KPMG in Bulgaria: Bulgaria and the USA have reached an agreement in substance on FATCA

Bulgaria and the USA reached an agreement on April 23 in substance regarding the implementation of the FATCA legislation in Bulgaria.

You will find below a brief overview of this specific legislation, its application in Bulgaria and the main responsibilities arising for the Bulgarian business in this regard.

What is FATCA?

On 18 March 2010, the USA signed into law provisions aimed at improving tax compliance and reducing tax evasion by US persons with offshore accounts or assets. These provisions, also known by the acronym FATCA (Foreign Account Tax Compliance Act), are wide-ranging and will practically oblige financial institutions across the globe to report details on their US clients.

Scope of FATCA 
In general terms, FATCA requires that foreign financial institutions (FFIs) register with the Internal Revenue Service (IRS) and start regularly reporting information on the financial accounts and assets of US taxpayers and certain foreign entities controlled by US tax payers. The information comprises data such as name, address, taxpayer identification number, income generated and account balance at year end.

FFIs which fail to meet their FATCA obligations would be penalized with 30% withholding tax on certain types of income with a US source (such as interest income, dividend income or proceeds from the sale of certain assets).

Intergovernmental agreements 
The direct application of FATCA by FFIs which are willing to comply with their new obligations may be problematic, since it is very often in contradiction with the local legislation regarding bank secrecy and personal data issues. This is also the case in Bulgaria.

A solution to the issue was found in early 2013 when the USA, along with five European countries, developed an alternative approach to FATCA compliance. More specifically, two models of intergovernmental agreements (IGAs) were drawn up aiming to transpose the FATCA provisions into local law and ensure proper reporting of the required information.

FATCA in Bulgaria

In early 2013, the Bulgarian National Revenue Agency (NRA) noted that the Bulgarian Government had agreed to proceed with negotiations on IGA with the USA based on the Model 1 agreement. Under this model, the local tax administration collects information from the local financial institutions and provides it to the IRS. On 23 April 2014, the NRA and the US Department of Treasury agreed on the IGA’s text and Bulgaria was included on the list of countries which had reached an agreement “in substance” with the USA. The IGA has to be signed and ratified by the Bulgarian Parliament.

In practice, for the Bulgarian financial institutions which fall within the scope of FATCA, the IGA means that they can now register for FATCA purposes through the IRS web platform and receive a global intermediary identification number (GIIN). The registration deadline is 1 January 2015 and, before this date, Bulgarian financial institutions will not be subject to 30% withholding tax under the FATCA rules, even if they do not present their GIIN to the entities which should be withholding the tax.

Who is affected by the new rules? 

The IGA affects mainly four groups of persons aligned in the category “financial institutions” as follows: custodian institutions, depository institutions, investment entities and certain insurance companies. The IGA sets out definitions for each of these.

In practice, the entities which fall within the scope of the IGA are mainly financial institutions such as banks, some insurance companies, investment brokers, collective investment schemes and their managing entities. The rules affect both Bulgarian financial institutions and Bulgarian branches of foreign financial institutions.

In addition, the FATCA rules may affect Bulgarian non-financial entities as described in the following section of this newsletter.

Next steps for the business 

As a start, Bulgarian taxable persons should analyze their FATCA status, i.e. whether or not they fall under the scope of the IGA. The definitions under the IGA are specific and an in-depth analysis is recommendable for each particular case.

If the analysis shows that an entity falls within the definition of reporting Bulgarian financial institution, it should take the following steps:

– Registration with the IRS system prior to 1 January 2015
– Scanning its client database with the aim to identify financial accounts held by US individuals and entities controlled by US persons (i.e. reportable accounts)
– Design of internal procedures for verification and control of financial accounts and for gathering of relevant client information
– Preparation and submission of annual reports as per the instructions contained in the IGA and the methodological notes which the NRA is expected to prepare
– Application of 30% withholding tax on certain types of income with a US source realized by beneficiaries not complying with the FATCA rules.

The above analysis is recommendable for non-financial entities as well since the definitions provided by the IGA are specific and do not necessarily conform to the general meaning of the notions used. Thus, the analysis may assign a status of reporting FFI to a seemingly non-financial entity with all the ensuing consequences.

It should be noted that FATCA implications are not excluded even if the analysis reaches the conclusion that the entity is indeed a non-financial institution for the purposes of the IGA. FATCA will still have a certain impact on the business, although significantly eased, since non-financial entities may have to provide their counterparties (beingreporting FFIs) with information on their FATCA status, the organizational chart of the group to which they belong and their ultimate parents. Similar information may be required by the FFIs as part of their own FATCA compliance process and due diligence requirements in identifying the reportable accounts.

How KPMG in Bulgaria can assist you 

The FATCA legislation is voluminous, highly complex and relatively new. Its analysis and the implementation of the resulting obligations for the business require specialized knowledge and experience.

KPMG has a network of FATCA professionals with extensive experience gained through a large number of FATCA projects carried out all around the globe. These projects have helped us to develop a working methodology which we can offer to our clients.

The KPMG team in Bulgaria can offer assistance at every stage of your FATCA project. Depending on the specifics of each individual case, we can help with:

– Analysis of the impact which FATCA has on the particular business
– Assistance in the process of registering the entity on the IRS platform and obtaining a GIIN number
– Assistance in screening the client database with the aim of identifying all financial accounts subject to reporting
– Preparation of new or review of existing internal procedures for collection and reporting of FATCA relevant information
– Review of existing IT solutions for FATCA compliance
– Training of a dedicated FATCA team.

We would be happy to assist you throughout the way which awaits you in ensuring your FATCA compliance and to discuss with you the impact of this new legislation on your business taking into consideration its specifics and particularities.