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White paper on fatca from Dion Global Soln
White paper on fatca from Dion Global Soln
White paper on fatca from Dion Global Soln
White paper on fatca from Dion Global Soln
White paper on fatca from Dion Global Soln
White paper on fatca from Dion Global Soln
White paper on fatca from Dion Global Soln
White paper on fatca from Dion Global Soln
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White paper on fatca from Dion Global Soln

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  • 1. INTELLIGENT COMPLIANCE:Finding a solution to FATCAand all that followsA Dion Global SolutionsWhitepaper – November 2012
  • 2. INTELLIGENT COMPLIANCE:Finding a solution to FATCA and all that followsA Dion Global Solutions Whitepaper – November 2012The US Foreign Account Tax Compliance Act (FATCA) has been keenly debated in global financialmarkets and continues to be an issue of significant concern to financial institutions and politicians alike. Thesituation remains in flux as the final details of the directive are yet to be disclosed. The opportunities forspeculation have been further increased as countries seek to secure favorable negotiations with the US TreasuryDepartment on Intergovernmental Agreements (IGAs), with the aim of lessening the burden of compliance.Notwithstanding this lack of finality, we know that action will have to be taken, processes will need to berevised and systems will need to be implemented. The recent 12 month delay to the initial 2013 deadlineoffers some breathing space, but it does not reduce either the scale or the complexity of the challengeahead. Firms must adopt a forward-looking strategy to ensure that decisions taken now support future re-quirements. To harness a well-worn phrase, firms must see compliance with FATCA not as a destination, butas the first step in a bigger journey to enhance the process and structure relating to client classification.This whitepaper cuts through the complexities of FATCA and IGAs to provide a clear picture of the currentsituation, and an indication of what is likely to come next. It explores the concept of what intelligentcompliance might look like; going beyond the immediate system impact to identify key factors that must beconsidered if a firm is to meet the initial deadlines – and also be ready for what the as yet uncertain futuremay bring.A LOOK BACK AT FATCA FATCA – THE STORY SO FAR18.03.2010FATCA SIGNED INTO LAW Introduced as part of the HIRE Act shocked by the initial draft regula-27.08.2010 in 2010, FATCA requires all foreign tions published in February 2012,IRS ISSUES THE FIRST ROUND OF financial institutions (FFIs) to en- which seemed to have been drawnFATCA GUIDANCE ter into an agreement with the US up without regard for its scale or08.04.2011 Internal Revenue Service (IRS) to broad scope.IRS ISSUES THE SECOND ROUND identify their US account holdersOF FATCA GUIDANCE and report them annually to the Recognizing the potential enormity14.07.2011 IRS. The burden has fallen on the of FATCA, governments aroundIRS ISSUES NOTICE 2011-53 financial services industry to imple- the world began lobbying the ment solutions that comply with US Government with a view to25.07.2011IRS ISSUES REVISED NOTICE these regulations to protect them- protecting local financial institutions2011-53 selves and their clients from potential that are already operating in an punitive withholding tax penalties increasingly demanding regulatory08.02.2012IRS RELEASES PROPOSED that may be imposed by the IRS regime. As lobbying intensified, itREGULATIONS for non-compliance. This new leg- became clear to the IRS that it had islation’s impact on firms stretches proposed regulations that would be30.04.2012COMMENTS ON PROPOSED far beyond the obvious tax and hugely challenging to implement.REGULATIONS TO IRS reporting obligations and will re- Indeed, in some cases, it could prove quire major changes in technology, impossble since the rules run coun-15.05.2012 operations, customer interaction ter to domestic tax collection andPUBLIC HEARING ON PROPOSEDREGULATIONS and procedures. data protection regulations. For the initiative to succeed, some level of Tax officers, compliance directors compromise would be required. and operational executives werewww.dionglobal.com
  • 3. ENTER THE IGA SUMMER 2012 NEW FORMS W-8 INCORPORATING FATCA CLASSIFICATIONBacking down a little from such remain outstanding. IGAs are not SUMMER/AUTUMN 2012stringent regulatory requirements, a one-way street, though. As well IRS ANTICIPATES ISSUANCE OFthe US Treasury Department intro- as reducing the burden of FATCA FINAL REGULATIONS, AND DRAFT AND FINAL VERSIONS OF FFIduced the concept of IGAs as a compliance, negotiated IGAs can AGREEMENT AND REPORTINGmeans of reducing the impact of also help the IRS overcome locali- FORMS.FATCA provisions on foreign finan- zation challenges. For example, in FALL 2012cial institutions. The first so-called many countries, data protection FINAL FATCA REGULATIONSModel IGA, which includes a recip- laws mean banks cannot deliver EXPECTEDrocal and a non-reciprocal version, data directory to the IRS. Underwas issued in July 2012 as a result of proposed IGAs, financial institutionsnegotiations between the US and will report information on relevantthe UK, France, Germany, Italy and account holders to their relevantSpain. In September, the UK signed national tax authorities, which will,a bilateral agreement to imple- in turn, provide the information toment FATCA based on this model the US under an existing automaticagreement. The IGA approach is exchange of information agree-proving popular and other coun- ment. In this way, local legislationtries including Japan, Switzerland, is not compromised and the IRS isIreland and Australia are keen to able to gather the tax information itmake similar agreements to that requires. It should also not be over-made by the UK. It is currently ru- looked that there is another issue atmoured that around 80 countries stake here. An objective for manyare considering or actively nego- countries negotiating IGAs is thetiating an IGA, andthe fact that possibility of achieving reciprocitythese discussions are still ongoing through data exchange or FATCA- FACTA AND THE FUTUREwas the primary driver behind the like regulations that will have an im- 01.01.2013revised timetable, since FATCA pact on US or other foreign banks. GRANDFATHER RULE: PAYMENTScannot come into force while IGAs MADE ON CERTAIN NON-EQUITY OBLIGATIONS (WITH A DEFINEDTHE NEED FOR CHANGE – THE SYSTEM TERM) OUTSTANDING AS OF JANUARY 1, 2013 ARE EXEMPTIMPACT FROM FATCA WITHHOLDING Q1 2013While IGAs will make compliance firms must sign a FATCA contrac- FINAL FATCA REGULATIONS TOwith FATCA slightly less onerous and tual agreement with the US Gov- BE RELEASEDmeasurably more workable, they ernment. At the moment, in light of FINAL FFI AGREEMENT TO BE RELEASEDare not a panacea to all compli- the legislation not being finalized, IRS TO BEGIN ACCEPTING FFIance challenges. Firms must still the deadline for limited reporting AGREEMENT APPLICATIONSmake significant change if they are to the IRS is set for March 2015, withto fall on the right side of the law. full FATCA reporting by all foreign fi- 31.12.2013Indeed, for firms with operations in nancial institutions covered by the DEADLINE TO ENTER INTO FFI AGREEMENT WITH IRS (THEREAF-multiple regions, they will actually act expected in March 2018. Penal- TER BE CONSIDERED NPFFI)introduce a further level of com- ties for non-compliance, essentiallyplexity as each office will need to 30 percent withholding tax, are ex- 01.01.2014 FATCA WITHHOLDING BEGINScomply with the relevant IGA, rath- pected to apply from 2017. ON FDAPer than one global centralized set of FFI AGREEMENT BECOMES EF-requirements. The first FATCA com- As has become clear, the system FECTIVEpliance deadline is anticipated to impact of FATCA is significant. Thebe 1 January 2014, by which time range of systems affected is considwww.dionglobal.com
  • 4. FFIS ACCOUNTABLE FOR erable, but because of the variety US tax. Client onboarding must alsoIDENTIFYING ALL NEW ´US in banks’ operational and techni- be reviewed to identify those cov-ACCOUNTS´RECALCITRANTS,AND NPFFI cal infrastructure, the exact details ered by FATCA and all accountsUPDATE ONBOARDING PROC- will differ from institution to institu- must be closely monitored to en-ESS FOR NEW ACCOUNTS TO tion. sure any account changes thatINCLUDE CHAPTER 4 REQUIRE- require attention are flagged up.MENTS. At the heart of fulfilling FATCA re- Beyond identifying accounts that30.06.2014 quirements, though, are high level must be reported to the IRS are theDEADLINE FOR FFIS TO COM- know-your-customer (KYC) capabil- automated workflows that will sup-PLETE REMEDIATION ON ALLPRIMA FACIE FFIS ities that can support a firm in iden- port categorization, remediation,DEADLINE FOR USWAS TO COM- tifying those that should be paying reporting and communication.PLETE REMEDIATION ON ALLPRIMA FACIE FFIS31.12.2014DEADLINE FOR FFIS TO COM-PLETE REMEDIATION ON ALL FATCA COMPLIANCEHIGH-VALUE ACCOUNTS 1. Obtain indicia information to determine US taxpayers among15.03.2015 account holdersREPORTING BEGINS ON “CHAP-TER 4 REPORTABLE PAYMENTS” 2. Comply with verification and due diligence procedures on allTO THE IRS BEGINS ON FORMS new and existing accounts as required, and prove that this1042 AND 1042-S has been done in accordance with the rules31.03.2015IRS REPORTING ON ‘US’ AC- 3. Report annually to the IRS, or the authority identified by theCOUNTS AND AGGREGATE relevant IGAREPORTING ON RECALCITRANTACCOUNTS FOR 2013 AND 2014 4. Deduct and withhold the 30 percent tax on payments to re-REPORTING BEGINS ON CERTAIN calcitrant account holders and foreign financial institutionsUS OWNERS OF OWNER-DOCU- that did not enter into an agreement with the IRS, and submitMENTED FFIS & PASSIVE NFFES those monies to the appropriate authority31.12.2015 5. Comply with any requests for additional information made byDEADLINE FOR FFIS TO COM- the IRSPLETE DUE DILIGENCE REVIEWSFOR ALL REMAINING AC- 6. Close the account where foreign law prevents the above ac-COUNTS tivitiesDEADLINE FOR USWAS TO COM-PLETE REMEDIATION ON ALLREMAINING PREEXISTING ENTITYACCOUNTS31.03.2016 ACHIEVING INTELLIGENT COMPLIANCEANNUAL IRS REPORTING ON ‘US’ACCOUNTS AND AGGREGATEREPORTING ON RECALCITRANTACCOUNTSBEGIN IRS REPORTING ON AC- The era of box-ticking compliance only covers essential functionality,COUNTS HELD BY NPFFIS has passed. The level of regulatory but is also highly flexible, configura-01.01.2017 scrutiny now faced, the complexity ble and future proof.WITHHOLDING BEGINS ON NON- of internal systems in a globalizedCOMPLIANT ACCOUNTS FORGROSS PROCEEDS PAYMENTS financial system, and the state of Flexibility world markets have combined toEARLIEST APPLICATION OFPASSTHRU PAYMENTS WITH- throw the spotlight squarely on not Apart from its scale, one of the mostHOLDING ON FOREIGN SOURCE just ensuring compliance, but en- significant challenges of FATCAPAYMENTS suring it is achieved in the optimal compliance is the need to deliver way. Intelligent compliance is best a solution against a draft specifica- supported by technology that not tion. Today’s solution must supportwww.dionglobal.com
  • 5. tomorrow’s unknowns, to avoid a nologies, will generate significantlysituation where multiple systems fewer implementation challengesmust be employed, or systems must than one that requires a completebe ripped out and replaced early in architectural rethink.their life-cycle. The range of operational infra-The number of ‘known unknowns’ structures employed by financialis considerable. Any system imple- institutions also calls for a flexiblemented now must have the capa- solution. It’s important to be able tobility to accommodate: identify a solution that will fit around you, rather than one that acts as a Any amendments to FATCA square peg made to fit a different- that come to light when it is shaped hole. finalized, relating to imple- mentation dates, reporting A modular solution carries signifi- requirements, indicia or addi- cant benefits from this perspective. tional authorities For example, FATCA reporting re- quires the capture and reporting of Further developments to the information that most firms hold, but IGAs it may not be tracked and instantly accessible at present. Similarly, firms Different compliance require- will be required to obtain and store ments for offices located in static data on account holders that countries operating under dif- has not previously been required ferent IGAs and local laws and many will need to automate the withholding and depositing of The distinct possibility of other tax. This can be integrated with the countries looking to implement payments system to calculate tax a similar regime to ensure foreign tax compliance. For this SOLVE reason, firms should CLASSIFICATION, consider flexible customer classifica- NOT JUST FATCA tion methods, in- cluding rule-driven reporting and case remedia- or withholdings, with a gateway to tion, that can adapt to the open the door to tax and compli- requisite directive. ance reporting.Flexibility is not only required to sup- At the same time, though, it is im-port future unknowns, but also when portant to look for a solution thatit comes to the present. The key is can handle FATCA compliance,to understand the impact compli- and indeed the whole classificationance will have on existing systems challenge end-to-end, rather thanand create a framework in which point solutions that solve solely theFATCA and other anticipated clas- KYC or payments situations.sification regulations can be imple-mented. A solution that can slot Intelligent solutionsin alongside existing systems andprocesses, and leverage the capa- Many financial institutions alreadybilities of these existing core tech- have huge experience and exwww.dionglobal.com
  • 6. pertise in implementing complex IT mitted to delivering high-quality so- solutions and in today’s market of lutions for FATCA compliance can downward pressure on costs most be invaluable, along with products will prefer to avoid the expense of that have embedded FATCA intel- using teams of external consultants ligence within them. Once imple- for FATCA compliance projects. mentation of such products is com- A FATCA project is a major under- plete and compliance is achieved, taking that needs expertise, intelli- resources can be diverted to the gence and a clear understanding equally important task of exception of the regulatory requirements as management, some of which can they are finalized. A helping hand also be automated with the right from an expert supplier that is com- solution. CONCLUSION As with any major project, FATCA This will reduce the impact on compliance will benefit from a existing systems and shorten time close relationship with a techno- to implementation, in turn reduc- logy partner that can not only ing the costs of the whole project. advise on point solutions, but also Most importantly, such intelligent work closely with a financial insti- compliance will reduce the impact tution to make best use of existing of the challenges ahead, whatever systems, integrate new functionality their exact course. and ensure a future proof outcome. Dion provides market-leading software solutions to financial institutions across the globe. With a compre- hensive range of targeted and focused offerings, Dion works with clients that operate across the entire financial markets spectrum.   As the trusted technology partner to nine of the world’s ten largest financial services institutions, Dion is the single source for a comprehensive and developing range of solutions, from which clients can select those that meet their business needs now and in the future.www.dionglobal.com
  • 7. connect@dionglobal.com www.dionglobal.com

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