What you need to know about the Singapore-US FATCA agreement

Singapore's MOF held a public consultation on FATCA which ended in October 2014. On December 9th, Singapore and the US signed a FATCA Model 1 IGA.

IGA stands for - intergovernmental agreement. FATCA stands for Foreign Account Tax Compliance Act and was enacted by the United States Congress back in 2010 to encourage tax compliance by US persons using non-US financial accounts.

The stated purpose of the law is "to clamp down on tax evasion and improve taxpayer compliance by giving the IRS new administrative tools to detect, deter, and discourage offshore tax abuses." FATCA is expected to raise $7.6 billion in tax revenue over a 10-year period.

I want to make it clear that FATCA is technically not a tax but a framework for exchange of financial information. FATCA requires all financial institutions outside the US to transmit on a regular basis information about financial accounts held by US persons to the Internal Revenue Service (IRS).

Financial Institutions that fail to comply could have certain US-source payments subject to 30% FATCA-related withholding.

But what does FATCA really mean for Singaporean financial institutions (SGFIs)? It means three (3) things.

Firstly, they must register with the IRS directly. Secondly, they must take appropriate actions to know their customers. Thirdly, they must report the activity of US persons as required by local law.

Firstly, SGFIs must register with the FATCA Registration Portal as a "Registered Deemed-Compliant Financial Institution (Including a Reporting Financial Institution under a Model 1 IGA)". When SGFIs register with the IRS, they obtain a Global Intermediary Identification Number (GIIN).

The deadline for so doing is now 22 December 2014 in order to be included on the IRS' Foreign Financial Institution (FFI) List by 1 January 2015. As of December 1st, only 1300 SGFIs registered on the IRS portal compared to 2500 FIs from Hong Kong.

Some SGFIs are still under the mistaken impression that they do not need to register if they have no US clients. This is untrue.

Secondly, SGFIs must know their customers. SGFIs are required to perform due diligence procedures in relation to New Individual Accounts and New Entity Accounts (i.e. accounts opened on or after 1 July 2014) as set out in Section III and Section V respectively in Annex I to the Singapore-US IGA.

SGFIs may apply a set of alternative due diligence procedures to certain New Individual Accounts and New Entity Accounts, as set out in Sections VI(G) to H in Annex I to the Singapore-US IGA.

Due diligence is required to identify accounts with certain US indicia or indicators which may suggest that account holders are US persons. Staff need to be trained and IT systems need to be implemented to identify clients US indicia which include but not restricted to - US citizenship or permanent residence (i.e. a green card), US birth place, US residence address or US correspondence address, US phone number, Standing instructions to transfer funds to an account maintained in the US, a Power of Attorney or signatory authority granted to a person with a US address, and an 'in care of' address or 'hold mail' address in the US.

Furthermore, companies and partnerships have to be checked intensively to see whether they are substantially owned by US persons.

Thirdly, SGFIs must now prepare to automatically remit information (using XML) to the US government via IRAS (details to be published in January 2015) of accounts believed to be beneficially owned by US persons (including US entities).

Details being exchanged would include the holder’s name, US Tax Identification Number, account balance as well as interest earned on the account. Most major SGFIs have already issued forms W8s / W9s to certain clients to confirm client details including their US tax identification number (if any).

Interestingly Article 5 of the IGA allows for SGFIs to rely on third-party service providers. Specifically, SGFIs may use third-party service providers to fulfill the reporting obligations contemplated in the Agreement, but these obligations shall remain the responsibility of the Reporting Singaporean Financial Institutions.

This should present an opportunity for firms already offering US tax compliance services.

For those firms that were being proactive in preparing for this inevitable FATCA IGA? They should comfortably meet these reporting requirements which come into force from next year.

For those who procrastinated however, I suspect that they may be rushing around this winter holiday season trying to get their house in order.

IRAS' website notes that further guidance will be provided by January 2015 by the IRAS, the Monetary Authority of Singapore (MAS), and the Ministry of Finance (MOF) to SGFIs on how to comply with their FATCA obligations. Let's watch this space.