MENA Banks, Financial Institutions facing US FATCA challenges

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The US FATCA regulation will make it impossible for any financial institute to operate without registering with the Internal Revenue Service (IRS).

MENA Banks, Financial Institutions facing US FATCA challenges.

MENA region, with 48.5% of the world’s proven energy resources, is set to record an economic growth of 4.6% in 2015 from 2.6% in 2013, according to the World bank Group’s latest economic update.  

However with this growth also come the challenges faced by the financial institutions’ in the MENA region due to imminent United States’ Foreign Account Tax Compliance Act (FATCA).

FATCA, codified as Chapter 4 of the Internal Revenue Code, represents the Treasury Department’s efforts to rope in US taxpayers holding financial assets in non-US financial institutions and other offshore vehicles from avoiding their US tax obligations.

It requires all foreign (non-US) banks, financial institutions (mutual and hedge funds, insurance companies, trusts and Islamic finance structures) to disclose all US account holders to the US Internal Revenue Services (tax authority).

“FATCA is one of the most important and challenging projects for global financial institutions this year. Every CEO and Board of Directors needs to understand the legalities behind it and know where they stand. Ultimately, that is where the responsibility rests,” said Joseph el Fadl, Partner In-Charge of Global Financial Services Industry for Deloitte in the Middle East.

All foreign financial institutions (FFIs) must enter into disclosure compliance agreements with the U.S. Treasury by the end of 2013.

This agreement is a challenge in itself for the financial institutions because it requires changes to internal systems, control frameworks, processes and procedures.

The final FATCA timeline : (click on image to enlarge)

FACTA Regulations Timeline
FACTA Regulations Timeline

“A series of deadlines have been set by the US Treasury by which various procedures need to be in place, and covers areas such as due diligence, monitoring, reporting, and withholding. Financial institutions need to put in place an effective plan to ensure that these requirements will be met,” said Humphry Hatton, Chief Executive, Deloitte Corporate Finance Limited.

Mohsen Adel, Chairman of the Egyptian Society for the Study of Financing and Investment identified the challenges as “the timeline given to banks to provide data on US clients, the ability of the IT infrastructure and the financial means of Arab institutions to create and allocate new circuits to implement the technical and legal mechanisms of the act, in addition to the availability of experts to do so.”

“The changes brought on by FATCA will also undoubtedly cause major disruption in all companies as non-compliance could leave organizations and senior personnel open to significant financial and personal penalties,” said Ali Kazimi, International Tax Services Leader at Deloitte Middle East.

“FATCA will have a negative impact on companies trading in the US,” said Nayel Faleh Aljawabrah, a financial analyst and regional manager-Middle East and Africa of LANCE Bank in Dubai told Zawya, adding that the regulation might be perilous for the US as many people may avoid doing business with the US.

Any entity that wants to do business with or invest in the United States has to comply with FATCA, irrespective of whether it has a U.S. branch, office, or other presence. Failing to comply with FATCA, its U.S. portfolio is subject to 30 percent tax on income as well as capital proceeds.

Implementation of this regulation would also affect distribution of American clients in the MENA region and may drive them away, said Adel. Earlier, in 2012 the US Treasury unveiled two models for intergovernmental agreements (IGAs) under FATCA.

Under Model 1, local government will have wider role in FATCA enforcement, allowing local regulations to supersede FATCA.

In Model 2, local governments would have reduced role because each financial institution will be required to enter into a direct agreement with Internal Revenue services (IRS).

“IGA is the least worst option. It affords many benefits over the IRS direct route including the removal of the withholding requirement and it also provides a protective buffer to the domestic banking industry,” explained Kazimi.

“The provisions of FATCA are complex and will make it difficult for any financial institution to operate unless it complies with the FATCA regime by registering with the IRS,” says the recently released Deloitte report on FATCA.

Photo-Martin Haesemeyer


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