Cambodian financial institutions with US clients, investors and interests are required to share data to help track tax evaders. Touch Tivea from Cambodia Post Bank outlines the regulations and asks: Are you compliant?
The Foreign Account Tax Compliance Act (FATCA), enacted in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act, is an important instrument in US efforts to combat tax evasion by US persons holding investments in offshore accounts.
Under FATCA, certain US taxpayers holding financial assets outside the US must report those assets to the Internal Revenue Service (IRS). In addition, FATCA requires foreign financial institutions to report to the IRS certain information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.
FATCA requires certain US taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a form (Form 8938) that must be attached to the taxpayer’s annual tax return. Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification.
FATCA imposes certain due diligence and reporting obligations on foreign (that is, non- US) financial institutions, notably the obligation to report US citizen or US tax-resident account holders to the IRS. Failure to comply with FATCA’s requirements will expose such financial institutions to a 30% US withholding tax on payments to them from US sources.
A Deal to Share
Governments around the world can form inter-governmental agreements (IGA) with the US in two different ways. Alternately, if there is no intervention from the government, a foreign financial institution may choose a non-IGA model, meaning they enter an agreement directly with the IRS.
IGA Model 1a
Governments that sign IGA Model 1a with the U.S have implicit and explicit responsibilities to enable their local financial institutions to comply with FATCA. A Model 1a IGA requires the competent authority or its delegate to collect financial institution and associated account holder information, perform a data quality check on and then submit consolidated information to the IRS in a secure manner. The Model 1a agreement is reciprocal, meaning that both governments are required to collect and share the relevant information.
IGA Model Ib
While IGA Model 1a is reciprocal, IGA Model Ib is not. For example, if Cambodia chose to enter into this type of agreement with the US, then Cambodia would be required to perform the above activities and provide information to the US, but the US would not be required to do the same in return.
The Model 2 agreement allows foreign financial institutions in partner jurisdictions to report directly to the IRS according to final regulations set out in the contract. Model 2 establishes a framework of enabling relevant financial institutions to seek consent for disclosure from US clients, and to report relevant tax information of such clients directly to the IRS.
FACTA and You
On 14 September, 2015, the Royal Government of Cambodia signed a Model 1b IGA with the US Under the agreement, Cambodian financial institutions in the banking, securities and insurance sectors are required to implement FATCA obligations, including:
- Reporting obligations are effective as of 30 September, 2016, and include reporting for 2014 and 2015.
- Obtain and exchange information with respect to US reportable accounts:
- the name, address, and US TIN;
- account name and number;
- identifying number of the Reporting Cambodian Financial Institution;
- the account balance or value;
- Identify US reportable accounts;
- For each of 2015 and 2016, report to the General Department of Taxation (GDT) the name of each nonparticipating financial institution to which it has made payments;
- Comply with the applicable registration requirements on the IRS FATCA registration website;
- Identify the preexisting individual accounts with a balance or value that exceeds $50,000 as of the determination date;
- Review of preexisting entity accounts with an account balance or value that exceeds $250,000 as of the determination date must be completed within two years from the determination date;
- Identify the new individual account depository account unless the balance exceeds $50,000 at the end of any calendar year or other appropriate reporting period;
- Identify a cash value insurance contract unless the cash value exceeds $50,000 at the end of any calendar year or other appropriate reporting period;
- By the end of any calendar year or other appropriate reporting period, review electronically searchable data maintained by the reporting Cambodian financial institution for any of the US indicators;
- Review of preexisting individual accounts that are lower value accounts for US indicia must be completed within two years from the determination date;
- If there is a change of circumstances with respect to a preexisting individual account, treat the account as a US reportable account.
Through my experiences with FATCA training and implementation, I have noticed that there are some challenging issues for Cambodian financial institutions to address in order to comply fully, such as:
- A lack of qualified resources to implement the FATCA requirements;
- Lack of a reporting and monitoring system to fulfill the obligations set out by the IGA;
- Building public key to deliver the data is still pending; and
- There is a lack of regulations and systems in place to guide the Cambodian financial institutions.
Only with adequate training can these shortfalls be addressed.
Contribution by Touch Tivea, Head of Legal and Compliance at Cambodia Post Bank