Staying on Track: The Race for FATCA Compliance

And they’re off! Finalised regulations issued last month by the US Internal Revenue Service (IRS) and effective from 28 January 2013 effectively fired the starting gun for the race towards the US Foreign Account Tax Compliance Act (FATCA) compliance, with the aim of providing tax avoidance. First out of the gate are those who understood that FATCA was fundamentally a data management issue with long-term implications. These leaders are closely followed by those who started to gear up for compliance over the past year. Bringing up the rear is the ‘we waited for clarification’ pack. Oh, and hold on! Some riders have been diverted to a side track by focusing, wrongly as it happens, on divesting their US clients, regardless of the fact that the legislation is supranational. Let’s see how they explain that to their trainers, never mind the horse owners, as they run up against a dead end.

Horse-racing analogies aside, publication of the IRS’ long-awaited final FATCA regulations has brought FATCA compliance to the fore. If your treasury has not done so already, now is your chance to approach this issue with the seriousness it deserves.

A Degree of Fine-Tuning

Let’s begin with a quick, non-advisory look at what is in the 544 pages of the newly-published final FATCA regulations.

Apart from reconfirming certain deadlines in the first draft proposalsand altering a few specifics, such as on eligibility of investments for grandfathering, all is much as was originally outlined in the original regulations. Nonetheless, clarifications help and the devil is most definitely in the detail. As commentators have noted “the majority of the same fundamental obligations and requirements set forth in the proposed regulations were adopted in the final guidance”.

However, some fine-tuning has been added, such as:

  • Clarification on which legal entities are in scope, whereby an entity without customers is generally exempt, as are activities undertaken by treasuries and holding companies of non-financial groups.
  • Conditional greater scope for the re-use of existing documentation as well as new documentation collected; thus in various instances documentation can be re-used to achieve compliance across multiple accounts held by a given individual or entity.
  • Expanded use of what type of documentation is allowed for certification, thereby expanding beyond the use of Forms W-8 and W-9.
  • The ability, subject to certain conditions, to treat new accounts as ‘pre-existing’ if they are from an existing customer.

The novelty does not end there. The final regulations also provide a host of clarifications on everything from detailing the responsibilities of foreign financial institutions (FFIs), to providing details of the IRS’ planned registration portal. In short, if you are in this race you had better read them, or have someone you can rely upon interpret them for you.  You need to do so quickly, as without a clear understanding of what it all means, you are unlikely to clear all the FATCA fences.

Despite these alterations, the bigger picture remains much the same and is where attention should be focusing. The prospect of multiple FATCAs, or ‘sons of FATCA’ as it is increasingly referred to, remains perhaps the biggest issue relating to this regulation that the finance profession will need to face in coming years.

This is about the very real prospect that countries beyond the US, including the UK, France, Germany and many others, will also adopt FATCA-like tax avoidance prevention legislation for their own nationals living abroad. The Organisation for Economic Co-operation and Development (OECD) has already gone on record in noting that this would be a natural progression from anti-money laundering (AML) regulations implemented over recent years. ‘Harmonised taxation’ is becoming a new key phrase, with the UK and others already working on appropriate legislation; so you need to plan accordingly.

Flexibility of IT is Key

The likely spread of FATCA’s reach means that whatever solution or approach treasurers put in place to meet current US regulation, they should aim to make it flexible enough to quickly extend application to new regulations and nationalities. This is after a regulation with supranational tentacles. In short, look for Indicia algorithms to be easy to alter and build, for processes to be ‘drag and drop’, for databases to be holistic and for systems that collect customer information to be more comprehensive. Those that focus on simply meeting the current FATCA requirements may well find themselves repeating the exercise and its associated expense many times over if they do not approach FATCA in this way. Other nationalities may well introduce their own equivalents.

There is also the reality that such implementations are likely to come fast and furious as more and more countries jump on the FATCA bandwagon. Why shouldn’t they? After all, once specific legislative models have been tested through successful implementation of the current FATCA, they will be available to be copied and modified as and where specific governments require. It’s a fast- track means to piggyback off all the hard work the US has done on FATCA and gain revenue for your country’s treasury. No pain, all gain. Who could pass that one up, especially given the public deficit levels accumulated by governments worldwide?

The result is, therefore, likely to be a snowball effect with the markets seeing multiple legislations hit them at the same time. It would be no surprise if, in a year or two, institutions which did not plan ahead are scampering to meet compliance deadlines on multiple, simultaneous fronts and associated costs that, in hindsight, could have been avoided. It would then be interesting to be a fly on the wall and hear the reasons given for not having foreseen what, by then, will be deemed to have been obvious. How many riders will fall off their horses as a result?

That said, there are solutions which have at their heart the need for the required flexibility and which were designed from the outset to meet the overall FATCA challenge, rather than just the current US-led one. Over the time left, the key will be to focus on the right one for your organisation.  In this respect, the recently-published final regulations are also a good steer, providing further specific terms of reference to help define what the right solution is, in order to get you to the end of the race leading the field.

For example, in several places, the final regulations note that certain facilitations – such as the ability to re-use existing documentation across accounts – are contingent on appropriate systems being in place to handle relevant capabilities, such as aggregation of the effected account information. Basically, if you lack systems that are able to aggregate account information, you cannot take advantage of the expanded use of existing documentation afforded in the regulations.

Nor does it stop there. Throughout the delineation of FFI responsibilities, certification of compliance and the actual reporting aspects, one will quickly see that the solution one adopts – the underlying enabling technology – is key. This is made all the more important by knowing that a host of contingent facilitations in the regulations are available, providing that the FFI has certain data handling, reporting and process management capabilities.

To put it even more bluntly: what the final FATCA regulations have made abundantly clear is that if you get the systems and functionality aspects wrong, a permanent competitive disadvantage will have been created in your company’s operations, business and – ultimately – profitability and competitiveness. This is not only in terms of achieving compliance, but in achieving it cost-effectively, flexibly and by making use of all of the facilitations the final regulations provide for.

In short, what the final regulations have really driven home is that in the FATCA race you are ultimately riding an IT horse.



Related reading