FATCA's impact on the banking industry

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FATCA is not just another tax issue that affects aspects of compliance. Rather, it touches the whole value chain and requires completely new and extended information and reporting systems.

What is the Foreign Account Tax Compliance Act?

FATCA is a new US tax law  designed to prevent US taxpayers from avoiding US tax on their income by investing in the US through non-US financial institutions and offshore investment vehicles.

  • FATCA was enacted on 18 March 2010, and becomes effective 1 January 2013.
  • FATCA requires reporting to the IRS regarding offshore accounts and investments held by US persons.
  • The IRS issued Notice 2010-60 (20 August 2010), which included the definition of a foreign financial institution (FFI), certain FATCA exemptions, and account documentation and reporting requirements.
  • The IRS issued Notice 2011-34 (April 2011), which revised certain procedures introduced in Notice 2010-60 and provided further guidance on "priority concerns," including on passthru payments.
  • The IRS issued Notice 2011-53 (July 2011) providing additional time for participating FFIs to enter into FFI agreements and implement FATCA's requirements associated with account identification, information reporting, and withholding.
  • The IRS issued revised Notice 2011-53 (July 2011)  clarifying that the revised withholding timeline in Notice 2011-53 applies to payments made by all withholding agents to both FFIs and NFFEs.
  • The IRS issued Notice 2012-15 (8 February 2012)  proposed regulations with significant changes and clarifications, including updated timelines for grandfathered debt obligations, reporting, and withholding.

How will FATCA impact you?

FATCA generally requires financial institutions (both US and non-US) to classify all account holders as either US or non-US and as individuals or entities, which are further broken down as financial and non-financial.

  • Foreign Financial Institutions (FFIs) are asked to enter into agreements with the IRS to identify US accounts and report certain information about those accounts to the IRS on an annual basis.
  • USFIs and FFIs must report certain information to the IRS about substantial US owners of non-financial foreign entities (NFFEs).

What is the “cost” of non-compliance?

Thirty percent withholding will apply to all US source dividend and interest payments plus the gross sales proceeds resulting from the sale of an asset that gives rise to US source income if paid to either a “recalcitrant” account holder, “non-participating FFI” or an NFFE that has not disclosed its substantial US owners. In addition, USFIs and FFIs will also be liable for any tax that they failed to withhold, plus interest and potential penalties.

What are some impacted business units and functions?

  • Investment banking

  • Private wealth/banking

  • Retail banking

  • Custody

  • Prime brokerage

  • Corporate tax

  • Tax operations

  • Compliance (e.g., Anti-Money Laundering/Know Your Client)

  • On-boarding and customer data

  • Information technology (IT)

  • Finance

  • Relationship management

  • Payment processing settlement