The Foreign Account Tax Compliance Act (FATCA), enacted under U.S. law in 2010, is aimed at combating tax evasion by U.S. persons holding investments in offshore accounts. FATCA is a complex and detailed law that includes different tiers of definitions, exceptions, and deadlines. FATCA is not just a tax issue, but a broad-based customer identification and reporting requirement for which compliance planning should begin immediately and involved parties should include legal, compliance, treasury, operations, IT, systems, audit, private banking, asset management, and risk management at a minimum.
Foreign Financial Institutions
Foreign Financial Institutions (FFIs) will be subject to stringent requirements to identify and report U.S. accountholders (both individuals and owners of foreign entities) to the Internal Revenue Service (IRS) in order to support FATCA’s objectives. FFIs that do not agree to comply with FATCA’s requirements are subject to a 30% withholding tax on specified U.S. source income, such as interest, dividends, and securities sales. Even for FFIs that agree to comply with FATCA, withholding will be required for their customers who do not agree to provide information to determine U.S. accountholder status.
FATCA defines FFIs very broadly, and the definition includes banks, mutual funds, custodians, trusts, hedge funds, venture capital funds, and private equity funds. Multiple FFIs under a single corporate structure will need to coordinate their compliance programs.
Summary of FATCA requirements for FFIs:
U.S. Financial Institutions
Under FATCA requirements, U.S. Financial Institutions (USFIs) will be required to withhold 30% of the proceeds of funds sent to non-participating FFIs and “recalcitrant” Non-Financial Foreign Entities (NFFEs). In addition, USFIs that have foreign financial institutions under their overall corporate structure, such as overseas affiliates or offshore funds, face the additional FATCA compliance challenges of implementing compliance programs at each FFI and coordinating these programs across the enterprise.
Summary of FATCA requirements for USFIs:
Key Success Factors
Key success factors in the different stages are:
- Involving IT and systems experts early in the process will be critical for effective due diligence, especially as FATCA allows reliance on electronically searchable information to identify U.S accountholders (FFIs) or to determine accountholder status (USFIs).
- Creating an identification and tracking system to generate listings of accounts.
- Tuning or developing systems to track and assemble the information required for reporting purposes.
- Enhancing capabilities and processes to identify incoming funds that are subject to possible FATCA withholding, apply proper withholding calculations, and maintain records for reporting purposes.
Protiviti’s Approach to FATCA Implementation
Our approach for implementing and maintaining compliance with FATCA comprises the following phases:
Protiviti has extensive experience working with financial institutions around the world. Our parent company, Robert Half,
is the world’s largest provider of specialized staffing services. Together, we can assist U.S. Financial Institutions and FFIs prepare for compliance with FATCA in the following ways:
- Project Management
- Staff Augmentation
- Information Technology
- Training and Communication
- Internal Auditing and Monitoring