Last month, the Foreign Account Tax Compliance Act (FACTA) came into effect, forcing overseas banks that accept US payments to disclose account information to the IRS or face a 30% withholding tax. The OECD has now introduced Automatic Exchange of Information (AEOI) guidelines to help countries standardise these rules for non-US transactions.
Nicknamed “GATCA”, the 300 pages of guidelines are essentially a globalised version of FATCA, issued in response to calls from other countries that wanted a way of exchanging FACTA-style information between themselves. 65 countries and independent jurisdictions have now said that they will adopt the practice, with 40 of these signing up to be early adaptors.
There are, though, some significant differences between the two approaches. Firstly, because it is not geared predominantly towards benefitting one country (as FATCA is) GATCA is fully reciprocal, and is based on the residency of the account holder, rather than their citizenship. Whereas the terms and scope of FATCA had to be laboriously re-negotiated with individual countries, GATCA will be standardised, without allowing for country-specific exemptions.
In many ways, GATCA is more straightforward than FATCA, in that it is more uniformly implemented and classifications are generally simpler. However, some elements are more onerous. Rules surrounding the opening of accounts, for example, are stricter, requiring self-certification.
Other elements are less concrete and so may be harder to navigate: “de minimus” account balance thresholds have not been set, which may lead to some confusion over which accounts should be subject to the rules. Withholding rules are not included, meaning that individual countries will need to negotiate ways of dealing with non-compliance. Rules determining tax residency will vary depending on the region and because, unlike FATCA, US dollars are not the default, reporting currencies will vary from place to place – and will need to be negotiated.
While these issues and inconsistencies may take a little time to iron out, it seems sensible for financial institutions to start thinking about GATCA now. Although they haven’t signed up to be an early adaptor, the US has already agreed to the global rules, leading some to predict that GATCA will eventually replace FATCA entirely.