ACCELUS SUMMIT: FATCA compliance is a manageable challenge, but deadlines loom

May 2, 2013

By Stuart Gittleman, Compliance Complete

NEW YORK, May 2 (Thomson Reuters Accelus) – A U.S. law to improve tax compliance by U.S. taxpayers with foreign financial assets is creating confusion for foreign financial institutions that must cooperate with the Internal Revenue Service to help enforce the law.

The law, the Foreign Account Tax Compliance Act, or FATCA, requires U.S. taxpayers with certain foreign financial assets and offshore accounts to report the assets to the Internal Revenue Service. 

FATCA also requires foreign financial institutions (FFIs) to report directly to the IRS about financial accounts held by the taxpayers or held by foreign entities in which the taxpayers hold a substantial ownership interest. Moreover, under FATCA the FFI is secondarily liable for withholding 30 percent of the U.S. taxpayer’s foreign account income.

Compliance once FATCA becomes effective on January 1, 2014 was a featured panel topic at a Thomson Reuters Accelus annual Compliance & Risk Summit in Manhattan on Thursday. Panelists included Michael Hirschfeld, a tax law partner at Dechert; Michael Obolensky, senior regulatory counsel at Lloyds Bank; and Jon Watts, director of operational capital markets at Deloitte & Touche.

Foreign institutions can begin registering with the IRS on July 15, and face a deadline of October 25. But FFIs should start identifying which customers FATCA applies to as soon as possible in order to determine whether to participate in the IRS program, which requires FFI reporting, Hirschfeld said. FFIs should also determine whether there is an intergovernmental agreement (IGA) between the U.S. and the appropriate jurisdiction, the terms of any IGA, and whether there is an exemption that applies to the taxpayer or the account.

But exemptions are “hard to come by,” Hirschfeld warned.

FFIs that are registering to be FATCA compliant can get a Global Intermediary Identification Number (GIIN) and have the IRS confirm that it is valid. Registration imposes due diligence and oversight obligations, and FFIs seeking to register as FATCA compliant should do so by the October 25 deadline they will be in an international compliance database in time for the new year, when the mandatory 30 percent withholding starts for non-participating firms.

The key to establishing a FATCA compliance program is to create onboarding and monitoring protocols that identify responsibility for functions, and to educate customers and clients about their tax obligations. An FFI required to withhold is not keeping the money, Watts said.

The FFI should also evaluate and engage service providers and tailor the services to meet the FFI’s needs, Watts added. The institution should take an enterprise approach to FATCA compliance, because if one part of the entity is not compliant, the IRS will deem the entire company to be noncompliant.

Watts suggested that FFIs consider how to build on their anti-money laundering (AML) and know-your-customer (KYC) onboarding data to determine which customers will be affected by FATCA, and that they try to use existing platforms more effectively and efficiently. FFIs should not expect to be able to quickly get certifications of third-party compliance, and even when the certifications become available, the FFI remains liable for compliance, he added.

FFIs should, however, expect that complying with FATCA and with reciprocal regulations will be accompanied by uncertainty, at least at the onset. The cost of compliance will be “a huge number,” Obolensky said.

Also, although AML and KYC due diligence is similar to that for FATCA, Obolensky said the objectives are different and FATCA compliance is more focused and requires “a deeper dive” into the FFI’s data.

FFIs must certify that they did not counsel customers on how to avoid FATCA, and they may have to close the accounts of recalcitrant customers in order to avoid paying the 30 percent withholding rate on the customer’s income, Obolensky added.

Obolensky also suggested that FFIs consider lobbying their home country regulators and educate them on the benefits of the reciprocal nature of the IGAs.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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