US law adds to SA burden of tax compliance
SOUTH African financial institutions face another regulatory burden, complying with a new US law aimed at preventing tax evasion by clients who are US citizens.
Chris Sickle, the asset management sector leader for Africa, and Eugene Skrynnyk, senior manager for asset management at Ernst & Young, said last week implementation of the Foreign Account Tax Compliance Act would impose a complex and onerous compliance burden on the companies.
They warned that local companies could not escape the act even though it was a US law.
Local financial institutions such as banks and insurers are already complaining about additional rules being introduced by regulators to tighten oversight of their businesses.
According to the US Internal Revenue Service (IRS), the act, which will be introduced in phases from next year, requires US taxpayers with "specified" foreign financial assets that exceed certain thresholds to report them to the tax authorities.
It also requires foreign financial institutions to report information about financial accounts held by US taxpayers or by foreign organisations in which they own significant interests.
The Ernst & Young executives said in a joint paper the act would affect many deposit banks, insurers and investment funds in South Africa and the rest of Africa.
"The goal of (the act) is to reduce US tax evasion by enabling the IRS to obtain information regarding worldwide income of US persons. As a result, South African financial institutions now face a complex and onerous compliance burden in order to meet (the act’s) requirements," they said.
"If organisations or account holders are found to be noncompliant, they will be liable for a 30% withholding tax on certain payments received after December 31 2013, including US source interest and dividends, gross proceeds from the sale of assets that produce US source income, as well as certain non-US source income."
They said less than a month before the act was introduced, it appeared as if local financial institutions had either not started or were just in the early planning stages of addressing its potential effect on their businesses.
The executives said local asset managers, banks and insurance companies would be "wise" to consider the effect of the law on strategic and operational issues.
Companies would need to consider plans to implement a host of other time-consuming operational tasks such as revamping certain electronic systems to capture applicable account information and/or to accommodate the new reporting and withholding requirements of the law.
The executives said the act required significant support from multidisciplinary teams such as business operations, information technology, marketing and legal.