17 Oct 2012

Foreign Account Tax Compliance Act (FATCA): the operational challenge In February 2012 draft FATCA regulations were released by the US Internal Revenue Service (IRS). Relief provisions have been included in certain areas to ease the administrative burden of FATCA, which are likely to be welcomed by many affected companies. Despite these allowances businesses should not sit back. Given that foreign financial institutions (FFIs) will want to submit their FATCA application to the IRS by 30 June 2013, institutions need to act now.

Updated regulations

The regulations released by US regulators on 8 February 2012 provided 388 pages of detailed guidance on the FATCA rules. As widely anticipated, IRS has responded to representations received during previous rounds of consultation by including relief provisions for certain aspects of FATCA. Businesses are now invited to provide further comments by 30 April 2012.

Below are some of the key changes introduced by the updated regulations:

•New categories of FFIs that are to be ‘deemed compliant’ and subject to reduced FATCA obligations
•Introduction of new de minimis thresholds for account identification in some areas
•Changes to the timings of certain provisions such as reporting of income and gross proceeds
•Amendments to the transfer of information to the IRS using existing information exchange treaties
•Modification to the rules on pass-through payments allow greater time for institutions to work through identified issues and provide scope for the IRS to agree alternative approaches with governments that enter into agreements to facilitate FATCA implementation

FATCA overview

FATCA will require foreign financial institutions (FFIs) that enter into an agreement with the 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.

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.

Compliance will be a complex and costly process for many FFIs and institutions should act now to ensure that they are ready to submit their FATCA applications by the 30 June 2013 deadline.

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
•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 opened
•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.

FFIs will also need to educate customer-facing staff and customers on how FATCA will affect them.