Foreign Account Tax Compliance Act (FATCA): the operational challenge
Overview and timetable
From 1 January 2013, the US Foreign Account Tax Compliance Act (FATCA) will require foreign financial institutions (FFIs) that enter into an agreement with the US Internal Revenue Service (IRS) to identify their US account holders and report them annually to the IRS. The definition of an FFI is very broad and includes banks, custodians, brokers, many types of funds and insurance companies.
If FFIs choose not to enter into such an agreement with the IRS they will suffer a 30% withholding tax on payments of US source income or capital into the institution, irrespective of whether payments are made to the FFI itself or on behalf of the FFI’s clients.
Compliance will be complex and costly. Some global institutions have estimated their costs at well over $100m.
FATCA is a tax measure but its impact on FFIs stretches far beyond the obvious tax and reporting obligations to require major changes in technology, operations and customer contact. The challenge of compliance is magnified by the number of jurisdictions in which FFIs operate and the variety of products they offer.
Based on the latest guidance, FFIs must enter into an agreement with the IRS by 30 June 2013 to be identified as participating institutions and to give US withholding agents enough time to refrain from withholding from 1 January 2014.
The guidance from US regulators is not yet comprehensive and final rules may not be available until a few months before the compliance date. Draft regulations are expected to be released imminently. FFIs must build programmes flexible enough to deal with uncertainty while positioning themselves to comply within a tight timeframe.
Priorities and challenges
Faced with evolving requirements that span the business, FFIs preparing for FATCA should:
- Prioritise compliance requirements, analyse the likelihood of change and assess resources required
- Ensure consistency in implementation across the group
- Analyse the impact of possible regulatory changes so that the direction can be changed in light of new guidance or regulations
- Monitor activities in the market, including those of competitors and industry bodies, to absorb new information
- Identify synergies with other programmes to accelerate implementation and reduce costs.
A key challenge will be sourcing and updating all know-your-customer processes to identify clients who could potentially be classed as US persons. Specific systems and process changes will likely include:
- Upgrading customer take-on procedures to gain additional information on US status and search information obtained when the account is opene
- Performing searches on existing client accounts, sometimes including paper reviews, to determine account holders’ US status
- Building reporting processes to aggregate information across businesses and enable annual reporting to the IRS
- Implementing procedures to collect withholding taxes on all US-sourced and pass-through payments
- Analysing US and non-US assets held by the FFI to calculate a quarterly pass-through payment percentage.
Compliance with FATCA’s due diligence, verification and annual reporting may also result in conflicts with local privacy laws and regulations.
FFIs will also need to educate customer-facing staff and customers on how FATCA will affect them.
Deloitte has built a global cross-functional FATCA team comprising advisory and implementation skills that is already helping clients to become FATCA compliant with this complex, high-impact change to their businesses.