FATCA compliance: what, why, how?

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FATCA compliance: what, why, how?

Key drivers for FATCA

FATCA (Foreign Account Tax Compliance Act) is not just another regulation or compliance requirement from the United States. Rather, it covers the entire banking value chain of U.S. clients with offshore accounts and requires completely new and extended information and reporting systems, thereby impacting the banking industry globally.

FATCA

In the United States, both U.S. citizens and residents are taxed on their worldwide income. Relief from the burden of double taxation is offered by setting off foreign taxes against U.S. tax. If a person’s “tax home” is in a foreign country and he or she meets the bona fide residence or physical presence test, that person

• Addressingtaxevasion

• Equipping the IRS with tools to discover anddiscourage offshore tax abuse

• Enabling the IRS toget information aboutU.S.taxpayers irrespective of investment location

• Fixing revenue leakage by collecting taxes from investments specifically designed to shield taxpayers from the IRS, or those made in tax heavens

The “cost” of non-compliance

30% withholding will apply to all U.S.-source dividend and interest payments plus the gross

can choose to exclude a limited amount of foreign earned income from the total income.

FATCA was enacted in March 2010 as part of the Hiring Incentives to Restore EmploymentAct (HIRE) and is intended to bolster effortsto prevent tax evasion by U.S. taxpayers with offshore investments. Under FATCA, Foreign Financial Institutions (FFIs), (Foreign) Trusts and Corporations must enter into disclosure compliance agreements with the IRS (Internal Revenue Service) about financial assets held by U.S. taxpayers or foreign entities with substantial U.S. ownership. All Non Foreign Financial Entities (NFFEs) must report or certifytheir ownership to the IRS or be subjected to 30% withholding.

sales proceeds resulting from the sale of an asset that gives rise to a U.S.-source income if paid to either a “recalcitrant” account holder, “non-participating FFI” or an NFFE that has notdisclosed its substantial U.S. owners. In addition, U.S. FIs and FFIs will also be liable for any tax that they failed to withhold, plus interest and potential penalties.

Impacted business operations

FATCA impacts customers, banks and financial firms globally along multiple dimensions.

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Indicia of U.S. status• Notice2011-34listssixindiciaofU.S.status:

• U.S. citizenship or lawful permanent resident(green card) status

• AU.S.birthplace

• AU.S.residenceorcorrespondenceaddress

• Standing instructions to transfer funds to anaccount maintained in the U.S. or directions regularly received from a U.S. address

• An“incareof”or“holdmail”addressthatisthesole address of the client; or

• A power of attorney or signatory authoritygranted to a person with a U.S. address.

Having any of the above does not mean that the account is owned by a U.S. client; only that

It must be scrutinized further.

Applicability criteria for FATCA

FATCA is still evolving and applies different criteria to Retail/ Individual and Entity/ Institutional customers

Whom Does It Impact

• FFIs,NFFEs,U.S.entitiesmaking payments to foreign entities

• Banks,insurancecompanies and other financial service providers and intermediaries

• IndividualandLegalEntityAccounts

Business Instrument Impact

• 30%taxon‘withholdable’ payments applies to:

• Interest,dividends,rents, salaries, wages, annuities

• Paymentfromsourceswithin the U.S.

• ProceedsfromsaleofU.S. property

• Interestpaidbyforeignbranches of U.S. firms

IT, Operations and Other Impact

• Complianceandcustomer onboarding processes

• Products

• Off-shoringbranches

• Taxationissues

• LegalEntityAnalysis

• Dataandtechnologysystems

• Reporting

Key Precautionary Measures

• Internalsystems,control frameworks, processes and document procedures on electronic platforms to be augmented

• Withholdingfunctionality to be built in

• Meticulousworkflow, document management and audit processes at FFIs

• Buildappropriatereporting model

Customer Type

Individual

FATCA Rules Criterion

• ThresholdAmount(USD=>50K)

• U.S.TaxNumber(TIN)

• U.S.Citizenship

• U.S.AddressforCorrespondence

• PowerofAttorneytoaU.S.Account

• StandingInstructiontoaU.S. account

• USPlaceofBirth

• U.S.PhoneNumber

• U.S.ZipCode

High Level Parameter List for FATCA Analysis

• AverageMonthlyBalance

• U.S.TaxNumber(TIN)

• PrimaryCitizenship

• SecondaryCitizenship

• AddressofResidence(Permanent/Temporary)

• AddressofOfficeCorrespondence

• OfficeandHomePhoneNumber

• PlaceofBirth

• StandingInstruction

• CitizenshipofBeneficiary

• PoAontheU.S.Account

• CitizenshipofAccountOperator

Typical Documents Needed for FATCA Compliance

• InformationWaiverDocument

• W-9

• W-8orW-8BEN

• IdentityDocument

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BanksoutsidetheU.S.faceoperationalchallengesand increased costs under new tax regulations, including FATCA,which comes into force in 2014.They need sweeping changes to cope.

It will be impacting the operations, processes and systems from client on boarding to regulatory reporting.

The client onboarding system needs to ensure that FFIs can identify whether a client is liable to pay tax in the U.S. under FATCA. Banks’ payments systems must be upgraded and new reporting systems installed to deliver all the information the IRS requires under the new regulation. All these come at a cost.

Challenges for the banking industry“Banks say they expect the most costly part ofcomplying with the law will be making sure they have done due diligence to identify all the U.S. citizens among their customers,” says Jim Evans, managing director at NavigantConsulting in London. “And they’re not just talking about their individual customers; they will need to be looking at their corporate and partnership accounts.”

Changes in KYC norms India’s current Know Your Customer (KYC) proceduresmaynotsufficetoidentifyU.S.citizensand residents and hence, along with account opening processes and transaction processing

Institutional • ThresholdAmount

• PlaceofIncorporation

• U.S.TIN

• CUSIP

• NatureofBusiness

• ExceptionListStatus

• PrincipalPlaceofBusiness

• CommunicationAddress

• AverageMonthlyBalance

• AverageMonthlyInvestments

• CountryofIncorporation/Registration

• US-TIN

• CUSIP

• ShareholdingPattern

• CitizenshipofMajorityStakeholder

• PrincipalPlaceofBusiness

• AddressforCorrespondence

• NatureofBusiness

• InformationWaiverDocument

• W-9

• W-8orW-8BEN

• Form1099

• U.S.TIN

• ParticipatingFFI-EIN

• ProofofExemptionStatusClaim

• IdentityDocument

Customer Type

Account Identification and Classification

FATCA Rules Criterion

Case Management

High Level Parameter List for FATCA Analysis

Reporting

Typical Documents Needed for FATCA Compliance

Withholding Support

FunctionalViewofaFATCASolutionRequiredbyBanksandOtherFinancialInstitutions

Individual and Institutional:

New Accounts,

ExistingAccounts,

AggregationProducts,

Thresholds and Indicia Checks

Follow-up on Accounts, AwaitingData/Documents,

Investigation and Closure

Annual U.S. Account Reporting by

ParticipatingFFIs

Account Holder’s Income Reporting

Interface to Core and Transactional systems for

Account Classification Data

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As with existing accounts, determining the customer balance is potentially a lot more complicated than it initially seems and not yet clearly defined. For example, FATCA insists on FFIs having the “ability to determine if several accounts should be treated as one when establishing account balance”. Does this involvescenarios where the customer has multiple accounts, possibly some of them joint accounts, where Person A is a U.S. person, and persons B and C are confirmed not. A has a joint account with B, a joint account with C and an account just in his own name. FATCA does not explain what is required here.

There are other questions for new accounts that FATCA does not yet answer.

Challenges in determining account balance for FATCA compliance

It is not clear what the timelines are for establishing the status of new accounts. Is it a pre-requisite for an account to fully open or can it happen within a certain time frame after the account has opened?

If there is a time frame for establishing the status of new accounts, it is possible this could allow checking for whether a customer makes reoccurring payments to the U.S. or instructs payments from there often.

How is the opening balance to be established? Is it the estimated or declared initial deposit, the actual initial deposit or the balance after a certain time (to prevent a $0.01 initial deposit followed by a $100,000,000 deposit flying under the radar)?

systems, will undergo significant changes following FATCA implementation. An ongoing reporting, testing and monitoring process is also required to sustain FATCA compliance.

Banks will also need to do other things, such as get waivers from customers to report to U.S. authorities, communicate about FATCA to customers, advise the Board of Directors,communicate within the FFI and understand what must be done about customers refusing to provide information.

They must implement documentation safeguards for new accounts, review documentation for preexisting accounts, and might eventually need to report and withhold tax.

Key challenges in FATCA implementation

• Understanding, validating and documentingcurrent client relationships

• Calibratinginternalgovernanceandoperationalprocesses to detect U.S. residents or citizens during account opening

• Understandingdiverselocalcountryproceduresfor identifying and validating customer information at account opening, and identifying gaps with respect to future requirements

• Evaluating IT systems and customer dataarchitecture and constructing them to compartmentalize and report U.S. resident or citizen relationships

• Scalingdownexistingcompliance functions tomeet the demands of enhanced requirements for customer identification, account monitoring and reporting

• Performing a strategic analysis ofwhether thebank will remain invested in the U.S. market (for its own and customers’ accounts)

• Meetingthedeadline.Theprovisionswillapplyto payments made after 1 January 2013.

Banks need to complete full impact analysis and adapt procedures and IT systems before that date.

• Complying with additional documentationrequirements:

• Searching for U.S. indicia in the whole customer base;

• Deciding to maintain or withdraw contact with U.S. clients; and

• Obtaining waivers from all U.S. customers toreport to the IRS.

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Important technology and operational considerations

• LegalEntityAnalysisandRepository

• CustomerDataAnalysisandRemediation

• AggregationofDepositandInvestmentData

• EightEntityandAccountClassifications

• Product Analysis (e.g., trusts, PICs, investmentvehicles)

• ImpactonCoreBankingSystem,KYCComplianceProcess

• AdditionalDataCaptureandValidation

• ReportingtotheIRSandCustomers

SelectiveExemptionsfromFATCARegulationtoFFI

Hedging and treasury companies that are part of a group of companies not

active in the financial services sector

Pension funds and similar institutions having retirement plans setup

under local laws; exempted U.S. persons for term of employment

with foreign employer

Insurance companies having business in non cash value services

like property insurance

Companies undergoing liquidation or recent restructuring

Start-up companies having business in non-financial service

Holding companies having investments in non-financial services

Family trust and other small entities

Thought Paper06 Thought Paper 07Manish Jain

IndustryPrincipal,Infosys

Milind Sudhakar GargeAvinash Gopalkrishna Paraskar

Sripriya RangarajanFSIPPS,Infosys

References1. www.kpmg.com/lu/en/issuesandinsights/

articlespublications/pages/fatcabanks.aspx

2. www.dajv.de/tl_files/DAJV/veranstaltungen/2011/FGT%202011/PPP/Tax_Schmidt.pdf

3. w w w . d e l o i t t e . c o m / a s s e t s / D c om -UnitedStates/Local%20Assets/Documents/Tax/us_tax_FATCA_FAQs_061711.pdf

4. www.ey.com/Publ icat ion/vwLUAssets/Foreign_Accounting_Tax_Compliance_Act_EN/$FILE/FATCA_March_2011_en.pdf

5. www.thehindubusinessline.com/features/mentor/article2155828.ece

6. www.risk.net/operational-risk-and-regulation/news/2101258/banks-starting-panic-fatca

7. www.thehindubusinessline.com/features/mentor/article2155828.ece

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