Earlier this month, an article on FATCA in the Trinidad Express extensively quoted a local attorney named David West. Mr. West is the former Head of the Central Authority Unit and a certified anti-money laundering specialist who went on to call on those drafting the Inter-Governmental Agreement (IGA) with the US to ensure that reciprocity is part of the arrangement. That is to say, if financial institutions based in Trinidad and Tobago must report the financial activity of certain US persons to the IRS, US-based financial institutions must report the activity of certain Trinidad and Tobago persons to the government of Trinidad and Tobago.
Mr. West makes a very good point and appears to have a better grasp of FATCAthan others. Here I am thinking about the Governor of the Central Bank of Trinidad and Tobago’s opening remarks at the meeting of the Council of Securities Regulators of the Americas (COSRA) in October 2012. In his wisdom, the Governor concluded that “there is little need for us to be unduly alarmed about FATCA.”
To complement what Mr. West has said and contradicted what the Governor has said, I would want to make 3 further points.
Firstly, reciprocity by US financial institutions appears to be an uphill battle. Aside from them not having the systems in place to make reciprocity feasible, last week, Reuters reported that the Texas Bankers Association and the Florida Bankers Association, both industry groups, filed a lawsuit attempting to block a new U.S. Treasury Department rule governing accounts held by foreigners in U.S. banks. Under this rule, known as DATCA (so the domestic version of FATCA), which is set to take effect in March 2014, U.S. banks will be forced to disclose information to the Internal Revenue Service about any account held by a non-resident alien that earns at least $10 of interest per year. Not only is DATCA being challenged in the courts, but it is also being challenged on the Hill. Earlier this year, Congressman Bill Posey proposed amendments that would kill DATCA. One would expect such challenges to continue.
Secondly, putting aside the big Canadian banks who are already compliant, for smaller FFIs or financial institutions based in Trinidad like Credit Unions, compliance is quite an expensive undertaking. In Jamaica, a senior manager with Ernst & Young quoted a price tag of US$30 million for each of the 614 soon to be affected financial institutions to implement the requirements of FATCA. If Trinidad adopts an IGA that allows financial institutions to report to a local government agency who would pass on the IRS details, compliance costs would be lower, but it would still be onerous. Of course, if we assume that the Board of Inland Revenue would be tasked with collecting and passing on data to the IRS, much work needs to be done to strengthen an already weak institution’s capacity. The bottom line, this would be a procedural nightmare and an undertaking not to be taken as lightly as the Governor appears to be taking it.
Thirdly, there is the burden on the regular citizens of Trinidad and Tobago. Despite common misunderstandings, the FATCA net not only captures US passport holders and US green card holders, but it also captures a group known legally as ‘US persons.’ So those who may have spent enough time in the US in a given year or those who may have income “effectively connected” with a US trade or business. For the many US citizens or residents who may reside in Trinidad and Tobago and enjoy investments with the Unit Trust or an FCB mutual fund, they may be subject to PFIC treatment specifically designed to penalize Americans who invest in non-compliant mutual funds outside of the US. For those who may have a small business in Trinidad, they should be filing form 5471 – failure to do so may result in criminal charges (yes, jail time) as well as civil penalties (US$10 000). These are all in addition to the FBAR (Form TD F 90-22.1) and FATCA (form 8938) obligations subject to most media attention.
In short, it is most unfortunate that the Central Bank Governor believes that “there is little need for us to be unduly alarmed about FATCA.” Time for him and his Joint Working Group to get to work.