The Effect of Foreign Account Tax Compliance (FATCA) in Indonesia

The Foreign Account Tax Compliance Act (FATCA) is a United States government regulation based on the Hiring Incentives to Restore Employment Act dated March 18^th 2010 and became effective on January 1^st 2013.

This regulation regulates the obligation for Foreign Financial Institutions (FFI) to report financial reports of US citizens to the International Revenue Service (IRS) contained in FFI. The main objective of FATCA formation is to tackle tax avoidance by US citizens who make direct and indirect investments through foreign financial institutions or foreign company ownership.

Foreign Financial Institution (FFI) is a financial institution that is classified as a foreign entity, whose activities include: accept deposits, hold financial accounts, engaged in investment, reinvesting, trading securities, and share interest. Non Foreign Financial Entity (NFFE) is a Foreign entity that is not a financial institution.

With the enactment of FATCA, FFI and NFFE, US citizens, both personal and in the form of investment in these entities, are required to provide their account statements to the IRS. FFI has agreed to cooperate with the IRS to sign the FATCA Agreement. FFI's duties include:
1. Identify and provide annual reports on US information account holder.

2. Act as an agent who has the duty to withhold taxes on payments originating from US citizens who do not violate FATCA.

For FFI and NFFE that violate FATCA rules, the IRS will be subject to 30% withholding tax.

The G5 countries (France, Germany, Spain, Italy and the UK) issued an Intergovernmental agreement (IGA) model to implement the broad-ranging provisions of FATCA. The IGA model provides a framework for the approach that each country must follow to negotiate bilateral intergovernmental agreements with the United States. Every country that enters into the bilateral agreement is designated as "FATCA Partners". Intergovernmental Agreements (IGA) has 2 (two) models, including:

Model I: Foreign Financial Institution (FFI) reports information on U.S. Accounts through the tax directorates of each country, not directly to the IRS. The tax directorate will then provide the information that has been obtained to the IRS.

Model II: Foreign Financial Institution (FFI) reports the U.S. Accounts directly to the IRS according to IGA working papers.
The Effect of FATCA Implementation in Indonesia

FATCA became effective in 2014 and has an impact on financial institutions or institutions in Indonesia. Some of the problems that may occur in the implementation are:

1. Compliance Issues
With the increasing number of reporting by FFI there will be problems regarding how this information will be collected and reported.

2. Business Issues
With the enforcement of FATCA, business people are faced with 3 (three) choices, namely:
• Follow FATCA
• Not participating in FATCA and subject to a 30% discount on US-sourced income
• Not participating in FATCA and withdrawing all investment

3. Legal Issues
For certain countries, there may be restrictions on disclosing personal information to foreign governments or there may be bank secrecy laws. There is a high probability that these regulations collide with FATCA so that there is a need for harmonization of regulations to conform these regulations to FATCA.

4. Operational Issues
In implementing FATCA, every customer information must be updated, complete and available electronically to meet reporting requirements, this is a data collection process that is quite burdensome for financial service business players and state financial institutions.
In general, the implementation of FATCA will be an administrative and financial burden for related institutions, especially in the financial sector. On the other hand, by not participating in FATCA, the financial sector institution will bear some business risks. Some of the impacts on Indonesia if you participate in FATCA are:
 

1. The financial sector in Indonesia will not be isolated in the international financial business sector because most of the FFIs in other countries have declared their participation in entering into the FATCA agreement and even some countries that have signed FATCA.
2. Through the IGA mechanism, the Indonesian government can collaborate reciprocally so that the data obtained from the IRS can be used to increase the potential for tax revenue in Indonesia.
3. The IGA mechanism will eliminate the obligation to make deductions for all FFIs in the territory of the IGA participating countries.

 
Therefore, the implementation of FATCA in Indonesia requires the government and financial institutions to evaluate/ update their regulations, both tax regulations and regulations that regard financial institutions so that they do not conflict with FATCA regulations.