The
U.S Foreign Account Tax Compliance Act (FATCA) comes into effect on January 1st
2013 to combat offshore tax abuse. Those caught by FATCA may be swiped with a
30% withholding tax on U.S investment income. For understatements on
undisclosed foreign (ie non US) assets there’s a further 10% to add to this.
Foreign
entities can avoid FATCA’s swingeing withholding tax as they enter the FATCA
regime – after entering into a binding agreement with the IRS to identify U.S
persons and to report certain information about them to the IRS. This
information is then used to identify potential instances of under-reporting as
well as fraud.
But
how is such information collected? FFIs must retain all paper and electronic
documentary evidence establishing the identity of account holders for 10 years.
As is to be expected records must be accurate, up to date, consistent, retained
for specific periods of time, and readily available for certification and
auditing purposes. And this latter point is the key – all documents must be
electronically searchable. The IRS will want to be able to run some
sophisticated data collection, recognition and analysis tools over high volumes
of data. No more hefty physical files of information or, if you do persist with
these, then they will need to be digitised.
Because
of these requirements firms will need to adapt their systems and operational
processes of January 2013 – this is a significant undertaking for many
organisations, least of all those with multiple customer platforms. FATCA will
be applicable for all types of financial institutions – the operational system
needs to be in a position to detect U.S clients at the moment when an account
is opened, as well as the entire lifecycle of a client through monitoring.
The efforts
needed to fulfil these obligations can be substantial for a financial
institution and can require specialist knowledge and assistance – knowledge
which can be aided by a supplier of such a system with an understanding of the
Act itself. Some firms are even taking the view that they will no longer broker
for US citizens.
Getting
parochial for a moment, it is essential that organisations caught by FATCA
review all their internal systems. Much of this should be in train already, but
the disclosure elements and, in particular, electronic searchability/ discovery
means that how firms handle, store and retrieve documents will be at the heart
of this. Discussions with a document or
content management provider should be high on the immediate agenda. A good
provider will be able to call on a strong understanding the act, and be able to
guide the organisation through the requirements and suggest any changes which
may be needed to current systems in order to meet FATCA and other compliance requirements.
