What is FATCA?

Considerable media attention is being focused on the tax
affairs of multinational corporations (MNCs), which appear to be present
everywhere yet resident nowhere. The summit of G8 leaders at Lough Erne,
Northern Ireland in June had tax evasion and transparency as its central
theme. Historically, tax has been a matter for national governments, but both
of these trends point to an area that is increasingly affecting businesses and
governments alike – the impact of globalisation on tax revenues.

In some senses, the US Foreign Account Tax Compliance Act (FATCA) is ahead
of the curve.  Announced in 2010, it formed part of president Obama’s Hiring
Incentives to Restore Employment (HIRE) Act, which was designed to provide a
stimulus to US employment and aimed to reduce US offshore tax evasion. FATCA
requires foreign (i.e. non-US) banks and other financial institutions (FIs) to
report on financial accounts held by their American clients. 

specifically, in order to comply with FATCA, foreign FIs need to identify
their American clients – using a definition of ‘US persons’ – both in their
existing book of business and as a matter of process when they take on new
customers. They also need to identify ‘withholdable payments’ – with certain
exceptions, income from US sources. There is a requirement to report annually
to the Internal Revenue Service (IRS) information regarding their US
accounts.  If they fail to comply, a withholding tax of 30% is imposed on
certain payments.

FATCA has a wide impact, affecting many areas of
a business. There are obvious impacts on tax and regulatory compliance, while
they will also be felt in IT and operations – and ultimately by client facing
staff as well as customers themselves. 

Who is Affected by

Many terms in FATCA are defined widely and the
worldwide population of FIs, as defined in the act, is estimated by the IRS to
be around 600,000. FATCA defines ‘financial institutions’ as any entity

  • Accepts deposits in the ordinary course of a banking or
    similar business.
  • Holds the ‘financial assets’ of others as a
    ‘substantial portion’ of its business.
  • Engages primarily in the
    business of ‘investing, reinvesting or trading in securities, partnership
    interests, commodities, or any interest in such securities, partnership
    interests, or commodities.’

The definition includes non-US hedge
funds, mutual funds and private equity funds, banks and brokerage firms.
Insurance companies are also brought into scope in certain scenarios – for
example those that are obligated to make payments with respect to financial
accounts, which include certain cash value insurance contracts and annuity

What is the Customer Impact?

The watchwords of FATCA may be ‘broad and deep’; US persons are also defined
widely.  The Act introduces the concept of ‘US Indicia’ identify customers who
may be US persons – this includes address and place of birth, and also phone
numbers and regular transactions to the US. 

Once indica has been
identified for a specific customer it must be ‘cured’; either by verifying US
status or by obtaining sufficient documentation to prove that there is no US
tax presence.  The IRS’s W-series forms (with various flavours of W-8 for
non-US persons, W-9 for US persons) are widely considered the gold standard
for self-certification documentation, but are not required in all
circumstances for all types of FI, and in some cases documentation perceived
to be less onerous to gather may be used.

It is essential for
business to minimise the impact on the end customer. This means making use of
the information the business already holds for the existing customer base, and
incorporating FATCA checks into the new customer on-boarding process to make
the approach as seamless as possible. 

International Approach?

Some provisions of FATCA conflict
with local law; for example the reporting obligations to the IRS conflict with
data privacy legislation within countries of the European Union (EU).  To
mitigate this, the US Treasury has been actively negotiating with the
governments of various jurisdictions to put in place inter-governmental
agreements (IGAs). These ease the process of incorporating FATCA requirements
into local law. The implementation of some key FATCA dates, including the
deadline for identifying new customers, has been pushed back to 1 July 2014 to
allow more time to complete these agreements.

Since FATCA was
announced, the US Treasury has signed 9 IGAs (with the UK, Ireland, Mexico,
Norway, Denmark, Germany, Japan, Spain and Switzerland), and has stated that
it is in the process of negotiating with a further 80 countries. There are two
models of IGAs.  Model 1 defines reciprocal reporting, that tax reporting
information will be shared bilaterally between the US and the partner country.
Model 2 mitigates the issues in local law, but still provides for reporting
directly to the IRS and does not include the reciprocal provisions.

The IGA approach complicates the requirement for FATCA reporting: whereas
FATCA required reporting solely to the IRS, a reporting entity in an IGA Model
1 jurisdiction is required to report to local tax authorities. This means that
a multi-national group with entities in different countries will be required
to report similar information to multiple tax authorities – and, given how
reporting for Intrastats in the EU and other multinational filings have been
implemented, probably using different electronic formats.

inter-governmental approach has also prompted a much wider discussion around
tax information reporting. Already in 2013, the UK government has acted to put
in place similar tax information reporting obligations from the UK Crown
dependencies and Crown territories.  This means that any FATCA solutions
adopted now should be ‘future-proofed’, to be able to take account of new and
changing requirements.

How Should Businesses

FATCA is a big issue and there is still
considerable uncertainty, particularly for businesses operating in
jurisdictions that are negotiating IGAs – so providing for future FATCA-like
requirements should not be discounted. It may be sensible to identify a
customer’s tax residency, rather than simply whether or not he or she is a ‘US
person’. Where self-certification is required, it may pay long-term dividends
to use the US W-series forms as a robust process rather than other methods.  

There has been considerable variation in industry practice as to
whether to adopt a centralised approach to a compliance programme, or whether
decisions should be made at a geographic or business unit level. Consensus is
generally emerging that an overall FATCA framework and guidelines may be set
by a central FATCA committee but that specific technology and process
decisions may be made at a lower level. For example, customer on-boarding
requirements for an investment bank, dealing mostly with other institutions,
will be different to those required for a private bank dealing with
individuals; and different levels of self-certification may be required,
depending on whether an institution is in an IGA jurisdiction or is operating
under the FATCA regulations.

What Solutions are

FATCA presents organisations with a number of
potential pain-points. One distinction that can be drawn is between the
one-off operations – for example, classifying FIs according to the FATCA
classifications  – and between the ongoing ‘business as usual’ processes such
as customer on-boarding.

Screening both existing and new customers
for US indicia is a fundamental building block of FATCA compliance. Thomson
Reuters’ own FATCA Indicia module interrogates address and other contact data
for indicia. The rules-based approach can also be applied to other data sets
to screen for UK indica, as required under the recently-published UK approach
to information sharing with Jersey, Guernsey, and other offshore islands.

Documenting customers and obtaining valid self-certifications (where
appropriate) is the next stage in the process. Thomson Reuters’ FATCA Identity
module facilitates the electronic collection, verification, and signature of
the US W-8 and W-9 forms, which as mentioned earlier are established as the
‘gold standard’ for self-certification. Again, the solution has been designed
to extend to cover other forms of self-certification as they are defined.

FATCA reporting remains – from a solution perspective – a slightly
uncertain area in that specifications and filing formats for form 8966 (for
FATCA reporting to the IRS) and the IGA equivalents have yet to be published.
Reporting via IRS Forms 1042s and 1099 is still required, however, and new
FATCA draft forms have been issued. Thomson Reuters developed ONESOURCE Tax
Information Reporting solutions to offer a comprehensive service around the
data collection, validation and filing of these (and many other) forms.  This
reporting technology will extend to cover FATCA reporting as definitions are

What are the Next Steps?

recent deferral of FATCA on-boarding deadlines has provided FIs with a brief
breathing space, and the timeline to implementation is not as rushed as it
would have been even in June. Even so, this should not be seen as an
invitation to delay a process as the FATCA reporting in March 2015 will
include the full calendar year 2014. Compliance will impact on a number of
different parts of the business, and may require a multi-faceted solution.
This may be undertaken using existing technologies or by working with third
parties, and using established and trusted vendors may remove much of the risk
inherent in in-house software builds. 

Regardless of the approach
taken, it is prudent to implement a robust technology framework around the
on-boarding and self-certification process. The intense media spotlight on tax
may abate, but the reputational damage that may be a consequence of an
aggressive tax policy takes much longer to fade.


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