NU Online News Service, Sept. 1, 2:50 p.m. EDT
A new withholding law will have punitive repercussions for financial-services companies that violate reporting requirements of U.S. citizens who invest in either non-U.S. financial accounts or non-U.S. entities, according to a report from PricewaterhouseCoopers.
The Foreign Account Tax Compliance Act (FATCA), which is set to take effect Dec. 31, 2012, will subject institutions to a 30 percent withholding tax on any “withholdable payment” on both non-U.S. and U.S. financial institutions that fail to make the required reporting and obtain proper documentation.
However, the definition of “withholdable” payment “is broad and includes not only interest, dividends, rents and other U.S.-source passive income, but also the gross proceeds on the sale or disposition of property that could produce U.S.-source interest or dividend income,” the 10-page report says.
The primary reason for concern, the report says, is that creating the process for compliance “will take 12-18 months.”
Guidance from the Treasury Department has been focused on banking, but the insurance industry “will be challenged to adapt quickly and move forward with implementation as more guidance becomes available,” the report says.
Insurers have some time because the Treasury and Internal Revenue Service have decided FATCA withholding should be phased in with no obligation to begin the withholding until Jan. 1, 2014.
While Treasury is still soliciting comments and developing guidelines, the report notes that insurers face “specific challenges” due to the limited-contact relationship between insurer and policyholder.
“Companies may need to change how and how often they interact with their policyholders,” the report suggests.
Opening new accounts may also require more documentation and follow-up with customers to make sure they remain up-to-date.
PwC says life products, such as annuities and life products with cash values, are most likely to fall under the umbrella of the new regulations.
Group retirement and pension and group benefit plans without cash value would “probably” be out of the scope of the new regulations.
Property and casualty, reinsurance and term life products would “most likely” be out of the scope of the new regulation.
The report says that in a March survey of 685 firms, more than half say they are assessing the issue over the next few months and 17 percent say they had completed an assessment already.
Of the 17 percent, 85 percent say they believe “their FATCA compliance effort will be significant.”