What is FATCA?

The Foreign Account Tax Compliance Act (FATCA) is a new US law aimed at foreign financial institutions (FFIs) and other financial intermediaries to prevent tax evasion by US citizens and residents through the use of offshore accounts.

The FATCA provisions were included in the HIRE ACT which was signed into US law on 18 March 2010.

1. What are the objectives of this new legislation?

•  Through increased reporting, the Act seeks to improve the tax compliance of specified US persons with offshore financial accounts
• It applies to individual client accounts with an aggregated annual value of above $50,000 and entities with an aggregated annual value above $250,000. However, there are additional requirements on accounts valued at over $1M.
• It is projected to raise $7.6bn in tax revenue for the US over a 10 year period

2. Who does it apply to?

The rules will apply to any foreign financial entity which:

• Accepts deposits in the ordinary course of business
• Holds financial assets for others (e.g. custody/ nominee services)
• Is primarily engaged in investing, reinvesting or trading in inter alia securities or commodities
• Is an insurance company that makes payment with respect to a financial account (e.g. contracts with value)

In practice this means that a wide range of financial institutions will fall under the remit of FATCA including Banks (Retail & Private), Investment funds, Insurance Companies, Mutual funds, Broker Dealers, Custodians, Intermediaries and Private Equity firms.

3. What are the timelines for implementation?

• As it stands, this regime will come into effect on 1 July 2013, although the most significant provisions (e.g. 30% withholding tax) are effective from 1 Jan 2014 onwards
• Firms that chose to enter into agreements with the IRS will have to do so before 1st July 2013
• Due to the complexities of achieving compliance (which will require process and systems changes), firms will not have the luxury of waiting to find out the final regulations before starting to assess the impacts and to put in place plan for implementation. (for more information see FATCA Timeline)

4. Where are we now with the regulations

Following enactment of the HIRE Act, a series of Notices were issued providing preliminary guidance as to how the HIRE provisions would be implemented. These Notices, however, generated as many questions as they answered and also gave rise to a great deal of feedback and concern from companies likely to be within scope.

On 8 February 2012, the Treasury Department and IRS released their proposed regulations providing further guidance with respect to information reporting and withholding.  Additionally, the US Treasury also issued a statement jointly with the UK, France, Italy, Spain and Germany expressing a mutual intention to pursue a government-to-government framework for implementing FATCA.

Although a very interesting development, to be clear the joint statement does not contemplate an exemption from FATCA for any jurisdiction. It offers a framework for information sharing pursuant to existing bilateral income tax treaties and allows FFIs to report the necessary information to their respective governments rather than to the IRS. The joint statement is intended to serve as a template for the United States to work with other countries and we fully expect that other bilateral agreements will be reached over the coming months.

Benefits for FFIs in “Participating” Countries

FFIs in the “Participating” countries would automatically become Participating FFIs (PFFIs) and be granted FFI identification numbers without having to enter into a contract with the IRS unless they fall under the expanded Deemed Compliant categories

There would be no 30% withholding against firms in these Participating countries on their US sourced income provided they comply with the reporting requirements for PFFIs or become deemed-compliant FFIs.  Taxation of payments made in favour of Non Participating FFIs established in Non-Partner countries is still under discussion.

Inter-governmental data exchange  will overcome some of the difficulties associated with data protection/ bank secrecy laws and may limit the need for firms to alter customer terms and conditions

FFIs in these countries will not have to terminate the accounts of Recalcitrant customers instead they would simply report on these accounts

FFIs in participating countries must still apply the necessary due diligence rules and identify pre-existing clients that qualify as US accounts.  In addition, they will most likely still have to update their new client on-boarding processes to capture additional information required to report on US accounts going forward.

5. What changes will UK firms have to make as a result of these regulations?

The level of change will be dependent on the nature of the business and the level of their involvement with US customers. Each firm will have to conduct an impact assessment into the extent to which FATCA requirements will affect their strategy, products, services, processes, systems and their people.

The findings from the impact assessment will determine the scale of the task ahead but each firm affected will almost certainly have to develop a contact strategy for existing customers and to make changes to their client on-boarding processes to gain the extra information required for IRS reporting going forward. 

In order to establish a FATCA compliant business model, firms then have to develop the systems capabilities to comply with the annual reporting requirements and to calculate the withholding taxes on recalcitrant customers or on pass-through payments to non-participating FFIs.

6. What are the next steps from the IRS on FATCA?

Governments, Financial Institutions and trade bodies now have a further opportunity to comment on the draft rules and to seek further amendments to elements they believe remain challenging or costly to implement.  

The US authorities have requested comments back on the draft regulations by 30 April 2012. A public hearing is scheduled for 15 May 2012 and organisations may request an opportunity to speak or provide outlines of topics for discussion by 1 May 2012. The final regulations are expected to be written into law by the “fall” of 2012.

Due to the complexities of achieving compliance (which will require process and systems changes), firms will not have the luxury of waiting to find out the final regulations before starting to assess the impacts and to put in place plans for implementation.

7. How BDO can assist you?

BDO can provide a comprehensive response to FATCA and can deliver a complete solution to all aspects of the regulations

Our specialist FATCA team offers:

• An integrated multi-disciplinary team covering Tax, Technology, Process and Operational expertise.
• US tax specialists to provide insight on IRS expectations and emerging thinking
• Deep knowledge of the financial services sector, including banking, insurance, capital markets and asset management.

Impact Assessment

As a starting point, we typically help clients with an initial FATCA impact assessment involving key stakeholders from within your operations, tax, compliance, IT, customer relations and sales and marketing areas.

We can also undertake detailed impact assessments using our industry-leading, online diagnostic tool to help you understand the scale of the task ahead and the strategic options that are available across your different business units.