What should you be doing now?

FATCA, the newly enacted Foreign Account Tax Compliance Act, which was signed into law March 2010, has been designed to restrict US citizens and businesses from evading US tax by holding income-producing assets through Foreign Financial Institutions or Non-Foreign Financial entities, writes Lise Baril, manager, Enterprise Risk Services with Deloitte & Touche

The legislative intent of FATCA is to ensure there are no gaps in the ability of the US Government to determine ownership of US assets in foreign accounts. Under the new Act, a punitive 30 per cent withholding tax will be imposed on qualifying US source payments unless rigorous information requirements are complied with.

Although implementation guidance has yet to be released, it is unmistakably clear that FFIs and NFFEs around the world will be faced with a major undertaking. Compliance with FATCA implies significant costs and will most likely require modifications to internal systems, control frameworks, processes and procedures.

Although many institutions have considered the option of exiting from US business, in reality it is not a practical solution once the overall global impact of FATCA is considered. Institutions will be faced with the compliance requirement of FATCA from all angles – with their US customers, when dealing with US securities and markets, brokers and custodians. In the end, no matter how hard institutions try to circumvent FATCA, they will eventually have to address it. For this reason, many institutions will opt for full compliance and face the extensive information requirements.

What should you being doing now

While the effective date of compliance is just under two years away, and there are still a number of unknowns, institutions should not delay in considering the impact of FATCA and develop a plan on how they will meet the requirements. Compliance will be a significant undertaking and in order to tackle FATCA head-on, institutions should take a multi-disciplinary approach by integrating the various legal, technical, tax and compliance components and start assessing the overall impact to their organisation:

Analyse the strategic choices – FFIs and NFFEs should have a clear picture of how their business strategy will look in the coming years and should determine how they want to position themselves in the new financial and regulatory environment. Should they continue to have US customers? Is the cost (both financial and opportunity) of entering into an agreement with the US Department of Treasury higher than opting for the 30 per cent withholding? These are all questions institutions will need to consider when determining their path with FATCA.

Educate your people – The implications of FATCA will affect the institution as a whole. Employees at all levels need to understand what FATCA is and how it can and will affect the organisation. It is best to keep people informed early on so they are prepared for any upcoming changes to systems, internal procedures and controls.

Establish a programme management team and governance structure – To ensure that the FATCA programme is carried out efficiently and effectively, it is important that people are accountable for the coordination, prioritisation of resources, and overall costs and risks of the programme. Institutions should establish a core team of individuals across the organisation to support the FATCA programme and assist with management and oversight. Additionally, a governance structure should be put in place to provide the FATCA programme with overall structure, processes and procedures to control operations and changes to objectives, and monitor progress.

Identify the systems, processes and procedures that will be impacted – In order to get a good picture of the impact on the operations, institutions should perform a current state assessment to identify which systems, processes and procedures will be affected. Customer agreements may need to be revised by legal, systems may need to be modified and updated to manage new data and reporting requirements, current client information will need to be assessed, etc. Institutions need to have a thorough understanding of the impact in order to determine the level of resources they will require and potential timeline for implementation.

Conduct a risk assessment and gap analysis – Institutions should perform a risk assessment and gap analysis on existing compliance, operations, and technology processes and systems, to assist in (i) determining what additional information will be required from client account holders and customers, (ii) establishing how that information will be collected and stored and (iii) identifying how record-keeping and other capabilities for withholding tax and reporting information to the IRS under an FFI agreement will be performed.

Analyse customer data – Identifying US persons is a challenging task. This is due to the fact that not only US citizens and persons residing in the US are included in this group, but also Green Card holders, those with dual citizenship and persons who have resided in the US for an extended period of time during the past three years, therefore, causing them to meet the “substantial presence test”. Institutions should analyse their customer data to determine how best to identify US persons and manage their data for reporting purposes.

Promote client awareness – It is inevitable that FATCA will have a large impact on clients whether they have US customers or not, therefore, education is key. Institutions should assess how best to promote awareness to their clients – this can be as simple as sending clients information sheets to conducting formal awareness workshops.

It is important for institutions to realise the implications of FATCA and not wait to begin assessing their needs and associated costs for compliance. By performing the proper assessment and analysis and evaluating modifications, institutions will be equipped to address compliance with FATCA’s new withholding and reporting regime.


Lise Baril