FATCA stands for Foreign Account Tax Compliance Act, a United States law passed in 2010 that takes effect for New Zealand tax purposes on 1 July 2014. It aims to reduce tax evasion by US citizens, US residents and other US entities.
FATCA requires foreign financial institutions, including New Zealand financial institutions, to provide the US Internal Revenue Service (IRS) with information on the accounts of US citizens, US residents, certain entities that are controlled by US citizens or residents, certain other US entities and ‘non-participating financial institutions’.
FATCA also requires that payments to non-participating financial institutions, including those in New Zealand, be reported.
The US tax system is unusual in that it taxes all US citizens and individuals granted permanent residency (green card holders) whether they live in the United States or not.
Under FATCA, New Zealand banks and other financial institutions will have to provide information about US persons and non-participating financial institutions.
The government is currently negotiating an intergovernmental agreement (IGA) with the US and making changes to tax law in order to make it easier for New Zealand financial institutions to comply with the requirements of FATCA.
The IGA will allow banks to send their FATCA reports to New Zealand Inland Revenue rather than direct to the IRS. Many countries have either signed or are negotiating similar agreements with the US.
In order to implement New Zealand’s obligations under the IGA, the New Zealand government is making changes to the tax law that will require banks and other financial institutions to give information to Inland Revenue, which will then pass that information to the IRS.
Under the Privacy Act, organisations such as financial institutions are only allowed to collect and disclose personal information, including bank account details, under a limited set of circumstances. If there was no legislative authority, it would not be possible in many cases to disclose the information needed for FATCA compliance, unless consent had been given.
If there was no change to New Zealand law, financial institutions in this country would, unless certain exceptions applied, have to pay a 30 percent withholding tax on certain US income. This financial cost would undoubtedly be passed on to a broad range of New Zealand consumers.
Most New Zealand banks receive some US income. For instance, US Treasury bonds play an important role in setting global interest rates, and are often used by banks to reduce their exposure to interest rate risk.
If New Zealand did not pass a law to allow FATCA reporting, banks and other financial institutions in this country may be unable to comply with FATCA without breaching the privacy principles relating to the collection and disclosure of client information.
If New Zealand did not negotiate an IGA with the US, the effect on American citizens and green card holders resident in New Zealand would be that it would be easier for them to avoid meeting their obligations to pay tax in the United States.
However, a significant portion of these tax obligations can be discounted by tax paid in New Zealand under the US-New Zealand double taxation agreement.
For these reasons, the Privacy Commissioner has not opposed the negotiation of the FATCA IGA with the US, and the amending tax law to implement the IGA.
Only those accounts covered by the terms of the IGA can be sent to the IRS. Financial institutions have to collect information on accounts that look like they might belong to a US person, in accordance with a set of criteria. Your financial institution may ask you for information about your citizenship or tax residency status. If you do not provide that information, your financial institution will have to send your account information to Inland Revenue, which will share it with the IRS.
Inland Revenue first consulted with the Office of the Privacy Commissioner in 2013 about the privacy implications of FATCA. We recognised New Zealand banks and other financial institutions would be unable to comply with FATCA without breaching the privacy principles relating to the collection and disclosure of client information.
We advised that amending the relevant revenue legislation to permit the collection and disclosure would be the most effective and transparent solution. Financial institutions affected by FATCA needed legal certainty.
We noted that financial institutions would not be required to provide information to Inland Revenue until the legislation to meet New Zealand’s FATCA obligations was in place. In some cases, information collected before that date would be captured by the legislative change.
Where an agency, such as a bank, holds personal information about you, you are entitled to have access to that information. If you want to know if you meet the FATCA criteria set out by the US tax authorities, you should ask a lawyer or an accountant.