There are a number
of ways in which the issue of FATCA compliance can be approached and a thorough review of your business will be
required to determine its status. This article is written with the aim of providing a ‘crib sheet’ to help start answering the question, ‘Should your
organisation have a reporting obligation under FATCA?’ It is more of an
introduction to the key areas and the aim is to provide you a basic idea of
what FATCA is, and where the treasury department needs to start its analysis. It is written for
FATCA compliance under the UK inter-governmental agreement (IGA), but should provide a good
starting point, independent of which FATCA model your country falls under.
Exempt versus Non-reporting
A small number of
organisations are exempt, although most of our customers do not fall under this
category as it is limited to mostly government organisations and charities.
There are also a number of options for classifying as a non-reporting
organisation, which seem to have been created to simplify matters for the tax
offices, not for the Foreign Financial Institutions (FFIs). It is important to highlight
that non-reporting organisations fall under a very strict set of rules, and in
many cases still have a reporting obligation, such as a local FFI described as a ‘small financial instititution with a local client base’.
Closing the US Accounts
This is an option, more specifically, limiting the
sale of your product and closing down potential pre-existing accounts
accordingly. While this is possible, FATCA still requires that your
organisation conduct a pre-existing account due diligence and report on any US
persons who have accounts, even if they are not living in the US, and closing
customers’ accounts based on nationality alone is considered discrimination.
Then there is the definition of ‘local’. If the company undertakes business or has
customers outside of the UK or European Union (EU), it can no longer be classified as a ‘Local
FFI’ – even if none of its offices are located in
the US and it can prove that none of its customers has a US
passport or tax identification number (TIN). This does not mean an organisation
cannot benefit from this classification, but it is important to recognise that
the classification still requires a project, and the initial work needs to be
Note on US Persons
The regulation refers to ‘US
persons’, rather than ‘US citizens’, thereby widening the net slightly to include
anyone who has a tax obligation in the US. This includes organisations, US
citizens and any non-US citizen who has a green card or similar. This applies independent
of the US residency status of account holder.
Foreign Financial Institution (FFI) is the term used by the
regulation to define a financial institution (FI) located outside of the US.
FIs cover a wide range of organisations, and includes almost
all organisations which, in one form or another, hdeal with customers, money or assets.
There are two categories of FFI, participating and non-participating; the latter referred to as NPFFI. The organisation’s
categorisation, as well as that of the organisations it deals with, must be
determined, as an NPFFI is automatically subject to withholding tax in the US. Also,
any participating FFIs must report on any transactions made to an NPFFI, or to an
FFI where the status cannot be determined. So for most FIs in
the UK, becoming a participating FFI is the safe option, with or without a
Global Intermediary Identification Number (GIIN).
GIIN, the next Global Identifier
A GIIN is assigned by the US Internal Revenue Service (IRS) to identify an organisation as being FATCA-compliant. This is the prize that an organisation receives for classifying
and registering on the portal in time. It is the easiest way
to ensure that the organisation will not be hit by withholding or reporting.
After reporting or non-reporting obligation, determining if your organisation
requires a GIIN is key to successfully achieving FATCA compliance.
Where an organisation is
international and does business in multiple countries, then the ‘global’ in GIIN
becomes critical. The IRS has stated that it will determine compliance on a global
level, not on a national one. Therefore if the organisation has offices in
multiple countries, and those individually meet the requirements for GIIN
registration, then each country must register under the same expanded
affiliated group (EAG). If a country fails to register, then the IRS will not
assign a GIIN to the EAG, and no member organisation of the EAG will receive their
member GIINs. That can mean 30% withholding tax is applied on affected transactions.
FDAPs: the Affected Transactions
The withholding tax
is on the fixed, determinable, annual or periodical (FDAP) portion of payments and a list of examples of payments that fall within this category, as
provided by IRS, is too long for this article. However, among the FDAPs that can
have a severe effect on FIs specifically are dividends,
interest and futures, to name just a few.
Multiple Entities, Multiple GIINs
In addition to international companies that need
to register different entities of the company under the EAG, nationally separate
entities also need to register. This presents a challenge for fund
managers, as well as organisations that manage a large number of funds. As regards
FATCA, each fund – and in some cases other investment vehicles – need to be
registered as a separate entity. For some of our customer organisations this
means that hundreds, if not thousands, of separate entities needs to be classified
and registered under the same EAG.
Classification and Completing the
Another area that we flag to our customers is around the
classification and registration work. A significant amount of data needs to
be collected to complete the registration, not least the classification.
Classification is also a complex piece of work, as there is a relatively low
number of generic classes and in most cases an organisation will fall into
multiple classes – or potentially fall in between the available ones. To ensure
that enough time and priority is given to complete classification prior to
registration deadline we recommend that this work is included in the initial
determination of FATCA impact.
Assessing an Account
At the time of writing, the equivalent of US$50,000 in pounds sterling (GBP) is 31,299. But from a FATCA perspective, there are three additional
questions that need to be taken into consideration when determining if an
individuals account is worth US$50.000 and, as such is reportable:
- Firstly, whether the
account is based on individual customers or customer organisations, so your
own firm will need to aggregate each customer’s account to determine if a
specific customer qualifies.
- Secondly, the definition of ‘account’ under FATCA regulation is broader than the one normally used in the UK. An
account includes, for example, cash value insurance, annuity contracts and
equity debt interest.
- Thirdly, it is the value of the account on the
account determination date that matters – so if the account’s aggregated value is
above US$50,000 (US$250,000 for certain products), the potential US tax obligation must
be determined for that customer.
Don’t Forget the Processing
An area that is often omitted in the initial discussions on regulatory
changes is the processing. This article has considered discussed the impact of the
regulation and what needs to be done, but has not touched on the changes
required internally. Before the first account determination date in 2014 a
number of processing updates must be completed. For example, staff who handle
client on-boarding and account opening need updated processes and procedures for
US indicia identification and monitoring, the webpages where customers can
register for accounts needs updating and there needs to be some way to store the
information about US indicia and status. There is also a potential legal review
to review and amend all affected contracts, prospectuses and distribution
agreements, to ensure that they are FATCA compliant.
Your Firm is Affected
If your firm holds accounts, can potentially be hit by
withholding tax, has offices abroad or transfers money or assets as part of
its daily operation, then it is affected by FATCA.
What should now be determined is whether it classifies as a reporting financial institution and if it requires a GIIN. If the answer is ‘yes’, the firm needs to report and to complete the necessary forms before April 2014. With the holiday season imminent and then followed by the
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