The United States Foreign Account Tax Compliance Act (FATCA) could lead to significant unintended costs for financial services companies and potentially lead to a polarisation in the industry between compliant and non-compliant firms.
BlackRock director Mark Oh said all large financial institutions would become compliant, but where those institutions dealt with smaller firms, they could potentially lose business.
"The issue is where you deal with a smaller distributor, they may not understand the legislation, they may not know about the legislation and may not agree with the legislation, but they are required to do something," Oh said.
"They might not have entered into an IRS (Internal Revenue Service) agreement, and then we might hit them with a 30 per cent withholding [tax].
"Is that a good experience? No, not for anybody."
FATCA is the US draft regulations that require foreign institutions to report financial details of their US clients.
The legislation would have high implementation costs attached to it, Oh said, as it would nearly impact on every process, including legal and compliance documentation, taxation, and operational and reporting processes.
"You need to build an additional system to deal with FATCA. Currently, no documentation has any wording around FATCA in it," he said.
Companies might also have to build withholding mechanisms to deal with non-compliant companies.
"Maybe [companies] don't want to build a system that withholds, so does that mean they won't deal with any foreign financial institutions? It is possible," Oh said.
"That is another unintended consequence; you are essentially bifurcating the financial services industry into people who comply and those who don't comply."
Oh is based in BlackRock's Hong Kong office and he said the awareness of the potential impact in the region was growing.
In Hong Kong, the superannuation sector is struggling with similar issues as in Australia, where funds do not comply with the IRS definition of a retirement fund.
"The Hong Kong Mandatory Provident Fund does not fall in the deemed requirement standards and is therefore not complaint," Oh said.
"They have similar issues to Australian super funds: you can make voluntary contributions."
But he also pointed out the regulations were still in draft form and more than 1500 submissions were filed to the recent public hearings in the US.
