What is FATCA? – New Rule to combat Tax Evasion
Most of us are aware of FATCA stands for the Foreign Account Tax Compliance Act. It is intended to provide the US Internal Revenue Service (“IRS”) with an increased ability to detect U.S. tax evaders hiding their money in foreign accounts. Foreign Financial Institutions (FFIs) will now need to report to the IRS the US accounts that they handle or be subject to a 30% withholding tax on any US-sourced income and gross sales proceeds.
What does FATCA aim to do? – Anti-Money Laundering
The primary goal of FATCA is to combat evasion of tax by US citizens, on their offshore earnings. The IRS aims to obtain information on US citizens who hold offshore financial accounts and identify people who are evading taxes on their income earned outside of the US. Statistics shows that of the seven million US citizens who live or work outside the USA, less than 7% file tax returns. By tracking down delinquent US taxpayers, the IRS expects to raise an additional $8.7 billion in taxes over the next ten years.
Who is impacted by FATCA? – Almost Everyone
FATCA does not replace the existing US tax withholding and reporting regimes it, however, add additional requirements and complexity to the existing regimes. FATCA requirement can impact any person, US or foreign individual, corporation, partnership, trust, association, or any other entity, including any foreign intermediary, foreign partnership, and foreign financial institutions (FFIs).
FATCA triggers all areas of Compliance, Reporting, Tax Calculation, Corporate action processing, KYC and off course, client onboarding within financial institutions
- New customer identification – With the new FATCA regulations all the accounts needs to be repapered by filling the new KYC form
- Documentation – IRS has issued the new W8 and W9 forms which incorporate all the required changes from chapter 3 and chapter 4.
- Reporting (New form 1042-s) IRS has issued a new 1042-s form based on the different payment types needs to be captured in different buckets as described in IRC Chapter 3 and Chapter 4
- Withholding procedures
The Impact of FATCA on Technology
|KYC/AML and CRM Systems||Change KYC/AML systems for new customer onboarding
Classify customers across lines of business, account types and countries – Single Customer View
Provide web-based services to customers to share and update their information
|Data Processing and Warehousing Systems||Connect disparate pieces of information to determine customer characteristics
Organize customer information across lines of business and account types for aggregation
Create data store to track a customer’s FATCA status for withholding and reporting
|Payment Systems||Build functionalities to identify transactions for withholding and calculating withholding tax
Keep a record of withholding transactions / credit withheld amounts to escrow account
|Trading and Settlement Systems||Build capabilities to identify recalcitrant accounts and apply the necessary withholding during settlement|
|Reporting Systems||Ensure external IRS reporting – annual and ad-hoc basis
Ensure internal reporting to risk and compliance office
Challenges in FATCA Implementation
- Legal entity analysis: Determining the status of an entity for FATCA purposes may be challenging.
- Existing account information: There may currently exist a misplaced confidence on the extent to which existing Know Your Client (KYC) information is readily available and/or could be leveraged.
- Lack of central customer data: Very few organizations have a single source of necessary information to readily make the required determinations with respect to account holders.
- Timing: The short time frame for implementation requires immediate focus on key start-up tasks while the US Treasury Department and the IRS develop additional guidance as to the final regulations
- Technology: Numerous unrelated systems must be addressed and modified to enable new required information reporting and withholding at the FFI and USFI levels.
- Vendors: Vendors’ FATCA readiness and capabilities will need to be assessed.
- Passthru payments: FFIs will need to identify where income is earned and sourced on a quarterly basis.
Happy to answer any questions on FATCA regulatory implementation.
You can reach me at firstname.lastname@example.org – Abhinav Gupta