FATCA compliance: what, why, how?

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FATCA compliance: what, why, how? Thought Paper www.infosys.

1 FATCA compliance: what, why, how? Thought Paper Universal Banking Solution Systems Integration Consulting Business Process Outsourcing

2 FATCA compliance: what, why, how? FATCA (Foreign Account Tax Compliance Act) is not just another regulation or compliance requirement from the United States. Rather, it covers the entire banking value chain of U.S. clients with offshore accounts and requires completely new and extended information and reporting systems, thereby impacting the banking industry globally. FATCA In the United States, both U.S. citizens and residents are taxed on their worldwide income. Relief from the burden of double taxation is offered by setting off foreign taxes against U.S. tax. If a person s tax home is in a foreign country and he or she meets the bona fide residence or physical presence test, that person can choose to exclude a limited amount of foreign earned income from the total income. FATCA was enacted in March 2010 as part of the Hiring Incentives to Restore Employment Act (HIRE) and is intended to bolster efforts to prevent tax evasion by U.S. taxpayers with offshore investments. Under FATCA, Foreign Financial Institutions (FFIs), (Foreign) Trusts and Corporations must enter into disclosure compliance agreements with the IRS (Internal Revenue Service) about financial assets held by U.S. taxpayers or foreign entities with substantial U.S. ownership. All Non Foreign Financial Entities (NFFEs) must report or certify their ownership to the IRS or be subjected to 30% withholding. Key drivers for FATCA Addressing tax evasion Equipping the IRS with tools to discover and discourage offshore tax abuse Enabling the IRS to get information about U.S. taxpayers irrespective of investment location Fixing revenue leakage by collecting taxes from investments specifically designed to shield taxpayers from the IRS, or those made in tax heavens The cost of non-compliance 30% withholding will apply to all U.S.-source dividend and interest payments plus the gross sales proceeds resulting from the sale of an asset that gives rise to a U.S.-source income if paid to either a recalcitrant account holder, non-participating FFI or an NFFE that has not disclosed its substantial U.S. owners. In addition, U.S. FIs and FFIs will also be liable for any tax that they failed to withhold, plus interest and potential penalties. Impacted business operations FATCA impacts customers, banks and financial firms globally along multiple dimensions. 02 Thought Paper

3 Whom Does It Impact Business Instrument Impact IT, Operations and Other Impact Key Precautionary Measures FFIs, NFFEs, U.S. entities making payments to foreign entities Banks, insurance companies and other financial service providers and intermediaries Individual and Legal Entity Accounts 30% tax on withholdable payments applies to: Interest, dividends, rents, salaries, wages, annuities Payment from sources within the U.S. Proceeds from sale of U.S. property Interest paid by foreign branches of U.S. firms Compliance and customer onboarding processes Products Off-shoring branches Taxation issues Legal Entity Analysis Data and technology systems Reporting Internal systems, control frameworks, processes and document procedures on electronic platforms to be augmented Withholding functionality to be built in Meticulous workflow, document management and audit processes at FFIs Build appropriate reporting model Indicia of U.S. status Notice lists six indicia of U.S. status: U.S. citizenship or lawful permanent resident (green card) status A U.S. birthplace A U.S. residence or correspondence address Standing instructions to transfer funds to an account maintained in the U.S. or directions regularly received from a U.S. address An in care of or hold mail address that is the sole address of the client; or A power of attorney or signatory authority granted to a person with a U.S. address. Having any of the above does not mean that the account is owned by a U.S. client; only that It must be scrutinized further. Applicability criteria for FATCA FATCA is still evolving and applies different criteria to Retail/ Individual and Entity/ Institutional customers Customer Type FATCA Rules Criterion High Level Parameter List for FATCA Analysis Typical Documents Needed for FATCA Compliance Individual Threshold Amount (USD =>50K) U.S. Tax Number (TIN) U.S. Citizenship U.S. Address for Correspondence Power of Attorney to a U.S. Account Standing Instruction to a U.S. account US Place of Birth U.S. Phone Number U.S. Zip Code Average Monthly Balance U.S. Tax Number (TIN) Primary Citizenship Secondary Citizenship Address of Residence (Permanent/ Temporary) Address of Office Correspondence Office and Home Phone Number Place of Birth Standing Instruction Citizenship of Beneficiary PoA on the U.S. Account Citizenship of Account Operator Information Waiver Document W-9 W-8 or W-8BEN Identity Document Thought Paper 03

4 Customer Type FATCA Rules Criterion High Level Parameter List for FATCA Analysis Typical Documents Needed for FATCA Compliance Institutional Threshold Amount Place of Incorporation U.S. TIN CUSIP Nature of Business Exception List Status Principal Place of Business Communication Address Average Monthly Balance Average Monthly Investments Country of Incorporation/ Registration US-TIN CUSIP Shareholding Pattern Citizenship of Majority Stakeholder Principal Place of Business Address for Correspondence Nature of Business Information Waiver Document W-9 W-8 or W-8BEN Form 1099 U.S. TIN Participating FFI-EIN Proof of Exemption Status Claim Identity Document Functional View of a FATCA Solution Required by Banks and Other Financial Institutions Account Identification and Classification Case Management Reporting Withholding Support Individual and Institutional: New Accounts, Existing Accounts, Follow-up on Accounts, Awaiting Data/ Documents, Investigation and Closure Annual U.S. Account Reporting by Participating FFIs Account Holder s Income Reporting Interface to Core and Transactional systems for Account Classification Data Aggregation Products, Thresholds and Indicia Checks Challenges for the banking industry Banks outside the U.S. face operational challenges and increased costs under new tax regulations, including FATCA, which comes into force in They need sweeping changes to cope. It will be impacting the operations, processes and systems from client on boarding to regulatory reporting. The client onboarding system needs to ensure that FFIs can identify whether a client is liable to pay tax in the U.S. under FATCA. Banks payments systems must be upgraded and new reporting systems installed to deliver all the information the IRS requires under the new regulation. All these come at a cost. Banks say they expect the most costly part of complying with the law will be making sure they have done due diligence to identify all the U.S. citizens among their customers, says Jim Evans, managing director at Navigant Consulting in London. And they re not just talking about their individual customers; they will need to be looking at their corporate and partnership accounts. Changes in KYC norms India s current Know Your Customer (KYC) procedures may not suffice to identify U.S. citizens and residents and hence, along with account opening processes and transaction processing 04 Thought Paper

5 systems, will undergo significant changes following FATCA implementation. An ongoing reporting, testing and monitoring process is also required to sustain FATCA compliance. Banks will also need to do other things, such as get waivers from customers to report to U.S. authorities, communicate about FATCA to customers, advise the Board of Directors, communicate within the FFI and understand what must be done about customers refusing to provide information. They must implement documentation safeguards for new accounts, review documentation for preexisting accounts, and might eventually need to report and withhold tax. Key challenges in FATCA implementation Understanding, validating and documenting current client relationships Calibrating internal governance and operational processes to detect U.S. residents or citizens during account opening Understanding diverse local country procedures for identifying and validating customer information at account opening, and identifying gaps with respect to future requirements Evaluating IT systems and customer data architecture and constructing them to compartmentalize and report U.S. resident or citizen relationships Scaling down existing compliance functions to meet the demands of enhanced requirements for customer identification, account monitoring and reporting Performing a strategic analysis of whether the bank will remain invested in the U.S. market (for its own and customers accounts) Meeting the deadline. The provisions will apply to payments made after 1 January Banks need to complete full impact analysis and adapt procedures and IT systems before that date. Complying with additional documentation requirements: Searching for U.S. indicia in the whole customer base; Deciding to maintain or withdraw contact with U.S. clients; and Obtaining waivers from all U.S. customers to report to the IRS. Challenges in determining account balance for FATCA compliance As with existing accounts, determining the customer balance is potentially a lot more complicated than it initially seems and not yet clearly defined. For example, FATCA insists on FFIs having the ability to determine if several accounts should be treated as one when establishing account balance. Does this involve scenarios where the customer has multiple accounts, possibly some of them joint accounts, where Person A is a U.S. person, and persons B and C are confirmed not. A has a joint account with B, a joint account with C and an account just in his own name. FATCA does not explain what is required here. There are other questions for new accounts that FATCA does not yet answer. It is not clear what the timelines are for establishing the status of new accounts. Is it a pre-requisite for an account to fully open or can it happen within a certain time frame after the account has opened? If there is a time frame for establishing the status of new accounts, it is possible this could allow checking for whether a customer makes reoccurring payments to the U.S. or instructs payments from there often. How is the opening balance to be established? Is it the estimated or declared initial deposit, the actual initial deposit or the balance after a certain time (to prevent a $0.01 initial deposit followed by a $100,000,000 deposit flying under the radar)? Thought Paper 05

6 Important technology and operational considerations Legal Entity Analysis and Repository Customer Data Analysis and Remediation Aggregation of Deposit and Investment Data Eight Entity and Account Classifications Product Analysis (e.g., trusts, PICs, investment vehicles) Impact on Core Banking System, KYC Compliance Process Additional Data Capture and Validation Reporting to the IRS and Customers Selective Exemptions from FATCA Regulation to FFI Family trust and other small entities Holding companies having investments in non-financial services Start-up companies having business in non-financial service Companies undergoing liquidation or recent restructuring Insurance companies having business in non cash value services like property insurance Pension funds and similar institutions having retirement plans setup under local laws; exempted U.S. persons for term of employment with foreign employer Hedging and treasury companies that are part of a group of companies not active in the financial services sector 06 Thought Paper

7 References 1. articlespublications/pages/fatcabanks.aspx /FGT%202011/PPP/Tax_Schmidt.pdf 3. UnitedStates/Local%20Assets/Documents/ Tax/us_tax_FATCA_FAQs_ pdf 5. mentor/article ece 6. news/ /banks-starting-panic-fatca 7. mentor/article ece 4. Foreign_Accounting_Tax_Compliance_Act_ EN/$FILE/FATCA_March_2011_en.pdf Manish Jain Industry Principal, Infosys Milind Sudhakar Garge Avinash Gopalkrishna Paraskar Sripriya Rangarajan FSI PPS, Infosys Thought Paper 07

8 About Finacle Finacle from Infosys partners with banks to transform process, product and customer experience, arming them with accelerated innovation that is key to building tomorrow s bank. For more information, contact Finacleweb@infosys.com Infosys Limited, Bangalore, India, Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.

FATCA FAQ. 15. W ho are Pre-existing account holders? Account holders that became customers of the FFI before July 1, 2014.

FATCA FAQ. 15. W ho are Pre-existing account holders? Account holders that became customers of the FFI before July 1, 2014. 1. W hat is FATCA? FATCA stands for the Foreign Account Tax Compliance Act. It refers to provisions included in the Hiring Incentives to Restore Employment Act signed into law on March 18, 2010 and effective