FATCA proposal adds to regulatory pressure on Australian financial institutions

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Thursday 9 February 2012 — Today’s release of the draft Foreign Account Tax Compliance Act (FATCA) regulations by the US Treasury and IRS will add extra pressure to Australian financial institutions already feeling the burden of a raft of other regulatory changes.

The law, which is designed to assist the US government track down overseas assets and income of US tax evaders, requires financial institutions to identify all US customers, report to the IRS and potentially withhold customer funds on certain types of income. Financial institutions that don’t comply face the prospect of suffering 30% withholding tax on certain payments they receive from US sources.

According to EY’s Oceania Banking and Capital Markets leader, Paul Siviour, financial institutions are left with little choice even though complying with the proposed regulations will require significant levels of investment in the face of stronger economic headwinds.

“FATCA regulations have the potential to affect the whole value chain of financial institutions, requiring changes to a wide range of processes and systems to comply with the increased compliance and reporting burden,” Siviour says.

“Coupled with other recent reforms such as Basel III, Stronger Super and FOFA, the FATCA regulations add mounting pressure on Australian banks and financial institutions to comply with an increasingly crowded regulatory landscape.”

Siviour said that while Australian financial institutions would need time to review the draft regulations to measure the impact on their business, there was likely to be the need for substantial investment in three key areas: identifying and documenting US customers, withholding 30% tax for US customers that can’t or don’t want to participate, and reporting information to the IRS.

“The draft regulations do provide some respite over the initial guidance provided by the IRS for financial institutions to be deemed compliant,” Siviour said.

“The re-defined rules on deemed compliance will provide more opportunity for smaller market players with a domestic focus to adopt a more simplified and less costly approach to the regulations,” Siviour said.

“On a broader positive note, the detail in today’s announcement provides a more solid framework to start working through the required changes.

“The release of the draft regulations allows Australian financial institutions to assess with more certainty the impact on their businesses and how to achieve compliance.

“The trick for many organisations will be to understand the impacts and the best way to address them with the minimum of effort and spend. CEO’s are expecting their compliance teams to tread the line between achieving compliance without spending too much. ”

Siviour said that to minimise the impact of the changes, Australian financial institutions should begin preparing now to ensure they are able meet the July 2013 compliance date.

“Although the regulations are not due to be finalised until mid-year, the July 2013 deadline means there is a decreasing window for organisations to take the necessary steps to ensure FATCA compliance,” Siviour said.

“By preparing now, Australian financial institutions have the opportunity to coordinate the processes and changes needed to help minimise the effort and cost of implementation.”

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EY Australia
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