On 15 May 2014 the Commonwealth Treasury released a Regulation Impact Statement on the implementation of the United States Foreign Account Tax Compliance Act (FATCA) in Australia.
On 28 April 2014, the Treasurer announced the signing of an intergovernmental agreement (IGA) between Australia and the United States regarding the FATCA.
FATCA aims to prevent US tax evasion by detecting untaxed income and assets held by US taxpayers in financial institutions outside the US. FATCA will commence on 1 July 2014 and will require foreign financial institutions – including financial institutions in Australia – to report details of accounts held by their US customers to the US Internal Revenue Service (IRS). Those institutions that do not comply will face a 30% withholding tax on their US-sourced income.
Had Australian not concluded an IGA, Australian financial institutions would have incurred one or more costs. These costs may have included the US withholding tax itself; increased costs associated with participation in global capital markets; or costs associated with reducing their exposure to US sourced funding or investments. There may also have been reputational or other practical limitations in dealing with foreign financial institutions due to the withholding obligations under FATCA.
The adoption of the preferred option is expected to result in average annual compliance cost savings of around $58 million. These compliance cost savings have been assessed relative to the estimated compliance costs that could have been incurred in the absence of government action.
The agreement has been assessed as likely to have a major impact on the Australian financial sector with flow-on effects to the broader economy. Given the significance of the proposal a post-implementation review will be required within five years.