FATCA - Update on HMRC and industry lobbying

We have now emerged from another intense period of industry lobbying on FATCA (the Foreign Account Taxation compliance Act). This latest flurry of activity started on 8th February 2012 with the release of the proposed regulations and the announcement of the intergovernmental approach in the G5 countries (UK, Italy, Spain, Germany and France) and has culminated recently in the IRS hearing on 15th May. Negotiations also continue to be held between the G5 and the US authorities in order to develop a model FATCA agreement for Partner countries.

Industry concerns

From our knowledge of responses from industry trade bodies such as the BBA, from BDO’s own participation in the “Big 6” Response Group in the US and from the verbal presentations made on 15th May, it is clear that there are some major themes are emerging:

Timelines: there have been calls for an 18 -24 month implementation period to be effective only from the release of the final regulations.  So far the IRS has not shown any signs of offering any relaxation on the effective dates.
Affiliated Groups/Limited FFIs: there are still some major concerns being voiced despite the two year transition period ending 1 January 2016 that allows for all affiliates within an expanded group to comply with FATCA requirements. There could be some very good reasons why it will not be possible to overcome local laws within this two year time period, particularly in non-Partner countries with strict secrecy or data protection laws. Groups should not be penalised as a result of the extra time that may be required to overcome these issues.
Documentation and due diligence: despite the greater reliance on existing AML & KYC procedures in the proposed regulations, there are still concerns that the regulations do in fact impose additional requirements such as monitoring the expiration of documents (particularly where these documents may have no bearing on US indicia).  Issues have also been raised around online applications & electronic verification, where documentation may not exist.  In this case there have been calls for online checks to be considered as “documentation”.
Complexity: it is clear that firms are struggling with the level of complexity in the proposed regulations for example in terms of the sheer number of entity classifications.  Here there have been calls for a greater reliance on information provided by entities on a self-certification basis.

Whilst the IRS did not directly answer any questions at the hearing at 15th May there is plenty of evidence that they are listening to the concerns of industry. We now go into a closed period whereby the authorities will work on drafting the final regulations which are expected to be released by the end of the “summer” 2012.  

Progress on Inter-Governmental Agreements

Meanwhile, work progresses on the negotiations between the G5 countries and the US on the shape of the FFI agreement for Partner countries.  It is hoped that a model agreement can be developed for the G5 countries that can be adopted for all countries that sign-up to Partnership agreements in the future. We believe that some 40 additional countries have already expressed an interest in entering into partnership agreements and have started some form of dialogue with the US authorities.

At a very well attended BBA FATCA seminar on 29th May, representatives of HMRC provided an update on the progress towards developing this model agreement. Key points from HMRC:

• HMRC support the aims of FATCA but are aware of concerns about the scope and the impact of the extra administration burden on UK financial institutions
• It is expected that the shape of the FFI agreement for the G5 Partner countries will be concluded by end June or by end July at the latest
• Negotiations, although complex, are progressing well and they believe they are well on the way towards gaining an agreed solution.  
• The G5 countries are seeking full reciprocity as part of the negotiations.
• It is anticipated that there will be significant commonality in the model agreement across the G5 with only a limited amount of  variation for local country-specific issues (these variations would be included as an appendix to the main agreement)
• Solutions are being discussed with the IRS to overcome the problems of having to implement partial withholding in Partner countries i.e. on payments to non-participating FFIs in non-Partner Countries.
• Partnership FFI agreements are promised to be much more straightforward and easy to read than the proposed regulations.  However, our conclusion from the HMRC speech is not to expect any full scale changes to the proposed regulations that we have seen.
• It is likely that FFIs in the Partner countries will have to register with the IRS and provide them with some information such as the details of their Responsible Officer. The exact format of this registration and how this will work is not yet known.
• HMRC’s role will be to develop the model for implementation in the UK and to raise awareness of the requirements.  They plan to issue a discussion paper on implementation by end September 2012
• FATCA requirements will be included in the draft Finance Bill Legislation in December 2012. Royal Assent of the Bill is expected in July/August 2013.

Next steps

Against this back-drop of intense lobbying and inter-governmental negotiations, the key question for many in industry is “how far should we be going with our FATCA implementations ahead of the final regulations and FFI agreements?”  

BDO’s strong view is that if you have not already done so, you need to be mobilising your project teams, allocating a Responsible Officer and conducting impact assessments.  Based on what we know in the proposed regulations, you can also move forward with your client identification efforts and with your review of new customer on-boarding processes.   

However, for the time being some clients may be able to defer detailed work on withholding and reporting systems until further clarity is reached on the regulations and the model agreements.