The US Foreign Account Tax Compliance Act (FATCA) raises significant data management challenges, but it is only one of a number of tax avoidance schemes that are emerging, making a strategic rather than tactical approach the best way to achieve compliance.
The challenges of FATCA were discussed during a recent A-Team Group webinar entitled ‘How to Meet the Data Requirements of FATCA’. A-Team chief content officer, Andrew Delaney, moderated the session and was joined by experts Devesh Shukla, global head of reference data product development, Bloomberg LP; Neill Vanlint, managing director, global sales and client operations, GoldenSource; and Haydon Perryman, CEO at Babylon Pangea.
If you missed the webinar, you can hear a full recording and download a Special Report on the topic here.
Delaney noted an A-Team Group survey of data managers showing FATCA as their greatest concern going into 2015, alongside the Basel Committee regulation BCBS 239, before inviting the experts to comment on the status of FATCA and other similar regulations.
All agreed that while FATCA is in place, additional regulations mean there is still more work to do. Shukla explained: “The implementation of FATCA started early this year and reporting requirements come in to play on January 1, 2015. Beyond FATCA, the Organisation for Economic Co-operation and Development (OECD) has issued a report covering common reporting standards for the automatic exchange of information for tax purposes. This is gaining traction in G20 and other countries that want to challenge tax avoidance.” Vanlint added: “The US has blazed the trail here, but many governments would like to repatriate a little tax money, so work in this space has definitely not finished yet.”
FATCA is far from complete
Considering FATCA, Perryman said it is far from complete with only 112 jurisdictions having intergovernmental agreements (IGAs) with the US or being close to agreeing them. This leaves 131 jurisdictions without IGAs, even before the slightly different suggestions in the OECD’s common reporting standards are considered.
IGAs were designed to ease the burden of administration for foreign financial institutions (FFIs) that must report under FATCA to the US Internal Revenue Service (IRS). So-called Model 1 agreements eliminate the need for withholding as described in FATCA, include an element of reciprocity between US and other governments, and allow FFIs to report to their local government, which then reports to the IRS. Model 2 agreements do not include reciprocity and require FFIs to report directly to the IRS.
Acknowledging the incompleteness of FATCA, Devesh pointed out that about 120,000 FFIs, a limited number within the overall universe, have registered on the IRS portal and gained a Global Intermediary Identification Number (GIIN) to mark their status. Some 81,000 of these FFIs registered before the end of June 2014 and two-thirds are from the UK and Cayman Islands, leaving plenty more exposed to FATCA withholding if they do not register and gain a GIIN before the deadline of December 31, 2014.
The addition of UK FATCA and GATCA
Turning to UK FATCA, more properly called CDOT, Shukla explained the difference between the US and UK versions of FATCA saying US FATCA obliges FFIs to register with the IRS and if they do so they will not experience withholding, the opposite being true if they do not register. UK FATCA, he said, is more mandatory and is restricted to Crown Dependencies and Overseas Territories.
The initial requirements of US FATCA, the addition of UK FATCA, and the possible further addition of OECD sponsored global tax data exchange standards, referred to colloquially as GATCA, create a large, but not insoluble, data management problem. Vanlint explained how to build a solution, saying: “The first thing to do is figure out the triggers that lead to the need for FATCA workflow, perhaps client onboarding. Then, Know Your Customer discipline needs to be applied to identify and validate all the necessary data. Data vendors are providing some of this data, but firms also need to make rules to derive data that is not provided by third parties. The disposition of the data must then be considered, perhaps to identify US citizens or instruments that are grandfathered. Lastly, action must be taken to report and comply with the regulation.”
The role of data vendors
Shukla agreed that data vendors can help firms at the instrument level by identifying which securities are within the scope of FATCA, classifying them and tracking any material changes that are made to them. He commented: “While FATCA is a unique regulation, it needs the same response as other regulations, the connection of multiple, disparate systems to deliver one copy of data throughout a firm.” On the more detailed issue of grandfathered obligations, he said: “A bank must classify instruments that generate potential income that could be withheld, identify which are grandfathered, and then monitor any material changes to these instruments. It may be best to go back to the issuer to find out if any change is material.”
Guidance for banks subject to FATCA
Taking a broader view of what a bank should be doing to identify accounts subject to FATCA and achieve due diligence, Vanlint explained: “Banks need to look at services that are available in the market and not hire more people to handle tasks manually. They need to be smart, looking beyond tactical solutions and taking a strategic approach. Essentially, they need to work with vendors to source content and develop a framework that can be modified to accommodate all versions of FATCA.”
Providing advice to data practitioners tackling the challenges of FATCA, Perryman said: “Think about whether your firm has a FATCA policy as there is a lot of activity going on that could be mistaken for productivity.” Bearing in mind that US FATCA is just the start of similar regulations in other jurisdictions, Shukla offered a final piece of advice, saying: “The need is for strong account creation and mediation processes, a solid reference data master and to work with data vendors and tax departments to ensure correct withholding and report to the IRS.”