FATCA, the Foreign Account Tax Compliance Act, represents a complex and costly compliance task being forced upon financial services firms globally by the US tax authorities. But some management teams still seem unaware of the full impact on their business, or the seriously high costs of non-compliance.
Much has been written (almost universally negatively it has to be said) about the impact of FATCA, brought in by the US authorities to clamp down on their citizens avoiding paying tax on offshore investments (targeted at investments above USD fifty thousand in value in aggregate).
Although the regime doesn’t come into force until 2013 (30th June 2013 is the current deadline for when firms have to sign agreements with the US Internal Revenue Service, IRS), many firms around the world are already taking action due the complexity and timeframes involved in achieving compliance.
Responses from the UK financial services industry vary widely. At one end, some firms have already set-up of £multi-million, multi-year impact assessments and implementation programmes to the other end of the extreme: an apparent denial by management that FATCA will affect them or a belief that they can drop below the radar of the IRS and avoid compliance.
But why is it not a viable option for UK financial services firms to simply ignore FATCA and hope it goes away?
Firstly, the definition of Foreign Financial Institutions (FFIs) under the regime is very broad and will bring into scope a wide range of UK institutions including banks, brokers, insurance firms and many types of collective investment vehicles.
Secondly, UK firms will be subjected to a stringent 30% withholding tax on any pass-through payments on any US assets (including US shares or US Treasury Bonds) made via other FFIs, even if the firms themselves don’t have any US domiciled customers. To avoid this withholding tax, UK firms will have to:
So what do we recommend?
As preparation is complex and the clock is fast ticking towards implementation date, UK FS firms need to take action now by accepting that this is more than a tax compliance issue. Instead, they must quickly conduct a detailed impact assessment into the extent to which FATCA requirements will affect their strategy, products, services, processes, systems and their people. A senior Sponsor should be appointed to lead this work and a strong cross-functional working group should be established incorporating representation from Sales, Marketing, Operations, IT, Tax and Compliance.
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. Management will also need to keep a close watch on the final details of the regulations as they emerge.
The Industry globally is lobbying hard to minimise the impact and costs of FATCA, although interestingly governments do not yet seem to be voicing their views. One thing seems certain though it looks like FATCA is going to happen in one form or another and doing nothing could be a very costly option for UK firms.
For more information on FATCA and how BDO can assist in assessing the impact of FATCA and preparing for compliance, please contact: