Race to the Finish Line: Addressing FATCA to Achieve Compliance

FATCA, which is a portion of the Hiring Incentives to
Restore Employment (HIRE) Act of 2010, is designed to ensure that the United
States tax net extends to persons with foreign financial assets and offshore
accounts, thereby preventing tax avoidance. Institutions must streamline tax
processes across multiple business lines and geographies; and if proper
technology is not built to adapt to these mandates, costly errors could result.
Know your customer (KYC) rules and client on-boarding systems and processes have
become crucial tools in alleviating this extra burden placed on institutions.

FATCA Goes Global

The US government has implemented this law to help
combat offshore tax evasion and recoup federal tax revenues. According to a 2008
US Senate Permanent Subcommittee on Investigations (PSI) staff report on tax
haven banks and US tax compliance, America loses an estimated US$100bn in yearly
tax revenues due to offshore tax abuses. The mandate provides the Internal
Revenue Service (IRS) with the tools to obtain information regarding US tax
payers’ investment location and to discourage offshore tax abuse. Additionally,
FATCA will assist towards minimising revenue leakage by collecting taxes for the

FATCA’s impact on the international marketplace is significant as
global institutions and investment entities enter into an intergovernmental
agreement (IGA) with the US However, the impact in terms of requirement depends
on the type of IGA. As of June 2013, nine countries have signed IGAs with the
US: the UK, Denmark, Mexico, Ireland, Switzerland, Norway, Spain, Germany,
France, South Africa, Japan and Italy. China, due to its tax laws and
regulations, will not have its financial institutions (FIs) directly comply with

Understanding the Mandate

Despite having four years to
prepare, FATCA will still impact on FIs’ business models, markets, distribution
and customer relationship strategies. As large-scale information management and
reporting requirements are necessary to achieve compliance, new processes and
systems requirements will lead to massive infrastructure ramp-up and increased
costs. Additionally, firms will need to identify whether an IGA will apply to
the entity or the payment stream, creating multiple paths of compliance that
must be addressed, and increasing the complexity of this process for the
organisation. The scale of implementation is the most daunting task, as it will
require changes in existing systems and processes, renewal of policies,
day-to-day practices and adding new tasks, such as IRS reporting. 

Further, all multinational corporations (MNCs) will have to properly examine
and identify the FATCA status of each entity within their respective
organisation(s). For a large organisation, this task will involve significant
time and effort. Proper controls will also be required to ensure ongoing
compliance, as FATCA covers various income and asset classes. As with the
majority of tax laws, it takes specific expertise to fully understand the
regulation. Corporate treasurers must ensure they partner with a trusted third
party and have a detailed understanding of the FATCA mandate. Some of the key
requirements include:

  • Ensuring proper processes are in place to identify
    and categorise each entity as a Foreign Financial Institution (FFI) or as coming
    under the purview of FATCA regulations.
  • Implementing superior governance.
    FFIs will be required to enter into an agreement with the IRS and also to
    appoint a ‘responsible officer’, who will be required to provide certification
    to the IRS for FATCA compliance.
  • Employing robust know your customer (KYC)
    and client onboarding, enhanced due diligence on account holders with
    requirements of additional documentation.
  • Detailed tax reporting, as FIs
    will be required to report more transactions and account relationships to the
    IRS or to the appropriate local governing body.
  • Tax withholding for any
    payments being made to recalcitrant account holders.
  • Annual reporting to
    the IRS, or any relevant authority as per the IGA.

Technology to Achieve Compliance

Corporate treasurers must classify the
existing accounts and request (as well as maintain) the necessary tax documents
from their clients. These firms must ensure that withholding functionality is
built into the platforms and implement a robust reporting model.

It is also
important that the FFIs within the organization, as they relate to FATCA
guidelines, initiate registration with the IRS and that the corporate treasurers
identify these entities. At the same time, companies should examine their payees
and counterparties and scrutinise their global payment flows. Additionally,
companies should begin restructuring processes, engage in robust training and
education programmes, and invest in tools and controls to ensure ongoing
compliance. Organisations should also develop and implement a certification
framework for publishing periodic certificates to the IRS. It is recommended
that all of this be done “viewed through a FATCA lens.”

To further prepare
for the FATCA mandate, a clear target operating model must be defined; one that
would leverage the current existing relevant processes. This model should be in
sync with ongoing business requirements. Corporate treasurers should also adopt
an approach such that the implementation could be viewed as an opportunity to
better align processes, rather than a simple government-driven initiative. Given
the complexity of this regulatory requirement, it is important to involve tax
experts throughout the implementation, to ensure the alignment between FATCA
requirements and business requirements is maintained.

FATCA regulations
will require systems/IT infrastructural change, which would ensure easy
transition and implementation going forward. The blend of technology and
workflow will alleviate the burden of implementing and maintaining FATCA
mandates. A robust technology platform is crucial for seamless integration of
regional processes to a single, centralised platform, with embedded rules and
customised templates that will significantly increase efficiency and accuracy.
Additionally, comprehensive reporting and dashboard tools that possess the
ability to interact with multiple systems across many functions will both
provide greater control and reduce manual efforts in preparing the various
FATCA-required reports.

Act Now and Finalise Preparations

regulations have created a burden on the industry throughout history, but as we
move closer to the final FATCA deadline, which this summer was put back six
months from 1 January 2014 to 1 July, firms must take the necessary steps needed
to ensure compliance. As the markets continue to become more globalised and
silos are broken down, governments will be creating new ways to increase
transparency among international investors. If corporate treasurers and the rest
of the industry fall behind now, they will struggle to catch-up as the reporting
requirements snowball and may become unmanageable. Engage now to ensure accuracy
and avoid costly errors in the future.


Related reading