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Market Practitioners Propose an Industry Data Repository to Ease Fatca Compliance

The US Foreign Account Tax Compliance Act (Fatca) was branded as an outrageous example of US fiscal imperialism and an effort by the US government to outsource tax collection to the UK by a panel of experts addressing the issue of ‘Meeting the Fatca Challenge’ at last week’s International Securities Association for Institutional Trade Communication (ISITC) conference in London.

While the panel agreed that Fatca is a big solution for a small problem, it recognised the need to comply with the legislation and suggested an industry built and shared data repository holding standardised information on US clients and their indicia as US taxpayers could ease the burden of compliance for all firms with US clients required to pay tax to the US Internal Revenue Service (IRS).

While the deadline for Fatca compliance has been pushed back a year to January 2014 and the US Treasury has negotiated an Intergovernmental Agreement with the UK to ease the burden of reporting and is likely to negotiate similar agreements with other countries, the basics of Fatca remain. Essentially, the legislation requires all foreign financial institutions (FFIs) with US clients anywhere in the world to carry the burden of tax reporting and compliance to meet US IRS requirements. Failure to comply with Fatca will cost FFIs 30% withholding tax on all payments from US sources.

Rob Bridson, a tax partner at Pricewaterhouse Coopers and chair of the ISITC debate, said: “We are being asked by the US Government to do due diligence on our investors to see if any are US taxpayers under Fatca. Compared to regulations such as MiFID, Fatca is not technically difficult, it is just very big. The intergovernmental agreement suggests it requires nothing more than anti-money laundering and know-your-client data, which is partly true, but these solutions don’t identify US taxpayers. The need then is to find indicia in data and conclude if an investor should be reported as a US taxpayer and if not, why not. A register of entities with Fatca status may be helpful to banks that must comply with the legislation.”

Audience member Chris Pickles, head of industry initiatives, global banking and financial markets at BT, suggested the numbers that will be used to identify legal entity identifiers (LEI) in the global LEI system being set up by the Financial Stability Board could be used by the IRS and US Treasury to identify overseas investors. A potentially sensible solution, but as Bridson commented: “These numbers could be used to cover Fatca requirements, but they probably won’t be and the US is not talking about using them.”

With the LEI not expected to be part of a Fatca solution, the panel discussed the possibility of a repository of data on overseas US taxpayers. Stephen Smith, director at BAM Advisory, said: “We start with a simple premise that there are things we do for profit and things we must do. Fatca is something we must do and we advocate a central utility as part of the solution. The scope could be defined by industry bodies and it would be a repository for best practice. The benefits would be clear communication with independent financial advisors (IFAs), no duplicated effort and an aggregated view of data required by Fatca in the repository.

“The technology side of a repository is not that difficult as data can be collected and rules applied. The issue is communicating, clarifying and articulating best practice. Once this is done, an industry repository could achieve a high degree of automation and operate as a not-for-profit, minimum-cost service that all institutions affected by Fatca could interrogate.”

Smith noted that moving the concept of a central utility into reality would require large firms to work together on best practice, a point picked up by Graeme Austin, CEO of ISITC Europe, who said ISITC could standardise communication among those needing to comply with Fatca and IFAs to create standardised information in a repository and support the development of best practice for a utility.

In response to a series of vox pop questions asked towards the end of the discussion, 75% of the audience indicated that a central repository would be useful as pat of a Fatca solution. Only 14% of the audience was confident it could identify US taxpayers for which it held assets, while a total of 53% were either concerned or very concerned about this issue. Some 43% of the audience said compliance departments are leading Fatca projects, while 47% said they were making progress or good progress on Fatca. At the extremes, 26% said they had got nowhere so far and 11% said they are storming ahead on Fatca projects.

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