FATCA and how it effects your firm

December 01, 2015 at 1:48 PM

The New Zealand Law Society have released a Practice Briefing advising law firms of their obligations in regards to the Foreign Account Tax Compliance Act.

The Foreign Account Tax Compliance Act (FATCA) is an agreement between the New Zealand and US governments to reduce tax evasion by American taxpayers with foreign accounts.  The Act imposes obligations on foreign financial institutions to report on financial accounts held by US taxpayers.  All law firms will be wise to familiarise themselves with the contents of the briefing in light of the OECD’s Common Reporting Standard which may see the NZ government enter into similar agreements with many other countries.

All New Zealand law firms with trust accounts and clients who are US citizens or US tax residents will be affected. 

The FATCA classifies foreign institutions into two categories; financial institutions (FI) and non-financial foreign entity (NFFE).  It is the responsibility of law firms to determine which classification applies to them. 

Financial Institutions (FI) and Non-Financial Foreign Entity (NFFE)

The classification of your firm will determine your obligations under FATCA.  There are more obligations for FIs (registration, due diligence and reporting) than for NFFEs.

Under FATCA all NZ law firms with trust accounts and clients who are US taxpayers will have to report on those clients.  The key difference between the two classifications relates to whom the law firm must report this information to.  Law firms who have registered as FIs will report directly to the IRD.  A NFFE law firm will report the relevant information to the bank with which it has its trust account.  The FATCA obligations will lie with the bank who will be registered as a FI for the purposes of FATCA.  It will be the obligation of the bank to obtain details of US reportable accounts from the law firm and report this to the IRD.

Defining Financial Institutions (FI)

Two definitions of a financial institution are provided.  Under the International Government Agreement (IGA) a law firm will be classified as a FI if they “manage” funds by placing client’s funds on interest bearing deposit.  The IRD is of the view that many NZ law firms will be FIs under this definition.

Law firms can, however, opt to take the US Treasury Regulations definition of an “investment entity” which is an “entity primarily carrying on a business providing investment services”.  The primary business for the vast majority of law firms is providing legal services.  Under this definition the NZLS believes that “few, if any” law firms will have to register as a Financial Institution for FATCA purposes. 

By default, firms who do not register as a Financial Institution will be classified as a NFFE.

Obligations of NFFEs

Despite the obligations of NFFEs being less than those for FIs, all firms with US taxpayers as clients will have obligations under FATCA.

A NFFE law firm must notify the bank with which it has its trust account of its NFFE status.  The firm must advise their bank if they have clients who are US citizens or US tax residents or if a “client entry has any controlling person who is a US citizen or US tax resident”.

Banks are required to obtain information annually from the law firm regarding these clients.

Obtaining Information

The NZLS strongly recommends law firms start obtaining information from their clients in regards to their citizenship and tax residency status.  In line with the OECD’s Common Reporting Standard, the NZ Government may enter into similar agreements with many other countries.  While law firms are currently only required to report on clients who are US citizens or US tax residents, having this information will assist firms in future if similar International Government Agreements are entered into. 

The NZLS has published a number of consent forms to assist firms.

Confidential Information and Client Consents

Where possible, law firms should obtain clients’ consent to disclose FATCA information.  This is regardless of whether this disclosure is to the IRD or to the firm’s bank.  This may be included in a firm’s letter of engagement and reasonable steps should be taken to make clients aware of the firm’s FATCA obligations.

The NZLS advises:

“Each law firm should start collecting information relating to clients whose funds are held or will be held in their trust account.  This information should be obtained from clients on an ongoing basis whenever moneys are held in the trust account.  At the same time that this information is gathered, the law firm should obtain appropriate consents to the disclosure of the information.”

OneLaw and Compliance

OneLaw are working on developments to assist clients to meet their FATCA obligations.  This includes facilities to collect and record information pertaining to a client’s citizenship and tax residency status.  We are investigating methods by which relevant information can be shared with either the IRD or your (FI) bank.

More information is included in the attached Practice Briefing provided by the New Zealand Law Society.  The NZLS website contains information on FATCA and how this will affect your practice.

Read the full NZLS Practice Briefing here.



Tags: NZLS Compliance
Category: Interest Topics

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