Foreign Account Tax Compliance Act (FATCA)
What is US FATCA?
In 2010, the US Treasury announced the Foreign Account Tax Compliance Act (FATCA). It is intended to prevent perceived tax evasion by US citizens and residents through the use of offshore accounts and is a watershed moment for international information exchange policy. Under FATCA, Financial Institutions (FIs) will be required to comply with a number of obligations, including reporting on accounts held by specified US persons. To encourage compliance FATCA introduces a 30% withholding tax on US source payments to non-compliant institutions. Furthermore, a monthly list of all registered FIs will be made publically available from June 2014. The main elements of FATCA commence from 1 July 2014 and there are a number of steps that need to be taken in advance of that to ensure compliance.
What is an Intergovernmental Agreement (IGA)?
A number of governments, including the UK, have signed agreements to collect data for the US. In return for the agreement, institutions in those countries will not suffer withholding on US source payments as compliance will be mandatory under local laws.
The agreements do not remove the requirement for local FIs to meet certain FATCA obligations. There are still a number of significant steps to achieve compliance and, due to the specific local legislation, the FATCA obligations for some FIs may differ dependent on location. This variation may make compliance more complex for multinational organisations where they operate under several different agreements.
What are the core obligations under FATCA?
Under either the US Regulations or an IGA, a number of obligations remain. We have outlined a number of areas and provided a short description of the work required. Broadly speaking, the requirements are for FIs to analyse new and existing client accounts, identify US account holders and report information on them.
- Entity classification: Entities, branches and subsidiaries will need to understand their own specific FATCA classification and register with the IRS as required. The registration portal is scheduled to open in August 2013 and the deadline for registration is 25 April 2014 (in order to be included on the first publically available list of registered FIs released by the IRS on 2 June 2014)
- Identify Financial Accounts: FIs will need to consider their different products to identify which client accounts will fall to be Financial Accounts for FATCA and need to be included in due diligence procedures to identify reportable accounts
- Classify Pre-existing Financial Accounts: For all Financial Accounts held at 30 June 2014, an FI will need to establish whether they are reportable - broadly this means identifying whether they are held by a Specified US Person or Non-Participating FI. Depending on the value of the account there are certain due diligence procedures to apply in order to reach this classification such as electronic search of data for individuals and obtaining knowledge from relationships managers. The due diligence procedures are usually required even where it is judged that there is a low chance of finding Reportable Accounts
- Classify New Financial Accounts: From 1 July 2014 FIs will need to have in place updated onboarding procedures which identify any new reportable accounts opened after that date. The requirements involve obtaining self certifications, residency detail and testing the reasonableness of information provided
- Report on Reportable Accounts: After classifying accounts FIs will be required to periodically report information such as account holders’ name, TIN, account balance and payments to the relevant authorities
- Withholding: FIs in partner jurisdictions will not be required to withhold on US source payments, however, where relevant payments are being made to a non-participating FI they may be required to pass information to the immediate payor in order to facilitate withholding. Where no IGA is in place then FIs will need to consider their withholding responsibilities.
Are there other similar regimes being developed?
FATCA has proved to be a watershed moment for international information exchange policy. As noted above a number of jurisdictions have entered agreements with the US and some of these have announced their intention to develop their own ‘FATCA-like agreements’. In May 2013 HMRC in the UK released a draft model agreement which is intended to facilitate information exchange with the Crown Dependencies and Overseas Territories. This agreement seeks to gather information on UK persons investing through those jurisdictions and the wording of the draft agreement is very close to that of the US FATCA IGA and is intended to be implemented on a similar timescale.
Furthermore, the G8 announced it would:
“commit to establish the automatic exchange of information between tax authorities as the new global standard, and will work with the Organization for Economic Cooperation and Development (OECD) to develop rapidly a multilateral model which will make it easier for governments to find and punish tax evaders.”
The expectation is that information exchange in this area is therefore set to expand and many institutions are considering to what extent they can ‘future-proof’ change programmes in order to account for new regimes. It is possible that in the near future the requirement will not be to identify just US or UK account holders, but to identify the relevant residencies of all account holders and report as required.
We have a proven approach to supporting FIs in developing a response to FATCA compliance and can offer scalable solutions ranging from ad hoc advisory to discrete deliverables including:
- Entity classifications and registrations services;
- Product and services reviews;
- Quality assurance;
- Implementation support (such as updating onboarding and performing due diligence reviews);
- Training and eLearning modules.
We have a proven approach to supporting businesses in understanding the correct FATCA classification and developing appropriate responses. If you would like to discuss any of the above in more detail we would be happy to assist. Our team has exceptional credentials in this area and we are ideally placed to provide assurance to your business if required.