The New Zealand Law Society says it is continuing its discussions with the New Zealand Bankers' Association and Inland Revenue concerning the effect the US Foreign Account Tax Compliance Act (FATCA) will have on moneys held in solicitors' trust accounts.
In a letter to law firm trust account administrators, the Law Society says the discussions have continued much longer than anticipated.
"It is hoped this matter will be resolved in the near future on a basis that will involve lawyers in significantly fewer obligations than previously contemplated," it says.
The Law Society says that while it cannot give legal advice, it considers that in the meantime it is desirable that law firms which can elect, and wish to elect to be NFFEs (Non-Financial Foreign Entities), do not delay making this election.
"The benefit of making this election is to avoid the law firm and its trust account entity being financial institutions with all the attendant FATCA reporting obligations to Inland Revenue which that status involves."
The letter says law firms should refer to the Practice Briefing, FATCA and New Zealand Law Firms, for information about whether a law firm can elect to be an NFFE, and as to whether a law firm would be an active or passive NFFE (most, if not all, law firms would be active NFFEs).
The Practice Briefing notes that IRD guidance is expected "before mid-2015", but this is now dependent on completion of the continuing discussions.
Becoming an NFFE
The letter says there is no formal method prescribed for a law firm to become an NFFE but a law firm's partners or directors might adopt a resolution along the lines of, "that [name of firm] adopt the US Treasury Regulations definition of 'investment entity' and advise its bank(s) promptly that as a consequence of adopting this definition, [name of firm] is an active non-financial foreign entity and that its trust account entity is a passive non-financial foreign entity."
Once a law firm becomes an NFFE through adoption of the US Treasury Regulations definition of "investment entity", it should promptly advise its bank of its status and the status of its trust account entity.
The letter says a law firm's letter to its bank could read as follows: "We advise that [name of law firm] has adopted the US Treasury Regulations definition of 'investment entity' as a result of which the firm is an active NFFE (non-financial foreign entity), and its trust account entity is a passive NFFE."
Responding to FATCA requests from bank to sole practices
As FATCA applies to entities and not to individuals, a lawyer in an unincorporated sole practice could respond to any FATCA request from its bank that "on account of my being a sole practitioner, FATCA will apply only in respect of moneys in my trust account. I await guidance from the New Zealand Law Society on how FATCA will apply in respect of such moneys."
The CRS regime
The Law Society says the adoption by a law firm of NFFE status will, incidentally, align the law firm with its likely status under AEOI (Automatic Exchange of Information - also referred to as the Common Reporting Standard (CRS)) which will be introduced in New Zealand from 1 July 2017.
"Under the CRS regime law firms are likely to be classified as NFEs (Non-Financial Entities, very similar to NFFEs under FATCA). It would therefore be beneficial for a law firm to have a similar status under both regimes. The CRS regime will be similar to FATCA and will involve NFE law firms collecting information for banks which will be reported to Inland Revenue and onwards to the tax authorities of jurisdictions with which New Zealand has bilateral obligations."