Foreign Account Tax Compliance Act (FATCA) Implications, Considerations and Responses

Foreign Account Tax Compliance Act (FATCA) Implications, Considerations and Responses

The Foreign Account Tax Compliance Act (FATCA) was enacted on March 18, 2010, by the U.S. Congress as part of the Hiring Incentives to Restore Employment (HIRE) Act. FATCA is an important development in U.S. efforts to improve tax compliance involving foreign assets and offshore accounts. Under FATCA rules, financial institutions not operating in the United States termed Foreign Financial Institutions or FFIs are required to report to the Internal Revenue Service (IRS) about any American client data with which they have direct or indirect contact. The definition of a U.S. client the relevant standard according to which incomes are to be taxed includes several classifications such as persons with U.S. citizenship, U.S. residents, and persons with a permanent permit to stay in the U.S. FATCA covers various types of financial products (representing both U.S. and non U.S.-sourced income) as well as individual and entity accounts with specific requirements. Based on those elements, the FATCA application area is broader than the Qualified Intermediary (Q.I.) regulation currently in force. FFIs that do not enter into an agreement with the IRS will be subject to a punitive tax of 30 percent on any U.S.-sourced income and gross proceeds generated by securities sales, originating from (a) non-participating FFIs or (b) clients who have failed to provide necessary information to prove their U.S. or non-u.s. status to the IRS. Figure 2: FATCA timeline and milestones Figure 1: Overview of FATCA requirements per Intergovernmental Agreement (IGA) and Announcement Identify U.S. Indicia Nationality, Residence, Mailing Address, Phone Number, Birthplace, Standing Instructions, Hold Mail/In Care Of Mail Address, POA Addres Disclosed U.S. Due Diligence Natural Persons Reduced for calendar years 2013 and 2014 (in 2015): Name, Address, TIN, Account Number Account Balance as of December 31, 2013/ December 31, 2014 Extended in 2016 for calendar year 2015: All income credited to the account Extended in 2017 for calendar year 2016: Gross Proceeds from broker transactions Request Documentation W9, W8 Passport, among others Recalcitrant/ Non-Participating FFI Aggregate reporting of Recalcitrant accounts beginning in 2015 for years 2013-2014 Classification Identify LE Category FFI, Owner-documented FFI, Not-for-profit Organizations, Retirement Plan, NFFEs, among others Non-U.S. January 1, 2014 Payments from U.S. source FDAP income (e.g. dividends, interests) Due Diligence Legal Entities Withholding Grandfathering/Exemption Request Documentation Organizational Document, Credit/Financial Report, W9, W8, Legal Counsel Confirmation and among others Participating FFI January 1, 2017 Gross proceeds from sales/ disposition of FDAP generating assets Foreign pass thru payments. Additional pending Withholding is not required for any payments or gross proceeds from any obligation outstanding on January 1, 2013 In July 2012, the IRS issued the first model for an Intergovernmental Agreement (Model IGA) for complying with the FATCA provisions. Directed at and negotiated with Italy, Germany, France, United Kingdom and Spain, it permits certain simplifications in terms of requirements when compared with the initial legislation. To date, many additional nations and jurisdictions (about 50) are in negotiations with the IRS to finalize their Model IGA. Based on feedback and suggestions received from stakeholders around the world, on January 17, 2013, the IRS issued the Final FATCA Regulations. These are substantially in line with key dates for companies operating under the Model IGA, simplifying, in some cases the requirements in the proposed regulation. To be compliant with the first regulatory deadline set for January 2014, banks may want to consider implementing their process and systems initiatives as soon as possible. This implementation also covers countries that adhere to the Intergovernmental Agreements. The first step in the process is the identification of U.S. account holders through a diligent review of procedures related to onboarding new clients as well as existing client accounts. Strategic Options for Intermediaries to Comply with FATCA FATCA imposes requirements that may affect different business areas, demanding significant efforts in terms of implementation. The Act may possibly impact operational processes, information systems, training and communication, and customer relationship management, as well as the compliance and tax functions. These changes may require investments and resources, especially in 2013 and 2014. The decision to implement a FATCA program is independent of the number of U.S. customers held by the FFIs, and estimates of costs are based both on the number of U.S. potential taxpayers and on the size and organizational complexity of the banking group. 2 3

Figure 3: Options for FFIs Figure 4: Processes impacted by FATCA compliance Areas impacted by FATCA compliance S Products/ Services Selling Due Diligence Withholding application to U.S. Authorities Products/services selling to new customers (credit cards, checking accounts, among others) AML Due Diligence process Requirements Processes Operations Collecting entering updating customer data process in the bank s general database Administrative management process/ document storage Accounting data management of financial instruments limited to recalcitrant client Credit incoming payments to recalcitrant client Credit money originated from withholding to the Regulatory Authority and Internal Control Periodic reporting to IRS (integration of periodic report already executed for IQ regulation) Second-level Internal Control/ Compliance process on the correct FATCA implementations FFIs have multiple options including (Figure 3): Continue to serve U.S. and non-u.s. clients, report to the IRS about U.S. client data in compliance with the FATCA Regulation, and apply the withholding tax on any U.S.-sourced income and gross proceeds of recalcitrant clients Close the U.S. recalcitrant accounts and implement appropriate procedures to avoid future relations with tax evaders; this would allow the withholding tax mechanism and reporting requirements (an exemption is not allowed for the Due Diligence phase that must be performed on a regular basis on the existing clients) not to be applied to FFIs Not conform to the FATCA Regulation and not invest (directly or indirectly) in the U.S. market to avoid the withholding tax of 30 percent Considering the impact on customers if FATCA is not complied with, many financial institutions may conform to the regulation, as non-participation will not be a suitable option for all. Issues to be Addressed As mentioned earlier, FATCA imposes requirements that will significantly affect organizational and business processes as well as information systems. In terms of organizational and business processes, some areas that may be affected include: Selling of products and services to new customers, due to the necessity of collecting relevant and new data and documents (useful for the FATCA Due Diligence phase) in the new customer identification/ onboarding process Administrative processes related to the application of the withholding tax to recalcitrant clients and/or FFIs that do not conform to FATCA reporting to U.S. authorities, by not providing the information requested on U.S. customers. These changes will require the implementation of new processes within the internal control functions to monitor the correct application of the FATCA Regulation. This will also include the implementation of a new process for the certification of the procedures enacted to identify pre-existing clients and periodic reporting, and for demonstrating the proper application of internal procedures. What has yet to be confirmed under the act is if these new processes are to be implemented under the direction of the FATCA Responsible Officer. In the information technology context, FATCA will impact: The onboarding platforms including Customers Master Data, Anti-Money Laundering (AML) and Know Your Customer (KYC) Systems to collect all required information for the Identification & Classification process (considering the FATCA indicia) Several legacy systems that acquire information for the periodic reporting and the withholding tax application Program Complexity and the Accenture Approach Programs to help comply with FATCA Regulation are typically characterized by: High complexity (involving several areas of the bank) Long regulation timeline (last implementation deadline is in 2017) Large perimeter of application (regulation involves the whole group, also crosses borders) Additional issues to consider include: Direct impact on customers, considering the use of sensitive data (privacy) and the request for new documents for U.S. clients subject to FATCA (waiver) for reporting data Interdependence on, and overlapping with, other ongoing projects (for example, alignment to AML programs), considering the long-term nature of FATCA programs The interpretation of the Final Regulation and the IGA is still in progress, affecting possible initial cost estimates and plans 4 5

For successful FATCA programs, some key factors to consider include: Adoption of a group-level program, with centralized governance FATCA Corporate Center Approach and local implementation Basing the governance model on a centralized business requirements definition (that can help enable a consistent approach and methodology) and on decentralized implementation (to consider the specifics of different local contexts) Taking a flexible approach to the long-term implementation timeline. A key success factor is the definition of a risk-based action plan. One step is to start analyzing and implementing the Customers Identification & Classification processes (characterized by a restrictive deadline) and then developing a process for the withholding tax management and reporting (characterized by a less restrictive deadline) Figure 5: Accenture standard methodology for process design Adoption of centralized solutions (such as Accenture s ) that can also be replicated at a local level. This can be accomplished using algorithms and engines external to legacy systems to help reduce operational impacts and enable economies of scale. Undertaking proactive communication with employees (supported by specific training initiatives and targeting specifically Front-Office functions and people) and, structuring a strong change management plan managed by a dedicated team with the involvement of the Marketing and Communications, Training, Legal and Compliance functions Key steps of process design Why Accenture? Accenture has broad experience in regulatory programs implemented across key Italian and international financial services groups. We have developed a complete project model to help handle, in an integrated and flexible way, all functions and groups of a client organization involved in a regulatory change program, including the people, processes and technology elements. Accenture collaborates with financial institutions, in conducting feasibility studies to help identify detailed functional and technical requirements, and elaborate a FATCA program master plan. Accenture has developed a comprehensive review of the new FATCA regulatory requirements. This review also covers 22 new process changes related to Due Diligence, Taxation and and is in accordance with the standard Accenture methodology (Figure 5): ILLUSTRATIVE Figure 6: Accenture s perspective on an architecture compliant with the FATCA Regulation Customers Customers identification Pre-existing account due diligence Periodic review of FATCA Status Legacy Positions 30% withhold tax Accounting and withholding payment Customers data, transactions, positions reporting Document management system Aggregated Positions Process design: High-level map of process activities and business owners involved Organizational process details: Detailed description of process activities IT architecture: High-level map of applications involved and their connections Securities Cash Account Enhancement-new logical modules Customer s Master Data Identification and Classification Other Payments Existing applications To respond to the new regulatory and/or administrative requirements, we have developed the Accenture Target IT Architecture Framework Design. This includes a new FATCA Engine, which can help clients address all functional and technical business requirements, and implement and address the following: Support the Customer Onboarding process, by performing all the new functionalities required by the act for the Customers Identification & Classification (online and offline) Interact with the legacy systems to collect all the data or information needed AML-CDD Sales Front End Electronic document storage Send the FATCA status to the concerned legacy systems Report the required information to the tax authority Digitally archive documents to support the Due Diligence or customers onboarding execution Manage new alerts workflows (for periodic review of the FATCA status) To limit the impact on the customers on-boarding process, synergies with the Anti-Money Laundering process can also be explored. Properly determine the final FATCA status and accurately route the FATCA workflows 6 7

Contacts Silvia Agnelli Wealth & Asset Management Service lead, IGEM silvia.agnelli@accenture.com Phone: 39 02 77757100 Tommaso Petrillo Risk Management Regulatory Compliance Offering lead, IGEM tommaso.petrillo@accenture.com Phone: 39 06 59561111 Management Consulting Accenture is a leading provider of management consulting services worldwide. Drawing on the extensive experience of its 16,000 management consultants globally, Accenture Management Consulting works with companies and governments to achieve high performance by combining broad and deep industry knowledge with functional capabilities to provide services in Strategy, Analytics, Customer Relationship Management, Finance & Enterprise Performance, Operations, Risk Management, Sustainability, and Talent and Organization. Accenture is a global management consulting, technology services and outsourcing company, with approximately 259,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$27.9 billion for the fiscal year ended Aug. 31, 2012. Its home page is www.accenture.com. Risk Management Accenture Risk Management consulting services work with clients to create and implement integrated risk management capabilities designed to gain higher economic returns, improve shareholder value and increase stakeholder confidence. Copyright 2013 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. This document is intended for general informational purposes only, does not take into account the reader s specific circumstances, and may not reflect the most current developments. Accenture disclaims, to the fullest extent permitted by applicable law, all liability for the accuracy and completeness of the information in this document and for any acts or omissions made based on such information. Accenture does not provide legal, regulatory, audit or tax advice. Readers are responsible for obtaining such advice from their own legal counsel or other licensed professional.