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Foreign account information-sharing agreements

Technical matters

Clauses 150 and 151

Issue: Criminal penalties

Submissions

(AMP, ANZ, BNZ, Ernst & Young, New Zealand Bankers’ Association)

Failure to register should not be a criminal offence, if it is to be a criminal offence, it should not be an absolute liability offence or be subject to some “reasonableness” standard.

Comment

Officials accept that in some respects, IGA compliance will be “self-policing” because the potential of being labelled “non-participating” (effectively, non-compliant) by the United States could have a severe impact on the business of a financial institution. However, under the proposed IGA with the United States, it is expected that New Zealand will have obligations to remedy any serious non-compliance by New Zealand financial institutions. Therefore, in order to be in a position to comply with the IGA, officials consider it is necessary to have a domestic penalties regime in place.

The New Zealand tax rules divide penalties into two categories: civil and criminal. Criminal penalties are effectively already in place in existing legislation for what officials consider are the other likely forms of serious non-compliance: failing to collect IGA-relevant information; and failing to pass that information onto Inland Revenue when required to do so (under a notice issued under section 17 of the Tax Administration Act). The bill therefore proposes a criminal sanction for failing to register when required to do so.

Officials consider that it would be incoherent to have criminal penalties for some aspects of serious non-compliance and civil penalties for others. Such a system would be costly to administer and would seemingly place a priority on enforcing some non-compliant acts, when the IGA will require New Zealand to address all forms of significant non-compliance.

In addition, civil penalties are generally levied on the basis of tax owing. However, in the IGA context there is no tax owing on which to attach a penalty. Any civil penalty would therefore have to take the form of a fine of an arbitrary figure. Bearing in mind New Zealand’s obligation to enforce compliance, it is considered that a civil penalty may not have the desired deterrent effect. This is because the penalty would have to be set at a level that would not financially cripple smaller institutions, but was nevertheless meaningful for larger institutions. Officials do not consider that a single civil penalty can achieve this result. By contrast the deterrent effect of criminal sanctions is universal.

Finally, officials note that Inland Revenue, if it were to pursue a prosecution for failure to comply with obligations under the IGA, is always subject to the Solicitor-General’s Prosecution Guidelines.[5]

These guidelines emphasise that a prosecution can only be brought if, amongst other things, the prosecution is “required in the public interest”. Officials consider these guidelines set a high bar and the Committee and submitters can therefore be reassured that prosecution decisions will not be taken lightly and can only be taken when the public interest warrants that action. Officials consider it extremely unlikely that any form of inadvertent non-compliance (such as that described in submissions) that was immediately remedied by the financial institution could ever satisfy this test.

Recommendation

That the submission be declined.

Issue: Transition period

Clauses 150 and 151

Submission

(KPMG)

Given the tight timelines for IGA/FATCA compliance, there should be a transition period for the proposed penalties that apply to financial institutions.

Comment

Officials accept that timeframes are tight for financial institutions. However, although information collection is due to commence on 1 July 2014, there will not be any actual reporting requirements for financial institutions until around the middle of 2015. Officials consider that is the earliest point at which any non-compliance will be able to be detected. It is anticipated that this is enough time for financial institutions to prepare.

In any event, officials note that the 1 July deadline for information gathering has been publicly known for some time. Although the IGA and the related provisions in this bill provide the legal framework for FATCA reporting, financial institutions have long been aware that their obligations would commence on 1 July 2014 and the first filing obligation would be in 2015.

Recommendation

That the submission be declined.

Issue: Timeframes for reporting

Clause 158

Submissions

(ANZ, BNZ, Ernst & Young, New Zealand Bankers’ Association, New Zealand Institute of Chartered Accountants)

The timeframe for providing information to Inland Revenue should be:

  • Four months. (ANZ, BNZ, New Zealand Bankers’ Association)
  • Six months. (Ernst & Young, New Zealand Institute of Chartered Accountants)

Comment

The bill proposes that information be collected in respect of a New Zealand tax year, ending on 31 March. The IGA is likely to require that information be transmitted by Inland Revenue to the IRS by the end of September in the same year. As a result, there a six-month window between the end of the year and final date for information to be sent. Allowing financial institutions the full six months to report to Inland Revenue, as proposed by some submitters, is therefore unworkable.

The bill proposes that financial institutions proving information to Inland Revenue in accordance with the IGA must do so within two months. The reasons for this are:

  • Inland Revenue will act as more than simply a “post-box” for IGA information. It is anticipated that Inland Revenue will also have a “gatekeeper” role to ensure that the data provided meets the minimum reporting standards. If a financial institution fails to provide complete data, this must be followed up to determine whether the data was sent in error or if more complete data is available to comply with minimum standards. In a worse-case scenario, this could mean that Inland Revenue would go through this process with every financial institution. The two month/four month split was therefore designed to allow some time for this checking to occur and also build in some inherent flexibility in reporting times (noting that there are no proposed legislative sanctions for late filing).
  • The IGA itself contemplates that the reporting should generally occur on a calendar year basis. This reporting period would allow nine months between the end of the period and the due date for transmission to the United States. The bill’s proposal to move this reporting period to a tax year was made because the industry preferred a reporting period that aligned with its tax reporting periods. On the assumption that Inland Revenue considered it needed four months to screen and collate the data, it seemed appropriate that the risk of the later reporting period be borne by the industry that requested it – rather than the Government.
  • Two months is the timeframe in which financial institutions must provide their non-resident withholding tax information in respect of accounts held by non-residents. Given the potentially similar customer base between the two types of reporting, there appear to be sound reasons for having a consistent reporting period.

In saying this, officials also recognise that providing this information will be as new to financial institutions as it will be for Inland Revenue. We also understand that some of the timeframe allotted to Inland Revenue was to allow for the data to be accumulated before sending. This has now changed. Indications from the United States are that it will accept information on a more piecemeal basis, so information from a single financial institution can be sent as soon as it is verified as meeting minimum standards. This being the case, officials consider there is some scope to move the reporting deadline, but not to the extent requested by submissions. Given that (in practice) information is likely to be received on or near the final date, some time is still needed for Inland Revenue to verify incomplete records. Officials therefore consider that splitting the six-month period evenly between the financial institutions and Inland Revenue will provide a fairer outcome for both parties.

Recommendation

That the submissions be accepted in part, with the reporting period for financial institutions extended to three months.

Issue: Excluded choices

Clauses 158

Submissions

(AMP, ANZ, BNZ, New Zealand Bankers’ Association, PricewaterhouseCoopers)

The concept of excluded choices should be limited so that financial institutions can still collect information from all new account holders, but only report on those where the value of the accounts exceeds the thresholds set out in the IGA. (AMP, ANZ, BNZ, New Zealand Bankers’ Association)

Prohibiting reporting on low-value accounts will increase the FATCA compliance costs for financial institutions and is not justified on policy grounds. Financial institutions obliged to report should be able to do so in the most cost-effective manner, even if this requires additional data to be collected and/or reported. (PricewaterhouseCoopers)

Comment

The provision dealing with excluded choices is designed to prevent a possible area of over-reporting. As the volume of submissions attest to, unnecessary reporting to the IRS is a genuine concern both for US persons and those that hold joint accounts with such persons. The bill therefore proposes that financial institutions cannot ignore any low-value thresholds set out in the IGA. Without this provision, a financial institution could chose to report on a US person that, for example, had an account with a balance of $30,000, even though such reporting is not actually required by the IGA.

However, officials recognise that:

  • It is unlikely to be possible for a financial institution to accurately assess on account-opening what a person’s account balance is likely to be at the end of the tax year, when threshold tests are applied.
  • For a financial institution, the best time to collect the relevant information is on account opening. Having to extract information from an existing customer at the end of the year in which account balances exceed certain thresholds may be expensive and relatively unfruitful.
  • Although the provision of data is understandably a sensitive area, the real issue in this case appears to be the transmission of any data to the IRS, rather than the information being collected and retained by the financial institution.

Officials therefore agree with submitters that the legislation should be amended to allow data to be collected, but nevertheless prohibit over-reporting of that data.

Recommendation

That:

  • The New Zealand Bankers’ Association, AMP, ANZ and BNZ submissions be accepted.
  • The PricewaterhouseCoopers submission be declined.

Issue: Permitted choices

Clause 158

Submission

(New Zealand Bankers’ Association)

At present, the bill arguably requires a person to comply with all possible scenarios contemplated in a foreign account information-sharing agreement. The application of the “permitted choice” provision should be limited to the choice actually made.

Comment

Officials disagree with the interpretation of the relevant section adopted by the submitter. The submitter refers only to sections 185F(1) and (3). However, it is intended that proposed section 185F be read as a whole. Particularly relevant to this submission is the wording of proposed section 185F(2).

Section 185F(1) is designed as an application section. It sets out what a “permitted choice” is – effectively any choice described or contemplated by the agreement. Section 185F(2) then provides the rule that applies to those choices. It says that the person is authorised to make a permitted choice and carry that choice into effect.

An application provision, followed by a rule, is a common feature of tax legislation. Officials consider its use here is appropriate and, more importantly, provides the desired policy outcome. This outcome is, as the submitter notes, allowing financial institutions to make, and carry into effect, a choice contained in the relevant agreement. It is not intended to compel a financial institution to make all possible choices.

Recommendation

That the submission be declined.

Issue: The information required to be provided

Clause 158

Submission

(New Zealand Bankers’ Association)

There should be a distinction between information that a person is required to provide to Inland Revenue and information they are authorised to provide.

Comment

Again, this is an issue where officials disagree with the interpretation adopted by the submitter. As the submitter notes in its previous submission, proposed section 185F(3) modifies a person’s obligations to the extent necessary to give effect to a permitted choice. This modification also applies to the section at issue here: section 185I.

It is anticipated that the information that a person provides may, to some extent, depend on “permitted choices” they have made. The purpose of section 185I is to compel the person to provide whatever information is produced from the exercise of their choices. The provision of this information is not optional – however, the composition of this information will depend on choices made.

For example, suppose two financial institutions in the same position are permitted a choice under the relevant agreement to do X or Y. Institution 1 chooses X and is required to report on 100 customers. Institution 2 chooses Y and is required to report on 50 customers. The number of customers reported on will be directly affected by the choice, but each institution is nevertheless required to provide the information that it produces as a consequence of their respective choices.

The section is designed to neither force a financial institution to report on the maximum or minimum number of people (such an obligation would be impossible to enforce in any event because it may not be known at the time the choice is made what the exact consequences of that choice will be). An institution is simply required to follow the consequences of any choices made.

Recommendation

That the submission be declined.

Issue: “Reasonableness” standard

Clause 158

Submissions

(New Zealand Bankers’ Association)

Obligations under Part 11B should be subject to a “reasonableness” standard.

Comment

Officials agree that IGA compliance is a new and untested regime. However, this is similarly true of any new set of tax rules. There is invariably a “bedding in” period for any new set of rules. Although officials accept that underlying FATCA is a complicated set of US Treasury regulations, the IGA is intended to significantly reduce, and in some cases eliminate, the need to consult those regulations. Therefore, there does not appear to be anything unique about Part 11B in this regard.

However, officials note that, in order to address the concerns of the financial services sector, Inland Revenue is currently undertaking a process whereby it is producing guidance notes for public consultation. These guidance notes are effectively draft interpretations of the model IGA, and feedback on the interpretations taken are being sought with a view to providing a full set of guidance notes covering all key issues before 1 July. It is anticipated that this process will allow the Department’s preliminary views of some of the more contentious issues to be tested and, ultimately, publicised so that the key affected parties are aware of these views.

Recommendation

That the submission be declined.

Issue: “Contemplated by the agreement” too broad

Clause 158

Submission

(Ernst & Young, New Zealand Institute of Chartered Accountants)

That the use of the phrase “contemplated by the agreement” in the draft legislation is too broad.

Comment

The expression “described or contemplated in the agreement” is designed to provide financial institutions with some degree of flexibility. Officials would be concerned if a financial institution felt it could not provide relevant information because that exact information was not strictly “described” in the IGA.

Recommendation

That the submission be declined.

Issue: Defining a “valid request”

Clause 158

Submissions

(Ernst & Young, New Zealand Institute of Chartered Accountants)

The legislation, in proposed section 185J, needs to be clearer in setting out what a “valid” request from a foreign competent authority is. (Ernst & Young, New Zealand Institute of Chartered Accountants)

There should be legislative authority to decline a request that is not “valid”. (New Zealand Institute of Chartered Accountants)

Comment

The IGA contemplates that information exchanges will generally occur between “competent authorities” (being special units within Inland Revenue in New Zealand and the IRS in the United States). However, it is expected that the IGA will also have a mechanism whereby, if the IRS discovers a minor or administrative error in information provided by a financial institution, it can approach the relevant financial institution directly to seek to address the matter rather than make all such requests through Inland Revenue. Proposed section 185J contemplates these exchanges and authorises New Zealand financial institutions to legally respond directly to such IRS requests without first having to respond to Inland Revenue.

Officials consider that a “valid” request will be one made in accordance with the terms of the IGA, where the IRS will be attempting to quickly resolve simple queries. It is accepted that there may be circumstances when it is unclear whether a request is strictly of a “minor or administrative” nature, or whether the request is actually more substantial. However, the competent authority at Inland Revenue will be available to assist financial institutions in making this judgement, if the need ever arises. Attempting to legislatively define “minor and administrative errors” could cause interpretation issues, and will detract from the broad nature of the legislation by introducing more terms that are potentially IGA-specific. In any event, the IRS has the option to contact Inland Revenue directly to seek its assistance in resolving any concerns they might have with the correct administration of the IGA.

Specific legislative authority is not needed to decline a request that is not valid. By definition, a request that exceeds the scope of the IGA’s terms will not be “valid”, so a financial institution will not be expected to respond to it.

Recommendation

That the submissions be declined.

Issue: Guidance for New Zealand financial institutions

Submission

(Ernst & Young, New Zealand Institute of Chartered Accountants, KPMG)

Inland Revenue should educate New Zealand financial institutions on their anticipated obligations under the IGA.

Comment

As mentioned above, Inland Revenue is currently drafting comprehensive guidance notes on what are seen as the key interpretive issues in the model IGA. Priorities for this guidance have been set in consultation with the industry, so that maximum time is allowed for discussion and finalising the Department’s views on contentious areas. In addition, the Department is also accepting and responding to ad hoc queries from interested parties on specific issues.

Recommendation

That the submission be noted.

Issue: Solicitors’ trust accounts

Submission

(New Zealand Law Society)

The status of solicitors’ trust accounts should be clarified by officials or specifically addressed in legislation.

Comment

Officials consider it would be contrary to the IGA to provide reporting exemptions in domestic legislation that are not provided for in the IGA itself. Such a course of action could see New Zealand breach the terms of the IGA by not providing information it has agreed to provide. However, officials acknowledge that the status of trusts is contentious – largely because “trusts” can range in complexity from simple family trusts through to widely held unit trusts.

For this reason, since submissions on this bill closed, the Department has released draft guidance on the IGA status of trusts, including solicitors’ trust accounts. Dialogue on these guidance notes is the most appropriate way of clarifying the status of trust accounts.

Recommendation

That the submission recommending clarification by officials be noted, acknowledging that draft guidance has since been provided.

That the submission recommending the status of solicitor’s trust accounts be addressed in legislation be declined.

Issue: Information provided and Privacy Act breaches

Clause 158

Submission

(New Zealand Law Society)

To cater for the possibility that information might have to be provided by account holders (including solicitors), the legislative protection against breaches of the Privacy Act should be extended to allow account holders to provide information when requested.

Comment

Officials consider that, if an account holder (such as a trustee) is asked to provide information on underlying beneficiaries, it will ideally ensure that it has the power to do so under the relevant trust deed or contract. It is anticipated that account holders will generally be protected by terms and conditions that allow them to comply with all legal information requests from financial institutions.

It is important to note that the proposed legislation is designed to ensure that financial institutions have all the tools available to collect and provide information to Inland Revenue in accordance with the IGA. It deliberately does not require account holders to provide the information when requested by financial institutions. This is because FATCA and the IGA are principally obligations on the Government and financial institutions, not the general public. If a person declines to provide relevant information, the default position may be that they are reported on as a suspected US person. The financial institution may also reserve the right in its terms and conditions to close such accounts. However, this is a choice and it is not considered appropriate to legislatively interfere with the relationship between financial institutions and their clients.

Recommendation

That the submission be declined.

Issue: Tax credits

Clause 37

Submission

(Ernst & Young)

It should be confirmed or clarified that New Zealand taxpayers may claim foreign tax credits for the full amount of (the 30%) FATCA withholdings in relation to income that is assessable here.

Comment

It is Inland Revenue’s view that the 30% withholding penalty will not qualify for foreign tax credits. This is because it is not a foreign income tax – it is a penalty. The Department’s conclusion on this point has been communicated to the financial services industry, including some instances when a credit could become available.

From a policy perspective, allowing a credit is not considered to be an appropriate outcome. It would permit a financial institution to effectively use the New Zealand tax base to offset a penalty that came about because that financial institution has failed to comply with the IGA. If a financial institution finds itself in a position where FATCA penalties are being imposed, the economic cost of that should be borne by that institution, not by the Government. This is consistent with how other similar penalties are treated for tax purposes.

Officials do not consider it is appropriate to legislate for this outcome because the current legislation already provides for it.

Recommendation

That the submission be declined.

 

[5] http://www.crownlaw.govt.nz/assets/Uploads/Prosecution-Guidelines/prosecution-guidelines-2013.pdf.