On October 23rd, 2014, we updated our
By continuing to use LinkedIn’s SlideShare service, you agree to the revised terms, so please take a few minutes to review them.
Understanding the Foreign Account
Tax Compliance Act
Challenges and Impact on the Global
By Eddie Russo, Advent Software
2 REGULATORY UPDATE
FATCA (Foreign Account Tax Compliance Act) was enacted in 2010
as part of the Hiring Incentives to Restore Employment (HIRE) Act.
FATCA requires FFIs (foreign financial institutions) to report to the IRS
information about financial accounts held by US taxpayers, or by for-
eign entities in which US taxpayers hold a substantial ownership inter-
est. In order to avoid withholding under FATCA, a participating FFI will
have to enter into an agreement with the IRS to be responsible for the
identification of US accounts, the reporting of specific information to
the IRS regarding US accounts, and the ability to withhold a 30 percent
tax on certain payments to non-participating FFIs and account holders
who are unwilling to provide the required information.
FFIs that do not enter into an agreement with the IRS will be subject
to withholding on certain types of payments, including US sourced
interest and dividends, gross proceeds from the disposition of US
securities, and pass-through payments.
FATCA is a direct result of increased efforts in the United States to com-
bat offshore tax evasion and recoup tax revenues. The primary goal of
the legislation is to alleviate deficiencies in the current methods used by
the US Internal Revenue Service (IRS) and the US Department of Justice
(DOJ) to identify US persons who utilize foreign financial accounts or
foreign entities. FATCA will allow the US government to receive infor-
mation on all assets held abroad by US citizens to determine the owner-
ship of all US assets held in foreign accounts. Therefore, all FFIs will be
required to enter into disclosure compliance agreements with the US
Treasury. Non-financial foreign entities (NFFEs) will also have to report
and/or certify their ownership or be subject to the same 30 percent
Due to the amount of publicity this legislation has been receiving and
the wide-ranging impact it will have, most, if not all financial institutions
are concerned about its ramifications and have already begun to look
at the requirements to become compliant under FATCA. One of the
biggest challenges for firms is that as of late 2011, the legislation has
yet to be completely finalized and a wide range of unanswered ques-
tions still exist. It is unclear what the IRS agreements will consist of,
what reporting will be required, who classifies as an FFI and, ultimately,
what the ramifications will be for those who don’t comply. From a doc-
umentation standpoint, questions still remain surrounding how the new
requirements will impact the opening of new accounts, what types of
forms will have to be submitted and whether or not existing docu-
ments can be used or need to be replaced/updated.
FATCA will allow the US
government to receive
information on all assets held
abroad by US citizens to deter-
mine the ownership of all US
assets held in foreign accounts.
About the Author
Eddie Russo is a Senior Solutions
Consultant in Advent’s Global Accounts
group, where he works closely with sales
to ensure that the Advent product suite
satisfies the needs of investment man-
agement firms around the globe. Prior to
joining Advent, Eddie spent ten years in
fund administration and asset manage-
ment, working for some of the largest
banks in the world. Contact him at
One thing, however, is certain: FATCA is going to be extremely costly
from both a time and resource perspective for those firms who will be
required to enter into an agreement with the IRS. The lack of finaliza-
tion is becoming a major roadblock for preparation and resulting in
increased frustration for firms who want to begin the budgeting
process for compliance. Although the IRS has recently released new
information which should clarify some of the documentation questions,
funds for the most part are still in a “wait and see” mode.
Ultimately, the global concern is that FATCA legislation is another
example of the US trying to wield its power and in this particular case,
telling countries how to do business with the US. It’s noteworthy, how-
ever, that FATCA is not mandatory. Financial institutions that are unwill-
ing or unable to meet the new legal requirements have the option to
not sign FATCA and thus must terminate all US client relationships and
20122011 2013 2014 2015
of US accounts
1 Adapted from “FATCA’s Impact on the Asset Management Industry” by Ernst & Young, 2011. For complete text and more information,
4 REGULATORY UPDATE
The application of FATCA is not driven solely by whether or not an FFI
actually has US clients, and closing these accounts will not exempt a
firm from having to comply. FFIs that hold and trade US investments on
behalf of their clients will be directly impacted as well since they will
also be required to enter into a FATCA agreement to avoid being clas-
sified as recalcitrant and subject to withholding. Thus, it’s of utmost
importance that any entity which makes or receives a payment of US
sourced income consider whether they are subject to FATCA.
“Withholdable” payments that must be reported are defined as:
៑ Any payment of interest (including any portfolio interest), dividends,
rents, royalties, salaries, wages, annuities, licensing fees and other
fixed or determinable annual or periodical (FDAP) income, gains,
and profits, if such payment is from sources within the US.
៑ Any gross proceeds from the sale or disposition of US property of
a type that can produce interest or dividends.
៑ Interest paid by foreign branches of US banks.
This means that FATCA will affect more than financial institutions—
because so many types of US payments to foreign entities will be sub-
ject to withholding, multinational corporations and individuals outside
the financial industry will also need to be compliant with FATCA once
it goes into effect. All kinds of companies will likely need to make mod-
ifications to their internal systems, controls, processes and procedures
for compliance by January 1, 2013.
US entities, both financial and non-financial, that make payments of US
sourced income outside the US will also be impacted, as they may be
required to withhold a 30 percent tax on that income if the recipient is
deemed “recalcitrant.” They will therefore have to maintain appropriate
documentation and track how those recipients are classified under
From a company workflow standpoint, most if not all current proce-
dures and processes from the top down will be impacted by FATCA.
This enterprise-level effort will require allocation of people, budget
and project ownership across the businesses, operations, compliance
and tax. It will most likely force firms to centralize all of their process
and systems across all of their divisions globally, which will not only be
a massive undertaking but will lead to substantial organization costs
and create a heavy burden on resources. The belief in the marketplace
is that complying with FATCA could increase operational budgets
All kinds of companies
will likely need to make
modifications to their internal
systems, controls, processes and
procedures for compliance by
January 1, 2013.
anywhere from 25 to 50 percent. This doesn’t even include setting cap-
ital aside for any fines that may be incurred for not fully complying with
the legislation. Some ramifications of these costs include:
៑ Foreign funds may choose not to invest in securities creating US
source income because FATCA’s compliance burden may be consid-
ered too costly.
៑ US brokers/bank withholding agents and upstream FFIs may ask
for compliance with certain clients since it may be too costly to do
business with non-participating FFIs.
៑ Sophisticated investors investing in offshore funds will want to
understand if an offshore fund is a compliant fund.
៑ Currently FATCA requirements are unique to those investing into
the US; however, the future could lead to implementation in other
From a software and IT standpoint, it’s critical that firms have a plan in
place for technology enhancements/updates as they look to consoli-
date their process and procedures. Institutions will be required to
change the way they support onboarding of new investors, capturing
of accounting enhancements and changes, processing of new data as
well as the ability to provide additional documentation that satisfies the
new reporting requirements.
Legal entities will require increased scrutiny and further analysis will be
needed to determine the status of each entity under FATCA. This par-
ticular area could be a major challenge because information about the
various entities included within the expanded affiliated group may not
be readily available. Also, transfer agency functions will be severely
impacted as in some cases “KYC” (Know Your Customer) information
may not be readily available. For information that is readily available,
accessing it will most likely require a major process change, as few
organizations have a single, centralized source of client information to
make required determinations with respect to accountholders.
There will also be numerous legal ramifications that have yet to be iden-
tified across the wide-ranging jurisdictions presented by the legislation.
Compliance with FATCA has significant business, strategic and brand
implications, and there are many risks associated for those funds that
do not comply. One of the biggest and most obvious risks is that
“recalcitrant” funds stand to lose investors. In today’s market, investors
The belief in the market-
place is that complying
with FATCA could increase
operational budgets anywhere
from 25 to 50 percent.
6 REGULATORY UPDATE
are more risk averse than ever before and it would be hard to justify
investing in a fund that is not compliant with FATCA due to the heavy
tax consequences imposed on non-compliant funds.
The high costs and far-reaching changes in policies and procedures as
well as the intrusiveness of the legislation are causing both contention
and frustration globally. Some of the more contested concepts include
the actual definition of a US citizen as well as the requirement that for-
eign financial institutions must submit information about their clients’
accounts to the IRS.
This last requirement could prove to be a major obstacle for hedge
funds on an international scale, as not only are they unsure as to how a
US citizen is defined, they’re struggling to find ways to implement the
new IRS requirement without violating their countries’ client privilege
and privacy laws. Some have declared that they will no longer provide
services to any US citizens.
As a result, FATCA will have a major impact across the world and for-
ever alter how financial institutions do business.
Source Impact Plan
Global on-boarding program
Design Development Implementation
Recertification of existing customers
on US indica
Withholding Withholding system enhancement
Design Development Implementation
IRS reporting IRS reporting
Design Development Implementation
Tax advisory Educate key stake-
holders and engage
with IRS and Treasury
Ongoing tax advisory support
Project set-up Ongoing global and local FATCA coordination
2011 2012 2013 2014 2015
G G G G G
FATCA Implementation Timeline2
2 Adapted from “FATCA’s Impact on the Asset Management Industry” by Ernst & Young, 2011. For complete text and more information,
The high costs and far-
reaching changes in poli-
cies and procedures as well as
the intrusiveness of the legisla-
tion are causing both contention
and frustration globally.
FATCA and Advent Solutions
The time to begin looking at what needs to be done to comply with
FATCA throughout all areas of a fund’s business has already come and
gone, as the necessary infrastructure and technology changes could
take anywhere from 12–18 months to complete. Despite the fact that
the legislation has yet to be finalized, some form of it will eventually go
into effect. How FATCA will look once it’s finalized is anyone’s guess,
but firms need to begin reviewing what it currently entails and begin
putting together a game plan to satisfy the requirements.
Those who are not prepared or haven’t started looking into compliance
requirements could incur much greater costs down the road in penal-
ties and fees as they rush to get things done in order to comply. The
same holds true for software vendors as they look to enhance their
solutions to help their clients support everything that FATCA entails.
In this respect, Advent Software has already started the process of
analyzing how its solutions can be architected to support the various
components that make up the FATCA legislation.
There are a number of areas that will need to be changed and/or
enhanced to satisfy the final set of FATCA requirements. Through vari-
ous provisions of FATCA as part of the HIRE Act, Advent’s product suite
enables firms to account and report on withholding tax for long and
short positions on equities, fixed income, as well as complex derivative
instruments, including Total Return Swaps. Advent solutions will also
allow FFIs to employ time series tracking and reporting for negotiated
prime broker withholding tax rates.
Other areas where FFIs will be able to utilize Advent products to
support FATCA include the ability for users to tag and track all US
sourced income. Firms will also be able to calculate pass-through pay-
ment percentages and electronically apply, account and report on the
necessary withholding tax against a recalcitrant account holder’s US
sourced income. Advent solutions will provide support for light transfer
agency functions to electronically track an investor’s account status
under FATCA, including but not limited to: “Specified US Accounts,”
“Other than US account” and “Recalcitrant Account Holder.” Using
Advent’s award-winning platforms, compliant hedge funds will have
the ability to track, tag and be alerted when capital is received from
recalcitrant account holders or non-compliant FFIs.
Advent Software has
already started the process
of analyzing how its solutions
can be architected to support the
various components that make
up the FATCA legislation.