Back in 2009 Barack Obama said, “Nobody likes paying taxes, particularly in times of economic stress but most Americans meet their responsibilities because they understand that it's an obligation of citizenship, necessary to pay the costs of our common defense and our mutual well-being”*.
Born from this common sentiment that there is worldwide tax evasion by US individuals is the Foreign Account Tax Compliance Act (FATCA), enacted in March 2010 and drafted and administered by the US Inland Revenue Service (the IRS).
FATCA aims to combat tax evasion by requiring Non-US financial institutions to provide information on US account holders. Where institutions fail to meet reporting requirements a withholding tax of 30% will be applied to payments made to Foreign Financial Institutions (FFIs), a provision applicable after the 31st December 2012.
The IRS has set out the requirements for FFIs to be considered fully compliant. FFIs will need to identify US account holders, perform annual reporting to the IRS and withhold 30% from ‘passthru’ payments to recalcitrant accounts.
To implement the requisite standards, three phases of work are recommended: (1) Planning and mobilisation, (2) detailed business impact assessment with implementation roadmap and (3) process redesign and implementation.
These steps follow a fairly typical programme management lifecycle but it is important to recognise that the challenges for UK and European banks, fund managers and insurers (who offer life products with just a cash value) are complex.
Timelines to implement FATCA requirements are very short, costs are potentially high (estimated at $250m per bank**) and changes impact widely within the business. Multi-disciplinary teams will be required and change is envisaged across systems and processes. The scope is not completely defined yet – it will be important to keep a keen eye on periodic releases from the IRS. Institutions need to act now and with agility.
Furthermore, all of these considerations, especially those related to data sharing and data management, must be articulated accurately and sensitively to customers and other stakeholders.
Nevertheless, opportunity exists for those institutions who act swiftly to leverage this mandatory change to develop improved customer data capture, analytics and reporting processes.
Posted by Dominic Probyn on the 30th of September 2011
*Quotation from the speech ‘Remarks by the president on international tax policy reform’, 4th May 2009
**EBF (European Banking Federation) and IIB (Institute of International Bankers)
