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The Impact of FATCA on U.S. Banks

Global financial services industry


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Overview

Seeking to address perceived abuses by U.S. persons with offshore assets, the U.S. Congress enacted the Foreign Account Tax Compliance Act (FATCA) in 2010 to assist the IRS in identifying offshore income held by U.S. persons. FATCA identifies offshore income by compelling non-U.S. entities to report the identities of U.S. account holders to the IRS, using a new U.S.-sourced withholding tax levied against non-cooperative foreign entities to enforce compliance. Similarly, FATCA requires U.S. persons to specifically identify substantial foreign assets (and income related to such assets) beginning on their U.S. tax returns filed in 2012. Comparing the information it obtains from compliant foreign entities with the new U.S. tax return information, the IRS believes it will quickly be able to identify sources of unreported foreign income and discourage tax evasion.

FATCA’s mechanism for compelling compliance, a new 30 percent withholding tax on U.S. source income, will have a significant impact on all U.S. and foreign financial institutions (FFIs) and it will likely encourage FFIs, as well as other affected foreign entities, to share information with the IRS for the first time. The withholding tax will be imposed in a similar manner to the existing withholding tax on U.S. source income under Chapter 3 of the Internal Revenue Code by requiring payors (or withholding agents) of U.S. sourced income and gross proceeds to withhold 30 percent on payments to non-U.S. entities that do not certify their compliance with FATCA. To avoid the tax, FFIs must enter into formalized agreements with the IRS to share the identities of U.S. account and asset holders (or be resident in a country that has a Model 1 Intergovernmental Agreement (IGA) with the U.S. to implement FATCA). Other affected non-U.S./non-FFI entities seeking to avoid the tax will be required to provide information to the withholding agents relating to any of their U.S. owners.

In final regulations released in January 2013, the U.S. Treasury and IRS have provided detailed requirements that FFIs, U.S. withholding agents and other non-U.S. entities must comply with to avoid the withholding liability under FATCA. The proposed regulations also detail exceptions and exclusions to the withholding and suggest a broader framework of international cooperation seeking to ease challenges of FATCA compliance on foreign entities. If affected by FATCA, you should understand the implications of these rules, exceptions and frameworks on your industry and business and prepare to address them. The proposed regulations have eased some of FATCA’s compliance deadlines, but some hurdles (and opportunities) still exist to prepare your processes, systems and business relationships now for a smooth transition to the new, more transparent international business environment that FATCA attempts to create.

Industry impact

FATCA requires U.S. banks to enhance the information they collect about non-financial foreign entities (NFFEs) and FFIs to whom they make a withholdable payment under FATCA. For individual payees onboarded after July 1, 2014, banks may not rely on a Form W-8 as proof of foreign status if contradictory information (i.e. U.S. birthplace) exists in know your customer (KYC) systems. For payees onboarded before July 1, 2014, banks are not required to electronically search existing KYC systems for a U.S. birthplace but must monitor for it as new information is received.

Any new or pre-existing payee that fails to provide satisfactory information (non-participating FFI or non-compliant NFFE) is subject to 30 percent tax withholding on payments of U.S. source fixed, determinable, annual or periodic (FDAP) income and gross proceeds1. If an FFI does not sign a FATCA agreement (not required for a Model 1 IGA FFI) or fails to fulfill its obligations, the U.S. bank must withhold a 30 percent tax on payments of FDAP income and gross proceeds payable to the FFI or its clients. Certain grandfathered obligations are excluded and withholding under FATCA replaces withholding that would have occurred under other tax regimes to the extent double withholding would otherwise apply.

In most cases, FFIs that sign a FATCA agreement (Participating FFI or “PFFIs”) or Model 1 IGA FFIs will be required to push down their own withholding responsibilities to the U.S. bank2. In these cases, the U.S. bank will receive a Form W-8IMY and a withholding statement detailing the amounts to be withheld. Absent these documents, the U.S. bank will be obliged to withhold 30 percent on the full amount of the withholdable payment.

Next steps

  • Impact assessment: Identify the business units, operational areas, IT systems and legal documents (e.g. account opening agreements, vendor agreements, counterparty agreements, etc.) impacted by FATCA. Operational areas that would be impacted include client onboarding, payment processing, tax withholding and depositing and regulatory reporting
  • Client classification: Classify accounts and other impacted relationships (e.g. counterparties for derivatives contracts) per FATCA rules to identify those needing special treatment.
  • Implementation planning: Make business decisions that would reduce the ongoing and implementation costs for FATCA compliance. Leverage and modify existing processes and systems to further reduce implementation costs and business disruption.
  • Communication: Communicate with internal and external stakeholders
  • Governance: Update policies and procedures, legal documents.

Important FATCA dates in 2013 and 2014 

2013  
August 19 FATCA registration portal will be accessible for registration
2014  
April 25 Last date an FFI can register with IRS to ensure inclusion in the June 2, 2014 IRS FFI list
June 02 IRS scheduled to publish first “GIIN” list
July 01 Grandfathered obligations cutoff
July 01 USWA & FFI to begin new account onboarding
July 01 Begin income withholding (excluding certain offshore payment of U.S. source income)
December 31 FFI & USWA to complete documenting/remediating preexisting accounts that are considered “prima facie FFIs”

**Other withholding/reporting requirements phase in from 2015 through 2018

To learn more

The final regulations are extensive and complicated and the changes from the proposed regulations are substantial. This document attempts to highlight certain important provisions of the final regulations that generally impact U.S. and non-U.S. mutual funds and other regulated open-ended funds and do not represent a broad-based summary of all of the changes. If you are directly or indirectly affected by the compliance obligations of the final regulations, you will likely want to take affirmative steps soon with respect to FATCA implementation. If you wish to discuss the final regulations or any FATCA-related matters, please contact one of our FATCA contacts listed on the following pages.

Full article is available for download. For more information please contact a Deloitte FATCA Leader or click here.

As used in this document, “Deloitte” means Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

1 Gross proceeds withholding begins on January 1, 2017.
2 The FFI will be required to conduct the withholding to the extent it is a fully withholding qualified intermediary, withholding partnership or withholding trust.

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