Introduction
Can a Vietnamese entity operating wholly in Vietnam be subject to US tax liability and to US penalties? The answer is, yes. Some of the exposed entities are securities firms, exchange traded funds, fund management companies and commercial banks. There are others.
The Foreign Account Tax Compliance Act (“FATCA”) was enacted in 2010 to prevent US taxpayers and US corporations from evading US taxes by investing their money through foreign financial institutions (“FFIs”). FATCA requires FFIs to disclose account information of US individuals, US corporations, and other foreign legal entities controlled by US individuals to the US Internal Revenue Service (“IRS”).
Foreign Financial Institutions that are required to report under FATCA include: (a) depository institutions;[1] (b) custodial institutions[2] ; (c) investment entities[3]; and even (d) certain types of insurance companies that have cash value products or annuities. Pension funds or retirement funds that are established in Vietnam, in certain instances, must report their account holders who are either US citizens or US entities unless they are foreign financial institutions exempt from FATCA reporting.
To require FFIs incorporated in, say, Vietnam or that have a branch in Vietnam, to report foreign accounts held by US taxpayers or US entities, the United States entered into intergovernmental FATCA reporting agreements (“IGAs”) with 112 foreign countries, including Vietnam. Of the 112 foreign countries, 98 countries (including Vietnam) have Model 1 IGAs, and 14 countries have Model 2 IGAs.
Model 1 IGA Between the United States and Vietnam
In a Model 1 IGA such as Vietnam’s, financial data about US citizens or US corporations with foreign accounts that exceed US$50,000 are collected by the partner country’s FFIs and normally sent to that country’s governmental tax authority. But in Vietnam FFIs are required to send the information to the State Bank of Vietnam (“SBVN”). The SBVN then passes the information on to the IRS. The IRS uses the information to determine whether a US taxpayer has paid and is paying the US taxes it owes. There are 98 countries that have agreed to Model 1 reporting. In a Model 2 reporting IGA, the foreign government’s tax authority is removed from the reporting chain, and the FFIs report all US account holders directly to the IRS through the IRS’ website. A total of 14 countries have entered a Model 2 IGA with the United States.[4]
In 2016, the United States and Vietnam entered into a bilateral FATCA reporting IGA under Model 1B. Under the Model 1B IGA, Vietnam’s financial institutions must perform a due diligence review of their account holders. If they are a reporting FFI, they must report US individual and corporate account holders with accounts over US$50,000 to the SBVN.
Under the US-Vietnam FACTA IGA, all financial institutions established in Vietnam or which have a branch in Vietnam and which are not otherwise exempt under Annex II of the US-Vietnam IGA, are subject to FATCA reporting. In other words, unless an FFI is an exempt entity, FATCA requires that it report to the SBVN. Exemptions are very limited, and failure to meet each element of an exempt entity means the FFI is a reporting FFI under both FATCA and the US-Vietnam IGA.
How can an FFI Determine Whether It is a Reporting FFI under US-Vietnam IGA?
For an FFI to determine whether it is exempt from reporting, it must consult the United States Code Section that established FATCA as well as the US-Vietnam IGA. All reporting from Vietnam to the United States Department of Treasury and the US IRS will be done by the SBVN. The SBVN can make the final decision whether a Vietnamese FFI is a reporting entity or is exempt from reporting under the US-Vietnam IGA.
In order to determine whether an account holder is a US individual or US entity, or whether the account holder has sufficient nexus to be deemed a US account holder, the reporting FFI must seek answers and documentation to address the following seven questions: (1) is the account holder a US citizen or resident; (2) does she have a US place of birth; (3) does she have a US address, including post office box; (4) does she have a US telephone number; (5) are repeating payment instructions made to a US address or to an account maintained in the U.S.; (6) has a current power of attorney or signatory authority been granted to a person with a US address; and (7) does the account holder have “in care of” or a hold mail address which is the sole address for the account holder.
Once SBVN determines that the Vietnamese FFI is a reporting FFI, the FFI must obtain additional information from the US account holder or suspected US account holder through the 01a FATCA Form or the 02a FATCA Form. Other forms that relate to US individuals or individuals who may be connected to the US include: (a) W-9; (b) W-8BEN; and (c) W-8BEN-E.
If the Vietnamese FFI is a reporting FFI and has failed to report its US account holders to the SBVN, the SBVN can impose sanctions and penalties on the Vietnamese FFI.
How can the US Department of Treasury and/or the IRS know if an FFI has violated FATCA?
It is not a flawless system, but some simple cross checking is possible. Because FATCA is a dual reporting statute, required reporting must be done by both US taxpayers (including US legal entities) of the existence of its foreign accounts in a Vietnamese FFI, and by the FFI, in the current or previous years, of accounts they have of US taxpayers. If the US taxpayer reported its foreign accounts held by the FFI and if the FFI did not report the existence of the US taxpayer’s foreign account with it, the IRS would know of the FFI’s failure to report. Similarly, if the FFI reports the existence of an account held by a US taxpayer, yet the US taxpayer failed to report the foreign account, the IRS would know that the US taxpayer failed to report the existence of the foreign account.
Potential Penalties on an FFI for Failure to Report under FATCA
The United States can impose a 30% withholding tax on US sourced payments and profits made in the United States by the non-compliant FFI. Such payments include interest, dividends, and other fixed or determinable annual or periodic gains from the US. More seriously, the United States can restrict the FFI’s access to the United States financial markets, which can significantly impact its operations and ability to conduct transactions involving US entities. It is also likely they will be subject to increased regulatory scrutiny from US regulators in connection with the FFI’s future activities. There is also the problem of reputational damage.
Potential Penalties on the U.S. Taxpayer that Failed to Disclose Foreign Financial Account
If a US taxpayer fails to file Form 8938 (Statement of Specific Foreign Financial Assets) with their tax return, they may be subject to a penalty of US$10,000. If the failure to file continues for more than 90 days after the IRS notifies the taxpayer, an additional penalty of US$50,000 may be imposed.
If a US taxpayer has knowingly violated FATCA for the purpose of tax evasion, he or she may face steep fraud penalties of up to 75% of the tax underpayment.
Conclusion
In order to prevent US taxpayers and US corporations from evading the payment of US taxes, the US Congress passed FATCA in 2010. Under FATCA, all US taxpayers with financial accounts abroad must report the existence of such accounts to the Internal Revenue Service. In addition, to prevent US taxpayers from hiding their accounts offshore, the United States entered into intergovernmental bilateral agreements with foreign countries, including Vietnam, to ensure that foreign financial institutions (FFIs) established in foreign countries report the existence of foreign accounts they hold belonging to US taxpayers. In Vietnam, FFIs established in Vietnam are either subject to reporting or are exempt from reporting under Annex II of the US-Vietnam Intergovernmental Agreement (IGA). To determine whether an FFI in Vietnam is subject to FATCA reporting or exempt from reporting, the FFI has to consult FATCA itself, the US-Vietnam IGA, and potentially must obtain a determination of the reporting authority designated under the IGA–the State Bank of Vietnam. Violation of FATCA reporting requirements will result in penalties to both the FFI as well as to the US taxpayer.
For further information, please contact:
Nguyen Huu Minh Nhut, Partner, Russin & Vecchi
NHMNhut@russinvecchi.com.vn
[1] Banks.
[2] Mutual funds, retirement funds, pension funds.
[3] Hedge funds and private equity funds.
[4] If an FFI is subject to a Model 2 IGA, it must register and report US account holders and suspected US account holders directly to the IRS through the FATCA Registration Website. In that case the Model 2 FFI will receive a Global Intermediary Identification Number (“GIIN”) from the IRS.
