FATCA compliance: what, why, how?
Thought Paper
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FATCA compliance: what, why, how?
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
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 Employment
Act (HIRE) and is intended to bolster efforts
to 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 certify
their ownership to the IRS or be subjected to
30% withholding.
Key drivers for FATCA
• Addressing tax evasion
• Equipping the IRS with tools to discover and
discourage offshore tax abuse
• Enabling the IRS to get information about U.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
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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 not
disclosed 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.
Whom Does It Impact
Business Instrument
Impact
IT, Operations and
Other Impact
• FFIs, NFFEs, U.S. entities • 30% tax on
‘withholdable’
making payments to
payments applies to:
foreign entities
• Banks, insurance
companies and
other financial
service providers and
intermediaries
• Individual and Legal
Entity Accounts
• Compliance and
customer onboarding
processes
• Interest, dividends,
rents, salaries, wages,
annuities
• Products
• Off-shoring branches
• Payment from sources
within the U.S.
• Taxation issues
• Legal Entity Analysis
• Proceeds from sale of
U.S. property
• Data and technology
systems
• Interest paid by foreign
branches of U.S. firms
• Reporting
Key Precautionary
Measures
• Internal systems,
control frameworks,
processes and
document procedures
on electronic platforms
to be augmented
• Withholding
functionality to be
built in
• Meticulous
workflow, document
management and audit
processes at FFIs
• Build appropriate
reporting model
Indicia of U.S. status
• Notice 2011-34 lists six indicia of U.S. status:
• U.S. citizenship or lawful permanent resident
(green card) status
• A power of attorney or signatory authority
granted to a person with a U.S. address.
• A U.S. birthplace
Having any of the above does not mean that the
account is owned by a U.S. client; only that
• A U.S. residence or correspondence address
It must be scrutinized further.
• Standing instructions to transfer funds to an
account maintained in the U.S. or directions
regularly received from a U.S. address
Applicability criteria for FATCA
• An “in care of” or “hold mail” address that is the
sole address of the client; or
Customer Type
Individual
FATCA is still evolving and applies different
criteria to Retail/ Individual and Entity/
Institutional customers
FATCA Rules Criterion
High Level Parameter List
for FATCA Analysis
• Threshold Amount (USD
=>50K)
• Average Monthly Balance
• U.S. Tax Number (TIN)
• Primary Citizenship
• U.S. Citizenship
• Secondary Citizenship
• U.S. Address for
Correspondence
• Address of Residence
(Permanent/ Temporary)
• U.S. Tax Number (TIN)
Typical Documents Needed
for FATCA Compliance
• Information Waiver
Document
• W-9
• W-8 or W-8BEN
• Identity Document
• Power of Attorney to a U.S. • Address of Office
Account
Correspondence
• Standing Instruction to a
• Office and Home Phone
U.S. account
Number
• US Place of Birth
• Place of Birth
• U.S. Phone Number
• Standing Instruction
• U.S. Zip Code
• Citizenship of Beneficiary
• PoA on the U.S. Account
• Citizenship of Account
Operator
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Customer Type
Institutional
FATCA Rules Criterion
High Level Parameter List
for FATCA Analysis
• Threshold Amount
• Average Monthly Balance
• Place of Incorporation
• Average Monthly
Investments
• U.S. TIN
• CUSIP
• Nature of Business
• Exception List Status
• Principal Place of Business
• Communication Address
Typical Documents Needed
for FATCA Compliance
• Information Waiver
Document
• W-9
• Country of Incorporation/
Registration
• W-8 or W-8BEN
• US-TIN
• U.S. TIN
• CUSIP
• Participating FFI-EIN
• Shareholding Pattern
• Proof of Exemption Status
Claim
• Citizenship of Majority
Stakeholder
• Form 1099
• Identity Document
• Principal Place of Business
• Address for
Correspondence
• Nature of Business
Functional View of a FATCA Solution Required by Banks and Other Financial Institutions
Account Identification
and Classification
Case Management
Reporting
Withholding Support
Individual and
Institutional:
Follow-up on Accounts,
Awaiting Data/
Documents,
Annual U.S. Account
Reporting by
Participating FFIs
Investigation and
Closure
Account Holder’s
Income Reporting
Interface to Core and
Transactional systems for
Account Classification
Data
New Accounts,
Existing Accounts,
Aggregation Products,
Thresholds and
Indicia Checks
Challenges for the banking industry
Banks outside the U.S. face operational challenges
and 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.
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“Banks say they expect the most costly part of
complying 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 Navigant
Consulting 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)
procedures may not suffice to identify U.S. citizens
and residents and hence, along with account
opening processes and transaction processing
systems, will undergo significant changes
following FATCA implementation. An ongoing
reporting, testing and monitoring process is also
required to sustain FATCA compliance.
• Evaluating IT systems and customer data
architecture and constructing them to
compartmentalize and report U.S. resident or
citizen relationships
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.
• Scaling down existing compliance functions to
meet the demands of enhanced requirements
for customer identification, account monitoring
and reporting
They must implement documentation safeguards
for new accounts, review documentation for
preexisting accounts, and might eventually need
to report and withhold tax.
• Performing a strategic analysis of whether the
bank will remain invested in the U.S. market
(for its own and customers’ accounts)
• Meeting the deadline. The provisions will apply
to payments made after 1 January 2013.
Key challenges in FATCA implementation
Banks need to complete full impact analysis
and adapt procedures and IT systems before
that date.
• Understanding, validating and documenting
current client relationships
• Complying with additional documentation
requirements:
• Calibrating internal governance and operational
processes to detect U.S. residents or citizens
during account opening
• Searching for U.S. indicia in the whole
customer base;
• Understanding diverse local country procedures
for identifying and validating customer
information at account opening, and identifying
gaps with respect to future requirements
• Deciding to maintain or withdraw contact
with U.S. clients; and
• Obtaining waivers from all U.S. customers to
report to the IRS.
Challenges in determining account balance
for FATCA compliance
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 involve
scenarios 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.
It is not clear what the timelines are
establishing the status of new accounts. Is
pre-requisite for an account to fully open or
it happen within a certain time frame after
account has opened?
for
it a
can
the
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 $100,000,000 deposit flying
under the radar)?
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Important technology and operational
considerations
• Product Analysis (e.g., trusts, PICs, investment
vehicles)
• Legal Entity Analysis and Repository
• Impact on Core Banking System, KYC Compliance
Process
• Customer Data Analysis and Remediation
• Aggregation of Deposit and Investment Data
• Eight Entity and Account Classifications
• Additional Data Capture and Validation
• Reporting to the IRS and Customers
Selective Exemptions from FATCA Regulation to FFI
Family trust and other small entities
Holding companies having investments in non-financial services
Start-up companies having business in non-financial service
Companies undergoing liquidation or recent restructuring
Insurance companies having business in non cash value services
like property insurance
Pension funds and similar institutions having retirement plans setup
under local laws; exempted U.S. persons for term of employment
with foreign employer
Hedging and treasury companies that are part of a group of companies not
active in the financial services sector
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References
1.www.kpmg.com/lu/en/issuesandinsights/
articlespublications/pages/fatcabanks.aspx
5.www.thehindubusinessline.com/features/
mentor/article2155828.ece
2. www.dajv.de/tl_files/DAJV/veranstaltungen/
2011/FGT%202011/PPP/Tax_Schmidt.pdf
6.www.risk.net/operational-risk-and-regulation/
news/2101258/banks-starting-panic-fatca
3. w w w . d e l o i t t e . c o m / a s s e t s / D c o m UnitedStates/Local%20Assets/Documents/
Tax/us_tax_FATCA_FAQs_061711.pdf
7.www.thehindubusinessline.com/features/
mentor/article2155828.ece
4. w w w. e y. co m / Pu bl i cati o n / v w LUAsset s/
Foreign_Accounting_Tax_Compliance_Act_
EN/$FILE/FATCA_March_2011_en.pdf
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Manish Jain
Industry Principal, Infosys
Milind Sudhakar Garge
Avinash Gopalkrishna Paraskar
Sripriya Rangarajan
FSI PPS, Infosys
Thought Paper
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