A globalized market is the bedrock of modern economy. It allows corporations to conduct business in and derive income from beyond its country of residence. Naturally, where there is income, tax is surely not far behind. Taxing authorities, aware of the potential tax loopholes brought about by a globalized market, tries to implement remedial measures to stop or at least minimize the bleeding. Enter the “Foreign Account Tax Compliance Act” or Fatca.
In this issue, we would cover basic tenets concerning Fatca. However, due to its varied and far-reaching effects and implications, we would limit our discussion on the effects to non-US financial institutions, or more commonly referred to in Fatca as Foreign Financial Institutions (FFI).
To start off, what is Fatca? It is a 2010 US legislation requiring FFIs to report to the Internal Revenue Service or IRS (the tax authority in the US) information about financial accounts held by US persons, or by foreign entities in which US persons hold substantial ownership interest. Fatca is used to determine or detect indicia of US persons and their assets outside of the USA.
Financial institutions that are subject to Fatca compliance include, but are not limited to, depositary institutions, custodial institutions, investment entities and certain types of insurance companies that have cash value products or annuities.
On the other hand, US persons are identified by certain indicia or signs which include, among others, a US place of birth, a US citizen or resident, a US residence, a US telephone number, standing instructions to pay using a foreign account to a US- maintained account, an authority or power of authority in favor of a person with a US address, or a US “in-care-of” or “hold mail” address.
Although it is a US legislation, financial institutions in the Philippines may still feel the drawbacks of noncompliance. Under Fatca, FFIs that refuse to register with and report to the IRS will be subjected to a 30-percent withholding tax on income payments sourced from the US. Likewise, FFIs that enter into reporting agreements with the IRS may be required to withhold 30 percent on certain payments to foreign payees that do not comply with Fatca. In other words, as long as an FFI receives income payments from US sources or from other FFIs with reporting agreements with the IRS, noncompliance to Fatca would subject the income they receive to a 30-percent withholding tax.
If a Philippine financial institution determines that it is indeed covered by Fatca, it must first register with the IRS. Luckily, through the wonders of modern technology, registration is a breeze. Registration is done completely online through a secure Web-based system called “Fatca Online Registration System.” Here, FFIs need only to provide their information and await confirmation of their registration.
After registration comes the reporting phase of Fatca. Since the IRS is concerned with nonfinancial US accounts of its resident taxpayers, it requires the FFIs to report such information. In the Philippines, however, Fatca does not require Philippine financial institutions to report directly to the IRS. Instead, by virtue of an Intergovernmental Agreement (IGA) entered into between the Philippines and the US on July 13, 2015, Philippine financial institutions will report relevant information to the BIR rather than directly to the IRS.
With all the foregoing, are Philippine financial institutions now mandated to submit reports as required under Fatca? Not necessarily.
It should be noted that the 1987 Constitution says: “No treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds of all the members of the Senate.” The IGA is an international agreement which requires concurrence by the Senate. The IGA was entered into on July 13, 2015. The same was ratified by President Duterte on December 1, 2016, and was transmitted to the Senate for concurrence where it is still pending. Sans the concurrence of Senate, full implementation of the IGA will not take place. Consequently, Fatca reporting cannot be carried out.
As of now, Philippine financial institutions can breathe easier knowing that they still do not need to comply with Fatca reporting. However, as the BIR once published in an advisory, Philippine financial institutions must take necessary steps to prepare for full implementation of the terms of the IGA and the concomitant submission of information. It is better to prepare for Fatca than to suffer a whopping 30-percent withholding tax on income received.
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The author is a junior associate of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at jomel.manaig@bdblaw.com.ph or call 403-2001 local 370.