Hiding money overseas to avoid taxes has been the long-established practice of some taxpayers. Offshore tax havens (i.e., countries that have low or no taxes and lack of transparency) still exist, making it possible for individuals to evade taxes by not reporting income earned or stashed abroad.
To address such practices, the United States enacted the Foreign Account Tax Compliance Act (FATCA) in March 2010.
FATCA requires all financial institutions outside the US, designated by the law as foreign financial institutions (FFIs), to report information on financial accounts held by US persons to the US Internal Revenue Service (IRS). FATCA [MTA1] covers individual accounts with at least $50,000 and corporate accounts with at least $250,000 in US-sourced income. Non-compliance with the FATCA reportorial requirements exposes erring FFIs to a 30% withholding tax on US-sourced income including dividend, interest, fees, sales, and investments.
Consistent with the Philippines’ goal to promote fiscal transparency, the Department of Finance and the Bureau of Internal Revenue (BIR) entered into a reciprocal Intergovernmental Agreement (IGA) with the US on July 13, 2015 to implement the FATCA under Model 1. FATCA is among the priority programs of the BIR this year.
The IGA helps facilitate the compliance of local banks and financial institutions. With the IGA, all financial institutions will effectively be considered FATCA compliant and will not be subject to the 30% withholding tax on US-sourced income, provided they register with FATCA and submit to its terms.
The Philippines and the US already have an existing double taxation treaty which contains an exchange of information provision where information may be shared between the respective competent authorities to carry out the treaty provisions or for the prevention of fraud in the administration of the statutory provisions on taxes. The exchange of information may be in response to a specific request or done on a routine basis.
To enhance this treaty provision, Model 1 of the IGA requires FFIs to regularly report information of financial accounts of American citizens in their records to the BIR; the BIR, in turn, annually transmits the information to the IRS. Covered FFIs must identify, collect and report the following by Sept. 30, 2015:
(1) account holder’s name;
(2) account holder’s US tax identification number (TIN);
(3) account holder’s address;
(4) account number;
(5) account balance or value with respect to 2014 activities and/or transactions; and
(6) aggregate number and balance or values for accounts held by recalcitrant/non-cooperating holders.
Considering that FATCA compliance involves disclosure of account information, it affects the Philippines’ bank secrecy laws. However, it is still possible for FFIs to observe FATCA requirements by securing written permission from affected clients to allow banks to disclose their account information, which is an exception to the bank secrecy law.
Aside from American expatriates living in the Philippines, FATCA also significantly impacts Filipinos with dual citizenship (those whose country of citizenship is the US); Filipinos who are permanent US residents (i.e., green card holders); or Filipinos with “substantial presence” in the US (i.e., those who’ve resided in the US for more than 183 days, but not working as a diplomat, teacher, student or an athlete).
Financial institutions are advised to evaluate if they are covered by FATCA, register their FATCA status if covered, perform due diligence on their identification and collection of information about US persons in their records (on top of their know-your-customer and anti-money laundering procedure), and prepare their operating systems to capture and report the required information. Ample training of bank employees on how to handle client queries is also vital in compliance with FATCA.
As an equivalent benefit, the IRS will supply the BIR with data related to Philippine residents maintaining bank accounts in US financial institutions. Thus, the BIR can also trace Filipinos trying to evade taxes under this information exchange agreement with the US.
Charity P. Mandap-de Veyra is a tax manager with the Tax Advisory and Compliance division of Punongbayan & Araullo.
source: Businessworld
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