BILLS DIGEST NO. 94, 2013–14              20 June 2014

Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014

Bernard Pulle and Margaret Lee
Economics Section 

Date introduced: 29 May 2014

House:  House of Representatives

Portfolio: Treasury

Commencement: This Act commences on the day it receives the Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose of the Bill

The Foreign Account Tax Compliance Act (FATCA) was enacted by the United States (US) Congress to assist the detection of US taxpayers who use offshore accounts to conceal assets and income from the US Internal Revenue Service (IRS).[1]

Briefly, FATCA requires individuals to report to the IRS their financial accounts held outside the US and foreign (that is non-US) financial institutions (FFIs) to report to the IRS about their US clients. FFIs that do not comply with obligations under FATCA will be subject to a 30 per cent withholding tax on their US source income.

In many cases, the laws of other nations, for privacy and other reasons, prevent a FFI from reporting to the IRS the information required by the FATCA statutory provisions and regulations. The Explanatory Memorandum to the Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014 (the Bill) states that Australian privacy laws would generally prevent compliance with FATCA obligations and that Australian state and territory anti-discrimination laws could also prevent interrogation of customer accounts based on US citizenship.[2]

The US Treasury developed models of intergovernmental agreements (IGAs) to overcome these impediments and to work within the framework of double tax relief treaties. It is anticipated that a number of Australian FFIs will be subject to FATCA.[3] In order to facilitate compliance with FATCA obligations the Treasurer on behalf of the Australian Government, and the US Ambassador to Australia on behalf of the US Government signed 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) on 28 April 2014.[4]

The purpose of the the Bill is to give effect to the FATCA Agreement.

Background

FATCA requires FFIs to periodically report details of accounts held by US taxpayers or by foreign entities controlled by US taxpayers to the IRS of the US. Non-complying financial institutions face significant penalties, notably a 30 per cent withholding tax on US income.[5]

The Bill will require financial institutions in Australia to identify and report relevant account holder information, as specified in the FATCA Agreement, annually to the Australian Taxation Office (ATO). This information will subsequently be sent to the IRS under existing taxpayer information-sharing arrangements authorised by the US-Australia tax treaty.[6]

Why is the Bill important?

FATCA will commence on 1 July 2014, irrespective of any action taken by Australia.[7] Australian financial institutions have a strong commercial incentive to comply with FATCA, as non-compliance could expose them to significant economic costs, reputational damage and loss of international competitiveness.[8] Without the FATCA Agreement and the Bill, financial institutions that seek to comply with FATCA could breach Australian anti-discrimination and privacy laws.[9]

The FATCA Agreement also reinforces Australia’s support for international tax transparency and cooperation between revenue authorities to help prevent tax evasion.

Committee consideration

Joint Standing Committee on Treaties

At the time of writing, the Bill has not been referred to a committee. As usual, however, the treaty itself, the FATCA Agreement, has been referred to the Joint Standing Committee on Treaties (JSCOT) for consideration. This is still in progress and hearings were held on the treaty on 16 June 2014.[10]

Policy position of non-government parties

The Bill received bipartisan support in the House of Representatives debate, with Shadow Assistant Treasurer Dr Andrew Leigh noting that the Bill is the culmination of negotiations begun by former Labor Treasurer Wayne Swan in 2012. Dr Leigh said the Labor Party welcomes ‘sensible steps to assist tax authorities in ensuring compliance with tax regulations’.[11]

Position of major interest groups

The Financial Services Council fully supports the FATCA Agreement.[12] The Australian Bankers’ Association also supports the Agreement.[13]

Financial implications

The Explanatory Memorandum identifies that the financial impact of this initiative is nil.[14]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[15]

Key issues and provisions

The Bill amends Schedule 1 of the Taxation Administration Act 1953 (TAA 1953) which deals with the collection and recovery of income tax and other liabilities.[16] Chapter 5 of Schedule 1 concerns administration. Part 5–25 of Chapter 5 sets out the record-keeping and other obligations of taxpayers. Item 2 of Schedule 1 of the Bill inserts proposed Division 396—FATCA into Part 5–25, which will require reporting Australian financial institutions to give the Commissioner[17] certain information to give effect to FATCA.

Proposed Division 396 requires two types of statements to be given to the Commissioner.

Proposed section 396–5 imposes reporting obligations about US Reportable Accounts:[18]

Reporting Australian Financial Institutions[19] 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.[20]

This is an ongoing reporting requirement.[21]

Proposed section 396–10 imposes reporting obligations about payments to non-participating financial institutions[22] in 2015 and 2016:

… 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.[23]

Issues

Financial institutions compliance costs associated with the reform proposal in the Bill are said to be high.[24] In requiring relevant financial institutions in Australia to report to the ATO, rather than directly to the IRS in the US, the Government has adopted a ‘Model 1’ approach to FATCA in the Bill.[25] The corresponding compliance costs are $482.7 million over ten years, with $255 million of these in upfront costs.[26] The purpose of the regime is to enable detection of relevant US taxpayers in Australia. According to the Regulatory Impact Statement to the Explanatory Memorandum, there are at least 120,000 accounts with US connections.[27] This suggests approximately $2,125 in upfront compliance costs for each account. (However, only accounts over $50,000 are required to comply, and there is no way of knowing the distribution of accounts by size.) However, the cost of doing nothing is higher ($477.5 million in upfront compliance costs and over a billion dollars over ten years). More important, the distribution of the compliance burden between potentially relevant taxpayers and other Australian bank customers (that are not US account holders) is not clear, as is explained in the Regulatory Impact Statement to the Explanatory Memorandum.[28] However, some Australian entities are exempt from the FATCA regime, including certain financial institutions with a local client base and local banks.[29] These are listed in Annex II of the FATCA Agreement.[30]

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2500.

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[1].              This is part of the US Hiring Incentives to Restore Employment Act 2010.

[2].              Explanatory Memorandum, Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014, p. 6, accessed 16 June 2014.

[3].              Ibid., p. 6.

[4].              Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA, done in Canberra on 28 April 2014, [2014] ATNIF 5, DFAT website, accessed 16 June 2014.

[5].              More background on FATCA is available in Parliamentary Library, H Gobbett and B Pulle, The US Foreign Accounts Tax Compliance Act (FATCA) and interaction with G20 initiatives: a quick guide, Research paper, 2013–14, Parliamentary Library, Canberra, 10 January 2014, accessed 16 June 2014.

[6].              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, done at Sydney on 6 August 1982, [1983] ATS 16. Article 25 (Exchange of Information) enables the ATO to provide bulk taxpayer data to the IRS, and the IRS to reciprocate by providing corresponding data to the ATO. See Explanatory Memorandum, Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014, op. cit., p. 26.

[7].              Explanatory Memorandum, Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014, op. cit., p. 4.

[8].              Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA, Australian Treaty National Interest Analysis [2014] ATNIA 9, paragraph 4, accessed 16 June 2014.

[9].              Ibid., paragraph 7.

[10].              Parliament of Australia, ‘Treaties being considered’, Australian Parliament website, 2014, accessed 16 June 2014.

[11].              A Leigh, ‘Second reading speech: Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014’, House of Representatives, Debates, 4 June 2014, p. 78, accessed 18 June 2014.

[12].              Financial Services Council, Submission to the Joint Standing Committee on Treaties, 30 May 2014, accessed 16 June 2014.

[13].              Australian Bankers’ Association, Submission to the Joint Standing Committee on Treaties, 29 May 2014, accessed 16 June 2014.

[14].              Explanatory Memorandum, Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014, op. cit., p. 3.

[15].              The Statement of Compatibility with Human Rights can be found at page 21 of the Explanatory Memorandum to the Bill.

[16].              Tax Administration Act 1953, accessed 16 June 2014.

[17].              The Commissioner of Taxation as appointed by the Governor-General, refer section 4 of the TAA 1953.

[18].              ‘US Reportable Accounts’ is given a wide definition in the FATCA Agreement (see Article 1(1)(cc)). It includes financial accounts held by US citizens or residents or entities controlled by them. Page 11 of the Explanatory Memorandum reflects that US Reportable Accounts will typically include cheque and transaction accounts, savings accounts, term deposits, debt interests and equity interests (including derivatives), and certain annuity contracts.

[19].              Reporting Australian Financial Institutions are defined in the FATCA Agreement to mean any Australian Financial Institution that is not a Non-Reporting Australian Financial Institution (Article 1). With the exception of those deemed or exempt, Non-Reporting Australian Financial Institutions are those that meet the criteria set out in Annex II of the FATCA Agreement. Page 11 of the Explanatory Memorandum reflects that 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.

[20].              Explanatory Memorandum, Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014, op. cit., p. 10.

[21].              Proposed subsection 396–5(6) requires the statement to be given to the Commissioner no later than the first 31 July after the end of the year.

[22].              Non-participating financial institutions are defined in Article 1 of the FATCA Agreement with reference to US Treasury Regulations. Essentially the definition includes foreign financial institutions that have not entered into an agreement with the US IRS, and are subject to withholding tax. More information on the basic operation of US Foreign Account Tax Compliance Act is available from the PwC website in the fact sheet entitled FATCA FAQs: frequently asked questions on the Foreign Account Tax Compliance Act, PwC website, accessed 17 June 2014.

[23].              Explanatory Memorandum, Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014, op. cit., p. 16.

[24].              Ibid., p. 3.

[25].              Proposed subsection 396–5(2). In Model 1 agreements a country will direct its financial institutions to provide FATCA information directly to its own revenue authority, which would subsequently transmit it to the US IRS. In Model 2 agreements a country will direct its financial institutions to conclude individual agreements with the US IRS and enable them to report directly consistent with the US FATCA regulations. That country would also agree to provide the US with further taxpayer information in response to IRS requests. For more information, see Explanatory Memorandum, Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014, op. cit., pp. 48–49.

[26].              Explanatory Memorandum, Tax Laws Amendment (Implementation of the FATCA Agreement) Bill 2014, op. cit., p. 34.

[27].              Ibid., p. 41.

[28].              Ibid., pp. 32–3.

[29].              Ibid., pp. 90–1.

[30] .              The text of the agreement is available via the Department of Foreign Affairs and Trade (DFAT) webpage titled ‘Agreement between the Government of Australia and the Government of the United States of America to Improve International Tax Compliance and to Implement FATCA’, DFAT website, accessed 16 June 2014.