FATCA: The current state of play
Following the release of the draft Foreign Account Tax Compliance Act (FATCA) regulations, any remaining uncertainties should not cause Australian entities to become complacent on FATCA, given there is less than 12 months to the 30 June 2013 deadline for entering into a FFI Agreement and having FATCA compliant on-boarding processes in place. The draft regulations released on 8 February 2012 reflected previous comments from the financial services industry and contained a number of concessions. For example, greater reliance on anti-money laundering (AML) and know-your customer (KYC) processes, raising de minimis thresholds for due diligence on pre-existing accounts and removing specific provisions for private banking. The Joint Statement issued on the same date by the US and five European nations also reflected successful efforts to utilise an intergovernmental approach (Model I IGA) to resolve conflicts between FATCA and local data privacy laws. However, many of the requirements of FATCA remain stringent, time-consuming and a number of uncertainties still exist. Since release of the draft regulations, there have been a number of FATCA activities and developments, including:
Accordingly, Australian FFIs should continue to prepare for FATCA by undertaking activities that will enable them to complete implementation upon release of the final regulations, including: ō Finalise project completion plans ō Build out teams to finish implementation ō Develop customer communication strategies
ō Submissions and lobbying on details in the draft regulations by financial services industry bodies, governments and FFIs across the globe
ō Finalise their expanded affiliated group and categorise entities
ō On 21 June, the U.S. released Joint Statements with Japan and Switzerland on a second model of intergovernmental cooperation (Model II frameworks)
ō Identify detailed on-boarding information gaps
ō Development of the draft FFI Agreement and the Model I IGA with the UK, drafts of which are expected to be released in August and July, respectively ō The expected release date for the final regulations has been pushed back to the U.S. fall, but with no announcement as to whether the 30 June 2013 deadline will also be pushed back ō On 26 July 2012, the U.S. released a model IGA, developed in consultation with France, Germany, Italy, Spain and the UK.
8
Our work with major foreign financial institutions (FFIs) overwhelmingly indicates that they expect to meet the 39 June 2013 deadline, although the model IGA indicates a possible revised 1 January 2014 deadline. They are not planning or hoping for a further extension. This approach is recommended as the most prudent course of action to be taken until an extension, if any, is actually provided.
ō Complete detailed impact assessments ō Deploy education and issue escalation processes for customer facing personnel. At all stages, the project team should inform the Board and executive levels of the organisation as to progress.
Key submissions on the draft regulations Submissions on the draft FATCA regulations were made by a number of Australian industry bodies, including the Australian Bankers’ Association, The Association of Superannuation Funds of Australia (ASFA) and the Financial Services Council (FSC). These submissions were consistent in many respects with submissions made by industry bodies, governments and FFIs globally. A number of the issues and comments consistently raised in submissions on the draft regulations, included: ō Improving coordination with current AML/KYC practices for documentation to be collected for FATCA (e.g. collecting documentation on an account holder basis rather than upon opening each new account, eliminating the requirement under FATCA to obtain new identification documentation upon expiry and eliminating the requirement to refresh documentation every three years) ō Additional categories of deemed compliant FFIs (e.g. including a deemed compliant FFI category for local insurance companies) ō Refining the requirements for deemed compliant FFIs (e.g. eliminate, reduce or amend the 98% local resident account holders requirement in the definition of a local FFI)
ō Extending the effective date for new on-boarding procedures beyond 1 July 2013 to allow sufficient time for system changes to be implemented ō Extending the period for transitional arrangements beyond 1 January 2016 for members of an expanded affiliated group that are unable to comply with FATCA due to local legal restrictions. The Australian industry bodies also made submissions seeking amendments to the draft regulations to enable Australian superannuation funds regulated by APRA to be excluded from FATCA or subject to reduced FATCA compliance obligations. Following the submission period, the industry bodies have continued to discuss Australian APRA-regulated superannuation funds with the U.S. Treasury and Internal Revenue Service (IRS) and work on a way to exempt those funds wholly or partly from FATCA. Any changes need to be non-Australian specific, but sufficient to cover Australian APRA-regulated superannuation funds. The success of the submissions and lobbying process will only be determined following release of the final regulations later this year. Until the final regulations are released, FFIs should continue to prepare for FATCA implementation as if the final regulations will not be substantially different to the draft regulations and that the timelines for FATCA compliance will not be extended.
Expected release of final regulations and pro forma FFI Agreement Original expected release
Revised expected release
Model FFI agreement
July 2012
August 2012 (or later)
Model IGA
June 2012
Released 26 July 2012
Final FATCA regulations
End of U.S. summer (September)
U.S. fall
Intergovernmental agreements: Increasing complexity On 21 June 2012, the U.S. Treasury released two separate Joint Statements with Japan and Switzerland outlining the first two variants of a Model II framework for FATCA. Whilst this demonstration of flexibility on FATCA is welcome, it results in increasing complexity. For FFIs with operations in a number of countries, there is the real possibility that the FFI will need to comply with up to four FATCA regimes. The table below highlights the features and differences between the standard FATCA rules, the Model I IGA, and the Model II frameworks with Japan and Switzerland.
9
Model I (France, Italy, Germany, Spain, UK)
Model II – Switzerland
Model II – Japan
Standard FATCA rules
Not required for FFIs resident in a FATCA partner country; instead, FFIs must register with the IRS
Subject to limited exceptions, all FFIs resident in Switzerland must enter into an FFI Agreement
Not required for FFIs resident in Japan; subject to limited exceptions, FFIs must register with the IRS
Subject to limited exceptions, all FFIs not resident in a FFI partner country must enter into an FFI Agreement
FFI Agreements FFI Agreements
Note: Japanese FFIs may register or enter into FFI Agreements (and presumably would be subject to standard FATCA rules) Registration with IRS
Yes
Yes
Yes
Yes
Enforcement of compliance
Unknown
Unknown
Unknown
IRS, Responsible Officer certifications
Deemed compliant/ exempt entities
Mutual agreement and U.S. guidance
Mutual agreement
Mutual agreement
U.S. statute and Treasury regulations
No
Possible if unregistered and no FFI Agreement
Yes
Yes – enabled by FATCA partner country
Yes – enabled by FATCA partner country
No
No Can resident FFIs be non-participating FFIs? Due diligence Resolution of conflicts Yes – legislation of law to permit promised by FATCA due diligence partner country and data mining Due diligence required
Yes, in accordance with promised implementing legislation
Yes, as required by FFI Agreement
Yes, in a manner consistent with the FATCA requirements
Yes, as required by FFI Agreement and Treasury regulations
Closing of accounts of recalcitrant account holders in FATCA partner country
No
No
No
Yes
Yes – legislation by FATCA partner country
Yes – enabled by FATCA partner country
Yes – enabled by FATCA partner country
No
Reporting Resolution of conflicts of law to permit reporting
10
Model I (France, Italy, Germany, Spain, UK)
Model II – Switzerland
Model II – Japan
Standard FATCA rules
Local authority
IRS
IRS
IRS
Information reporting Prescribed by and requirements implementing legislation
According to FATCA rules
Consistent with FATCA Prescribed by U.S. requirements statute and Treasury regulations
Reporting of U.S. accounts
Not specific; likely automatic for U.S. accounts
Automatic for U.S. accounts
Automatic for U.S. accounts
Automatic for U.S. accounts
Reporting of recalcitrant account holders
Not stated; likely upon request
Upon request
Upon request
Not reported
U.S. reciprocity
Yes
No
Under existing income No tax convention
Withholding on resident FFIs
No U.S. withholding under FATCA to apply to FFIs resident in a FATCA partner country
No U.S. withholding under FATCA to apply to Swiss resident FFIs (unconditional) or FFIs resident in a FATCA partner country
No U.S. withholding Yes, withholding under FATCA to apply applies to any to Japanese resident non-participating FFI FFIs (conditional) or FFIs resident in a FATCA partner country
Withholding on resident FFIs
No U.S. withholding under FATCA to apply to FFIs resident in a FATCA partner country
No U.S. withholding under FATCA to apply to Swiss resident FFIs (unconditional) or FFIs resident in a FATCA partner country
No U.S. withholding Yes, withholding under FATCA to apply applies to any to Japanese resident non-participating FFI FFIs (conditional) or FFIs resident in a FATCA partner country
Withholding on non-resident, non-participating FFIs
Yes
Yes
Yes
Yes
Withholding on foreign passthru payments
No
No
No
Yes
Withholding on U.S-source payments
No
Yes
No
Yes
Withholding on recalcitrant accounts
No
Withholding applies only to U.S. – source income; no withholding on foreign passthru payments
No
Yes
Reporting of information to local authority or IRS
Withholding
11
At this point in time, the Australian government has not released anything formally on FATCA. On 28 August 2012, Treasury stated that the Australian government is exploring the feasibility of an IGA with the U.S. to reduce compliance costs for Australian FFIs. Existing tax exchange arrangements between Australia and the U.S. are likely to be utilised. Treasury requested written submissions on the advantages and disadvantages of an IGA between Australia and the U.S., based on the model IGA released by the U.S. Treasury on 26 July 2012. Even if Australia seeks an IGA with the U.S., it may not be finalised and effective before the first FATCA compliance deadlines (e.g. 1 July 2013 for FATCA compliant on-boarding processes). In addition, based on the Joint Statements to date, an IGA or framework will still require substantial compliance with the on-boarding, due diligence, reporting and withholding requirements set out in the draft regulations.
Impact assessment Implementation plan
Customer remediation
Take-on of new customers On-boarding process change
Customer platform change
Withholding approach Withholding system change
PPP calculation
FATCA reporting Compliance reporting
Management information
FATCA agreements Compliance agreements
Internal assurance
Technical Tax Interpretation
12
Governance, controls and assurance
Strategy, policy and operating model
Remediation of existing customers Identification and classification
Given some aspects of the draft regulations are unlikely to change and other areas are uncertain, FFIs should consider appropriate actions now, whilst preserving resources, so that they can prepare for FATCA implementation upon release of the final regulations. There are six key work streams to be undertaken to achieve compliance with FATCA, as shown, with four surrounding components that will run through these work streams. The project team should include representatives from operations, finance, risk, compliance, legal and tax. The burden of compliance can be reduced by applying experience and knowledge from other regulatory change (e.g. AML/KYC). Further, existing programs should be leveraged to develop the most effective and efficient way to implement FATCA solutions. Undertaking an enterprise-wide scope analysis to consider whether any entities are excluded or deemed compliant under FATCA (and thus subject to reduced FATCA obligations) can save time and effort in later project implementation.
Program design and management
Gap analysis
Key actions until final regulations are released
Adopting a phased approach and prioritising those activities that must be completed first (e.g. on-boarding of new customers and remediation of existing customers) can also help to preserve resources. Making changes that can cover future potential reporting requirements beyond FATCA should also be considered.
Key questions and actions FFIs should consider: ō Determining the current scope of FATCA, including: – Documenting the organisational structure and identifying all entities within the expanded affiliated group and their domicile – Undertaking an enterprise scope analysis to determine if any members of the expanded affiliated group are excluded FFIs or qualify for a deemed compliant status. ō Engaging the Board on FATCA to ensure the Board understands the potential impact of FATCA on the operations of the FFI and the impact of non-compliance and to enable the Board to consider the possible strategic approaches to FATCA ō Ensuring that an appropriately resourced project team is put in place and a project plan developed that can be refined upon release of the final regulations ō Developing an education plan for those in the business affected by FATCA and communication plans for customers/investors, counterparties and service providers ō Determining appropriate governance structures and body of evidence required to enable the responsible officer to make certifications upon entering into an FFI Agreement ō Adopting a phased approach to FATCA (e.g. on-boarding first, followed by due diligence of pre-existing accounts, reporting and then withholding)
13
ō Undertaking high level impact assessments, including: – Impact on product offerings and structure – Impact of privacy and discrimination laws and other potential conflicts of law – For managed funds, discussing with custodians, administrators and other service providers how FATCA compliance will be achieved for the fund and who will have responsibility for various FATCA obligations – For insurance companies, reviewing products to determine if any are ‘cash-value’ products (which are included in FATCA) – Documenting existing processes, systems and infrastructure for account opening and reporting on account holders. ō Including FATCA-specific comments in offering documents and other materials for new products, accounts and issues of financial instruments or interests. The final word: a prudent and proportionate approach Given the current state of play, undertaking the above activities on the basis that the first FATCA deadline is 30 June 2013 and that the draft regulations will not substantially change is a prudent and proportionate approach that should enable resources to be mobilised and effort accelerated to finalise FATCA implementation upon release of the final regulations later this year.