The FATCA 'World Cup'

By Mark Benzing, Investment and Compliance Consultant for DST Global SolutionsKick Off
By Soapbox

By Mark Benzing, Investment and Compliance Consultant for DST Global Solutions

Kick Off

FATCA is a new U.S. tax regime requiring global participation, which will have significant impact on many investment firms. It is expected to be finalized by the end of summer 2012. The goal is to prevent tax evasion by U.S. taxpayers who maintain assets overseas, and foreign entities in which U.S. taxpayers hold a substantial ownership.

The Teams and the Players

FATCA places onerous operational requirements on a wide range of foreign financial institutions (FFIs) including fund/asset managers, IFA/wealth managers, hedge funds, custodians, distributors/platforms, transfer agents and brokers. These are classified into six main playing categories:

1. Participating Foreign Financial Institution FFIs who agree to enter into an agreement with the IRS to supply information to identify U.S. accounts.

2. Deemed Compliant Foreign Financial Institution entities that dont require a FATCA agreement to comply with FATCA.

3. Exempt Beneficial Owner this will involve the least amount of data collection and reporting.

4. Non-Participating Foreign Financial Institutions all FFIs that have not entered into agreement with the IRS.

5. Recalcitrant Individual Account Holders uncooperative account holders who refuse to provide the information to become FATCA compliant.

6. Non-Financial Foreign Entities a foreign entity that is not a financial institution.

Rules of the Game

FFIs must identify existing and new accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest, reporting these directly to the IRS. There are seven defined Indicia of U.S. citizenship, which underpin the identification procedure. Failure to comply could result in 30% withheld tax on U.S.-sourced dividends, interest and gross proceeds from the sale of securities that generate U.S.-source income.

European Qualification

The United States, France, Germany, Italy, Spain and the United Kingdom confirmed a common approach to FATCA implementation. Other countries are in the process of finalizing agreements with the U.S.

Match Analysis

The main requirements for FATCA implementation are:

– Customer identification new and existing customers
– Calculation of withholding tax
– Formal reporting

The aim of FATCA is to generate reporting to the IRS; the threat of withholding is a potential red card to force FFIs to comply.

No one is currently ready for FATCA, although global players are ahead of the curve. Robust systems and processes must be in place to detect U.S. clients, report to the IRS and deduct 30% withheld tax, where applicable. Firms should aim to build a global solution, not just a FATCA solution.

A responsible officer must be nominated by each FFI to act as captain and provide formal approval that FATCA procedures have been correctly applied. This appointment is fundamental to the successful implementation of FATCA, as it creates specific ownership and responsibility.

The desire to prevent tax evasion is global. The U.S. leads the way and has indicated it will reciprocate with other countries introducing the same requirements as FATCA. With more players following their lead, the concern is that the game will become too difficult to referee.

FATCA appears to only benefit the U.S. government and will be a costly burden on the financial services industry; the high costs of administration are likely to be passed on to inventors.

Final Whistle

Despite the global challenges of implementation, FATCA is not going away and will be fully applied by the end of 2017; sitting back and waiting for the game to begin is not an option.