The “original” Foreign Accounting Tax Compliance Act (FATCA) – the federal law enacted by United States Congress in 2010 to target non-compliant US taxpayers through reporting by foreign financial institutions (FFIs) and governments – is at the epicentre of this worldwide movement. Incongruous, say industry observers, since much of the original pushback to the regulation came from the very countries that are now enacting similar laws.
“There is an irony here because the FATCA regulation was picked up by a number of different countries because many of the governments had to look at signing intergovernmental agreements [IGAs],” says Ross McGill, CEO of TConsult. “At that time, they started looking at what the regulations implied for their domestic financial institutions and several of them had similar issues – especially in the United Kingdom Ð around tax evasion.”
Mary Burke Baker, Government Affairs Advisorat K&L Gates, was working for the US Senate Committee when the initial draft of US FATCA was introduced and has watched the evolution of the “original” FATCA to the sprawling global effort of today. “Before FATCA was enacted, it had not really received a lot of publicity due to other economic factors,” she says. “Once it was and countries really started seeing how broad the implications were Ð affecting potentially every foreign financial institution in the world Ð it was viewed, at first, as some extra-territorial regime that the US was imposing on the rest of the world for its own tax administration.”
Although by then, it was law, and the US Treasury began talking to other foreign governments to start implementation. “As those countries started to figure out how to implement it, they figured out a few problems we hadn’t thought of, including the extent of privacy and data protection laws,” she says. “However, they were interested in the same information and said this may work for us too. Let’s see how we can all work together in partnership as opposed to criticising FATCA.”
What followed were countries like the United Kingdom creating its own FATCA, organising a regulatory structure between the UK and its crown dependences. Soon after, the Organization for Economic Cooperation and Development (OECD) began its own efforts. In 2013, the G20 Finance Ministers took steps to usher in a new standard known as the automatic exchange of information (AEOI), defined by the OECD as “[involving] the systematic and periodic transmission of ‘bulk’ taxpayer information by the source country to the residence country concerning various categories of income (e.g. dividends, interest, etc). It can provide timely information on non-compliance where tax has been evaded either on an investment return or the underlying capital sum, even where tax administrations have had no previous indications of non-compliance.”
After committing to the legal framework to allow the governments to exchange data, early 2014 brought the G20’s endorsement of the Common Reporting Standard for the AEOI, with more than 60 jurisdictions signing up as early adopters to the exchanges in 2017.
“That is where the alternative to FATCA on the global stage started becoming shaped,” says McGill. But there is still much to do, he says, and there are more questions than answers at this point. “The UK is trying to produce its guidance shortly and we understand a number of jurisdictions are waiting for that guidance to produce their own CRS guidance,” says BNY Mellon’s Chris Mitchell. “It could be some time before that guidance is available. It is ideally required before 1st of January 2016 in the 51 countries that are early adopters of the CRS.”
“The OECD has instituted global FATCA in the form of CRS, and the onboarding process in early adopting jurisdictions starts on 1st of January 2016,” he adds. “Almost 100 countries to date have said they will support it. In practical terms, it is an ongoing feast. There are more countries signing up, but a number who haven’t. We could end up with a situation where one group of countries has signed and one group has not. I wonder if we will ever get to the stage of truly ‘global’ FATCA.”
In addition, Mitchell adds, “while the US fully supports the OECD initiative, it is proposing to keep FATCA. UK FATCA is expected eventually to be subsumed into the OECD’s CRS.”
Anecdotally, the average financial institution outside of the United States is spending approximately $25 million dollars just to become compliant with US FATCA. “Now in the OECD Automatic Exchange of Information (AEOI) and Common Reporting Standards (CRS) model (commonly called ‘ATCA’), there will be at least 20 more markets?” says McGill. “It’s a cat’s cradle. Not just American outbound, but you end up with a situation entailing an enormous amount of money spent to change systems so the info can be intelligently sorted and reported but also the policies and procedures. It is an enormous task.
“As I travel around the world, I get the impression that there was hype, correctly, given, about FATCA. Everyone knew the timeframe and most met the requirements of FATCA by first deadlines,” he adds. “There was fair warning with lots of discussion. I am not seeing that from the CRS viewpoint. It is below the radar and many of the firms that do know are trying to handle FATCA with one hand then OECD’s AEOI and CRS with the other.”
Some fund managers are reaching out to outsourcing providers, like BNY Mellon, to help them comply with FATCA and CRS says BNY Mellon’s Mitchell. “Some of our bigger clients are well informed and they are managing their own programmes. They may have a project manager and their own links to the IRS web site and local tax web sites where the information is supplied. Smaller clients are finding that they are relying more on our tax services as a financial service provider and as a big global custodian.”
It also very much depends on what business the client is in, he adds. “From BNY Mellon’s point of view, for our custody service, we have an obligation to be FATCA complaint. This is because the financial institution is responsible for being compliant in each jurisdiction. The other big area we are involved in is where our clients have investment entities and their funds are classified as FIs, and we are the transfer agent who holds their registry.”
Other major issues include the acquisition of client data, including automating it. “An enormous amount of additional data has to be collected in a consistent way,” says McGill. “As well as judged, assessed and validated. And once that is done, the sub set of information that trips a particular enhanced due diligence or reporting trigger then the subset of data needs to get squired out to the local regulator who can then send to the other governments.”
He calls this a “validation nightmare” in which more than 400 different permutations can exist Ð and one in where the failure rate of w-8s alone is already in the 60% range the further you get away from the US. “The geography and language and culture mean the further east you go, the lower the compliance,” McGill says. “And no one even knows the compliance is that low. And even the government doesn’t know that. It is hard to make a judgment generically about how compliance is going – and multiply that on a global scale.”
In addition to outsourcing providers, technology companies have also been looking to fill the gap. “The software vendors are pretty far up the curve. They know AEOI is coming and they are developing systems,” McGill says. “There is a consistency, but the difficulty is that the timeframe is not long enough to develop, test it and integrate. And even if it was, the vendor solutions have to work in a practical banking environment and the environment is highly regulated.”
Into the unknown
Regardless of the operational and compliance issues, the march toward “global” FATCA continues and the number of jurisdictions that haven’t signed continues to get smaller and smaller, even if the revenues of these exercises have yet to be realised.
“There are fewer places to be, in affect, non-compliant,” says BNY Mellon’s Mitchell. “I think the days of turning away business are past. “The quality of the information and how it is actually used is going to be another hurdle for the jurisdictions – how they are going to keep it and exchange it. It’s going to be a huge job. It remains to be seen whether the revenue gained from the exercise will confirm that the rules were worth it and achieve what they aimed to achieve. Hopefully, they will.” K&L’s Mary Baker Burke agrees. “It is fair to categorise that there is race to the finish to be the one that emerges saying we lead this effort to end this tax erosion.”
But it’s a race in which many fund managers and financial institutions are simply trying to keep up Ð without knowing completely what is around the bend.
– Alexandra DeLuca