In order to ensure that tax chargeable by the United States of America (“U.S”) is not evaded by U.S. taxable persons who hold foreign accounts, the U.S. in the year 2010 enacted the Foreign Account Tax Compliance Act (“FATCA”) to enable a more transparent reporting of U.S. persons and their activities offshore. To achieve this objective, FATCA was made to have an extra territorial effect so that its scope may be expanded to affect the operations of Foreign Financial Institutions (FFIs) and Non-Financial Foreign Entities (NFFEs), whose sphere of operations may fall within its purview with respect to U.S. Offshore Accounts.
B. HIGHLIGHTS OF FATCA
FATCA imposes a system of information reporting and a 30% withholding tax on “withholdable payments” made by U.S. persons and others to FFIs and certain NFFEs that do not meet the information reporting requirements of FATCA. Accordingly, in compliance with FATCA requirements, FFIs, as well as certain NFFEs through which U.S. persons invest, are required to identify U.S. investors within their portfolio and disclose information regarding U.S. account holders or investors to the U.S Internal Revenue Service (IRS) and withhold 30% on withholdable payments made to non-compliant FFIs, certain NFFEs and recalcitrant account holders who do not provide relevant disclosures and are not exempted. Furthermore, FATCA introduces phased reporting and withholding regimes starting from July 1, 2014 to January 1, 2017.
C. BECOMING FATCA COMPLIANT
A FFI may comply with FATCA by observing the requirements of any Inter-governmental Agreement (IGA) entered into by relevant authorities in the local jurisdiction with the IRS on FATCA or by entering into an agreement with the IRS (i.e. registering to become a participating FFI). At date, no IGA has been signed by the Nigerian government. However, a CBN circular dated January 22, 2015 advises Nigerian financial institutions to be FATCA compliant notwithstanding. Accordingly, Nigerian FFIs are required to enter into relevant agreements (i.e. register) with the IRS for this purpose. Once registered, Nigerian FFIs may ensure compliance by creating FATCA compliance units to oversee and ensure that FATCA reporting requirements are met. From a transactional perspective, FFIs may allocate FATCA risk by inserting certain clauses and representations to ensure that downside risks which may occur on the basis of a contract are minimised. To assist with the above, the Loan Market Association (LMA) in June 2014, issued riders which may be adopted by FFIs in their transaction documents.
It is encouraging to realise that a significant number of Nigerian entities qualifying as FFIs are duly registered with the IRS at date and we are hopeful that more FFIs will be registering in the coming months.
The Nigerian government together with relevant authorities may need to take active steps in negotiating an Inter-governmental Agreement (preferably model 1 for reciprocity and a better uniform governmental reporting framework) between FFIs in Nigeria and the U.S. It can be said that FATCA is at its originating state and its actual transactional effect is yet to be fully appreciated at date. However, given the impact of its provisions on transactions and FFI operations generally especially with reporting and withholding requirements, it cannot be ignored. It is therefore imperative that FFIs take an active stance in understanding its impact on their operations/transactions.