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Details of Fatca Compliance Remain Elusive Despite Looming Deadlines

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The first deadline for reporting under the US Foreign Account Tax Compliance Act (Fatca) is set for July 1, 2014 and it looks like it will stay that way, despite calls from industry participants for a delay on the grounds that they need more time to prepare and that the Internal Revenue Service (IRS) has yet to finalise details of the reporting system.

A recent webinar hosted by A-Team Group and entitled ‘Fatca: Getting to Grips with the Challenge Ahead’, discussed issues around Fatca deadlines, the data challenges involved in compliance and the InterGovernmental Agreements (IGAs) that could be the beginning of global sharing of tax information.

A-Team Group editor-in-chief Andrew Delaney moderated the webinar and was joined by Fatca experts Haydon Perryman, director of compliance solutions at Strevus; Charles Price, senior director of entity data products at Interactive Data; and Sulolit Mukherjee, vice president of Markit’s Fatca service bureau.

Delaney described 2014 as ‘the year of Fatca’ in terms of regulation and noted the legislation’s key deadlines including a January 1, 2014 start for foreign financial institutions (FFIs) to register with the IRS through its online portal; an April 2014 deadline for inclusion in the first IRS list of FFIs reporting under Fatca; a July 1, 2014 requirement for new accounts to be compliant; and a December 31, 2014 requirement for full compliance including existing accounts.

Having set out the deadlines of Fatca, he asked the webinar panellists to share their views on what banks and other market participants in the scope of Fatca are doing to meet them and the difficulties involved in doing so. Perryman described four parts of Fatca: governance, withholding, reporting and customer due diligence. He said: “A lot of people are looking for an extension to the Fatca deadlines, but that won’t happen. Withholding and reporting could move to the end of the year, but not customer due diligence.”

Perryman also noted that the IRS portal for FFI registration is being revised after an audit revealed it needed to be improved and that Form W8, Certificate of Status of Beneficial Ownership for United States Tax Withholding, has yet to be finalised by the IRS. This could cause a delay as FFIs have six months to get revised W8 forms in place and may not make the July 1, 2014 deadline if the forms are not made available this month. Finally, he described the data challenges of different versions of Fatca being put into law in different countries and regions, and the need for harmonisation across these.

The IRS has already extended Fatca deadlines twice and is not expected to do so again, but having failed to get the required forms in place and the portal working well, Price suggested it may take a softer stance on enforcement of the legislation next year. Mukherjee added: “Financial institutions must not wait for the IRS, instead they need to start getting ready for Fatca. First, they need to ensure they have internal policies and procedures in place for due diligence, then they need to designate a responsible officer for Fatca and identify internal staff who will be responsible for implementation and enhancements, such as synchronising the technology for Fatca and Know-Your-Customer (KYC).

“On boarding and due diligence for new accounts must be complete by the July 1, 2014 deadline, then there is a need for a remediation strategy that will look at legacy accounts that fall within the scope of Fatca. This will take longer, so needs to be started soon. The deadline for these accounts to be compliant is the end of 2014 and getting everything in place will be an enormous task.”

One of the most difficult challenges of Fatca are grandfathered obligations. Price explained: “The need is to understand whether instruments fall into Fatca eligibility in terms of the IRS rules or whether they are grandfathered. The issue of grandfathered obligations raises great concern as their status can be changed by material modifications. This is a challenge at the security master level and it is also important to share information about grandfathered securities with tax reporting groups.”

If, for practical reasons, such as the lack of a final Form W8, FFIs won’t be able to meet the Fatca deadlines, Delaney asked what they should do. Perryman responded: “FFIs need to prove the steps they have taken to comply and then lay out a remediation plan. They need to have evidence of all they have done to avoid getting fined and suffering reputational damage.”

If final forms and the IRS portal are holding up progress on Fatca compliance, so too could IGAs stymie the system. Perryman noted that IGAs are predicated on a prerequisite that there will be reciprocity, with the US reporting tax avoidance to other jurisdictions, but he noted that there is no legal enabler to underpin this. With only five IGAs in place, instead of the 50 forecast by the IRS to be in place by the start of 2014, Mukherjee highlighted an October note from the IRS suggesting that IGAs that are under discussion will be considered to be compliant in the same was as IGAs that are complete.

Turning to the issue of Fatca Global Intermediary Identification Numbers (GIINs), Delaney questioned the need for another identifier code and questioned its overlap with Legal Entity Identifier (LEI). Price explained: “The IRS felt it needed its own identifiers to manage FFIs as they register. Firms will have to add them into their infrastructure and map then to the master table along with other identifiers such as LEIs and internal identifiers.”

Perryman added: “The IRS has made a massive mistake. Too much logic has been built into GIINs. For example, they include ISO 3166 country codes, which means if an FFI moves it will need a new GIIN. There shouldn’t be logic in the code.”

Another difficult area of Fatca is the requirement for a responsible officer. Delaney asked the panellists how firms were addressing this requirement. Mukherjee said the challenge is not as tough as it was when the legislation was first published as some IGAs have done away with an official requirement for a responsible officer. He does, however, still recommend that firms do have such as officer. For non-IGA countries, the requirement remains and responsible officers must be chosen and understand the scope of their duties and personal responsibilities before going through the certification process and pledging to the IRS that Fatca procedures will be followed. As Mukherjee commented: “Putting a responsible officer in place is not easy, but it is not an option in non-IGA countries.”

Looking at the longer term scenario, Perryman described the model IGA between the US and EUG5, which agrees the sharing of tax information, as well as work by the Organisation for Economic Co-operation and Development on the exchange of information. He expects these developments to lead to Fatca becoming international quite quickly, a point agreed by Price, who said: “This is the beginning of globalisation of the sharing of tax information.”

Provding a final word of advice to the webinar audience, Price noted the need to understand the data requirements of Fatca, Mukherjee suggested that small to medium sized firms should look to IT vendors for help, and Perryman promoted the need to get customer due diligence right and provide evidence on how every customer is made Fatca compliant.

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