We expect universal compliance with FATCA by all major Asian financial institutions. FATCA enforces its requirements through a withholding tax on US-source income and assets. This means that any institution or account having direct or indirect interests in such assets will be forced to comply in order to meaningfully transact in the capital markets.

Managers of high-value accounts will be most affected. They may be called upon to perform more due diligence for FATCA, and respond to internal inquiries regarding the US status of their clients. Wealth managers must implement documentation safeguards for new accounts, review account documentation for preexisting accounts, and eventually may need to report and withhold tax.

Most of what is required must be completed by June 30, 2015, and very major aspects must be completed as soon as June 30, 2013. This will require major wealth managers to make significant and immediate commitments in highly specialized resources from now into 2015. Undoubtedly, for an Asian wealth manager, locating and retaining such highly specialized teams of people for this period of time will be the most significant challenge to successful execution.

Wealth managers should immediately consider each of the new exceptions provided in the proposed regulations as these will drive the level of effort required to comply. Absent an exception applying, the regulations provide a detailed roadmap to the implementation of procedures for new accounts and the remediation of preexisting accounts in a manner which will meet the requirements of FATCA regardless of progress made or not made towards intergovernmental agreements.

Exceptions to the rule

Wealth managers that are licensed and regulated under their local laws as a bank, broker, financial planner or investment adviser may be deemed to be FATCA compliant. This generally requires the wealth manager and its affiliates to have no place of business outside its home country, solicit customers only in its home country, be subject to domestic withholding and reporting rules for residents, and have at least 98 per cent of accounts held by residents.

There will also be investment funds which are deemed to be FATCA compliant with one type depending heavily on agreements with distributors. The agreements must prohibit sales of fund interests to certain types of investors, including US persons. Generally, a distributor is not required to otherwise comply with FATCA as long as it meets certain requirements and limitations regarding size, customers, operations and marketing, and agrees to limited procedures and agreement modifications.

There are additional exceptions which may reduce the scope of FATCA for firms depending on circumstances, including wealth managers which are subsidiaries of larger financial institutions. The retirement plan exception has also been expanded and this means that more will be deemed to be FATCA compliant.

Dates for your diary

The effective date of FATCA is 1 January 2013; however, the Treasury and IRS have provided much-called for transition relief in the new regulations. The most important transition relief gives firms until 30 June 2013, to implement new account onboarding safeguards and then sign an agreement with the IRS. The rules also give firms two years after signing their agreement to remediate preexisting accounts.

Reporting is phased in and must be completed by 2016. Withholding on US-source amounts begins in 2014, while the controversial foreign passthru payment withholding regime is pushed back to 2017. (There are several reasons for the foreign passthru payment delay with one being the hope that near universal compliance with FATCA may allow the Treasury and IRS to radically simplify the foreign passthru payment requirements.)

We recommend that all Asian wealth managers begin the process of determining the scope of impact immediately so that they can begin to execute on these projects. Some wealth managers may find their requirements limited; however, global, regional and multi-national Asian wealth managers should expect to be subject to almost all the major requirements of FATCA. After the release of the regulations, there is no longer any reason to delay detailed scoping and implementation.

Wealth managers have only until 30 June 2013, to implement new procedures and then sign their agreement with the IRS. At the same time, they will need to begin the remediation of preexisting high-value accounts in order to certify compliance within one year of their agreement, and then certify within two years that remaining accounts subject to remediation are in compliance.

The major challenge will be the very tight deadlines combined with the need for highly specialized resources combined and the one-offness of the effort. The people needed to accomplish this project are rare in Asia and elsewhere. The right people will have specific expertise and training on a highly technical subject. The proposed regulations are almost 400 pages long, filled with technical terms and cross-references and references to other areas of the Internal Revenue Code and US tax regulations, and include many terms of art.

And, we expect more rules, many more pages, and more complexity in the future. Finding the right types of people to interpret and operationalize these rules, manage and execute the projects on time, and having access to credible and experienced US tax advice who can properly train people will be extremely difficult. The search for these types of people and teams should begin now before the market is depleted. One way forward is that Asian wealth managers outsource this difficult resource problem.

What do Asian wealth managers need to know about FATCA?

Under FATCA, foreign financial institutions are required to report information about offshore accounts and investments held by US taxpayers to the IRS annually. These institutions include banks, custodians and brokers, insurance and real estate companies, wealth managers, hedge funds, mutual funds, and private equity firms. FFIs must enter into agreements with the IRS. If they fail to enter into such agreements to report US accounts, they will face a 30 per cent withholding tax on US-source income and sales proceeds.

Below are the main points and changes that Asian wealth managers should note from the new proposed regulations:

1. The rules simplify due diligence procedures for certain accounts

The Treasury Department has modified due diligence procedures for pre-existing accounts to permit FFIs to rely on electronic searches for accounts ranging from $50,000 to $1 million. For accounts with a balance of more than $1 million, FFIs will have to do paper searches that would be limited to documentation, current account files, and certain correspondence. FFIs would also be required to question any relationship managers associated with these accounts to confirm that they don't have any knowledge that the client is a US person. Searches are not required for accounts of less than $50,000 or for certain insurance contracts or entity accounts of less than $250,000. In many cases, including most instances of new account onboarding, banks would be able to rely on know your customer and anti-money laundering rules they already have in place.

2. The rules provide some relief around reporting

The proposed rules give FFIs additional time to make adjustments to their systems for reporting US income. Through 2014, FFIs would only have to provide identifying information (name, address, taxpayer identifying number, and account number) and the account balance or value of the US accounts. Beginning in 2016, they will be required to report income. By 2017, the full transactional reporting will be required.

4. The rules give members of expanded affiliated groups more time to comply

These rules would add a three-year transition period to the expanded affiliated group requirement to comply with FATCA. The rules previously required that each FFI in an expanded affiliate group needed to sign up either as a participating or deemed compliant FFI in order for all FFIs in the group to be in compliance - meaning no one could participate if even one affiliate could not satisfy the requirement. The new rules now provide additional time for affiliates that are in restricted countries to enter into agreements. However, these restricted FFIs will still have to go through due diligence requirements with respect to their accounts. And, if they receive 'withholdable' payments, then they will be subject to withholding during this transition period.

5. The treatment of foreign passthru payments remains uncertain

Participating FFIs are required to deduct and withhold 30 per cent of any passthru payment made to a recalcitrant account holder or non-participating FFI. Under previous Treasury and IRS guidance, payments were 'deemed' to be attributable to a withholdable payment based on the percentage of the participating FFI's total assets that are US assets. As a result of concerns raised about the practical difficulties with this approach, there will be further consultation on foreign pass thru payments with the objective of reducing the compliance burden. To facilitate this, withholding on foreign pass thru payments has been deferred to 2017.

6. These are proposed regulations, not final ones

The rules released by the Treasury Department and IRS are not yet finalised. Industry can still submit written or electronic comments to the Treasury Department and IRS by 30 April. A public hearing is scheduled for 15 May.