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The FACT of compliance

Final regulations for FATCA are on the table. FDs of financial service companies will need to prove compliance, writes Jim McGivern

23 Feb 2012

By Jim McGivern, AutoRek

regulatory-compliance

IN JANUARY, the Internal Revenue Service (IRS) released the final version of the Foreign Account Tax Compliance Act (FATCA) guidelines which included 500 pages of guidance, clarifying how organisations can prove compliance with the regulations while minimising the implementation costs. The latest guidance outlined who is expected to comply with FATCA, negotiating intergovernmental agreements (IGAs) that resolve data protection issues and simplifying how they can be implemented through the introduction of an online registration process.

However, the fundamental details of FATCA remain the same. From January 2014, banks, funds, trust companies and charities will be required to report on all US-sourced payments that a financial institution receives on behalf of itself or its clients - such as dividends and interest paid by US corporations, including proceeds from the sale of relevant US assets. Organisations that fail to comply will be subject to a 30% withholding tax.

How will UK businesses be affected?

The UK has already entered into an intergovernmental agreement with the IRS that will remove obstacles surrounding data protection or client confidentiality. As a result, financial institutions need to start preparing systems so they can prove compliance.

To avoid being victim of the 30% withholding tax, organisations will need to determine whether existing customers’ accounts are to be treated as US accounts. For each account holder with total accounts over $50,000 (£32,334) in value, the Foreign Financial Institution (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.

Identifying existing US accounts can be challenging since existing client data may be incomplete, poorly indexed for FATCA analysis, and stored across several systems within the financial institution’s operations. Given the size of the project as well as the lead times involved in making changes to IT systems for most financial institutions, FFIs need to act now and start preparing systems to ensure that they can prove they are complying.

How to comply

As a starting point to proving compliance, organisations should ensure that they are able to perform a detailed analysis of existing customer bases to correctly identify any US clients that will need to be reported to the IRS.

This check may also need to be re-performed - more than once. In addition, financial institutions will need to ensure they are able to capture any additional information about new customers that will need to be included in annual reporting exercises.

Once FFIs uncover indications that an existing client may be a US citizen or resident, organisations need to gather additional documentation from clients on their past activity and report this information back to the IRS. Those clients who refuse to co-operate will need to be labelled as “recalcitrant” and financial institutions will be required to introduce system functionality that can withhold 30% of funds from non-compliant customers.

FATCA reporting will also be subject to audit by the IRS so financial organisations will need to ensure that this work is well documented and performed with a high degree of accuracy.

It’s also important to note that FATCA is likely to be the first of many similar initiatives designed to detect any tax evasion taking place.

The UK will want to be able to benefit from reciprocation and - despite the howls of protest that are sure to come from the powerful UK financial services industry - the UK will expect its institutions to comply.

Businesses will need to be collecting the data now (from existing as well as new clients) and be in the process of planning how they are going to create and maintain an enhanced single customer view to meet both FATCA and similar regulations that are introduced by other countries in the future.

Key points

• The final version of the FATCA regulations clarify who is expected to report on all US-sourced payments that a financial institution receives on behalf of itself or its clients by January 2014
• Organisations that fail to prove compliance will be subject to a 30 percent withholding tax
• As a starting point to meeting the regulations, organisations will need to change system processes to generate a single view of the customer that identifies whether existing customers' accounts are to be treated as U.S. accounts
• Organisations will need to ensure that the activity of relevant clients is well documented and audited to a high degree of accuracy to ensure accurate reporting back to the IRS
• Those clients who refuse to co-operate should be labelled as "recalcitrant"
• Financial institutions will also need to build system functionality that can withhold 30 percent of US Tax from certain customers when required
• Organisations need to start preparing systems now to prove compliance before the January 2014 deadline and to ensure they can meet any similar FATCA-like agreements introduced in the future

Jim McGivern is an associate director at AutoRek

 

 

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