FATCA-style agreements present taxing times for GRC teams

If your role has anything to do with governance, risk and compliance or with international tax agreements, then you’ll be familiar with the United States Foreign Account Tax Compliance Act and the potential impact on many of the world’s financial institutions, writes Jon Asprey, vice president strategic consulting, Trillium Software.

Certainly you’ll also be on the look-out for potential spin-off agreements too, such as from the UK and wider members of the EU and the G8. Perhaps you’ll be aware of HM Treasury’s ‘Statement on the pilot multilateral automatic information exchange facility’ which suggests multiple nations have serious intent.

The fall out of all such agreements will be increased pressure on FIs to identify, classify and report on implicated client accounts. They will need to create effective, repeatable and reliable processes for doing so.

In June of this year, HMRC published a discussion document around plans for a UK-style FATCA regime. See: ‘Implementing the United Kingdom’s Agreements with the Crown Dependencies to Improve International Tax Compliance’. Depending upon their client-base, FIs that might easily cope with FATCA (perhaps having few US client accounts), may find it heavier work to comply with tax information exchange agreements from multiple nations.

Deadlines

The time remaining for FIs to prepare for compliance is tight. With regard to FATCA, revised timelines announced in mid-July 2013 by the US Department of the Treasury and the Internal Revenue Service (IRS) give a little extra breathing space, but not a great deal. The bare facts of the revisions are that foreign (non-US) financial institutions (FFIs) that choose to register, will now be able to do so from August 19th, 2013. The deadline for ensuring client onboarding compliance is postponed by six months to July 1st 2014.  (For various other changes and provisions see the IRS notice ‘Revised Timeline and Other Guidance Regarding the Implementation of FATCA.’)

Looking at the UK, it’s currently proposed that the first date for reporting accounts to HMRC will be 31 May 2016 and that all reportable data for 2013, 2014 and 2015 must be provided by this date.

Data challenges

The good news is firstly that the HM Treasury document of nations’ intent proposes a global standard. Secondly, HMRC’s plans aim to be consistent with the standards set for FATCA. These two proposals should assist FIs in that the requirements of each tax information exchange agreement would be similar. However, the big question for many FIs remains the same. Do they capture, store and have access to the necessary information on both private and corporate clients to identify and classify those accounts to be reported?

To identify clients that should potentially be reported, FIs will need to screen their electronic account data for indicia (indicators) suggesting whether a client might have a responsibility to pay taxes according to any agreement with a relevant nation. Such information could include citizenship or residency status, birthplace, correspondence address or telephone number.

Most firms with a large client base will seek to use software-based solutions to make such initial searches. They may then need to approach clients for documentary evidence proving one way or the other, their status for reporting.  But there’s a problem. Automated searches can only work effectively where the FI’s client data is complete, accurate and consistent. In reality, institutions’ data is often of varying quality, full of gaps and is scattered across a web of disjointed systems.

As financial institutions get deeper into the practical application of such agreements, many are just starting to think about the complexities. These could include multiple account touch points resulting from “power of attorney” stipulations or different billing and mailing addresses. A private banking client may have several accounts with multiple addresses for correspondence and may also have nominated a signatory on a number of these accounts.

An important area causing FIs concern surrounds the requirement on them to determine the status of legal entities holding accounts. For example, under FATCA they must classify whether an entity is an FFI, non-financial foreign entity (NFFE), US Financial Institution (USFI) or Exempt/Deemed Compliant. This obligation will require the business type of the entity to be identified first. Some organisations plan to rely on their existing standard industrial classification (SIC) coding of entity customers to drive FATCA classification. However, without any view on the completeness and accuracy of the SIC coding, it cannot be relied upon as a robust source of client business type.

Putting things right

The delay in US FATCA is time to be used wisely. What institutions must do now, and do urgently, is undertake a data readiness assessment to ascertain whether their client data and data capture processes are reliable for compliance reporting. If issues go undiscovered, then the outcome can only be bad for the institution. False reporting will annoy clients, a failure to report relevant accounts could incur penalties, and last minute ‘fire-fighting’ fixes are always expensive.

By way of a positive example, at Trillium Software we recently undertook a FATCA data screening project for a banking institution. This was a relatively quick and mostly automated process. The outcome was that we highlighted some 100,000 accounts that would appear to have data issues making their status for reporting unclear. The bank was surprised, but now has enough time to put things right before the deadline for reporting compliance.

Rectifying large numbers of data issues can be thousands of hours’ work. Thus it’s important to carry out a data readiness assessment for tax-information exchange regimes in good time. If you’ve not yet done undertaken a data readiness assessment, the time is now.