Two things are obvious from the preceding week’s presentation. The first is that both financial and non-financial institutions are targets of the FATCA law, and the other is that the new rules affect them in similar ways. Though they both must be ready and able to provide the information desired by the US Government, only those private non-financial entities in which US citizens or permanent residents are substantial owners have to respond. A substantial owner is one who owns 10 percent or more of the shares or value of the business. Sole proprietorships and small partnership entities know who their owners are and can deal with that issue without much effort. Larger enterprises with hundreds or thousands of owners will have to perform more due diligence. They will also have to modify their information systems to ensure that they can report all the information needed.
Yet, their work will not be as burdensome as those of the commercial banks. Be that as it may, risks remain for all types of private businesses. Substantial owners of sole proprietorships, small partnerships and even closed companies might believe that with full control over their information, they do not have to be above board about their ownership status. This could be a mistake since information about links to the US could reside in other organizations, inside and outside of Guyana, like the lending institutions, insurance companies and other financial houses with which they do business and that also have to perform due diligence, and report information about them to the IRS. With the Caribbean Single Market and Economy, it is quite possible that a financial business in Trinidad and Tobago for example could identify a customer as a US person while the Guyana entity identifies the same customer as a non-US person. That conflict will have to be resolved by both the erring local financial institution and the taxpayer, and could involve criminal consequences for both if the conflict stems from a deliberate act on the part of the erring parties.
The local financial institutions do not have the luxury of skipping the due diligence, and they can hardly be happy with the unpaid roles of information collectors and withholding agents of the US government. Since tax liabilities are calculated on the basis of cash and constructive cash received during the year of assessment, the focus is squarely on commercial banks because they provide the most transparency about the amount of cash a taxpayer has. Unless their information systems were configured already to capture in one place the type of information that needs to be collected, stored and transmitted, the commercial banks in Guyana will have to invest heavily in modifying their information systems.
The banks in Guyana have begun the process of evaluating the action required of them, but they are nowhere near determining what it will cost to implement and maintain the changes imposed by the US demands for information about its citizens and residents. Even with the exemption of certain pre-existing accounts, a considerable challenge for the commercial banks remains. They need to identify all their customers in all parts of the world. Some of this might have been accomplished with the “know your customer” profile of the anti-money laundering act. In addition, they will need to have a proper understanding of some US tax rules and laws so as to ensure that they are configuring their information systems in the most efficient and effective manner. It is likely that they will have to rely on persons familiar with US tax laws to ensure that they have the correct focus and definition of the issues, proper software and communication links in place to meet the reporting and withholding requirements.
The burden of carrying out the obligation increases where the value of an account exceeds US$1 million. The proposed regulations require that a manual review be performed also on those accounts. A local financial institution that has a small quantity of those types of account would not have much work to do, but those with many such accounts would incur significant extra costs. If the estimates put out by US accounting organizations could be relied on, the cost for each bank in Guyana could be substantial, reaching somewhere between five and 10 percent of their deposit base.
Even as banks ready themselves for the unwanted responsibility and unplanned investments, they could face a different stress test. Their deposits could take a hit and injure the business models that they have developed with the existence of large amounts of liquidity in their possession. Some affected persons could decide to avoid all the worries related to offshore accounts and alter their relationship with the banks. They can decide to close their accounts or they can decide to reduce substantially the amount of money held in bank accounts in Guyana. This happened to many Swiss banks which saw their offshore North American assets shrink by about 60 percent in the last two years when Americans became aware of the stricter reporting law. It is not known yet what the banks in Guyana will do, but some might behave like aggrieved European banks and decide to terminate the accounts of U.S. citizens as happened following the announcement of the stricter reporting requirements. Some large European banks also decided to avoid the problem altogether by refusing new applications from Americans.
In addition, Guyanese who might be sending money home for the purpose of enjoying their retirement in Guyana might decide that it was not worth the hassle and stop saving in Guyana. There is therefore a possibility that remittance flows to Guyana could take a hit with serious implications for resolving its social and economic problems. The investment in housing and income-generating activities to support a retired lifestyle might also be abandoned. Guyanese who have nothing to do with US tax payments could also be adversely affected if they are part of a company with an uncooperative substantial owner. A payment for a company passing through a bank could be subject to the 30 percent withholding if the company has a recalcitrant owner causing all owners to lose income. With their bottom line likely to be adversely affected, companies might also decide to jettison US citizens or green card holders as shareholders.
Developments of this type could undermine the macroeconomic framework of the Guyana economy. Transferring money abroad instead of saving it in Guyana would reduce the deposit base of commercial banks considerably and slow down domestic lending. Such action could also slow down the rate of reinvestment of profits because entrepreneurs who might have kept their money in Guyana with a view to expanding the business might decide to scale back their operations and send the money overseas. A decline in remittances, a decline in bank savings and a decline in bank lending could also reduce aggregate demand for goods and services in Guyana. The 2012 budget revealed that the growth of many industries in the service sector, the largest sector of the economy, was progressively declining over the last five years. This decline could be further exacerbated by the US tax evasion hunt.
The local financial and non-financial entities need to undertake a serious evaluation of the implications of the FATCA and its proposed regulations so that they could clearly define the tasks to be performed, cost them and set up an implementation schedule. That process would help with a cost-benefit analysis of implementing the new tax evasion law. Armed with such useful information, organizations in Guyana could also make a determination as to what attitude to adopt with respect to the new FATCA law and the course of action to take to become compliant, if they wish to become unpaid agents of the US Government.