Monitoring Malaysia’s status on FATCA

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In March 2010, the Foreign Account Tax Compliance Act (FATCA) was enacted in the US for the purpose of preventing the non-compliance of US persons with US taxation laws through the participation and co-operation of foreign governments and financial institutions.

BLD_MALAY_USOn 30 June 2014, Malaysia reached an agreement in substance with the US to implement the FATCA, based on the Model 1 intergovernmental agreement (IGA). However, at the time of publication, the Malaysian government had yet to announce a date for the finalization of the IGA.

Under the framework of the Model 1 IGA, Malaysian-based financial institutions (MYFIs) are to report the required account information on US persons to the Inland Revenue Board Malaysia (IRBM), which shares the information with the US Internal Revenue Service (IRS). The Malaysian government recently announced that the deadline for the submission of reportable information for the years 2014 and 2015 by MYFIs to the IRBM was 30 June 2016.

In anticipation of the finalization of the IGA, the IRBM has taken certain steps to prepare for the implementation of the FATCA in Malaysia. On 15 March 2015, the IRBM published the draft Malaysia-US IGA Guidance Notes on its website, which provides in detail the new due diligence and reporting obligations for MYFIs in relation to the FATCA.

The draft guidance notes were open for public consultation from 15 March to 15 April 2015. Following the comments it received during that period, the IRBM issued a revised version of the draft guidance notes on 11 September 2015.

The IRBM also conducted testing sessions on the FATCA international data exchange service (IDES) system for MYFIs that had completed the IDES enrolment. The IDES system is an online data transmission system that allows the IRS to exchange taxpayer information with foreign tax authorities, and is also the system through which MYFIs will have to file their FATCA reports.

FATCA overview

Under the FATCA, MYFIs are required to undertake new obligations to identify US accounts and report the requisite information to the IRBM. Section 6.1.2 of the revised draft guidance notes defines an MYFI as one of the following: a custodial institution; a depository institution; an investment entity; or a specified insurance company.

All MYFIs are required to undertake the FATCA reporting obligations and are to be identified as reporting MYFIs, unless they fall under one of these categories: exempt beneficial owners as defined in section 8.2; or deemed-compliant MYFIs as defined in section 8.8.

If a reporting MYFI does not comply with these obligations, it could be treated as a non-participating foreign financial institution (NPFFI) by the IRS, and could possibly be subject to 30% withholding tax on all US-sourced payments at the discretion of the IRS. The IRS retains a list of NPFFIs that require other participating FATCA-compliant financial institutions to report on, should they hold an account with them. An NPFFI is defined as a financial institution that is not participating under the FATCA. Additionally, penalties may also be imposed by the IRBM against non-compliant MYFIs. The details of these penalties have yet to be revealed by the IRBM.

Any other entity that is not an MYFI will then be determined as a non-financial foreign entity (NFFE), which is then further sub-categorized as either active or passive. While an NFFE is not under any obligation to register with, or report to, the IRBM or the IRS, it must still determine its own FATCA/IGA classification and, where necessary, self-certify its classification to the reporting MYFI that maintains its financial accounts. This is an important step as only a passive NFFE will need to be assessed by reporting MYFIs when undertaking the due diligence procedures under the IGA. This is to ensure that the controlling persons of the passive NFFEare not US persons who fall under FATCA.

FATCA registration of MYFIs

FATCA’s withholding of US-sourced payments commenced on 1 July 2014. As Malaysia is included in the US Treasury’s list of jurisdictions with an IGA in effect with the US since 30 June 2014, MYFIs are not considered as NPFFIs and are not subject to withholding tax.

As there has been no announcement yet regarding the finalization of the Malaysia-US IGA, it is uncertain when the FATCA reporting obligations will come into full force for MYFIs. However, reporting MYFIs are already able to register themselves on the IRS website to obtain their global intermediary identification number (GIIN) for inclusion under the IRS foreign financial institution list. Furthermore, the IDES system has been set up and a prudent MYFI should take this opportunity to become familiar with the FATCA system of reporting before it is implemented fully in Malaysia.

Business Law Digest is compiled with the assistance of BAKER & MCKENZIE. Readers should not act on this information without seeking professional legal advice. You can contact Baker & McKenzie by e-mailing Danian Zhang at danian.zhang@bakermckenzie.com, or for general enquiries contact Anand Ramaswamy at anand.ramaswamy@bakermckenzie.com