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The Impact of FATCA on U.S. Broker/Dealers

Global financial services industry



The Foreign Account Tax Compliance Act ("FATCA") is by far one of the most extensive and complex tax information reporting regimes created by the Internal Revenue Service ("IRS") and U.S. Treasury. After almost three years of notices, announcements, and proposed regulations, the final FATCA regulations were published on January 17, 2013 and take a risk-based approach similar to the Anti-money-laundering (AML)/Know Your Customer (KYC) concepts and serves to reduce the operational burden on financial firms while maintaining FATCA's core objective to address perceived abuses by U.S. taxpayers with respect to assets held offshore. However, the risk based approached is a double edge sword adding additional complexity to an already complex set of rules.

FATCA encourages non-U.S. entities to comply with reporting requirements by requiring payors of U.S. source income and gross proceeds to withhold 30% on payments to non-U.S. entities that do not certify their compliance with FATCA or disclose their substantial U.S. owners. The new rules will have a significant impact on U.S. broker/dealers and U.S. branches of foreign broker/dealer firms acting as U.S. Withholding Agents ("USWA") under FATCA. 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% on payments to non-compliant payees. To avoid the withholding, Foreign Financial Institutions (FFIs) must enter into FFI agreements with the IRS or be subject to Intergovernmental Agreements ("IGAs") in force with the share the identities of U.S. accountholders. Other affected Non-Financial Foreign Entities (NFFEs) seeking to avoid the tax will be required to provide information to the withholding agents relating to their U.S. owners with a substantial ownership stake.

The regulations provide exceptions and exclusions to withholding requirements and suggest a broader framework of international cooperation seeking to ease challenges of FATCA compliance on foreign entities. Moreover, the regulations attempt to harmonize many of the FATCA requirements with the current U.S. income tax withholding rules and model IGAs. The IGAs in particular represent another significant step forward in the global exchange of information to combat tax evasion. The U.S. government is still negotiating with several countries around the world to conclude IGAs.

The final regulations and Notice 2013-43 provide a number of important changes to earlier guidance in the proposed regulations and the Announcement 2012-42 that followed. The final regulations also provide additional details regarding establishing new client on-boarding requirements, enhanced due diligence and documentation standards, FFI registration and Compliance Program requirements, as well as implementing new withholding and tax information reporting among other guidance. Understanding these changes along with the implications and exceptions under the new rules will help your industry and business effectively prepare to address them. The final regulations have eased some of FATCA's compliance deadlines but significant hurdles and opportunities still exist to update your processes, systems, and business relationships for a smooth transition to the new, more transparent international business environment that FATCA seeks to create.

How does FATCA impact your business?

FATCA requires U.S. broker/dealers to enhance the information they collect about FFI and NFFE investors with which they do business. All broker/dealers are impacted by FATCA including those crediting clients for interest (including portfolio interest), dividends, other fixed, determinable, annual, or periodical (FDAP) income, gross proceeds from the sale or redemption of securities, and certain payments under derivative contracts. Custodial and other services are likewise impacted by FATCA.

As anticipated, Treasury adopted a revised timeline for gross proceeds withholding to being on January 1, 2017. Unfortunately, the regulations provided limited additional guidance on gross proceeds including on the much commented upon issue of withholding in "delivery versus payment" or "cash on delivery" transactions and the proposed imposition of withholding responsibilities on qualified clearing organizations. The rules do, however, reserve the ability to elect to be withheld upon for gross proceeds, signaling potential future relief for non-U.S. broker/dealers.

The final regulations introduce the Global Intermediary Identification Numbers ("GIIN") that will be used for FATCA reporting purposes (formerly the FFI-EIN/FATCA ID). The U.S. financial institution with a foreign branch that is a reporting Model 1 FFI will need to register on behalf of the branch and obtain a GIIN to comply with its FATCA partner reporting obligations with respect to such branch. A U.S. financial institution with a foreign branch that is a Qualified Intermediary ("QI") and seeks to maintain QI status will be required to register through the IRS portal to renew its QI status for the branch regardless of whether the branch is a reporting Model 1 FFI. The rules however also make certain offshore payments U.S. source income subject to withholding (for example, bank deposit interest paid by a foreign branch of a U.S. financial institution). Fortunately, such payments are not subject to withholding until January 1, 2017 if the branch is not acting as an intermediary; helping to alleviate some of the pressure of revamping withholding systems in the short term.

With respect to pre-existing relationships, the regulations require U.S. withholding agents to complete the documentation of "prima facie FFIs" by December 31, 2014 to prevent withholding. All other pre-existing entity relationships are required to be documented by June 30, 2016 to prevent withholding. The regulations and Notice 2013-43 also modify the scope of grandfathered obligations to include any obligations outstanding on July 1, 2014 (previously January 1, 2013), and simplify the withholding agent's burden to determine whether an obligation is grandfathered.

Important FATCA dates in 2013 and 2014

August 19 FATCA registration portal will be accessible for registration
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

Leading considerations

In order to be FATCA compliant by July 1, 2014, U.S. broker/dealers would have to undertake substantial work and overcome significant implementation challenges. It is important to begin the preparation activities now. The immediate next step should be to make sure that planning and solutioning be put in place based on the new final rules along with updating any initial planning and/or implementation that has already occurred based on the proposed regulations. The impacted broker/dealers should begin designing future state operating models and implementation road maps along with identifying the functionalities of technology systems that will need to be updated.

Some specific questions to consider:

  • Does your organization have entities in its expanded affiliated group which are FFIs or NFFEs?
    • Companies should review their legal entity structure to identify affiliates and majority joint ventures that will need to take action to comply with FATCA.
  •  Does your organization offer accounts to individuals or entities domiciled in a foreign jurisdiction?
    • The company will need to consider its existing KYC processes to determine that it is able to identify foreign investors with U.S. indicia (e.g. U.S. birthplace, U.S. phone number, standing instructions to make payments to a U.S. account, etc.) and will need to enhance existing systems to report on U.S. investors in privately held foreign companies and withhold in accordance with the FATCA requirements. Withholding will be confined to investors that are non-participating FFIs or recalcitrant account holders.
  • Are changes required to investment contracts and/or account agreements to permit compliance with FATCA requirements?
    •  Investment contracts and account agreements may need to be revised to include terms that permit reporting of required information and/or the closure of accounts that fail to provide waiver to permit reporting where foreign law would otherwise prevent the reporting of information to the IRS.

Some of the key action items for U.S. broker/dealers to consider when developing their FATCA compliance programs include:

  • Determine each entities' classification under the FATCA categories and explore if the expanded scope of the regulations allow you to reduce compliance burden;
  • Determine whether entities classified as FFIs need to register with the IRS;
  • Classify client accounts into FATCA categories;
  • Analyze existing customer data to confirm if it meets the due diligence standards including new provisions which may allow reliance on existing documentation in certain circumstances;
  • Remediate customer information as required for pre-existing accounts;
  • Conduct reviews of client onboarding processes to identify where additional data, documentation, and due diligence is required for new accounts;
  • Develop a governance structure for implementation and establish cross functional FATCA support group and subject matter experts;
  • Outline a solution for supporting the FATCA withholding and reporting requirements which are phased in from 2014 to 2018;
  • Develop communication strategies for investors, counterparties, and other stakeholders;
  • Educate client relations personnel and distributors about the impact to their business or functions, and
  • Identify the impact to existing processes or technology platforms.

To learn more

The Final Regulations are voluminous, extensive and complicated and the changes from the proposed regulations are substantial. This document attempts to highlight certain leading provisions of the final regulations 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 should take affirmative steps with respect to FATCA implementation immediately. If you wish to discuss the Final Regulations or FATCA-related matters, please contact any of our FATCA contacts listed below.

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 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.

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