI Agreement with the IRS.||Not required; registration instead.||Not required; registration instead.|
|Identification and documentation of account holders. Australian domestic privacy and anti-discrimination laws may prevent compliance.||Required. The IGA, together with enabling legislation, will resolve the conflict with Australian law.||Required. The IGA, together with enabling legislation, will resolve the conflict with Australian law.|
|Reporting of US accounts. Australian domestic privacy law may prevent compliance.||Required, but information reported to the ATO instead of the IRS, thereby mitigating national legal impediments and risks of litigation against banks. Australia-US tax treaty confidentiality and use rules apply.||Required, but information reported directly to the IRS. Australia-US tax treaty confidentiality and use rules apply.|
|IRS information requests directed to Australian financial institution.||IRS information requests directed to ATO under Australia-US tax treaty - ATO then contacts Australian financial institution.||IRS information requests directed to Australian financial institution. New enabling legislation required to allow this. IRS group information requests also directed to ATO under Australia-US tax treaty|
|Deduct and withhold tax with respect to passthru payments made to recalcitrant account holders and non-participating FFIs.||Not required for recalcitrant accounts (reporting on these accounts is required instead); withholding only required if the Australian financial institution is acting as a qualified intermediary (or equivalent) on payments to non-participating FFIs; reporting required on payments to nonparticipating FFIs and to immediate payers of passthru payments.||Not required for recalcitrant accounts (reporting on these accounts is required instead); withholding only required if the ATO does not respond to an IRS group information request within 6 months; reporting required on payments to nonparticipating FFIs.|
|Close accounts of recalcitrant account holders.||Not required.||Not required.|
|FATCA exemptions for Australian entities and financial products determined under FATCA regulations.||FATCA exemptions for Australian entities and financial products specified in IGA Annex II.||FATCA exemptions for Australian entities and financial products specified in IGA Annex II.|
|No additional US financial account information provided from IRS to ATO.||Additional US financial account information provided from IRS to ATO.||No additional US financial account information provided from IRS to ATO.|
Option 1 - Require Australian financial institutions to report to the Australian Government (Model 1 IGA)
Benefits of reporting to the Australian Government
3.105 Australia's financial industry has advocated Australian Government intervention by adopting the Model 1 IGA framework following the US announcement of the IGA approach in February 2012.
3.106 Concluding an IGA with the US (based on the US Model 1 IGA) - supported by relevant enabling legislation - would reduce the overall burden of FATCA in Australia. In particular, it would:
- Address the Australian privacy and anti-discrimination law impediments that currently prevent industry from complying with FATCA by providing the necessary legal authority for Australian financial institution to perform the due diligence and reporting obligations. The enabling legislation would authorise the collection and use of personal information for FATCA reporting purposes
- Enable information reporting and handling within the Australian legal framework
- Reduce the incidence of direct interaction between Australian financial institutions and the IRS
- Ensure that information is collected, handled and provided to the IRS in accordance with existing tax treaty rules, which contain safeguards with respect to the confidentiality and use of information
- Remove the need for Australian financial institutions to pursue individual FFI agreements with the IRS or to seek customer waivers to enable it to comply with those agreements
- Provide financial institutions with access to less onerous due diligence requirements compared to the FATCA regulations (for instance, unlike the FATCA regulations, the IGA does not prescribe documentation of record requirements)
- Ensure that US income derived by Australian financial institutions and other Australian entities (such as government investment funds) will not be subject to the 30 per cent US FATCA withholding tax
- Ensure that financial institutions will not be expected to close or withhold tax from recalcitrant accounts or from payments to other non-complying financial institutions
- Ensure that financial institutions will automatically receive the benefits of more favourable terms afforded by the US to foreign financial institutions in its IGAs with other countries
- Ensure that financial institutions will have the opportunity to contribute to the development of the proposed ATO FATCA reporting system
- Allow Australian financial institutions to be generally presumed compliant with FATCA if they report annually to the ATO. This will enable counterparties in financial dealings to easily verify Australian financial institutions' FATCA status
- Treat Australian financial institutions as FATCA compliant, and not subject to FATCA withholding tax, from the date of signature of the IGA, providing that Australia is using its best endeavours to bring the IGA into force before the first IGA reporting date of 30 September 2015
- Exempt certain categories of Australian financial institutions and financial products from the scope of FATCA. In particular, the following entities and financial products would be specifically excluded from the FATCA rules:
- All Australian superannuation entities and products, pooled superannuation trusts and entities that invest exclusively for or on behalf of Australian superannuation entities
- Specified Federal and State Government entities (including the Reserve Bank) and investment funds (such as the Future Fund)
- International organisations with an office in Australia
- Small Australian financial institutions (including those with primarily Australian and New Zealand resident account holders)
- First Home Saver Accounts (FHSAs) and FHSA life insurance policies
- Most exempt life insurance policies
- Employee share schemes and employee share trusts
- Funeral policies
- Scholarship plans
- Australian equivalents to any financial products excluded under another country's IGA
- Enhance the integrity of the Australian tax system by broadening the scope of existing information sharing arrangements between the ATO and the IRS
- Reinforce Australia's support for international tax transparency and cooperation between revenue authorities to help prevent tax evasion
3.107 Furthermore, by signing the IGA, privacy outcomes are better protected as the Australian Government is involved in the control and sharing of information. Greater opportunities for accountability and scrutiny are provided than if individual FFI Agreements were to be signed.
3.108 Concluding an IGA based on the US Model 1 IGA would also be consistent with the approach taken by other countries. To date, only 4 countries (Bermuda, Chile, Japan and Switzerland) have adopted the US Model 2 IGA approach.
Costs of an IGA
Administration costs for the ATO
3.109 The information reported under the IGA would be in addition to the taxpayer information the ATO already exchanges on a reciprocal basis with the IRS pursuant to the Australia-US tax treaty. The ATO expects to meet the costs of adapting its systems to collect and report the relevant FATCA information to the IRS from its existing budget allocation.
3.110 The design of necessary law changes would be the subject to consultation with Australian stakeholders. It would be necessary to amend the taxation law to require Australian financial institutions to comply with the IGA's terms. Those legislative changes would either expressly or implicitly overcome any Australian privacy law and anti-discrimination law impediments.
Costs for Australian industry
3.111 An IGA would require all Australian entities that fall within the IGA definition of 'Australian financial institution' to comply with the IGA's requirements.
3.112 Australian industry estimates that the minimum upfront implementation costs for Australian banks, fund managers and life insurance companies totals just over $255 million. This includes project development and management, system development, legal advice and other costs that are non-ongoing. The proportion of compliance costs that relates to each of these components varies greatly across entities, and the size of the relevant entities. Australian financial institutions have already incurred over $110 million in FATCA compliance costs to prepare for their expected IGA obligations.
3.113 Ongoing compliance costs are estimated to total approximately $23 million per year. For wealth management entities, the ongoing compliance cost would depend on the fees charged by third parties (such as custodians) to perform the necessary due diligence and reporting requirements and, as such, this figure may be subject to change as these charges are incurred.
3.114 Collectively, the annual yearly costs for this option of both the start-up and recurring costs is $48.27 million per year. Throughout this document, 'annual yearly costs' includes the industry wide annualised start-up costs (over the ten year period) coupled with the ongoing yearly costs.
3.115 Annex II of the proposed IGA would provide FATCA treatment certainty for a range of Australian entities and financial products.
3.116 The majority of Australian customer owned financial institutions (such as credit unions) expect to fall within the IGA Annex II exemptions for small financial institutions. The IGA would therefore largely eliminate compliance costs for such customer owned financial institutions.
3.117 The IGA would also effectively eliminate compliance costs for the other entities and products specified in its Annex II, which includes Australia's entire superannuation industry.
Costs for US citizens
3.118 The IGA does not alter existing US tax obligations and filing obligations for US citizens. However, the IGA increases the chance of detecting US citizens who have not complied with their US tax obligations in respect of income held in Australian accounts. This is consistent with the objective of FATCA, and is consistent with the terms of the Australia-US tax treaty which expressly recognises the US's right to tax US citizens even if such individuals are also Australian tax residents.
3.119 In a submission to Treasury, the Office of the Australian Information Commissioner (OAIC) noted that 'Entering into an IGA with the US would create an opportunity to bring the IGA and its information sharing obligations within the scrutiny of Parliament. This will provide Parliament with an opportunity to examine, among other issues, the privacy impacts of the implementation approach contained in the IGA and any enabling legislation.'
'The OAIC suggests that, if information is to be exchanged on the basis of the proposed IGA, specific domestic legislative authority should be the basis on which an Australian Government agency is authorised to collect the personal information from domestic entities and to disclose that personal information to the US Government.'
3.120 Treasury considers that an IGA would adequately address Australian privacy concerns while meeting FATCA's tax system integrity objectives. Allowing Australian financial institutions to review accounts based on US citizenship would be also be consistent with the Australia-US tax treaty which preserves the US's taxing rights over income derived by US citizens.
Option 2 - Require Australian financial institutions to report directly to the US Government (Model 2 IGA)
Benefits of Reporting to the IRS
3.121 Under this approach, the Government would conclude an IGA with the US Government (based on the US Model 2 IGA) which would require the Australian Government to direct and enable affected Australian financial institutions to register with the IRS and confirm their intention to comply with the US FATCA regulations, including:
- Applying the due diligence rules to identify US accounts
- Annually reporting in the time and manner prescribed by the FATCA regulations
3.122 Many of the benefits of the Model 1 IGA are replicated in the Model 2 approach, including that the Model 2 IGA would become the legal authority to make the necessary Australian law changes.
3.123 Amending Australian law to remove the Australian privacy and anti-discrimination law impediments would enable Australian financial institutions to report accountholder information to the US Government, and would remove the need for Australian financial institutions to conclude individual FFI agreements with the US or seek customer waivers.
3.124 While concluding a Model 2 IGA would adequately enable industry to comply with FATCA it would present a number of significant drawbacks. For example:
- Amendments to non-tax laws, such as privacy and anti-discrimination laws, would be required;
- The terms of a Model 2 IGA would not require the US to provide reciprocal account information to Australia. In this regard, concluding a Model 2 IGA would not meet the Government's objective of enhancing the integrity of the Australian tax system.
- This option could be perceived as being inconsistent with the Government's long-standing position in relation to international cooperation to prevent tax evasion, and its commitment, through the G20, to the implementation of the OECD's Common Reporting Standard for the exchange of financial account information between revenue authorities.
3.125 In view of these drawbacks, it is considered that concluding Model 2 IGA would be an inferior option from a tax transparency policy perspective.
Costs for Australian industry
3.126 Australian industry estimates that the minimum upfront implementation costs for Australian banks, fund managers and life insurance companies totals just over $319 million. This represents approximately $64 million more than for Option 1.
3.127 Ongoing compliance costs are estimated to total approximately $25 million per year. This represents approximately $1.9 million more per year than for Option 1.
3.128 Collectively, the annual yearly costs for this option of both the start-up and recurring costs is $56.54 million per year. This represents approximately $8.27 million more spent per year than for Option 1.
Costs for US citizens
3.129 These costs are unchanged from Option 1.
5.3 Option 3 - No Government Intervention
Benefits of no Government intervention
3.130 In the absence of Government intervention, individual Australian financial institutions would be free to decide whether and to what extent to comply with FATCA. That is, they would face no additional Australian regulatory burden and could choose to either ignore FATCA or attempt to comply with it directly.
- If they chose to ignore FATCA - a foreign law that has no legal standing in Australia - they would not be required to undertake any interrogation of their customer accounts to search for US indicia.
- If they attempted to comply directly with FATCA, they would need to do so consistently with Australian privacy and anti-discrimination laws.
3.131 Some Australian stakeholders may prefer this option. These could potentially include for example:
- small Australian financial institutions that either do not invest in the US or believe that their FATCA compliance costs would exceed the 30 per cent FATCA withholding tax imposed on their US sourced income. It is expected there would only be a small number of Australian financial institutions with FATCA reporting obligations that would fall within this category; most of the financial institutions that do not invest in the US are likely to fall within the FATCA exemptions for small financial institutions or local banks;
- brokers that may be required to assist Australian financial institutions complete the necessary FATCA due diligence for account holders; and
- US citizen account holders who have not complied with their US tax obligations.
Costs of no government intervention
3.132 The majority of Australia's financial institutions do not support this option because ignoring or attempting to comply with FATCA directly is likely to impair their competitive position in relation to financial institutions from countries that have concluded IGAs with the US. That is, their exclusion from the IRS register of financial institutions entitled to exemption from the 30 per cent FATCA withholding tax could limit the number of counterparties they deal with and effectively deny them access to some financial markets. Industry is of the view that some counterparties may be attracted to the simplicity of restricting their dealings to transactions that would not require them to withhold and remit tax to the IRS.
3.133 Without Government intervention, industry representatives have outlined various concerns, including exposure to legal risk, increased capital provisioning and potentially being locked out of FATCA compliant jurisdictions. This would have an effect on the types of products that Australian financial institutions could provide and would reduce their global competitiveness. Financial institutions that would not be caught under the FATCA regulations are in the minority and, as such, the effects of a non-compliant jurisdiction would have an impact on the majority of the Australian financial sector as a whole.
3.134 Beyond the associated costs that would be incurred by industry, this approach would be inconsistent with Australia's standing as a global leader on exchange of information, and furthermore would be inconsistent with the approach advocated by the OECD and the G20 in relation to the Common Reporting Standard.
Choosing to ignore FATCA
3.135 While the US FATCA regulations provide a number of exemptions that would apply to certain Australian entities and financial products, the majority of Australian financial institutions would face difficulties in their dealings with financial institutions in other jurisdictions and US payers. These other institutions would seek confirmation of their FATCA status from the IRS. Without such confirmation, these Australian entities may have the FATCA 30 per cent withholding tax incorrectly withheld from their US sourced income, which would generate significant costs in seeking redress. In addition, there would be reputational costs to Australia's financial industry.
3.136 Other affected financial institutions with FATCA reporting obligations that chose to ignore those obligations would be deemed FATCA non-compliant by the US and become liable for the 30 per cent withholding tax on their US sourced income, to be withheld at source by US payers and by participating FFIs on their passthru payments to non-participating Australian financial institutions. Notwithstanding Australian financial institutions' ability to rely on the Australia-US tax treaty to seek a refund of any excess withholding tax, this would nevertheless have a significant impact on their liquidity (particularly on those financial institutions participating in the US capital markets or deriving income from the US financial markets) and add complexity to their dealings with foreign counterparts, which would assume withholding obligations.
3.137 Industry has indicated that most affected Australian financial institutions (especially banks, fund managers and life insurance companies) would not choose the option of ignoring FATCA, as that choice would ultimately impede their ability to operate effectively in international financial markets - especially in the US and in those jurisdictions that are generally FATCA compliant.
3.138 Australian entities that consider that they or their products fall within the scope of the exemptions provided by the FATCA regulations may need to incur legal costs to confirm this with the IRS, in order to protect themselves from the FATCA 30 per cent withholding tax on their US sourced income.
Choosing to comply directly with FATCA
3.139 Affected Australian financial institutions could attempt to comply directly with the FATCA regulations. This would require each affected financial institution to enter into a binding FFI agreement with the IRS to collect and report account holder data. As FFI agreements would be required for each affected subsidiary within a group, industry estimates that several thousand FFI agreements would be required.
3.140 Each of these would generate significant costs with regard to:
- obtaining legal advice on the interpretation and application of complex US law;
- signing and registering the FFI agreement with the IRS;
- assuming legal liability (including personal liability for officials) in relation to the obligations imposed by those agreements;
- developing systems to accommodate direct information reporting to the IRS, i.e. systems to accommodate unfamiliar technical IRS specifications;
- identifying 'recalcitrant' account holders and segregating them for special treatment;
- building capability to meet their own withholding obligations in relation to non compliant counterpart financial institutions and recalcitrant account holders;
- maintaining an ongoing relationship with the IRS in relation to reporting requirements, data transmission, data quality and dispute resolution.
3.141 Few, if any, affected Australian financial institutions could fully comply with the FFI agreement obligations without some form of Australian government (Federal and State) intervention to overcome Australian privacy and anti-discrimination law barriers. Australian financial institutions would incur substantial costs in advocating for necessary changes, but would also need to operationalise a legal solution for the intervening period while a legislative solution was reached.
3.142 In addition, with a first reporting date of 31 March 2015 (the date that applies in the absence of an IGA), Australian financial institutions would be unlikely to be able to comply with FATCA as the withholding and waiver systems would be both time-consuming and costly to build. Based on Australian Government announcements to date, Australian financial institutions are expecting a Model 1 IGA that would negate the need to build such withholding and waiver systems.
3.143 As FATCA targets US citizens, it is likely that its reporting and account closure requirements are inconsistent with some State or Territory anti-discrimination laws. There would be no breach of such laws, however, if Commonwealth legislation was enacted to override the relevant State or Territory discrimination laws or amendments were made to the relevant State or Territory laws themselves.
3.144 Consequently, it is likely that affected Australian financial institutions would press for such amendments to give them sufficient legal protection, at a significant cost. If the Federal and State governments were persuaded to make such amendments, a coordinated national plan may need to be negotiated and this would need to be done without a treaty status document to rely on as authority for the amendments.
3.145 Under Australia's privacy law, Australian financial institutions can generally only disclose information with the relevant individual's consent or if required by Australian law. Under Option 3, affected Australian financial institutions would therefore need to obtain their customers' consent to interrogate accounts and report the required FATCA information to the IRS. Industry has indicated that contacting every customer and establishing procedures for handling customer responses, enquiries and complaints would not serve the purpose of effective information exchange. The ABA has indicated that this approach would be costly as millions of account holders would need to be contacted (Australian banks have more than 16 million accountholders). It would also be unlikely to be effective based on previously ineffective response rates to customer mail-outs.
3.146 In that event, it is very likely that affected Australian financial institutions would press for Australian Government intervention to amend Australian law to allow them to legally perform the FATCA due diligence and to report the required information to the IRS.
3.147 Under the terms of a FFI Agreement, a financial institution would be required to withhold tax with respect to recalcitrant account holders (i.e. account holders that fail to provide the necessary documentation or information requested by the financial institution) and non-participating financial institutions (i.e. financial institutions that are not covered by an IGA or who have not entered into a FFI Agreement). It is unlikely that current Australian law would permit this, especially if the account holder was not in fact a US person. Consequently, it is likely that affected Australian financial institutions would press for Australian Government intervention to allow them to legally perform the FATCA withholding obligations.
3.148 In order to perform those withholding obligations, affected Australian financial institutions would also need to develop a FATCA withholding tax capability. The extra cost associated with building the withholding tax capacity and making other necessary changes forms part of the compliance costs attributable to business systems design and development for this option.
3.149 Affected financial institutions seeking to comply with the FATCA requirements would also incur the additional upfront implementation costs and ongoing compliance costs that apply with an IGA (as above).
Costs for Australian industry
3.150 Australian industry estimates that the minimum upfront implementation costs for Australian banks, fund managers and life insurance companies seeking to comply with the FATCA requirements in the absence of a Model 1 IGA totals over $477 million. This represents approximately $222 million more than for Option 1.
3.151 Ongoing compliance costs are estimated to total approximately $59 million per year. This represents approximately $36 million more per year than for Option 1.
3.152 Collectively, the annual yearly costs for this option of both the start-up and recurring costs is $106.59 million per year. This represents approximately $58.32 million more spent per year than for Option 1.
Costs for US citizens
3.153 These costs are less than under Option 1 as some Australian financial institutions will not be able to comply with FATCA, meaning that any of their accounts held by US citizens will escape reporting.
Weaknesses of this approach
3.154 Like Option 2, this option would not meet the Government's objective of enhancing the integrity of the tax system by improving the existing reciprocal tax information-sharing arrangements from the US to Australia. Under this option, the US is not required to provide equivalent financial account information to Australia. Further, the US is unlikely to receive all its desired information if the FATCA reporting requirements are not met by Australian financial institutions.
6. COMPLIANCE COSTS
3.155 Treasury consulted through peak bodies that represent a significant portion of businesses to be affected by FATCA to estimate the burden of compliance on business. These peak bodies were the:
- Australian Bankers' Association (ABA)
- Customer Owned Banking Association (COBA)
- Financial Services Council (FSC)
3.156 FATCA will apply to Australian Financial Institutions that fall within the FATCA definition of 'financial institution'. The definition of financial institution extends to those institutions that fall within the FATCA definitions of Depository Institution, Investment Entity, Custodial Institution or Specified Insurance Company
3.157 Banks fall within the definition of Depository Institution for the purposes of the FATCA, and therefore all ABA members are expecting to have FATCA obligations. FSC members that expect to have FATCA obligations include those which fall within the FATCA definitions of Investment Entity, Custodial Institution or Specified Insurance Company. The estimates provided by the FSC represent those members who would be captured under FATCA. The majority of COBA members expect to be exempt under FATCAs Non Registering Local Bank Exemption and Local Client Base Exemption.
Costs to business
|Start Up Costs|
|Item Name||Item Description|
|Professional Legal Services||These services will be engaged in relation to confirming entities' FATCA obligations.
Australian financial institutions are required to establish their FATCA obligations under the extensive US FATCA regulations (in excess of 300 pages plus commentary) and/or the terms of an IGA. Option 3 is the most onerous.
The cost of ascertaining the legal obligations under either IGA option (i.e., Options 1 and 2) is similar because the entity only has to rely on the IGA and any corresponding domestic legislation for the obligations that the agreement imposes. Option 3 requires the entity to gain an understanding of the FATCA regulations and also their interactions with Australian law. Essentially it requires familiarity with two tax systems and the interactions between the two.
The difference in associated costs will be primarily in relation to the varying degree to which Australian financial institutions will be able to rely on domestic law, and to what extent they will need to be familiar, and comply, with US legislation.
Other possible legal advice costs include:
|Business systems design and development||In order to comply with the due diligence and reporting requirements, each business will have to build an information system capacity to retain information for, identify, classify and interrogate customer accounts.
Australian financial institutions are required to apply thresholds to identify and classify customer accounts held at 30 June 2014 into various categories depending on the account balance. Accounts held by individuals must be classified as either non-reportable, lower value or higher value accounts. Accounts held by entities must be classified as either non-reportable or reviewable accounts. Lower value, higher value (individuals) and reviewable accounts must be interrogated electronically and, for certain accounts also manually, to identify whether the accountholders are US individuals or US controlled-entities. Details of reportable accounts must be reported annually to the ATO/IRS. Customer interface enhancement includes updating account opening procedures (on-boarding) and developing self-certification procedures for customers that will have to demonstrate that they are not US persons).
In addition, existing systems will need to be enhanced to minimise the effect on customers of the FATCA requirements. Customer interface enhancements are expected.
The identification, classification and interrogation obligations increase incrementally from Options 1 through to 3. In particular, a system built for Option 3 will need a withholding tax capacity which institutions do not currently have, greater information collecting capacity to fulfil the more onerous information obligations under the FATCA regulations, and the system must be able to produce information to be reported directly to the IRS.
|Business Model implications||The FATCA compliant status of an Australian financial institution with operations in a jurisdiction that is FATCA non-compliant (due to local law conflicts) could be jeopardised. Changes to the business model and becoming legally compliant with both FATCA and local laws would require:
These costs are the direct cost associated with complying with the FATCA regulations directly. Opportunity, reputational and economic costs have not been included.
|Development of staff training and education||This is the cost associated with ensuring staff are able to understand the business' obligations. This is particularly important for front-line staff that will have to explain why the customer may have to include foreign tax residency status in their paperwork.|
|Registration with IRS||This is the process by which an entity will register with the IRS. Registration would be required for all relevant subsidiaries of Australian parent financial institutions.|
|Internal compliance assurance||This is the development of internal governance procedures that will minimise Australian financial institutions' exposure to legal sanctions for non-compliance.|
|Business operating model changes||Non-IT changes to business models, including:
|Management of global conglomerates||Many large financial institutions operate globally and undertake activities covering different industry sectors, e.g. insurance, banking and funds management.
This line activity relates to central management and support functions provided from financial institutions' Australian offices.
|Conversion costs||These are the costs associated with building a new solution to comply with the FATCA regulations directly. In general, the FFI agreement approach (Option 3) contains more prescriptive obligations. In order to meet the FFI agreement standards, businesses would incur new costs to enable them to comply.
Some Model 1 solutions may be able to be reworked, but these sunk costs have not been included in these prospective figures. It is the cost which businesses will incur in either adapting existing solutions or starting new solutions in a variety of areas, such as account opening procedures, infrastructure and documentation.
|Other||This includes FATCA project governance and administration costs, under central and decentralised models, including executive involvement costs.|
|Operation of business systems||This is the operation of the business system as described above. The components of this price will relate to:
|Compile and report data to ATO/IRS||In order to comply with FATCA, the necessary due diligence will require businesses to provide reports of all identified US account holders either to the ATO (Option 1) or to the IRS (Options 2 and 3).|
|Deliver staff training and customer education||This includes:
|Engagement with the ATO/IRS||Receiving advice from the tax administrations and seeking guidance as necessary.|
|Manage customer consent issues||Where there is no legal requirement for compliance with FATCA, businesses will have to seek consent for the use and release of their data for FATCA purposes. This is due to the interaction with domestic privacy and anti-discrimination legislation, as canvassed above.|
|Compliance assurance||This is the ongoing process by which internal processes seek to reduce risks to the business. It will also include part of the budget for the withholding tax capability.|
|Professional legal services||Ongoing advice on the legal obligations for compliance.|
|Other||Ongoing costs associated with running a decentralised model.
It may also include for some members of the same group, system maintenance and manual inputting of data.
Regulatory Burden and Cost Offset (RBCO) Estimate Table
|Average Annual Compliance Costs (from Business as usual)|
|Costs ($m)||Business||Community Organisations||Individuals||Total Cost|
|Total by Sector||$48.27 M||$||$||$|
|Cost offset ($m)||Business||Community Organisations||Individuals||Total by Source|
|Total by Sector||$||$||$||$|
|Proposal is cost neutral? ✓ yes no|
|Proposal is deregulatory ✓ yes no|
|Balance of cost offsets < $58.32 M > (per year)|
|Average Annual Compliance Costs (from Business as usual)|
|Costs ($m)||Business||Community Organisations||Individuals||Total Cost|
|Total by Sector||$56.54||$||$||$|
|Cost offset ($m)||Business||Community Organisations||Individuals||Total by Source|
|Total by Sector||$||$||$||$|
|Proposal is cost neutral? ✓ yes no|
|Proposal is deregulatory ✓ yes no|
|Balance of cost offsets < $50.05 M >|
|Average Annual Compliance Costs (from Business as usual)|
|Costs ($m)||Business||Community Organisations||Individuals||Total Cost|
|Total by Sector||$106.59||$||$||$|
|Cost offset ($m)||Business||Community Organisations||Individuals||Total by Source|
|Total by Sector||$||$||$||$|
|Proposal is cost neutral? ✓ yes no|
|Proposal is deregulatory ✓ yes no|
|Balance of cost offsets NIL|
|Option 1||Option 2||Option 3|
|Annual ($M)||Total (over 10 years) ($M)||Annual ($M)||Total (over 10 years) ($M)||Annual ($M)||Total (over 10 years) ($M)|
Comparing the Compliance Cost Burden
3.158 The compliance costs as indicated above show that Option 1 is the least expensive option for business. The estimated compliance costs progressively increase through Options 1 to 3. Less government regulation in this context will cause greater compliance burdens - in addition to economic costs that cannot be included in the RIS compliance cost analysis.
3.159 Option 1 solely has the combined benefits of treaty protection, efficiency through liaising with the ATO and consistency with other international tax information sharing initiatives developed by the OECD and endorsed by the G20.
3.160 It is also the least expensive of the options. Based on the estimates provided by industry, the minimum upfront costs total $255 million. As indicated above, these costs are those that are non-ongoing and reflect the significant set up costs associated with building the systems to enable compliance. The ongoing yearly cost is estimated to be $23 million a year.
3.161 Initial start-up costs make up almost 53 per cent of the total compliance costs, with the remaining 47 per cent of the total costs over the ten year period being ongoing.
3.162 Business system design and development accounts for 79.9 per cent of the start-up costs and 42 per cent of the total costs (over ten years). The next biggest cost is legal advice costs at 12 per cent of the start-up costs and 7 per cent of the total costs (over ten years). The lowest proportion of start-up costs is the registration with the IRS at 0.5 per cent.
3.163 Operation of business systems makes up the highest proportion of ongoing costs at 51.5 per cent and 2 per cent of the total costs (over ten years). Preparing and reporting data for compliance made up 19 per cent of the ongoing costs, and makes up almost 1 per cent of the total costs (over ten years).
3.164 Option 2 shares some of the common benefits with Option 1, which is reflected in the smaller proportion of cost difference between the two options. The average yearly cost difference between Option 1 and 2 is about $8 million.
3.165 Based on the estimates provided by industry, the minimum upfront costs total approximately $319 million. As indicated above, these costs are those that are non-going and reflect the significant set up costs associated with building the systems to enable compliance. The ongoing yearly cost is estimated to be $24.6 million a year.
3.166 Initial start-up costs make up almost 56 per cent of the total cost of compliance, with the remaining 43 per cent of the total costs over the ten year period being on-going.
3.167 Business system design and development make up 73 per cent of the start-up costs and 41.6 per cent of the total costs (over ten years). The next biggest cost is legal advice costs at 10 per cent of the start-up costs and 5.7 per cent of the total costs (over ten years). The lowest proportion of start-up costs is the registration with the IRS at 0.4 per cent.
3.168 Operation of business systems makes up the highest proportion of ongoing costs at 47.5 per cent and 2 per cent of the total costs (over ten years). Preparing and reporting data for compliance accounts for 6 per cent of the ongoing costs.
3.169 There are similarities in the proportionate spending across the variety of line items between Option 1 and Option 2. The increases in spending between the two are the increase in cost associated with:
- Start-up - Business systems design and development - worth about $31million
- Start-up - internal compliance assurance - worth an estimated $6.3 million - this cost is not associated with the first option
- Start-up - increasing costs in making changes to the business operating model - almost $1 million
- Ongoing - compliance assurance - $6.1 million.
3.170 Option 3 is the most expensive of the three options. Less government regulation in this context will cause business additional compliance costs.
3.171 The total start-up cost associated with this option is $477.47 million. The ongoing cost per year is $58.8 million. Each year, the total average ongoing compliance cost burden that will fall on business is $106.59 million.
3.172 The biggest start-up costs are:
- Business design and development representing 51.3 per cent - worth $245.24 million
- Legal costs representing 8.5 per cent - worth $40.42 million
- Business model implications representing 19.7 per cent - worth $94 million
3.173 The biggest ongoing costs are:
- Managing customer consent representing 28.4 per cent - worth $16.7 million per year
- Compliance assurance representing 27.86 per cent - worth $16.39 million per year
- Operation of business systems representing 23.3 per cent - worth $13.7 million per year
3.174 The biggest differences between the compliance costs under this option and signing either of the two IGAs are:
- An additional $8 million on start-up legal advice under Option 3
- An additional $40 million compared to Option 1 and around an additional $10 million compared to Option 2 on the building and design of a system to comply with FATCA directly
- An additional $94 million compared to Option 1 and an additional $88 million compared to Option 2 on implications to the business model
- Internal compliance assurance
- Changes to the operation of the business model
- Conversion costs - worth about $39 million
- Other associated costs with start-up
- Ongoing managing customer consent
- Ongoing compliance assurance
3.175 Furthermore, the compliance costs associated with Option 3 do not account for the significant pressure from business that would arise should there be no intervention.
- This pressure would be applied at state and federal levels to drive for legislative change to enable compliance with FATCA under domestic legislation.
- Without the legal backing of the treaty status document, uncertainty may arise as to whether the Federal Government would have the constitutional authority to effect the change without the cooperation of the States.
- Changing legislation on a State-by-State basis as required would lead to difficulties around consistency.
Managing the process by which these legal changes could be made is also likely to be costly and time consuming. There could also be significant delays between the commencement of FATCA and when the necessary domestic changes came into effect.
3.176 The costs in the above table do not include the economic, reputational and opportunity costs of not pursuing either Options 1 or 2. Australian business has emphasised, however, that these additional costs would be significant.
3.177 Industry has indicated that changing from the original Australian Government indicated position of the Model 1 IGA will impose significant additional compliance costs. The conversion is most pronounced where no government action is taken, where it is estimated that it will cost $39 million to convert businesses to non-IGA solutions. This cost does not factor in the spent costs already sunk, which is estimated to be about $110 million.
3.178 Industry has further indicated that such a change from the Australian Government announcements would place business at a significant disadvantage.
3.179 The Australian banking industry has built FATCA compliance systems on the basis that an IGA was imminent. If an IGA were not signed, the ABA is concerned that this would result in the entirety of the Australian banking industry being non-FATCA compliant. This, in turn, would result in immediate significant system redesign costs to meet the standards of a FFI agreement as highlighted by the quantitative analysis.
3.180 According to the ABA:
'A failure to implement an IGA would mean that Australian banks and other financial institutions will not be participating FFIs since they are unable to exchange information directly with the US Inland Revenue Service under existing Privacy Laws. This would result in a potential contraction of the Australian finance industry's participation in global markets due to ongoing increased transaction costs, perceived increased counter-party risk (of dealing with Australian banks) and the deconstruction of Australian global bank operating business models. More particularly:
- Investments by Australian banks and managed funds in most US equities will become subject to 30 per cent withholding tax on a staggered basis, so too US securities and debt lent to US subsidiaries of Australian companies. This will result in an artificial reweighting of investment and debt portfolios as Australian financial institutions wind down their participation in the US market.
- Australian banks will, over time, be excluded from participating in global derivative and interbank markets if US and global banks put in place policies which prohibit transacting with parties which are not participating FFIs due to the complications of withholding and reporting.
- Australian banks will, over time, withdraw from jurisdictions which have laws that prevent the signing of a FFI Agreement and do not have an IGA in place to avoid "tainting" the global conglomerate (with non-participating FFI status). Cessation of operations in foreign jurisdictions will also negatively impact Australian Banks' ability to develop and grow their businesses by limiting and reducing their potential offshore income streams.'
3.181 Industry has also noted that there would be a reputational cost for Australian financials as a result of being in a non-compliant jurisdiction. Industry contends that access to finance will become difficult for Australian banking institutions without an IGA.
3.182 Industry further notes that there would also be opportunity costs associated with pursuing a non-IGA option. This would include the profits associated with alternative projects that would have to be forfeited due to expenditure on FATCA.
3.183 The Australian Government announced that it would commence discussions on an IGA with the US on 7 November 2012. While the proposed Australia-US IGA like that of most other countries reflects the US Model 1 agreement, the Government has been actively engaged with Australian stakeholders to ensure the overall compliance burden of the US legislation is minimised and the legitimate interests of Australian citizens are protected.
3.184 Treasury has conducted extensive consultation throughout the IGA negotiation process including through the invitation of public written submissions, a general information session for industry representatives and targeted stakeholder meetings.
3.185 Prior to the previous Government's announcement that Australia would enter into IGA negotiations with the US, written submissions were sought in relation to the advantages and disadvantages of pursuing an IGA. Treasury received feedback from 32 stakeholders: 23 from businesses and their representative bodies, 7 from individuals and 1 each from the Office of the Australian Information Commissioner and the Tax Justice Network.
3.186 Overall, Australian industry was supportive of entering into an IGA. Industry broadly agreed that this option reduces the compliance cost for industry and consumers through removing the need for Australian financial institutions to enter into, administer and certify individual agreements with the IRS. Furthermore, industry was of the view that utilising existing reporting channels would minimise information transmission costs and improve efficiency. However, concerns were also raised that there would be significant costs as a result of the need to establish new infrastructure, processes and compliance frameworks. Some industry participants submitted that these costs would be likely to fall disproportionately on smaller institutions such as Australia's mutual banking sector and would reduce their competitiveness against the big four banks.
3.187 The Information Commissioner acknowledged that an IGA would generally address legal privacy concerns by making disclosures 'required or authorised by law' for the purposes of the Privacy Act. The Information Commissioner noted that other privacy law obligations would continue to apply if an IGA was concluded, including the obligation to notify individuals about the purpose for which information is collected and the organisations to which the information will be disclosed. The proposed IGA would facilitate Australian financial institutions' compliance with the FATCA requirements because the IGA would require domestic law to be implemented.
3.188 Some individuals that generally oppose FATCA expressed the view that individual FFI agreements would distribute the FATCA burden more equitably, with the burden falling exclusively on individuals who wish to deal with financial institutions that access US funding.
3.189 US citizens who reside in Australia are generally opposed to the conclusion of an IGA on the grounds that it could expose them to IRS enforcement action. While the IGA would not provide any special concessions for such US citizens, the US offers an Offshore Voluntary Disclosure Program (OVDP) for US taxpayers to get their US tax affairs in order. The OVDP would allow US taxpayers with undisclosed foreign accounts and unreported income to seek protection from criminal prosecution. However, US citizens have complained that the OVDP is only attractive where the individual only has a small amount of US tax outstanding.
3.190 In addition to financial costs, industry also identified legal impediments to compliance with FATCA in the absence of an IGA.
3.191 One stakeholder noted that suitable amending legislation would be required to support Australian financial institutions' reporting obligations under the IGA. Treasury intends to develop relevant amendments to the taxation laws, in consultation with industry, to give effect to Australia's obligations under the IGA.
3.192 The Information Commissioner was concerned that the Model IGA did not contain any specific rules regarding the storage, security and retention of personal information, access to information, correction of information, or limits on the use of personal information. In response to this concern, Treasury notes that the proposed IGA would specifically provide that all information exchanged would be subject to the confidentiality and other protections provided for in the tax treaty, including provisions limiting the use of information exchanged. The Exchange of Information Article in the Australia-US tax treaty specifically provides that:
Any information so exchanged shall be treated as secret and shall not be disclosed to any persons other than those (including a Court or administrative body) concerned with the assessment, collection, administration or enforcement of, or with litigation with respect to, the taxes to which this Convention applies.
3.193 The Exchange of Information article in the tax treaty follows internationally accepted principles and imposes a higher standard of tax secrecy than Australia's domestic tax secrecy laws. In so doing, it provides legal protection against the misuse of personal information.
3.194 Industry also provided comments in relation to the content of the IGA. In particular, it was noted that definitions of certain terms published in the model agreement are inconsistent with its interpretation and understanding in the Australian financial services industry. The proposed IGA tailors these definitions to the Australian context to the extent possible.
3.195 Industry was also keen to ensure that Australian financial entities received equivalent IGA treatment to their counterparts (or competitors) in other IGA jurisdictions. Treasury has worked with industry and US Treasury to include IGA text that achieves equivalent treatment to the extent possible without creating unintended gaps in the FATCA reporting framework. While it was possible to accommodate some of industry's proposals (such as the Memorandum of Understanding clause which clarifies the reporting obligations for securities registered in an Australian securities clearing and settlement facility), US Treasury officials could not accommodate other Australian industry proposals which they considered were inconsistent with the FATCA rules or reporting framework (such as the Australian Property Council's request for FATCA exemptions for Australian property trust structures).
3.196 Numerous other written submissions were received as part of Treasury's ongoing consultation with industry on IGA design issues - especially from the ABA and the FSC, and their members. Following the IGA negotiation announcement, consultation has focussed on suitable content for Annex II of the proposed IGA, practical IGA due diligence (Annex I) issues, and IGA implementation issues. Treasury has worked closely on a technical level with peak industry bodies to address these specific concerns. The ATO has also been involved in the implementation aspects of the IGA.
3.197 Throughout the consultation process, the proposed IGA has received widespread support from Australian industry. Peak industry bodies and corporates have advised that the conclusion of an IGA would significantly reduce their FATCA-related compliance costs and overcome domestic legal constraints. Not proceeding with the IGA would be contrary to the interests and submissions made by the financial services industry.
3.198 The Tax Justice Network is also broadly supportive of an IGA as it is consistent with the global trend towards facilitating the automatic exchange of tax information.
3.199 The following bodies have provided input to the IGA consultation process:
- Australian Bankers Association (ABA)
- Australian Finance Conference (AFC)
- Australian Financial Markets Association (AFMA)
- Australian Securitisation Forum (ASF)
- Association of Superannuation Funds of Australia (ASFA)
- Australian Securities Exchange (ASX)
- Australian Custodial Services Association (ACSA)
- Computer Share
- Customer Owned Banking Association (COBA) - formerly Abacus - Australian Mutuals
- Export Finance and Insurance Corporation
- Financial Services Council (FSC)
- Future Fund
- Property Council of Australia (PCA)
- SMSF Professionals' Association
- Tax Institute
- Treasury's Tax Treaties Advisory Panel (consisting of professional body and industry representatives)
3.200 Other corporate stakeholders that have been consulted include the major accounting bodies and legal firms and firms that are part of the property management, infrastructure, superannuation, banking and financial services industry. State and Territory governments and their investment entities were also consulted. Treasury has also consulted with the ATO, Australian Prudential Regulation Authority, the Department of Industry and the Department of Foreign Affairs and Trade. Advice was also sought from the Office of International Law (Attorney General's Department), the Australian Government Solicitor and the Office of the Australian Information Commissioner.
3.201 Together with the ATO, Treasury expects to conduct further consultation as the IGA is implemented domestically.
3.202 Treasury's preferred option is to conclude a Model 1 IGA (Option 1).
3.203 Option 3 would fail to meet the Government's overriding objectives. It would not:
- Adequately protect industry's international competitiveness because it would put Australian financial institutions at a disadvantage compared to financial institutions from countries that have concluded IGAs with the US;
- Guarantee industry's compliance with FATCA;
- Provide greater FATCA treatment certainty for Australian entities and their financial products; or
- Implement enhanced information-sharing with the US.
3.204 Option 2 would adequately protect industry from exposure to the FATCA withholding tax but would commit each Australian financial institution to develop and maintain an ongoing relationship with the IRS, including the provision of sensitive customer information directly to the IRS. It would also fail to meet the Government's overriding objective of obtaining enhanced information from the US on a fully reciprocal basis.
3.205 Option 1 meets all of the Government's objectives.
3.206 Industry's support for the conclusion of a Model 1 IGA is consistent with the desire to reduce industry's own compliance burden whilst remaining able to operate competitively in a global marketplace. An IGA would also minimise the compliance costs on the broader Australian community.
3.207 The Treasury recommends the signature of the proposed Model 1 IGA to allow time to implement the IGA before the FATCA rules commence on 1 July 2014 and to meet the first IGA reporting date of 30 September 2015.
10. IMPLEMENTATION AND REVIEW
3.208 The Treasury would develop relevant amendments to the taxation laws, in consultation with industry, to give effect to Australia's obligations under the IGA. Although the final design and form of the amendments still needs to be settled, the legislation is likely to consist of a reporting obligation on relevant Australian financial institutions to provide the necessary information (as specified in the IGA) to the ATO and a supporting administrative framework. Such amendments would address the potential conflicts with privacy law and anti-discrimination law.
3.209 It is intended that all relevant enabling legislation to give effect to the IGA be enacted prior to July 2014 (being the date on which the FATCA obligations commence). This would negate the need for transitional rules prior to the first IGA reporting date of 30 September 2015.
3.210 In parallel, the ATO will continue to consult with prospective reporting Australian Financial Institutions and the IRS on the development of appropriate systems, methods and guidance for IGA reporting.
THE PROPOSED (MODEL 1) IGA FRAMEWORK
3.211 The proposed IGA would consist of three elements:
- the main body;
- Annex I (due diligence obligations for Australian financial institutions); and
- Annex II (exempt entities and products).
3.212 It would also be accompanied by a Memorandum of Understanding dealing with some interpretation issues and confirming that Australian financial institutions will be treated as FATCA compliant from the date of signature of the IGA.
1. Main body
3.213 The preamble notes Australia and the US's mutual desire to:
- Build on the existing relationship of mutual assistance in tax matters, including the automatic exchange of tax information authorised by the Australia-US tax treaty;
- Improve international tax compliance and pursue reciprocal and equivalent levels of information exchange;
- Address Australian legal impediments and reduce the FATCA compliance burden;
- Work together on achieving common reporting and due diligence standards for financial institutions in the long term; and
- Coordinate FATCA reporting obligations with other US tax reporting obligations of Australian financial institutions.
3.214 Article 1 defines the key terms used in the IGA (vis-à-vis the FATCA regulations' definitions), e.g. 'Reporting Australian Financial Institution' (Australian financial institutions that must undertake due diligence and report information on US accounts) and 'US Reportable Account' (the types of financial accounts that are required to be reported on). Terms not defined in the IGA would be interpreted in accordance with Australian law.
Obligations to obtain and exchange information on reportable accounts
3.215 Article 2 obliges Australia to obtain and exchange information with the US on accounts that have been deemed reportable by the IGA's due diligence rules (Annex I). Article 2 also prescribes the relevant account information to be reported by Australian financial institutions to the ATO:
- Name, address, US tax identification number, account number, name and identifying number of the reporting Australian financial institution, account balance or value of the account as of the end of the relevant year, and in certain cases, the total gross amounts of dividends, interest and income from other assets held in the account, gross proceeds from the sale or redemption of property and gross deposits and withdrawals.
Time and manner of exchange of information
3.216 Article 3 governs the timing and manner of the exchange of information. For instance, it allows the amount and character of payments into reportable US accounts to be determined under Australian tax laws, rather than US FATCA regulations or other US tax laws.
3.217 Article 3 also phases-in the information that has to be obtained for the 2014 to 2016 calendar years, according to its type. It also provides a general deadline for the provision of information to the IRS - 9 months after the end of the calendar year to which it relates.
FATCA treatment of Australian financial institutions under the IGA
3.218 Article 4 operates to treat Australian financial institutions that comply with the IGA's due diligence and information reporting obligations as generally FATCA-compliant by the US and not subject to withholding tax. (However, as explained below, particular Australian financial institutions that have not complied with their obligations may be exposed to withholding tax).
3.219 The US FATCA regulations on withholding tax and the closure of 'recalcitrant' accounts will be suspended. Instead, Australian financial institutions will apply IGA due diligence measures to ascertain whether an account is a 'reportable US account' and, if so, report the relevant information to the ATO according to IGA (not US domestic) rules.
3.220 Article 4 expressly exempts Australian superannuation funds from FATCA, as well as other financial institutions listed in Annex II.
3.221 The IGA will lift the general requirement that all members of a multinational group be FATCA compliant in order for any one member to remain compliant. For instance, the non-compliance of a foreign branch will not taint an Australian financial institution's compliant status (subject to certain conditions).
3.222 Further, Article 4 will ensure that Australia will not be obliged to obtain and exchange information prior to the date by which other FFIs are required to report similar information to the IRS under relevant US financial institutions.
Continued collaboration on compliance, enforcement and enhancing transparency
3.223 Article 5 sets out how the ATO and IRS will collaborate to enforce financial institutions' compliance with the IGA. In particular, it will allow them to notify each other of any 'significant non-compliance' by a financial institution, in which case domestic law sanctions (including applicable penalties) would apply. While it is envisaged that the existing uniform penalty regime in the Taxation Administration Act 1953 would apply to non-compliant Australian financial institutions, the precise approach will be determined during the IGA implementation process.
3.224 'Significant non-compliance' might include the intentional provision of incorrect information, intentional or negligent omission of information, repeated failure to adhere to the due diligence obligations, or consistent late submission of information.
3.225 If the ATO's enforcement actions do not resolve an Australian financial institution's non-compliance within 18 months of notification by the IRS, the IRS will treat the Australian financial institution as non-compliant (as a 'non-participating financial institution'). The general presumption of FATCA-compliance would thus be reversed in respect of that Australian financial institution, thereby exposing it to withholding tax on payments it receives from some foreign financial institutions.
3.226 Article 5 also gives financial institutions the flexibility of using third party service providers to fulfil their IGA obligations. The obligations would, however, remain the responsibility of such financial institutions. Industry has welcomed this option.
3.227 Article 6 contains a mutual commitment to enhance the effectiveness of information exchange and transparency. For example, the US acknowledges the need for domestic rules to enable it to engage in reciprocal automatic information exchange with Australia.
3.228 Article 7 automatically affords Australia (and Australian financial institutions) the benefits of any more favourable terms (on the treatment of Australian financial institutions and their due diligence requirements) that the US provides under an IGA signed with another country.
3.229 Article 8 provides for bilateral consultations to help resolve any difficulties that arise with the implementation of the IGA, and for the amendment of the IGA by mutual written consent.
3.230 Article 9 clarifies that Annexes I and II form an integral part of the IGA, and Article 10 establishes rules for the entry into force and termination of the IGA.
2. Annex I (due diligence obligations)
3.231 Australian financial institutions will be required by Australian law to apply the IGA's due diligence procedures to identify reportable accounts and payments made to certain non-participating financial institutions. These procedures are generally simpler than the equivalent US FATCA regulations provisions and would be adapted to the Australian context in relevant implementing legislation. However, Australian financial institutions may elect to apply the US FATCA regulations if they consider them to be better suited to their circumstances if Australia so permits.
3.232 Under the IGA, a financial account will only become reportable (a 'U.S. Reportable Account') when it is so identified through the application of the due diligence requirements in Annex I.
3.233 Four separate categories of due diligence requirements are set out for: pre-existing individual accounts; new individual accounts; pre-existing entity accounts; and new entity accounts. A pre-existing account is one maintained as at 30 June 2014.
3.234 In acknowledging that Australian financial institutions may have many pre-existing accounts, Annex I will allow Australian financial institutions to review them over extended periods, depending on their value. Reviews would generally consist of searching existing electronic databases, or reviewing information collected for regulatory or customer relationship purposes (including under Anti-Money Laundering procedures), for 'US indicia' - for example, a US place of birth, address, telephone number, or place of incorporation. Where such indicia are detected, or account values exceed certain thresholds, further identification processes may be required to establish the account holder's status.
3.235 For new accounts (opened from 1 July 2014) Australian financial institutions must generally obtain customer self-certifications affirming whether or not they are US taxpayers (or, for some entities, whether their owners are US taxpayers). The IGA would allow Australian financial institutions to rely on existing account opening practices, Australian Anti-Money Laundering rules, public information or information their possession, to test whether the self-certifications are reasonable in the circumstances.
3.236 Annex I also sets out the procedures for determining whether an account holder is a non-participating financial institution. Australian financial institutions must report the payments made to any account holders that are identified as a non-participating financial institution.
3.237 Industry stakeholders have advised they are generally satisfied they can meet these Annex I procedures. Further consultation will be undertaken as necessary with a view to unfolding or clarifying Annex I terms (including in Australia's implementing legislation).
3. Annex II (exempt entities and products)
3.238 Annex II will be the country-specific part of the IGA, which will exempt certain 'low-risk' entities and products from FATCA's identification, reporting and withholding rules.
3.239 Specifically listing certain Australian entities and products will:
- provide greater certainty to Australian stakeholders;
- overcome any ambiguities or gaps arising from the application of the US rules; and
- generally ease the compliance burden on Australian financial institutions.
3.240 Annex II was developed in consultation with Australian Government and industry specialists and aims to ensure consistency between stakeholders' needs and FATCA's objective of addressing tax evasion. It will provide relief for Australian entities and products as follows.
3.241 The following entities would be exempt from FATCA.
Australian governmental entities
3.242 Australian federal, state and local governments and their wholly owned agencies and instrumentalities, including:
- The Clean Energy Finance Corporation, the Export Finance and Insurance Corporation, the Future Fund, the Building Australia Fund, the Education Investment Fund and the Health and Hospitals Fund (or any of their wholly owned subsidiaries); and
- State government Treasury (or equivalent) corporations
- The Reserve Bank of Australia.
3.243 International organisations with offices in Australia, including those that are covered by the International Organisations (Privileges and Immunities) Act 1963, or that have signed a headquarters agreement for the conferral of privileges and immunities with the Australian Government.
Australian superannuation funds
3.244 All Australian superannuation funds, including any plan, scheme, fund, trust or other arrangement operated principally to administer or provide pension, retirement, superannuation or death benefits, including a 'superannuation entity', a 'public sector superannuation scheme', a 'constitutionally protected fund', a 'pooled superannuation trust', or any entity wholly owned by the foregoing.
Small financial institutions
- Financial institutions with a local client base (provided that at least 98 per cent of the financial accounts maintained by that financial institution is held by residents of Australia and New Zealand);
- Local banks (provided that they are an 'authorised deposit-taking institution' as defined in the Banking Act 1959 and that its total assets do not exceed USD175 million);
- Financial institutions with only low-value accounts (provided that none of the financial accounts it maintains have a balance in excess of USD 50 000 and its total assets do not exceed USD 50 million);
- Qualified credit card issuers (provided that it is a financial institution solely because it issues credit cards and customer deposits cannot exceed USD 50 000)
Deemed compliant investment entities
- Australian trusts to the extent that their trustees are required to report all relevant information;
- Certain Australian financial institutions, controlled foreign corporations and closely held investment vehicles with sponsoring entities that comply with all relevant requirements on their behalf;
- Investment advisors and investment managers;
- Certain regulated collective investment vehicles;
Products and accounts
3.245 The following products/accounts would be exempt from FATCA.
Certain savings accounts
- Certain retirement and pension accounts that are a 'complying superannuation/FHSA life insurance policy', 'exempt life insurance policy' or 'retirement savings account';
- Certain regulated non-retirement savings accounts;
- Certain tax-favoured products that are 'employee share schemes', 'employee share trust', 'first home saver accounts', 'funeral policies' or 'scholarship plans'.
Certain term life insurance policies
- Accounts of a type excluded under an IGA between the US and a third country.
Accounts held by deceased estates
Partner jurisdiction accounts
Schedule 1: FATCA
|Bill reference||Paragraph number|
|Item 1, subsection 995-1(1) of the ITAA 1997||1.58|
|Item 2, section 396-1 of Schedule 1 to the TAA 1953||1.59|
|Item 2, subsections 396-5(1) and (2) of Schedule 1 to the TAA 1953||1.21|
|Item 2, subsection 396-5(3) of Schedule 1 to the TAA 1953||1.34|
|Item 2, subsection 396-5(4) of Schedule 1 to the TAA 1953||1.30|
|Item 2, subsection 396-5(5) of Schedule 1 to the TAA 1953||1.31|
|Item 2, subsection 396-5(6) of Schedule 1 to the TAA 1953||1.32|
|Item 2, subsections 396-10(1) and (2) of Schedule 1 to the TAA 1953||1.45|
|Item 2, subsection 396-10(3) of Schedule 1 to the TAA 1953||1.48|
|Item 2, subsections 396-10(4), (5) and (6) of Schedule 1 to the TAA 1953||1.47|
|Item 2, section 396-15 of Schedule 1 to the TAA 1953||1.57|
|Item 2, section 396-20 of Schedule 1 to the TAA 1953||1.28, 1.46, 1.36|
|Item 2, section 396-25 of Schedule 1 to the TAA 1953||1.52|
|Item 3, paragraphs (1) and (3)||1.61|
|Item 3, paragraphs (2) and (3)||1.61|
United Nations Human Rights Committee, CCPR General Comment No, 16: Article 17 (Right to Privacy), The Right to Respect of Privacy, Family, Home and Correspondence, and Protection of Honour and Reputation, 8 April 1988, available at: http://www.refworld.org/docid/453883f922.html.
United Nations Human Rights Committee, CCPR General Comment No, 18: Non-discrimination, 10 November 1989, para 7, available at: http://www.refworld.org/docid/453883fa8.html.
ICERD Committee, General Recommendation No. 30: Discrimination Against Non-Citizens, 1 October 2004, para 4.
G20 Communiqué of the Meeting of Finance Ministers and Central Bank Governors, Sydney 22-23 February 2014.
See Human Rights Committee, Muller and Engelhard v Namibia, Communication No. 919/2000, views adopted on 26 March 2002, para 6.8.
For further information, please refer to the Office of the Australian Information Commissioner's website at http://www.oaic.gov.au/.
Australian Bureau of Statistics Catalogue 5352.0 - International Investment Position, Australia: Supplementary Statistics, 2012 Table 1
Australian Bureau of Statistics Catalogue 5204.0 - Australian System of National Accounts, 2012-13
Reserve Bank of Australia website: Main Types of financial Institutions http://www.rba.gov.au/fin-stability/fin-inst/#adis
Australian Bureau of Statistics Catalogue 5352.0 - International Investment Position, Australia: Supplementary Statistics, 2012 Table 8
According to advice provided by the Reserve Bank of Australia to Treasury on 5 March 2014.
The Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, which entered into force on 31 October 1983, and its Amending Protocol which entered into force on 12 May 2003.
That is, born in the US, but reside on a permanent basis in Australia.
Other than the Privacy Act 1988, there are a number of other Australian laws that relate to privacy, for example, on telecommunications, data-matching, and anti-money laundering and counter-terrorism. This Regulation Impact Statement is only concerned with the Privacy Act.
The Privacy Act 1988 was amended by the Privacy Amendment (Enhancing Privacy Protection) Act 2012. From 12 March 2014, Schedule 1 of the amending Act, that is, the Australian Privacy Principles, replaced the former National Privacy Principles and Information Privacy Principles. The Australian Privacy Principles apply to the handling of personal information by most Australian and Norfolk Island Government agencies and some private sector organisations.
Refer Press Release 2012/110 - Deputy Prime Minister & Treasurer, Wayne Swan - 7 November 2012.
Refer joint press release 017/2013 - Treasurer, Joe Hockey and Assistant Treasurer, Arthur Sinodinos AO - 6 November 2013.
Bermuda, Canada, the Cayman Islands, Chile, Costa Rica, Denmark, Finland, France, Germany, Guernsey, Hungary, Ireland, the Isle of Man, Italy, Japan, Jersey, Malta, Mauritius, Mexico, the Netherlands, Norway, Spain, Switzerland and the United Kingdom. Of these, only Japan, Switzerland and Bermuda have followed the Model 2 text.
G20 Communiquè Meeting of Finance Ministers and Central Bank Governors , Sydney 22-23 February 2014. https://www.g20.org/sites/default/files/g20_resources/library/Communique%20Meeting%20of%20G20%20Finance%20Ministers%20and%20Central%20Bank%20Governors%20Sydney%2022-23%20February%202014_0.pdf
These entities and products are generally considered to pose a low risk for US tax avoidance by US persons. While most of these entities and products would fall within the FATCA regulations exceptions for such entities and products, their specific listing in Annex II guarantees this (thereby removing any potential compliance costs associated with confirming their FATCA treatment). Securing exceptions for Australia's entire superannuation industry (including superannuation entities and superannuation products) and Australia's government investment funds are key objectives from an Australian compliance cost perspective. Adapting the exception for small financial institutions to take account of the Australian context (including the potential proportion of New Zealand resident account holders), as well as expressly naming low risk Australian financial accounts (such as first home saver accounts), are also key objectives for Australian industry.
See OAIC submission to the Treasury, paragraph 20.
See OAIC submission to the Treasury, paragraph 21.
Treasury also contacted the Property Council of Australia on 4 March 2014 in order to get an appreciation of the number of its members that may be captured and exposed to FATCA compliance costs. Unfortunately, it has not been possible to get the data in the time available regarding the number and size of Property Council members that would be impacted, or the Compliance costs that they would be expected to incur. However the Property Council has indicated that pending internal validation, it is comfortable with assuming these costs would be akin to similarly sized businesses who are members of the ABA or FSC.
This cost is attributed to the yearly cost as calculated by: (Start-up cost ÷ 10) + yearly ongoing cost
This cost represents the difference between the status quo (take no action) Option 3 and Option 1. The status quo is estimated to cost $106.59 million per year.
This cost is attributed to the yearly cost as calculated by: (Start-up cost ÷ 10) + yearly ongoing cost
This cost is attributed to the yearly cost as calculated by: (Start-up cost ÷ 10) + yearly ongoing cost
This is the status quo.
Due to the complexity of Option 3 and industry's expectation that it will not be adopted, little data was available in relation to the true expected legal compliance costs. For instance, there could be significant costs associated with legal advice on the application of FATCA regulations themselves, closure of recalcitrant accounts and the legality and risks of waivers and both anti-discrimination and privacy law constraints. Contingency funds may also be needed for any legal challenges to actions by customers or other parties. In addition there are fundamental differences in the legal advice that would be required between Option 3 and the options which rely on an IGA. Both Option 1 and 2 would result in an international agreement, which would provide the legal authority to address existing domestic law impediments such as anti-discrimination and privacy barriers. An IGA would provide a legal basis upon which an entity could rely in order to comply with the regulations. This should therefore be taken as a conservative estimate.
ABA advice to Treasury on 7 March 2014