Game Changer: FATCA’s Impact on Financial Institutions and Businesses

On 8 February 2012, the US government added new regulatory proposals to the Hiring Incentives to Restore Employment (HIRE) Act 2010. The Foreign Account Tax Compliance Act (FATCA) stipulations will help to pay for the Act by identifying US persons who stash away untaxed dollars in offshore accounts, earning income they do not declare1. This will have wide-ranging implications on the way global financial institutions operate and their relationship with clients.

Interestingly enough, FATCA sounds like a shortened acronym for ‘fat cat’, a term which US President Barack Obama has often used to refer to wealthy US individuals who avoid paying taxes by tucking away their money in unreported offshore accounts. FATCA provides the US Internal Revenue Service (IRS) with the arsenal to get back what it believes is its share of taxes from these ‘fat cats’ who may not have been paying their fair share of US taxes.

President Obama signed FATCA into US law in March 2010, but the precise rules are only now coming out for consultation. FATCA is due to become operational on 1 July 2013. Non-US financial institutions will be required to report details of offshore accounts with more than US$50,000, held by US persons, to the IRS, or subject those accounts to withholding taxes. Similar rules apply for US entities.

How Does FATCA Work?

First, what is a foreign financial institution (FFI)? As defined by FATCA, this covers a broad range of financial institutions, including banks, insurance companies, investment funds, pension funds, mutual funds, private equity funds and broker dealers. Most financial institutions will therefore be caught by FATCA, yet another wide-ranging implication.

FATCA then requires FFIs to become tax collection and information-gathering agents on behalf of the US government. Under FATCA, FFIs wear two hats with distinct responsibilities: as the payor (withholding agent) of withholdable payments and as the payee (recipient) of withholdable payments.

The new rules also place an onus on FFIs to file with the IRS information regarding how much investment income has been earned by American persons, information which previously should have been provided by taxpayers. To do this, an FFI will need to enter into an agreement with the IRS to report on accounts held by US persons (comprising US entities, citizens or permanent residents, such as green card holders). The FFI then becomes known as a ‘participating FFI’.

FFIs that do not enter into an agreement with the IRS, known as ‘non-participating FFIs’, will suffer a 30% withholding tax on all relevant US-sourced payments paid to them, such as dividends and interest paid by US corporations. The same 30% withholding tax will also apply to gross sale proceeds from the sale of relevant US assets. Participating FFIs suffer no withholding taxes on such payments at that point of receipt. There is therefore a significant penalty on non-participating FFIs and it is expected that most FFIs will enter into an agreement with the IRS.

Equally, any US customer who refuses to allow a participating FFI to report their investment income to the IRS, or any customer who refuses to provide sufficient information to the FFI to determine whether they are an American person, will suffer similar withholding taxes, which is where the FFI becomes the tax collection agent. These customers are known as ‘recalcitrant’.

FATCA’s Far-reaching Impact

FATCA will have a great impact on FFIs, especially those in well-known offshore banking locations such as Singapore, Hong Kong and the Caribbean. Singapore financial institutions which hold or manage money for US persons are being particularly targeted by FATCA, as are Singaporean branches of global financial institutions.

As FATCA will require FFIs to submit detailed information on their US customers to the IRS, there is significant pressure on the financial services sector to get their compliance and IT systems in place so that they can be FATCA-compliant from mid-2013 or even earlier. For example, FFIs will need to review the way they approve and capture new customers in the systems, in order to evaluate if they are US persons. FFIs will also have to ask existing customers who are US persons if they are willing to have their personal and account details reported to the IRS. If not, they become recalcitrant.

Therefore, participating FFIs will need to invest in three key areas in the next one to two years:

  • Documentation: capturing process changes and analysing the customer database.
  • Withholding: building functionality for withholding on recalcitrant account holders.
  • Reporting: building and sustaining a reporting model for all US persons to cover account balances and gross payments.

Challenges in Navigating FATCA

To successfully navigate FATCA, there are significant challenges which financial leaders must address. These include:

  • Programme governance or ownership: The enterprise-level effort required to allocate people, budget and project ownership across businesses, operations, compliance and tax. This should not be underestimated.
  • Legal entity analysis: Determining the status of entities for FATCA purposes may be challenging (i.e. are customers in or out of scope)?
  • Existing account information: There may currently be misplaced confidence that existing Know Your Client (KYC) information, which is readily available, could fully discharge the obligations of a participating FFI; particularly for entities, if not persons. Methods of electronically investigating this data need to be designed.
  • Lack of central customer data: Very few organisations have a single source of necessary information to readily make the required determinations with respect to account holders. And for those that are planning it, there are potential additional implications.
  • Timing: The short timeframe – it is nearly less than 15 months away – for implementation requires immediate focus on key start-up tasks.
  • Technology: Numerous unrelated systems must be addressed and modified to enable new required information reporting and withholding.
  • Education: Generally, there is a lack of full awareness of FATCA, its requirements and the resulting impact to the business, which will necessitate early, senior-level commitment and communication. If employees fail to comply with FATCA, there could be penalties for the FFI. Is your board fully aware?
  • Vendors: The FATCA readiness and capabilities of vendors will need to be assessed.
  • Passthru Payments: Although FATCA Passthru Payments have been put on hold until 2017, potentially FFIs will need to identify where income has been earned and sourced (i.e. is it US investment income as they ‘passthru the payment’ to their clients). This is not easy when you have tiered investments.
  • Private banking relationships: While the IRS has removed the private banking requirements, they have replaced it with similar obligations for any account balance over US$1m. FFIs will need to identify such accounts and, on a continuing annual basis, perform enhanced reviews of documentation to identify if the account holder is a US person.

The Clock is Ticking on FATCA

Time is short with nearly less than 15 months to go before FATCA commences. FFIs need to obtain a detailed understanding of FATCA and analyse its impact on the business. They must have a clear understanding of what their business will look like in the coming years and how they want to position themselves in the new environment. Here are some important steps to take:

  • Understand the impact of FATCA on your business: Workshops and other consultations with external specialists can help financial leaders gain an understanding of the new regulations and their effect on business activities.
  • Make strategic decisions: Financial intermediaries must decide whether US persons will be retained as clientele and whether US securities will be included in the product range. If an institution says ‘yes’ to these basic questions, then FATCA looms in.
  • Analyse implementation guidance: The implementation guidance for FATCA and the actual specifics of the requirements must be continually analysed and the operating model must be adapted accordingly so that organisations can prepare adequately for compliance. FFIs need to:
    • Educate themselves about the need to comply with FATCA.
    • Conduct a high-level review of business operations and entities that may be affected.
    • Assign primary points of contact for the FATCA initiative within those operations and entities that may be affected.
    • Develop an initial FATCA roadmap illustrating timeline, principal workstreams, outputs and targeted internal deadline.
    • Document how entities currently keep track of customer accounts and whether the accounts are linked to one another.
    • Ascertain what data is kept in paper form versus electronically.
    • Identify processes, procedures and technology systems that will need to be enhanced or added.


  • Implement FATCA: Financial institutions will need time to adapt their processes and systems to the new regulations. Ideally, systems should be ready three months before the new FATCA regulations apply to ascertain smooth functioning.

There is no doubt FATCA is a challenge. It is not just another tax issue that affects aspects of compliance. Rather, it touches the whole value chain and requires completely new and extended information and reporting systems. Implementing FATCA compliance within an entity requires education and cooperation of not only the tax department, but also of other functions with the group, including compliance, legal, operations, IT, risk management and central management. Therefore, FFIs need urgently to put together a process to meet the FATCA implementation deadline and sooner rather than later.


1 The HIRE Act is a law to provide tax benefits for businesses to hire unemployed workers. FATCA is an ‘offset’ provision in the HIRE Act. Tax revenue collected from FATCA will help to offset the costs of the HIRE Act.



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