10 FATCA Facts All FFIs Must Know – The US Government’s Foreign Account Tax Compliance Act (FATCA) will take effect from 30th June 2013. FATCA requires non-US financial institutions, or as FATCA charmingly calls them “foreign financial institutions” (FFIs), and other financial intermediaries to help prevent tax evasion by US citizens. These FFIs include banks, asset managers, and insurers among others.

1. Who should care about FATCA?

• Chief Compliance Officers, CF10A people, Heads of Tax or Operations and other key leaders within any FFI will need to evaluate the potential impact of these regulations and develop a plan for managing the operational impact of FATCA.

2. Why should non US financial institutions care about FATCA?

• Because if you don’t comply with FATCA all US-sourced payments that your financial institution receives on behalf of itself or its clients – such as dividends and interest paid by US corporations – will be subject to a 30% withholding tax.
• This 30% withholding tax will also apply to gross sale proceeds from the sale of relevant US assets.

3. What do I need to do to comply with FATCA?

• To avoid the withholding tax penalties each FFI must enter into an agreement with the US tax authorities – The Internal Revenue Service (IRS) or the FFI’s local tax authorities who in some cases may act as the IRS’s agent. As part of that agreement the FFI will need to:
  • • Perform a detailed analysis of its existing customer base. To ensure that any US clients are correctly identified as such and are correctly reported to the IRS. This check may need to be re-performed more than once.
  • • Capture additional documentation on new customers when they set up an account or portfolio.
  • • Build system functionality to withhold the 30% US Tax on customers who refuse to supply the information and documentation required.
  • • Report to the IRS annually on the assets held and transactions that have occurred on the accounts or portfolios of any US clients.

4. Is FATCA really a big project?

• Yes, and given the size of the project and the lead times for most financial institutions – particularly for IT system changes – FFIs need to act now.

5. What about the detailed analysis of your existing customer base?

• FATCA requires the FFI to determine whether existing customers’ accounts are to be treated as US accounts. For each account holder with accounts over $50,000 ($250,000 for an non-personal accounts or insurance based products)* in value (and which are not already designated US accounts) the FFI must search its electronically held records to ensure that there are no indicators that any of its accounts may in fact be held by a US person. In addition, for accounts over $1 million, the IRS requires the FFI to search its paper records. FATCA specifically mandates that both the electronic and paper searches must check that:
  • • There are no identification documents that might indicate that the account holder is a US resident or US citizen.
  • • There is no US address associated with the holder of the account (whether a residence address or a correspondence address).
  • • There is no record of a US place of birth for the holder of the account.
  • • An “in care of” address, a “hold mail” address, or a P.O. address that is not the sole address on file with respect to the account holder.
  • • Any power of attorney or signatory authority granted to a person for the account does not have a US address.
  • • Any standing instructions to transfer funds are not to an account maintained in the US
  • • Directions received to pay money from the account are not received from a US address.
  • • The account holder does not have a US telephone number

• It can be argued that this represents one of the greatest challenges to bringing a financial institution into compliance with FATCA. The existing client data may be incomplete, poorly indexed for FATCA analysis and stored across several systems within the financial institution’s operations.

• *- The Feb 2012 version of the FATCA regulations has diluted the requirement to link accounts, which are not already linked, before applying the threshold exemptions.
  • Even if the final regulations require no account linking, which we believe is unlikely, Comsure recommends that FFIs create Single Customer Views (SCV) of each account holder for practical customer service reasons.
  • A SCV will allow the FFI to avoid asking the customer for the same document several times for each account he, she or it holds with FFI.

6. What IT developments are required?

• It is hard to speak in general terms as no two FFIs are the same, but as a minimum it is likely that an FFI will have to amend the following systems:
  • • Account opening and “Know Your Client” (KYC) systems.
  • • Custody, dividend and corporate actions systems –
  • • Banking systems and interest and tax calculation systems.
  • • Trading and settlement systems.
  • • Client and tax reporting systems.
• This list is not exhaustive. One of the first steps in any FATCA project must be a detailed analysis of which systems and processes are impacted.

7. So what happens if the Institution finds indications that an existing client may be a US citizen or resident?

• The FFI must review its records and collect additional documentation to prove that any client where indicators suggest a possibility of them being a US person is not in fact a US person.
  • Alternatively, if the client is a US person then the FFI must collect additional information from the client, set the client up as a US client on its systems and make the necessary reports to the IRS thereafter.
• If a client displaying indicators that they may be a US person refuses to co-operate, then the FFI must designate the client as a “recalcitrant client” and withhold the 30% from US-sourced income and sales proceeds.
  • This may require changes to dealing, settlement, banking and custody systems within the FFI.
• Under the Feb 2012 draft regulation, the work performed by the FFI on a client displaying indications of being a US person is seemingly no longer subject to audit by the IRS.
• The FFI will still need to perform checks and ensure that work to analyse and correct the existing client base is well documented and performed with a high degree of accuracy. Any failure in these processes highlighted by a future audit or review may trigger IRS sanctions.

8. Surely there are data protection issues if an FFI reports its clients’ information to the IRS?

• This is certainly a point that an FFI’s FATCA project manager will need to consider. However, if the FFI is based in France, Germany, Italy, Spain or the United Kingdom this problem may have been overcome.
• The Feb 2012 version of the FATCA regulations was accompanied by an announcement from the governments of those countries and the US that they intended to explore an intergovernmental approach to FATCA implementation. It is hoped that this approach will allow FFIs in those countries to provide the information required under FATCA to their own tax authorities (HMRC in the UK) rather than to the IRS.
• If this intergovernmental approach comes to naught or if the FFI is based in another country, it may need to take legal advice on its agreement with the IRS and may, as a minimum, need to revise its client agreement documentation to address the data protection issues raised.

9. Where can I get more information?

• The Feb 2012 version of the FATCA regulations is available on the IRS’s website – Unfortunately they are written by tax lawyers so you may need to consider what legal, compliance and IT support your institution might require to ensure its FATCA project is successfully delivered.

10. Is that all?

• No.
• FATCA regulations are expected from the IRS and US Treasury Department during the summer of 2012, so while it is important to start your FATCA projects now you must also ensure that they have the capacity to handle late changes.