Life insurers with US
policyholders face another tough regulatory hurdle: the Foreign
Account Tax Compliance Act (FATCA) which was enacted in March 2010
as part of the Hiring Incentives to Restore Employment
Act.

FACTA requires foreign
financial institutions (FFI) to report information to the US Inland
Revenue Service (IRS) about financial accounts held by US
taxpayers, or by foreign entities in which US taxpayers hold a
substantial ownership interest.

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To comply with FATCA, or face
a 30% withholding tax, a FFI will have to enter into an agreement
with the IRS to:

  • identify US
    accounts;
  • report certain information
    to the IRS regarding US accounts; and
  • withhold a 30% tax on
    certain payments to non-participating FFIs and account holders who
    are unwilling to provide the required information.

According to professional
services firm Deloitte, the withholding requirement is applicable
to what it terms “withholdable payments”, which include:

  • premiums and annuity
    payments;
  • interest and dividends;
    and
  • proceeds from the sale or
    redemption of any security of a type which would give rise to US
    interest or dividends.

In a review by
PricewaterhouseCoopers (PwC) of FACTA, the professional services
firm noted that the act requires that by July 2013 non-US insurance
companies should have in place a process to review all information
received from policyholders for indicators that the policyholder
may be a US person.

Reporting and withholding
requirements will commence in January 2014.

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PwC also noted that many
insurers are awaiting additional guidance from regulators and have
yet to start preparing for FATCA.

PwC warned that preparation
will take almost two years and leaves insurers waiting to commence
the task in danger of running out of time.

“Insurers are generally
behind other sectors, such as banking and asset management, in
understanding what is needed to prepare for the expected changes in
front, middle and back office technology and operations, as well as
analysis and integration of disparate areas,” said Dominick
Dell’Imperio, a partner at PwC US.

“Insurers have to make progress amid uncertainty or else
face a potentially insurmountable hurdle down the road.”