Credit unions may be exempt under FATCA
Published:Wednesday | November 13, 2013 | 12:00 AM
Avia Collinder, Business Reporter
In line with international trends, local credit unions may be exempted from the reporting requirements of the United States foreign tax law, FATCA.
However, a waiver for Jamaican institutions is not yet a certainty.
Jamaica's Technical Working Group (TWG) on FATCA has already completed advanced negotiations with the IRS regarding the signing of a Model 1 Reciprocal inter-governmental agreement (IGA), the terms of which have been submitted to Cabinet for its approval.
The Cabinet is reviewing the terms for a Model 1 reciprocal IGA with the US, and not a memorandum of understanding as previously reported. The IGA would relieve individual financial institutions affected by the law from having to report information directly to the US Internal Revenue Service (IRS).
The terms of the Model 1 IGA were negotiated with the IRS by Jamaica's TWG on FATCA. Both Jamaica and the US must sign off on the terms for the IGA to go into effect.
The Bank of Jamaica (BOJ), one of the agencies on the local FATCA task force, says the treatment of credit unions - which are typically community banks with small savers - is to be finalised.
Exemptions are dealt with under Model Annex II of FATCA.
"It's an issue we are considering," said BOJ general counsel Robin Sykes of a potential exemption.
"We are discussing this with the Registrar of Cooperatives ... it will depend on whether they can qualify as low risk."
Pension funds may also be exempt under Annex II, but their status did not arise in the FATCA presentation made by Sykes at the second annual anti-money laundering conference hosted by the Jamaica Bankers Association in late October.
Private pension funds are regulated by a different agency - the Financial Services Commission. The regulator did not speak specifically to whether there is consideration to seek an exemption for the Jamaican sector, but outlined conditions under which individual entities could be.
LOCAL PENSION PLAN
FSC director of investigation and enforcement, Lorice Edwards Brown, said a local pension plan may be considered a 'deemed compliant financial institution' under FATCA if it: is a legally approved retirement plan; is sponsored by a foreign employer; and "does not allow US participants and beneficiaries other than employees who worked for the foreign employer in the country where the plan was established".
The average savings in the credit-union sector falls well below the reporting threshold required under FACTA.
With a savings pool of J$57 billion and membership base of approximately 976,500, credit union savings in Jamaica averaged J$58,000 or US$554 per account in June.
FATCA requires foreign financial institutions to disclose information on American accountholders or clients with assets exceeding US$50,000.
Some countries, like Jamaica,
have opted to report the data under bilateral arrangements. Such IGAs will start taking effect in July 2014.
Sykes said the list of qualifying criteria for "local banking" and low-risk institutions is lengthy.
The US Treasury Department notes on its website that under Model Annex II of FATCA, credit unions may possibly gain exemption under the category of 'local bank', which includes a financial institution operating solely as a bank or credit union, or as a non-profit cooperative.
It must also have business consisting, in the case of a bank, primarily of receiving deposits from and making loans to unrelated retail customers; and with respect to a credit union or other cooperative, its members, provided that no member has a greater than five per cent interest in the entity.
The local bank or credit union must also not have more than US$175 million (J$18.4 billion) in assets on its balance sheet, and the financial institution and any related entities, taken together, should not have more than US$500 million (J$53 billion) in total assets on their consolidated or combined balance sheets.
Some credit unions may also be exempt under the category of institutions with 'only low-value accounts', but only if it is not an investment house and none of its accounts value more than US$50,000, and its balance sheet assets fall must below US$50 million (J$5.3 billion).
"To qualify as a deemed compliant entity under Annex II there are different categories that different types of financial institutions may fit under and there are a variety of different criteria that such institutions must meet," said Sykes.
"The current versions of the IGA do not name in the annexes any specific types of institutions that are classified as deemed compliant," he said.
"Therefore, before any decisions can be taken as to which local entities meet these criteria, there must be appropriate data and information that can verify that these criteria are met. The task force has had and continues to have discussions with different sector regulators on this issue. This is likely to be settled by way of an inter-agency agreement," he said at the conference.