THE USA’s global initiative to fight tax evasion is entering its final stages of implementation with over 150 countries already agreeing to report American persons’ financial accounts data to the US authorities.

The recently issued Foreign Accounts Tax Compliance Act (Fatca) directive has extended the reporting deadline of such data to September 30, 2016 to accommodate the legal and administrative challenges faced by some countries striving to become Fatca-compliant.

This means that Pakistani authorities now have one more year to set up the necessary framework to report information on accounts owned by US citizens and green-card holders with Pakistani banks and other financial institutions as of December 31 of 2014 and 2015.

The information exchange under Fatca is a continuation of other measures that the American administration had taken in the past to fight tax evasion, such as the Tax Information Exchange Agreement (TIEA). Despite the fact that the IRS has faced several years of budget reductions, the agency remains committed to stopping offshore tax evasion in all parts of the world.

The current endeavour is part of the IRS’s overall efforts to implement the regulations enacted in 2010 by the US Congress to target non-compliance by its taxpayers using foreign accounts or entities to hide financial assets outside America.

The act requires withholding on certain payments made to non-US (including Pakistani) banks and financial institutions unless such institutions agree to report to the IRS information about financial accounts held by the US persons. According to the American tax law enacted in 1906, a US person is required to report his global income on his US tax returns and bank accounts to American tax authorities.

Pakistan has shown interest in agreeing to the IGA Model 1, which, coupled with the tax treaty signed between the two nations in 1957, will essentially form the legal basis for reporting bank accounts data of US persons to the American authorities

In response to the enactment of Fatca as well as other jurisdictions’ interest in participating in the financial account exchange programme, the US government has entered into a number of bilateral inter-governmental agreements (IGAs) that set the groundwork for cooperation between jurisdictions.

Pakistan has shown interest in agreeing to the IGA Model 1, which, coupled with the tax treaty signed between the two nations in 1957, will essentially form the legal basis for reporting bank accounts data of US persons to the American authorities. Inherent and strict Fatca measures under this model entail automatic account reporting from banks and financial institutions in Pakistan to the American taxation agency.

It would therefore become highly unlikely that financial accounts of US taxpayers and of businesses substantially owned by them in Pakistan will go unnoticed by the US tax authorities. The Banker’s Secrecy Act 1976 requires US persons and entities to report certain details of their bank accounts owned outside America on a calendar year basis. The consequences of non-compliance starts from a penalty of $10,000/account per year and goes up to 50pc of the highest account balance, as well as criminal prosecution in certain cases.

Though authorities in Pakistan have not yet formally signed an agreement with America, irrespective of the absence of a formal IGA in place between the two governments, the information flow to US tax authorities by banks and financial institutions in Pakistan is expected to begin as scheduled to prevent them from being penalised with 30pc withholding on their US based income, fear of being black-listed and possible criminal proceedings.

This view is endorsed by the fact that Pakistan is primarily a dollar-based economy and accordingly a large volume of its international trade and overall financial dealings are routed through the American financial system. Hence, the country cannot afford to ignore Fatca compliance and face potential disruptions in its international trade transactions.

Cognisant of this reality, economic managers in Pakistan are already putting efforts to become Fatca-compliant and the State Bank of Pakistan’s BPRD circular asking banks to register with the IRS is a reflection of this policy intent. US Treasury resources frequently update the list of Pakistani banks and financial institutions already registered with the IRS which have agreed to provide the required information.

Given the complexity of the legal and regulatory infrastructure in Pakistan, a year of extension in deadline to comply with Fatca provides an opportunity to the Pakistani government to update the policy framework and adjust the existing local regulations to facilitate banks and financial institutions in the country, enabling them to share the information with Pakistani competent authorities for subsequent electronic transfer to the American authorities.

The IRS notice promulgating the extension in the reporting timeline also offers Pakistani banks and financial institutions to adopt necessary measures and establish an appropriate compilation system to consistently collect Fatca-related information from its existing and new account holders.

At the same time, certain entities in Pakistan — namely the government, retirement funds, the central bank, banks with local customers, international organisations and other exempted beneficial owners — may fall under chapter 4 of the US Code Title 26 IRC sections 1471 and 1472. This means that these entities will be deemed compliant despite being non-reporting and depending on their classification and structure of operation may or may not be required to register with the IRS and obtain the GIIN.

However, such exceptions will be partially determined by the contents of the favoured nation clause of the standard model one agreement (if included in the IGA between the two countries) and based on determination by local authorities in Pakistan.

While holding its resolve to implement Fatca in its true spirit, the IRS is also encouraging US persons to become compliant and avoid penalties through its various amnesty programmes such as the Offshore Voluntary Disclosure Programme.

Tens of thousands of US persons around the world and several in Pakistan have come forward voluntarily to disclose their foreign financial assets, taking advantage of special opportunities to comply with the American tax system and resolve their tax obligations. Estimates suggest that the US tax agency has collected over $8m from US persons taking advantage of the amnesty schemes.

The writers are tax advisers and Fatca specialists squadri@swqpc.com, fmaqsood@swqpc.com

Published in Dawn, Business & Finance weekly, November 9th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play