QI Agenda May 2010
Foreign Account Tax Compliance Act
The Foreign Account Tax Compliance Act (FATCA), officially signed into law on 18 March 2010 by the US president, will have
significant impact on the financial sector.
An additional complex system
The FATCA rules go significantly further than the current QI regulations, which remain in place. The circle of affected parties is
widened considerably. Alongside banks, they also affect (for example) brokers, investment companies and fund structures - an estimated
50,000 to 100,000 financial intermediaries worldwide. Other financial market participants, such as stock exchanges and clearing houses,
must also deal with FATCA. The rules for insurance institutions and their products are still unclear. The US is acting on the assumption that
all financial intermediaries will sign this agreement. The alternative of a 30% withholding tax on all payments from US sources primarily
serves as a strong incentive for financial institutions to enter into an agreement with the IRS and forces US taxpayers to disclose their
assets deposited abroad.
The challenge of customer identification
The new regulations cover not only US investments, but also foreign investments, i.e. non-US securities, regardless of whether they
are held by US persons directly or indirectly via a company or similar structure. Information and processes currently available at financial
institutions are not sufficient to provide the IRS with the required data, especially as the burden of proof, regarding correct reporting to
the IRS, resides with the financial institutions.
Clarity about the strategy
Banks and other financial institutions must decide whether they want to continue providing services to US persons as direct or indirect
customers and whether US securities are part of their product portfolio and proprietary trading. If so, an agreement has to be signed with
the IRS. If a foreign financial intermediary is unwilling to sign such a contract, a 30% withholding tax is imposed on the US revenues and
on proceeds resulting from the sale of US securities of all its customers, i.e. not just the US customers.
Major changes, under time pressure
In order to comply with the FATCA rules, institutions must adapt their operating models, from the identification and documentation of
customers, to the product portfolio and IT systems, through to the internal processes. These changes must occur group-wide: if a financial
intermediary is part of a group of companies which includes at least one other institution that has signed an agreement with the IRS
("expanded affiliated group"), it too is obliged to adhere to the FATCA provisions. However, this financial intermediary is free to enter
into its own contract with the IRS, thus undertaking to operate in compliance with FATCA. There is also considerable time pressure, as the
new rules will apply to payments from the start of 2013 and to some dividend-equivalent payments even as early as autumn 2010. However,
the institutions should not make any hasty decisions. There are still no implementing guidances for the new act. The penalties in the event
that an institution does not adhere to its agreement with the IRS are also still unclear. In view of the current conflicts between the US
and various institutions, penalties of a significant nature do seem possible.
Specific need for action
Financial institutions must act quickly. In the first phase, up to autumn 2010, it is essential to gain a detailed understanding of the
new act and to analyse the effects on the business model and the operating model thoroughly. External experts can support this process
systematically. Fundamental strategic decisions must be made by the end of 2010, including decisions on the future business strategy regarding
US persons and US securities. Otherwise, there will not be enough time left to adapt processes and systems to the new regulations.