Complying with the US Foreign Account Tax Compliance Act (FATCA) does not need to be costly, if Australian financial institutions find smart ways to recycle their existing anti-money laundering (AML) infrastructure, according to Deloitte.
"Existing infrastructure can be recycled to a great extent to meet these new regulations," Deloitte financial advisory services partner Graham Dillon said yesterday.
"If you don't recycle, if you don't use your existing investments., well, you might indeed need the new infrastructure," he said.
The use of existing infrastructure should bring down the costs substantially, Dillon said.
"The numbers that were bounded around in more recent history of $100 - 150 million are still out there," Dillon said.
"The point is when you read these [FATCA] regulations that should not be needed," he said.
"But - and this is a big but - that depends on the efforts the institutions go through to recycle their existing infrastructure in a smart way," he said.
"It should not be a $150 million problem," he said.
US citizens who live and/or work abroad are still required to pay tax to the US tax office, the Internal Revenue Service (IRS).
The FATCA regulations are designed to reduce US tax evasion by requiring the identification of US account holders abroad and imposing reporting obligations on financial institutions around the world.
If institutions decide not to supply the required information, FATCA will introduce a 30 per cent withholding tax on their investments in the US, that will apply to items such as interest dividends, rents, and gross proceeds on disposal of property.
In practice, financial institutions do not want to be non-compliant, Deloitte argued, because it would be nearly impossible to maintain relationships with major banks and other financial institutions.
According to JP Morgan, the regulations will have dramatic implications for asset managers, as many have complex distribution networks.
"Few asset managers have substantial exposure to a direct client base - platforms and intermediaries have served to anonymise the client," the firm said in a publication for clients.
"This, unfortunately, does not remove the obligation to respond to - and comply with - FATCA."
The US government expects to raise $7.6 billion over a period of 10 years through these new regulations, JP Morgan said.
Non-US financial institutions must enter into an agreement with the IRS by June 30 2013 in order to avoid being subject to the withholding tax starting on 1 January 2014.
