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FATCA legislation to dramatically impact the South African financial services sector.

South African companies who do business with US organisations, whether in South Africa, Africa, Europe, must comply with the United States Foreign Account Tax and Compliance Act (FATCA), or risk being excluded from lucrative markets.

South African companies who do business with US organisations, whether in South Africa, Africa, Europe or further afield, must comply with the United States Foreign Account Tax and Compliance Act (FATCA), or risk being excluded from lucrative markets.

This is the view of Eva Crouwel, Manager in Risk Advisory at Deloitte Cape Town, who says that, since the introduction of the Act in South Africa in 2014, many SA companies in the financial services sector have been ill prepared for its impact, yet, compliancy with the Act will also be a requirement from 1 January 2016 by the Organisation of Economic Co-operation and Development (OECD), giving companies very little time to become compliant. 

“FATCA is poorly understood by companies in South Africa, mostly because it is perceived that the expertise level required for compliance is low and expensive. Yet, the irony is, not complying with FATCA will cost companies greatly,” says Eva. 

Eva explains that FATCA is a series of US-led tax compliance rules for financial institutions to collect, verify and report information on US customers, especially those with offshore accounts and investments. The South African Revenue Service (SARS) has an agreement with the US tax body, the Internal Revenue Service (IRS) that requires South African companies to disclose specific information on employees and customers with offshore accounts and investments. Should financial institutions default on providing this, they will be liable to pay both local and international tax penalties, with the last level of non-compliance being market exclusion. 

“SARS may penalise companies as much as R16 000 per month per non-compliance issue, and businesses may risk removal from the IRS compliant participants list, resulting in IRS penalties. In the case of non-compliance, the IRS can withhold 30% tax on all US-sourced payments received, meaning that any company in South Africa that declares dividends, or has indirect business ties with the US even from another country, will be affected,” says Eva. 

She uses the example that if a South African company does business with a financial institution in Europe, but this financial institution is listed on the New York Stock Exchange, then the South African company will be asked to comply with FATCA.

“Developed countries are already compliant with FATCA and are requiring the same from companies that do business with them, yet our financial services industry has been slow to implement the regulation. The problem is compounded by the fact that SARS retrospectively announced in 2015 that it requires FATCA compliance from 2014, giving institutions very little time to become compliant,” says Eva.  

In addition, the OECD, the progressive economic policy body comprising 63 member countries, including South Africa, will rigorously enforce FATCA from next year.  

 “The OECD recognises the crippling effect that tax evasion has on emerging markets, and as such, is adamant that global financial markets will have to prepare themselves for an increase in compliance requirements as a result of FATCA. South Africa has claimed to be the first country to be FATCA-ready, yet the stark reality is that this is an administrative and tax challenge for firms, due to the multi-level requirements from the IRS, SARS and the OECD,” says Nazrien Kader, Managing Partner, Deloitte Tax Africa.  

To better prepare for the impending legislation, Eva recommends that companies ramp up their compliance measures in the short time that is left. She suggests that companies prioritise and consider implementing measurements and using tools to categorise the important considerations of FATCA. Such measurements include analytic tools for client identification, automated compliance, and an auditable framework for reporting.

“While the administrative burden of compliance may seem onerous, it also brings opportunities and opens doors to discuss new ways for governance and best practice, which is necessary to propel the financial services industry forward,” concludes Eva. 

Key Contact

Eva Crouwel
Manager : Risk Advisory
RA Forensics
Tel: +27 21 427 5673

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