Americans living abroad and financial institutions located outside the United States are now facing additional information disclosure obligations following the recent passage of laws and regulations along with the Hiring Incentives to Restore Employment Act (HIRE).

The laws and regulations have two key impacts.  The first impact is on any United States citizen who has an interest in or has signing authority over an account located in a foreign country in excess of US$10,000.  The second impact is on foreign financial institutions which maintain accounts for United States citizens under the Foreign Account Tax Compliance Act (FATCA).   This article focuses on the latter, with particular relevance to the operations of financial institutions in the Pacific.

Impact on foreign financial institutions and other entities

One key part of FATCA is a requirement that foreign financial institutions, hedge/private equity funds, trusts, partnerships and corporations (Institutions) either agree with the US Department of Treasury to disclose information about US investors or be subject to the statutory withholding regime (a 30% rate). 
 
Issues immediately arise therefore regarding the steps being taken by Australian and Pacific based institutions to reach such agreement and the position they should be taking regarding their own dealings with trust companies, partnerships and corporations who are themselves customers and perhaps not the beneficial owner of funds in any given account.
 
There are also a number of other implications of FATCA, including:

• imposing a similar withholding tax on foreign companies which fail to supply the name, address and tax identification number of any US individual with at least 10 percent ownership in that company.  Issues arise here regarding the obligations now placed on the Institution to conduct further and detailed due diligence regarding the exact ownership of all relevant entities they are dealing with.  This task in itself could be significant, even in a relatively modest corporate structure.

• relevantly for the Pacific, given the prevalence of trust arrangements in various jurisdictions, regulations will now be in effect for foreign trusts if any current, future or contingent beneficiary is a US citizen, and the Treasury Department is now allowed to presume that a foreign trust has a US beneficiary if a US citizen directly or indirectly transfers property to that trust.  There are a number of issues here for the Institution, including:

• ascertaining its exposure to foreign trusts;
  
  
• ascertaining its position in relation to who or what may (relevantly) be a current, future or contingent beneficiary (including the treatment of discretionary trusts); and
  
  
• how the Institution can shift the onus of determining when property has been transferred by a US citizen into a foreign trust, the meaning of ‘property’ in this context, and where property is domiciled.

The above highlights just a few of the key issues which now arise for Institutions operating in the Pacific which are or may be exposed to these new laws and regulations.  Institutions would be well advised to acquaint themselves with the details of the new laws and regulations and determine where and how they may be exposed.

This article has been prepared for the general information of clients and contacts of PLN Lawyers Sydney and the affiliated firms of the Pacific Legal Network. While it deals with and comments on the law in specific areas it is not intended nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

PLN Banknote July 2010