FATCA sparks culture clash with Asia GPs

Differences in cultural norms and local legislation will make compliance with the US Foreign Account Tax Compliance Act (FATCA) especially difficult for the Asia private equity industry, stressed regional trade groups in comments letter to the US Internal Revenue Service (IRS). 

Passed by Congress in 2010, FATCA requires foreign firms to provide US tax authorities the name, address, tax identification number, and other key financial details of their US investors or suffer a 30 percent withholding tax on certain US-connected payments.

In some situations FATCA requires information on customers born in the US to submit documents explaining why they abandoned citizenship or did not obtain it at birth. The Japan Securities Dealer Association (JSDA) notes that “asking such a delicate and private question is not something Japanese financial institutions could ask to their customers”. They said that the general perception relating to nationalities in Japan differs from that in the US and Europe.

Even more straightforward requirements could potentially pose a challenge as FATCA customers are required to make representations of their identities “under penalty of perjury”. However Japan has no custom of making legal oaths and Japanese customers would be extremely reluctant to give them, the JSDA comment letter notes.

Regarding cross border legal challenges FATCA will require financial institutions to look through their customers’ ownership to find US persons holding more than 10 percent of an entity. That represents a gap from the 25 percent threshold written in Japan and Hong Kong regulations. 

Moreover when customers fail to submit certain information to US tax authorities they risk a closure of their account. Comment letters from Singapore, Japan, and Australia noted that this would be impractical, impermissible or possibly in breach of contract under local rules.