10-28-2013, 12:10 PM
What is FATCA?
Laurence Kiddle, Thomson Reuters - 11 Oct 2013
For a subject that is used to being the focus only for accountants and - once a year at least - a source of pain and hardship for everyone else, tax is currently enjoying a spell in the spotlight thanks to the US proposal to impose the Foreign Account Tax Compliance Act (FATCA).
Considerable media attention is being focused on the tax affairs of multinational corporations (MNCs), which appear to be present everywhere yet resident nowhere. The summit of G8 leaders at Lough Erne, Northern Ireland in June had tax evasion and transparency as its central theme. Historically, tax has been a matter for national governments, but both of these trends point to an area that is increasingly affecting businesses and governments alike - the impact of globalisation on tax revenues.
In some senses, the US Foreign Account Tax Compliance Act (FATCA) is ahead of the curve. Announced in 2010, it formed part of president Obama’s Hiring Incentives to Restore Employment (HIRE) Act, which was designed to provide a stimulus to US employment and aimed to reduce US offshore tax evasion. FATCA requires foreign (i.e. non-US) banks and other financial institutions (FIs) to report on financial accounts held by their American clients.
More specifically, in order to comply with FATCA, foreign FIs need to identify their American clients - using a definition of ‘US persons’ - both in their existing book of business and as a matter of process when they take on new customers. They also need to identify ‘withholdable payments’ - with certain exceptions, income from US sources. There is a requirement to report annually to the Internal Revenue Service (IRS) information regarding their US accounts. If they fail to comply, a withholding tax of 30% is imposed on certain payments.
FATCA has a wide impact, affecting many areas of a business. There are obvious impacts on tax and regulatory compliance, while they will also be felt in IT and operations - and ultimately by client facing staff as well as customers themselves.
Who is Affected by FATCA?
Many terms in FATCA are defined widely and the worldwide population of FIs, as defined in the act, is estimated by the IRS to be around 600,000. FATCA defines ‘financial institutions’ as any entity that:
• Accepts deposits in the ordinary course of a banking or similar business.
• Holds the ‘financial assets’ of others as a ‘substantial portion’ of its business.
• Engages primarily in the business of ‘investing, reinvesting or trading in securities, partnership interests, commodities, or any interest in such securities, partnership interests, or commodities.’
The definition includes non-US hedge funds, mutual funds and private equity funds, banks and brokerage firms. Insurance companies are also brought into scope in certain scenarios - for example those that are obligated to make payments with respect to financial accounts, which include certain cash value insurance contracts and annuity contracts.
What is the Customer Impact?
The watchwords of FATCA may be ‘broad and deep’; US persons are also defined widely. The Act introduces the concept of ‘US Indicia’ identify customers who may be US persons – this includes address and place of birth, and also phone numbers and regular transactions to the US.
Once indica has been identified for a specific customer it must be ‘cured’; either by verifying US status or by obtaining sufficient documentation to prove that there is no US tax presence. The IRS’s W-series forms (with various flavours of W-8 for non-US persons, W-9 for US persons) are widely considered the gold standard for self-certification documentation, but are not required in all circumstances for all types of FI, and in some cases documentation perceived to be less onerous to gather may be used.
It is essential for business to minimise the impact on the end customer. This means making use of the information the business already holds for the existing customer base, and incorporating FATCA checks into the new customer on-boarding process to make the approach as seamless as possible.
FATCA: An International Approach?
Some provisions of FATCA conflict with local law; for example the reporting obligations to the IRS conflict with data privacy legislation within countries of the European Union (EU). To mitigate this, the US Treasury has been actively negotiating with the governments of various jurisdictions to put in place inter-governmental agreements (IGAs). These ease the process of incorporating FATCA requirements into local law. The implementation of some key FATCA dates, including the deadline for identifying new customers, has been pushed back to 1 July 2014 to allow more time to complete these agreements.
Since FATCA was announced, the US Treasury has signed 9 IGAs (with the UK, Ireland, Mexico, Norway, Denmark, Germany, Japan, Spain and Switzerland), and has stated that it is in the process of negotiating with a further 80 countries. There are two models of IGAs. Model 1 defines reciprocal reporting, that tax reporting information will be shared bilaterally between the US and the partner country. Model 2 mitigates the issues in local law, but still provides for reporting directly to the IRS and does not include the reciprocal provisions.
The IGA approach complicates the requirement for FATCA reporting: whereas FATCA required reporting solely to the IRS, a reporting entity in an IGA Model 1 jurisdiction is required to report to local tax authorities. This means that a multi-national group with entities in different countries will be required to report similar information to multiple tax authorities - and, given how reporting for Intrastats in the EU and other multinational filings have been implemented, probably using different electronic formats.
The inter-governmental approach has also prompted a much wider discussion around tax information reporting. Already in 2013, the UK government has acted to put in place similar tax information reporting obligations from the UK Crown dependencies and Crown territories. This means that any FATCA solutions adopted now should be ‘future-proofed’, to be able to take account of new and changing requirements.
How Should Businesses Comply?
FATCA is a big issue and there is still considerable uncertainty, particularly for businesses operating in jurisdictions that are negotiating IGAs – so providing for future FATCA-like requirements should not be discounted. It may be sensible to identify a customer’s tax residency, rather than simply whether or not he or she is a ‘US person’. Where self-certification is required, it may pay long-term dividends to use the US W-series forms as a robust process rather than other methods.
There has been considerable variation in industry practice as to whether to adopt a centralised approach to a compliance programme, or whether decisions should be made at a geographic or business unit level. Consensus is generally emerging that an overall FATCA framework and guidelines may be set by a central FATCA committee but that specific technology and process decisions may be made at a lower level. For example, customer on-boarding requirements for an investment bank, dealing mostly with other institutions, will be different to those required for a private bank dealing with individuals; and different levels of self-certification may be required, depending on whether an institution is in an IGA jurisdiction or is operating under the FATCA regulations.
What Solutions are Available?
FATCA presents organisations with a number of potential pain-points. One distinction that can be drawn is between the one-off operations - for example, classifying FIs according to the FATCA classifications - and between the ongoing ‘business as usual’ processes such as customer on-boarding.
Screening both existing and new customers for US indicia is a fundamental building block of FATCA compliance. Thomson Reuters’ own FATCA Indicia module interrogates address and other contact data for indicia. The rules-based approach can also be applied to other data sets to screen for UK indica, as required under the recently-published UK approach to information sharing with Jersey, Guernsey, and other offshore islands.
Documenting customers and obtaining valid self-certifications (where appropriate) is the next stage in the process. Thomson Reuters’ FATCA Identity module facilitates the electronic collection, verification, and signature of the US W-8 and W-9 forms, which as mentioned earlier are established as the ‘gold standard’ for self-certification. Again, the solution has been designed to extend to cover other forms of self-certification as they are defined.
FATCA reporting remains - from a solution perspective - a slightly uncertain area in that specifications and filing formats for form 8966 (for FATCA reporting to the IRS) and the IGA equivalents have yet to be published. Reporting via IRS Forms 1042s and 1099 is still required, however, and new FATCA draft forms have been issued. Thomson Reuters developed ONESOURCE Tax Information Reporting solutions to offer a comprehensive service around the data collection, validation and filing of these (and many other) forms. This reporting technology will extend to cover FATCA reporting as definitions are finalised.
What are the Next Steps?
The recent deferral of FATCA on-boarding deadlines has provided FIs with a brief breathing space, and the timeline to implementation is not as rushed as it would have been even in June. Even so, this should not be seen as an invitation to delay a process as the FATCA reporting in March 2015 will include the full calendar year 2014. Compliance will impact on a number of different parts of the business, and may require a multi-faceted solution. This may be undertaken using existing technologies or by working with third parties, and using established and trusted vendors may remove much of the risk inherent in in-house software builds.
Regardless of the approach taken, it is prudent to implement a robust technology framework around the on-boarding and self-certification process. The intense media spotlight on tax may abate, but the reputational damage that may be a consequence of an aggressive tax policy takes much longer to fade.
Laurence Kiddle, Thomson Reuters - 11 Oct 2013
For a subject that is used to being the focus only for accountants and - once a year at least - a source of pain and hardship for everyone else, tax is currently enjoying a spell in the spotlight thanks to the US proposal to impose the Foreign Account Tax Compliance Act (FATCA).
Considerable media attention is being focused on the tax affairs of multinational corporations (MNCs), which appear to be present everywhere yet resident nowhere. The summit of G8 leaders at Lough Erne, Northern Ireland in June had tax evasion and transparency as its central theme. Historically, tax has been a matter for national governments, but both of these trends point to an area that is increasingly affecting businesses and governments alike - the impact of globalisation on tax revenues.
In some senses, the US Foreign Account Tax Compliance Act (FATCA) is ahead of the curve. Announced in 2010, it formed part of president Obama’s Hiring Incentives to Restore Employment (HIRE) Act, which was designed to provide a stimulus to US employment and aimed to reduce US offshore tax evasion. FATCA requires foreign (i.e. non-US) banks and other financial institutions (FIs) to report on financial accounts held by their American clients.
More specifically, in order to comply with FATCA, foreign FIs need to identify their American clients - using a definition of ‘US persons’ - both in their existing book of business and as a matter of process when they take on new customers. They also need to identify ‘withholdable payments’ - with certain exceptions, income from US sources. There is a requirement to report annually to the Internal Revenue Service (IRS) information regarding their US accounts. If they fail to comply, a withholding tax of 30% is imposed on certain payments.
FATCA has a wide impact, affecting many areas of a business. There are obvious impacts on tax and regulatory compliance, while they will also be felt in IT and operations - and ultimately by client facing staff as well as customers themselves.
Who is Affected by FATCA?
Many terms in FATCA are defined widely and the worldwide population of FIs, as defined in the act, is estimated by the IRS to be around 600,000. FATCA defines ‘financial institutions’ as any entity that:
• Accepts deposits in the ordinary course of a banking or similar business.
• Holds the ‘financial assets’ of others as a ‘substantial portion’ of its business.
• Engages primarily in the business of ‘investing, reinvesting or trading in securities, partnership interests, commodities, or any interest in such securities, partnership interests, or commodities.’
The definition includes non-US hedge funds, mutual funds and private equity funds, banks and brokerage firms. Insurance companies are also brought into scope in certain scenarios - for example those that are obligated to make payments with respect to financial accounts, which include certain cash value insurance contracts and annuity contracts.
What is the Customer Impact?
The watchwords of FATCA may be ‘broad and deep’; US persons are also defined widely. The Act introduces the concept of ‘US Indicia’ identify customers who may be US persons – this includes address and place of birth, and also phone numbers and regular transactions to the US.
Once indica has been identified for a specific customer it must be ‘cured’; either by verifying US status or by obtaining sufficient documentation to prove that there is no US tax presence. The IRS’s W-series forms (with various flavours of W-8 for non-US persons, W-9 for US persons) are widely considered the gold standard for self-certification documentation, but are not required in all circumstances for all types of FI, and in some cases documentation perceived to be less onerous to gather may be used.
It is essential for business to minimise the impact on the end customer. This means making use of the information the business already holds for the existing customer base, and incorporating FATCA checks into the new customer on-boarding process to make the approach as seamless as possible.
FATCA: An International Approach?
Some provisions of FATCA conflict with local law; for example the reporting obligations to the IRS conflict with data privacy legislation within countries of the European Union (EU). To mitigate this, the US Treasury has been actively negotiating with the governments of various jurisdictions to put in place inter-governmental agreements (IGAs). These ease the process of incorporating FATCA requirements into local law. The implementation of some key FATCA dates, including the deadline for identifying new customers, has been pushed back to 1 July 2014 to allow more time to complete these agreements.
Since FATCA was announced, the US Treasury has signed 9 IGAs (with the UK, Ireland, Mexico, Norway, Denmark, Germany, Japan, Spain and Switzerland), and has stated that it is in the process of negotiating with a further 80 countries. There are two models of IGAs. Model 1 defines reciprocal reporting, that tax reporting information will be shared bilaterally between the US and the partner country. Model 2 mitigates the issues in local law, but still provides for reporting directly to the IRS and does not include the reciprocal provisions.
The IGA approach complicates the requirement for FATCA reporting: whereas FATCA required reporting solely to the IRS, a reporting entity in an IGA Model 1 jurisdiction is required to report to local tax authorities. This means that a multi-national group with entities in different countries will be required to report similar information to multiple tax authorities - and, given how reporting for Intrastats in the EU and other multinational filings have been implemented, probably using different electronic formats.
The inter-governmental approach has also prompted a much wider discussion around tax information reporting. Already in 2013, the UK government has acted to put in place similar tax information reporting obligations from the UK Crown dependencies and Crown territories. This means that any FATCA solutions adopted now should be ‘future-proofed’, to be able to take account of new and changing requirements.
How Should Businesses Comply?
FATCA is a big issue and there is still considerable uncertainty, particularly for businesses operating in jurisdictions that are negotiating IGAs – so providing for future FATCA-like requirements should not be discounted. It may be sensible to identify a customer’s tax residency, rather than simply whether or not he or she is a ‘US person’. Where self-certification is required, it may pay long-term dividends to use the US W-series forms as a robust process rather than other methods.
There has been considerable variation in industry practice as to whether to adopt a centralised approach to a compliance programme, or whether decisions should be made at a geographic or business unit level. Consensus is generally emerging that an overall FATCA framework and guidelines may be set by a central FATCA committee but that specific technology and process decisions may be made at a lower level. For example, customer on-boarding requirements for an investment bank, dealing mostly with other institutions, will be different to those required for a private bank dealing with individuals; and different levels of self-certification may be required, depending on whether an institution is in an IGA jurisdiction or is operating under the FATCA regulations.
What Solutions are Available?
FATCA presents organisations with a number of potential pain-points. One distinction that can be drawn is between the one-off operations - for example, classifying FIs according to the FATCA classifications - and between the ongoing ‘business as usual’ processes such as customer on-boarding.
Screening both existing and new customers for US indicia is a fundamental building block of FATCA compliance. Thomson Reuters’ own FATCA Indicia module interrogates address and other contact data for indicia. The rules-based approach can also be applied to other data sets to screen for UK indica, as required under the recently-published UK approach to information sharing with Jersey, Guernsey, and other offshore islands.
Documenting customers and obtaining valid self-certifications (where appropriate) is the next stage in the process. Thomson Reuters’ FATCA Identity module facilitates the electronic collection, verification, and signature of the US W-8 and W-9 forms, which as mentioned earlier are established as the ‘gold standard’ for self-certification. Again, the solution has been designed to extend to cover other forms of self-certification as they are defined.
FATCA reporting remains - from a solution perspective - a slightly uncertain area in that specifications and filing formats for form 8966 (for FATCA reporting to the IRS) and the IGA equivalents have yet to be published. Reporting via IRS Forms 1042s and 1099 is still required, however, and new FATCA draft forms have been issued. Thomson Reuters developed ONESOURCE Tax Information Reporting solutions to offer a comprehensive service around the data collection, validation and filing of these (and many other) forms. This reporting technology will extend to cover FATCA reporting as definitions are finalised.
What are the Next Steps?
The recent deferral of FATCA on-boarding deadlines has provided FIs with a brief breathing space, and the timeline to implementation is not as rushed as it would have been even in June. Even so, this should not be seen as an invitation to delay a process as the FATCA reporting in March 2015 will include the full calendar year 2014. Compliance will impact on a number of different parts of the business, and may require a multi-faceted solution. This may be undertaken using existing technologies or by working with third parties, and using established and trusted vendors may remove much of the risk inherent in in-house software builds.
Regardless of the approach taken, it is prudent to implement a robust technology framework around the on-boarding and self-certification process. The intense media spotlight on tax may abate, but the reputational damage that may be a consequence of an aggressive tax policy takes much longer to fade.