FATCA How It Impacts Technology & Operations. 3 May 2012

Transcription

1 FATCA How It Impacts Technology & Operations 3 May 2012 Circular 230 Disclosure: This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties that may be imposed on any taxpayer.

2 FATCA Basics A US tax law to prevent US tax evasion by US persons through offshore accounts held at foreign financial institutions Key term is FFI, which generally includes: Banks Insurance companies Investment funds, including hedge funds and private equity funds Custodians Banks need to sign a contract with the US Government in 2013 Proposed US Treasury regulations issued 8 February

3 New US Tax If Bank Not FATCA Compliant New 30% US withholding tax applies on specified payments received by Bank that does not comply with FATCA Withholdable Payments (from 2014 onwards) Foreign Passthru Payments (from 2017 onwards) Withholdable Payments include: Interest income and dividends on US stocks and US securities (including US Treasuries) Gross proceeds on sale of US stocks or securities Passthru Payments are payments from another FFI that complies with FATCA Even non-us assets can be affected by Passthru Payments 3

4 Impact if a Bank Does Not Comply with FATCA Interest Income $100 Bank (FFI) Gross Sales Proceeds $2000 US WithholdingTax $30 US Treasury Securities US WithholdingTax $600 Bank invests in US Treasury securities that generate US source interest income and eventually gross proceeds from sale If Bank does not comply with FATCA, a new 30% US withholding tax will apply to payments of interest income and gross sale proceeds 4

5 Withholding on Foreign Passthru Payments by Bank Complying With FATCA Non- Participating Bank Payment from Participating Bank = $1000 Passthru Payment = $1000 x 40% = $400 Participating Bank 60% Non-US Investments FATCA can require Bank complying with FATCA to implement a new 30% US withholding tax on even non-us payments that it makes to another FFI not complying with FATCA Starting no earlier than % US Investments 5

6 How Does a Bank Comply with FATCA? Under an FFI Agreement, Bank agrees to meet: Enhanced due diligence procedures to identify: Existing US account holders Non-US accounts that have substantial US owners Collect more information when opening new accounts if US indicia or other conditions are identified during the onboarding process Report to the IRS the US accounts and US-owned accounts identified, as well as account holders who do not provide information Withhold US tax on certain payments and pay over to the US Government on: Account holders who do not provide information FFIs that do not comply with FATCA 6

7 Bad Apple Bank Sub or Branch that Does Not Comply with FATCA Can Taint Affiliates A sub or branch that fails to comply with FATCA can prevent all other bank affiliates within its affiliated group from complying with FATCA Even if the failure to comply is because of local country legal prohibitions Bad apple taints affiliated bank entities starting from Jan 2016 if there are local prohibitions; otherwise taints starting Jan 2014 HK Sing Taiwan Korea PRC Malaysia Shanghai Thailand Nonparticipating FFI -- Brunei Shenzhen Beijing 7

8 FATCA Compliance Timeline under Proposed Regulations Key dates: 1 July January July 2014 Initial effective date of all FFI agreements signed before this date; Banks need new customer account identification procedures in place FATCA withholding commences on certain withholdable payments (i.e. US source interest, dividends, etc.) Need to certify due diligence is complete on high value accounts 30 September 2014 First FATCA reporting is due 8

9 FATCA Compliance Timeline under Proposed Regulations (Cont d) Key dates: 1 January July January 2017 FATCA withholding commences on gross proceeds from sale of US stocks or securities that could produce US interest or dividends Need to certify due diligence is complete on all pre-existing accounts FATCA withholding scheduled to commence on foreign passthru payments no earlier than this date 9

10 Time for Banks in Hong Kong to Mobilize Now A Bank can readily take more than one year to eighteen months to get FATCA ready US withholding tax begins January 2014 Banks in Hong Kong should mobilize now Unlike other Tech and Ops projects, a key criterion for a successful project is adherence to detailed, complex US tax rules There is no good faith effort, but we didn t timely comply or we are 90% done relief for FATCA Hong Kong regulators are alert to FATCA Reputational and strategic consequences to FATCA decisions 10

11 Some Operational Aspects to Consider Complying with the proposed FATCA regulations may impose significant financial costs and operational burdens on Asia Pac banks Institutions will be required to successfully manage large multidimensional transformation projects covering multiple jurisdictions (and their related privacy and contractual legal requirements), operating units, business lines and support functions. Banks will need to interact with their customers, service providers, counter parties and other third parties with which the institution has a relationship in order to attain compliance. The time available to institutions to ensure compliance is limited 11

12 Some Operational Aspects to Consider (Cont d) Projects will need to involve multiple stakeholders within Banks, including: Technology / Operations Compliance Tax Legal Client relationship management Strategy Product development Business units Finance 12

13 What functional areas in a Bank are impacted? Customer / Account Withholding & 4 Documentation Profile Deposits Reporting Client Identification AML/KYC Review of FFIs/NFFEs Account Master Product Master Counterparty Master Business View Account Setup Credit Approval / Review Tax Review Document Storage Enhanced W-8 / W-9 Transaction Processing / Payments Withholding System Deposit (to the IRS) IRS Other (FFI) Client Customer Master Reporting System Monitor Change in Circumstances 5 Legal Entity and FFI Management 13

14 What order and by when do you need to implement? Selected key dates: July 1, 2013 FFIs new account procedures Jan 1, 2014 FATCA withholding (US FDAP) Jul 1, 2014 FFIs due diligence preexisting high value accounts Sept 30, 2014 FFIs First FATCA reporting due Jan 1, 2015 FATCA withholding (gross proceeds) Jul 1, 2015 FFIs all other pre-existing accounts due diligence Mar 15 & 31, 2016 Expanded form reporting Jan 1, 2017 FATCA withholding (foreign passthru payments) FFI Agreement Window Example Implementation Timeline Legal Entity Classification Legal Entity Maintenance FFI Certification Periodic Retesting FFI Management and Periodic Retesting New Accounts Technology (On-boarding) FATCA Document Management Account Maintenance and Monitoring Monitoring Product Analysis Payee Classification Pre-Existing Accounts Analysis Pre-Existing Accounts Remediation (1) Pre-Existing Accounts Remediation (2) Maintenance Maintenance Withholding Calculations, Deposits and Refunds Withholding Calculations, Deposits and Refunds IRS and Client Reporting IRS and Client Reporting Passthru Payments Percentage Calculation* 14

15 What are technology challenges for new accounts and account maintenance and monitoring? FATCA Requirements Client AML/KYC Identification New Account On-boarding Account Setup Credit* Tax Account Maintenance Account Master Customer Master Monitor Change of Circumstance Key Considerations Monitoring change in circumstance Where / how to store new attributes Reason to know Treatment of recalcitrant accountholders Jurisdictional differences in KYC Relevant Technologies Account opening technologies Account maintenance technologies Monitoring Workflow Digitizing unstructured data *May apply in some instances 15

16 What foundational data efforts help prepare for building withholding capabilities? Product Analysis Grandfathered Obligations Product Processors Security Masters Customer Masters Monitor for Material Modifications and Change in Circumstance FATCA Requirements Withholding System Key Considerations Grandfathered obligations Monitoring for material changes Track new withholdable payments Leveraging current capabilities Handling of limited FFIs Relevant Technologies Monitoring Matching and data quality Notification / workflow Withholding calculations engine 16

17 What are technology challenges for pre-existing accounts analysis and remediation? Customer/ Accounts AML/KYC Tax Credit Electronic Indicia Search Non-Electronic Indicia Search Missing Docs? Yes No Investigate / Remediate Classified & Documented Key Considerations Identification of data sources Multiple data sources, quality, consistency Reason to know Balance aggregation Data privacy Relevant Technologies Data Profiling, Quality, Matching Rules Engine Scanning / OCR Indexing / Search Case Management and Workflow 17

18 In summary why FATCA Impacts Tech and Ops FATCA requires electronic search of databases on existing individual customers FATCA will affect customer onboarding and what customer info is requested and stored Identified US customers and non-us customers with substantial US owners have to be tagged on systems FATCA requires classification of entity customers into new FATCA categories and storage/retrieval of this info FATCA asks a Bank to report info on US customers and US-owned customers to the US Govt. Reporting has to be generated by systems 18

19 In summary why FATCA Impacts Tech and Ops (Cont d) In some cases, FATCA requires a Bank to withhold on some payments made to (1) a customer who refuses to provide info to the Bank and (2) FFIs that do not comply with FATCA Chief Compliance Officer or other Responsible Officer has to periodically certify FATCA compliance to US Govt. They will want to know that Tech and Ops support is in place FATCA requires certain written policies and procedures on FATCA to be in place. Tech and Ops are an important part of meeting this requirement 19

20 PwC contacts if you later have questions Tim Clough Risk & Controls Solutions Partner Angelica Kwan US Tax Partner

21 Questions No reliance permitted -- These materials are for educational purposes only and are not intended, and should not be relied upon, as advice to any party. The application of FATCA to any particular party is dependent on the facts and circumstances relevant to such party. PwC has no responsibility for the accuracy or completeness of any discussion included in these materials. Circular 230 Disclosure: This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties that may be imposed on any taxpayer.