The final FATCA regulations and financial institution preparedness

With the Final Regulations having been issued, the preparations for implementing the FATCA provisions have entered the home stretch; still, the level of readiness among financial institutions varies greatly.


These provisions deal with the issue of tax evasion by U.S. taxpayers using foreign accounts. At the same time, publication in the official journal corresponds with the coming into force of the Final Regulations, bringing about far-reaching implications for the financial services industry.
The issuance of the Final FATCA Regulations is a long-awaited event at global level, both by financial institutions, as well as national governments, as it represents a key step in the achievement of a common approach at intergovernmental level to combating international tax evasion. These guidelines offer a better understanding for organizations with regard to their roles under the new regime, and thus enable planning and implementation efforts that have been, up to the present, uncertain and irresolute.
FATCA represents a series of information reporting and withholding tax provisions published on 18 March 2010 by the IRS as part of the HIRE Act (Hiring Incentives to Restore Employment Act), adding new clauses to the United States Internal Revenue Code. According to FATCA, foreign financial institutions (FFIs) are required to report to the IRS certain information with respect to U.S. accounts or accounts held by entities with substantial U.S. ownership. Recalcitrant individuals and FFIs not participating in FATCA will be penalized by having 30 percent of certain U.S.-source payments made to them withheld. The US Department of the Treasury has reached out to governments across the world, stating that there are more than 50 countries engaged in discussions to implement FATCA through intergovernmental agreements (IGAs).
Against this backdrop, KPMG International conducted a survey between May and August 2012 of 129 executives at financial institutions that fall under the scope of FATCA, of which 57 percent are headquartered in the United States and 43 percent are headquartered in other jurisdictions. The respondents comprised global banks (32 percent), insurance companies (22 percent), regional banks (19 percent), asset management companies (9 percent) and other organizations (18 percent) such as global investment banks and brokers/dealers, securities companies and transfer agents. The survey participants answered a number of questions, focused mainly on non-tax technical issues, to ascertain what planning and implementation actions they are taking in readiness for FATCA, the resources they are committing, and the challenges they face.
The FATCA provisions affect a broad swathe of the financial sector. Almost all the organizations surveyed (93 percent) believed the Act would apply to their company. Most of these (89 percent) had started taking some sort of steps towards achieving compliance. However, the level of preparedness varied, with action having been centered primarily on undertaking an impact assessment. Some organizations had gone further, with 11 percent in the process of revising policies, procedures and systems, at that time, and 10 percent building an operating model. By contrast, 12 percent were waiting for release of the final regulations before committing to further action.

Time pressures
Before the Final FATCA Regulations could provide financial institutions with a clear framework in which to plan their compliance projects, the survey respondents predicted implementation schedules in response to the the time pressures suggested by the previous Proposed Regulations of February 2012 as follows:
• Two-thirds anticipated FATCA implementation projects would take somewhere between six and 18 months;
• Almost a quarter (23 percent) expected implementation to take 18 months or more;
• Only 9 percent thought implementation would require less than six months.
The complexity of responsibilities and time required to achieve compliance meant less than half of respondents (45 percent) were confident of meeting the FATCA requirements by the original 1 January 2013 deadline for U.S. Withholding Agents (USWAs) and for FFIs. Since the survey was conducted, the US Treasury Department and IRS have issued the Final FATCA Regulations, extending deadlines and establishing concrete time frames for compliance that remain, nevertheless, challenging.
Resource allocations
The scale of the challenge organizations face in achieving FATCA compliance should not be underestimated. However, the amount of resources our survey respondents are dedicating to the task varies enormously, which is likely a reflection of the location, size and scope of the institutions’ businesses:
• 63 percent estimate that 10 or more people will be involved with their FATCA implementation project, with 18 percent signaling more than 100 people will take part;
• 36 percent expect to use less than 10 people.
Similarly, while the median budget among the survey respondents was approximately US$250,000, the figure hides a wide disparity in companies’ actual or planned allocations. For example, USWAs with no or limited exposure to the IGA (Intergovernmental Agreements) requirements will have a relatively light FATCA compliance burden, and thus need to make only limited investments. By contrast, a global bank operating in multiple regions and subject to a web of IGAs will have to undertake a significant retooling of processes and systems.

IGA implications
On 8 November 2012, the Treasury Department made an announcement on the situation of the discussions carried out with countries all around the world, stating that there are more than 50 countries engaged in discussions to implement FATCA through intergovernmental agreements. At present, five countries have signed bilateral agreements (including the U.K., Denmark, Mexico and Ireland which have signed a Model 1 IGA, while Switzerland was the first country to sign a Model 2 IGA on 14 February 2013), and four others have initialed such treaties (Spain, Norway, Italy and Germany, with the latter having made the announcement on 22 February 2013). Romania is listed among the jurisdictions with which the Treasury is working to explore options for intergovernmental engagement.
The amount and complexity of work involved in FATCA compliance will depend to a large extent on the number and types of jurisdictions in which an organization operates. In particular, the emergence of the IGAs means different countries are formulating alternative FATCA compliance arrangements, which will have an enormous bearing on institutions’ obligations and workloads. For instance, the IGAs contain several important simplifications compared to the proposed FATCA regulations, such as eliminating withholding on recalcitrants. However, the agreements introduce logistical complexities for companies as well, as with the new definition of an investment entity, country-to-country differences in Annex 2, which lists the entities, plans, and products that are to be excluded from FATCA reporting, and that partner countries will be left to determine much of the detail on specific obligations (e.g. on the issue of self-certification). Organizations with cross-border operations falling under different regimes (i.e. partially IGA Model 1, IGA Model 2, FFI and USWA) face particularly complex implementation and ongoing compliance requirements. 
The Model 1 IGA is a welcome simplification for those FFIs captured by the agreements. Firstly, it eliminates the requirement for FFIs to withhold tax on gross proceeds, and potentially on “passthru” payments as well. In addition, a responsible officer will no longer be held accountable for certifying their institution is meeting its compliance obligations (although as-yet undefined local country certification requirements may be introduced). As a result, the commercial, legal, and reputational risks previously associated with FATCA are significantly reduced. Furthermore, by making the client on-boarding process less onerous and removing the need for institutions to build a withholding engine, the IGAs effectively drive down the cost of compliance.
The Model 2 template, published by the US Treasury Department on 14 November 2012, stipulates that FFIs in the applicable jurisdictions will have to register with the IRS by 1 January 2014 and comply with the terms of an FFI Agreement (i.e. meet the client identification, disclosure and withholding responsibilities set out by FATCA). Where appropriate consent from account holders is granted, FFIs will report the necessary information on their customers directly to the IRS with aggregate information on their non-consenting account holders. The IRS may subsequently request further detailed information on these accounts and obligations from the jurisdiction’s government, which will have six months to provide it. Having to report directly to the IRS in this way will likely make the process more complex for FFIs, with potentially greater commercial, legal and reputational risks than under the Model 1 framework. 
The current model IGAs are premised upon a requirement that the country entering into the IGA have either a tax treaty or tax information exchange agreement (TIEA) with the United States. Some notable jurisdictions, for example Hong Kong and Singapore, do not have these agreements with the US, and would have been presumed ineligible to enter into an IGA. However, the US Treasury Department notice on 8 November 2012 included Singapore, which indicates that not having a tax treaty or a TIEA will not hinder jurisdictions from entering into an IGA. Yet despite their potentially game-changing impacts, our survey revealed the majority of respondents (56 percent) either did not know or were unsure whether any governments in the countries in which they operate intend to enter into an intergovernmental agreement with the United States.

The uncertainty that KPMG’s study revealed to be surrounding the requirements for institutions in the post- FATCA world has been mostly lifted with the issuance of the Final Regulations, and the industry’s compliance readiness efforts can now be targeted and efficiently undertaken. This is especially true for institutions with a broad global footprint, which are subject to an array of reporting and withholding tax arrangements. 
Nevertheless, it is clear from our survey that a high level of awareness about FATCA existed among industry participants and that the vast majority of organizations had already kick started their compliance projects in some form before January 2013. 
The survey results also demonstrate a widespread consensus about where the focus of work will lay, with almost all respondents stating client on-boarding, customer identification and/or documentation processes will need revising, and with most planning to leverage existing AML/KYC compliance programs to help satisfy their FATCA requirements. 
Meanwhile, the majority of organizations are adopting some form of centralized plan to drive their implementation projects, rather than delegating responsibility to their regional or country businesses. Yet wide divergences in approaches and opinions are evident too. 
The survey reveals a broad spectrum of responses in terms of the number of people and size of budget organizations are dedicating to FATCA compliance, the time they expect project implementation to take, and whether they will be ready for the upcoming deadlines. 
At this stage, with the final rules having been released and international agreements still in flux, focusing your efforts on well-defined areas that enable your organization to meet the most important deadlines and compliance requirements, while minimizing the risk of undertaking work that subsequently proves redundant once a possible IGA would come into force, should be a priority.
Read the full report in attached pdf document