Overcoming challenges relating to operational implementation

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Overcoming challenges relating to operational implementation

  1. 1. Foreign AccountTax Compliance Act (FATCA)Overcoming challenges relating to operational implementation
  2. 2. Editorial
  3. 3. In March last year, the US President signed the HIRE Act, thus paving the way for theimplementation of the Foreign Account Tax Compliance Act (FATCA). In our first brochure“Mastering the challenges of the new US regulations”, we presented the fundamentalconsiderations which were necessary following the introduction of the FATCA regulations.We also explained how FATCA works, and how participating foreign financial institutions(“participating FFIs”) will be affected as from 2013.Because the text of the HIRE Act functions within the meaning of a framework legislationand the specific guidance are still to be drawn up that there is considerable uncertaintyamong financial intermediaries. The focus is particularly on the question of whether ornot a financial service provider consitutes an FFI as defined under the FATCA regulationsand must make appropriate analysis. On the other hand, there are the issues of identifyingcustomer and US accounts and the treatment of withholdable payments. Finally, there alsoappears to be widespread uncertainty concerning the question of what – if any – alternativestrategic options an FFI has.The US Internal Revenue Service (IRS) shed some light on this issue by releasing RevenueNotice 2010–60. This notice deals in particular detail with the issues concerning theidentification of customers and US accounts as well as the definition of the term FFI andmeasures which must be taken by participating FFIs.By publishing this second brochure on the issues surrounding the FATCA, we would liketo provide an overview of the most important content of the regulations stipulated in theRevenue Notice 2010–60 and share our thoughts on strategic options available to FFIs.Another section of the brochure deals with considerations on the possibility of settingup and executing a project in the event that participation in the new FATCA system isconsidered. We also present initial findings from “impact assessments” which have beencarried out.This second brochure naturally contains more technical information than our first publication,which focussed more closely on the fundamental issues. Should you have any questionsabout the FATCA, wish to discuss topics related to the FATCA or are planning a FATCAproject, please do not hesitate to contact a member of our team.Hans-Joachim Jaeger Bruno Patusi Roger WalterPartner Senior Manager Senior Manager
  4. 4. ContentsFATCA: open questions and uncertainties 6Specific definitions and instructions 8 Identification – what is required on the customer side? 8 Exemptions from FFI status 12 Annual reporting 13 Business strategy put to the test 14 FATCA and the fund industry 16FATCA – views on the project 18 Project approach and procedures 19 Initial project findings 22
  5. 5. FATCA: open questions and uncertaintiesThe wording of the FATCA has led to lots of heated debates in thebanking, insurance and asset management sectors. Fundamentalquestions like “Which business units within our Group are in fact FFIs?”and “Can structured products also generate US source income?”were discussed. At the same time, considerable lobbying wasdirected at the IRS and Treasury, which is evidenced by the justunder 80 “comment letters” received by these two institutionsto date. The authors range from industry associations to largecorporations and ambassadors of European countries in the US.And it is difficult to overlook the fact that implementing the FATCAregulations is considered extremely expensive by all types offinancial service provider. Accordingly, there was a huge outcry inthe financial sector demanding specific and practical instructionson what to do.The IRS held out the prospect of more detailed regulations in thecourse of 2011. However, in August last year, the IRS alreadyissued Revenue Notice 2010–60 within the meaning of a declarationof intent, in which it deals with four subject areas and calls on thefinancial industry to make further comments.6 Ernst & Young Foreign Account Tax Compliance Act (FATCA)
  6. 6. FATCA: open questions and uncertainties  |To the great disappointment of the insurance sector and the asset Instead, the notice is limited to four core areas:management industry, the notice gives no clues as to how these (1) grandfathered obligations, which even under the FATCAtwo industries should respond to pressing questions affecting them do not result in withholdable payments; (2) the distinctionspecifically. In this respect, it is particularly important to think about between FFIs and Non-Financial Foreign Entities (NFFEs);the issues concerning customer identification and identification (3) the identification and collection of information on naturalof US accounts as well as the issue of “passthru payments”. In persons(“individual accounts”) and legal entities (“entitysimple terms, the latter are payments of a participating FFI or accounts”) as well as (4) the reporting of US accounts undera US withholding agent, insofar as they can be allocated to a the FATCA regulations.“withholdable payment”. In the area of “passthru payments”,which are likely to play an important role in relation to the asset These four core areas already cover the vast majority of themanagement and fund industry, there is, however, still a huge need obligations which participating FFIs must meet. These are elementsfor interpretation. Apart from these payments, the fund industry is of the FATCA, which we introduced in our first brochure based onalso particularly concerned with the identification of US accounts. the following diagram.Within the European distribution system, the fund, which as an FFIshould identify its customers, is unable to perform this duty, as itdoes not have access to the required information. The notice provides (I) detailed information on sections Identification of (I) – Identification, US accounts (III) – Reporting and (IV) partially (IV) – Treatment Punishment of recalcitrant of recalci- (II) accountholders and trant non-participating FFIs. Obtain account a waiver holders from US and non- customers participating FFIs (III) Annual reporting to the IRS Ernst & Young Foreign Account Tax Compliance Act (FATCA) 7
  7. 7. Specific definitions and instructionsIdentification – what is required on the customer side?When it comes to identifying US accounts, the participating FFIs account relationships, which are held directly by natural persons,are obliged to investigate both natural persons and in terms of US stratification must be performed as early as 2012. A distinctionindications legal entities. In response to the justified complaint of needs to be made between deposit accounts with an averagethe financial sector that it would be impossible to identify several monthly balance of less than USD 50,000 (“small accounts”)million customers by contacting them all by 2013, the IRS made and all other accounts. Basically, “accounts” constitute all deposita proposal to simplify the identification process. For instance, the accounts and deposit relationships as well as – in certain cases –notice envisages that initially all account relationships with natural investments in the FFI. Whereas the “small accounts” can bepersons, which had already been treated as US accounts, must treated by the FFI as non-US accounts, all other customer informationcontinue to be treated as such for FACTA purposes. For all other relating to accounts must undergo a search for indicia.Simplified to a certain extent Existing individual accounts Small depository acc. < $ 50,000 average Other accounts monthly balance Electronic search for indicia Strong indicia Medium indicia Weak indicia No indicia W-9 or W-8 BEN W-9 or W-8 BEN Request W-9 and doc. evidence or doc. evidence yes Identified as a no Treat as non-US Average monthly yes account balance of US account? (interim basis!) > $ 1 million no Treat as new account Treat as new account Option of treatment Treat as a US account and repapering until and repapering until as a non-US account the end of 2017 the end of 2014 Unless sufficient information has already been collected, assessed and held in electronic form by the FFI.8 Ernst & Young Foreign Account Tax Compliance Act (FATCA)
  8. 8. Specific definitions and instructions  |As far as these other accounts are concerned, participating FFIs electronically. Whether this rigid demand will be maintained, or ifmust conduct an electronic search in their static customer data an FFI can also rely on existing, but not electronically searchable(e.g. in the CRM system). The aim of the search is to find US indicia data, requires explanation in greater detail in the regulations.without initially having to personally contact the customer. In thisrespect, a distinction is made between the strength of the various Customer relations which are treated as non-US accounts on anpieces of indicia which are found during this search. Depending on interim basis and for which there is not yet sufficient documentationhow strong the indicia is, the FFI must request various documents available require a further distinction: If the average monthlywithin one year of entering into the FFI agreement and must balance of the account relationship in the year before the FATCAhave actually recieved it within another year. In concrete terms, agreement becomes effective exceeds USD 1 million, then checksthe Revenue Notice requires, in the case of strong indicia, (e.g. are required regarding whether or not the account relationship mayUS citizenship) the submission of a W-9 form. Medium indicia continue to qualify as a non-US account within two years of the(born in the US or customer address there) will require the implementation of the FATCA agreement (i.e. by the end of 2014FFI to either request a W-9 or W-8BEN form and documentary as a rule). Otherwise, the check must be carried out within fiveevidence. In case of weak indicia (e.g. standing order to the US years (i.e. before the end of 2017 as a rule). In this respect, theor submission of instructions from the US), on the other hand, check follows the rules for new accounts.detailed documents are sufficient. If the FFI does not receivethe requested documentation, the customer is considered an If the search revealed that there was no indicia, the financial sectoruncooperative(“recalcitrant”) account holder, which results in hoped that the customer would no longer have to be checkedthe imposition of the 30% FATCA withholding tax. up on. As a result, there would no longer be any need to contact the customer in order to request additional information. The IRSAn FFI can generally rely on customer documents that it has already obviously has a different opinion on this matter: Any accounts withcollected, provided that these contain the level of detail and the no such indicia can be classified in the interim as non-US accounts,format demanded above. However, it should be noted that key but according to the current state of knowledge they have to bedata within the collected documentation would have to be stored reidentified by 2017 (“repapering”). Ernst & Young Foreign Account Tax Compliance Act (FATCA) 9
  9. 9. |  Specific definitions and instructionsAs far as legal entities are concerned (“entity accounts”), as the electronic search reveals that it might be another FFI, it mayidentifying the account holders is far more complex. In general, provisionally also be treated as an assumed NFFE. However, theparticipating FFIs must decide if the legal entities: participating FFI must request documentation from its customer which confirms its FFI status. If such documents are not submitted(1) a US account, within one year, this customer will then be considered a non-(2) another participating FFI, participating FFI. Such customers will be affected by the FATCA withholding tax. If the participating FFI finds no evidence of any(3) a “deemed-compliant” FFI, possible FFI status, it must treat the customer relations as NFFE:(4) a non-participating FFI, (6) and (7). In this case, the FFI must make further inquiries to determine whether or not his customer is active in trade or(5) an uncooperative (“recalcitrant”) account holder, business outside the finance sector. Such customers are exempt(6) an exempt NFFE or from the FATCA regulations. However, due to the fact that the relevant information is generally not systematically stored in-house,(7) a non-exempt NFFE. it will have to fall back on external databases or ask customers for additional documents. This makes the identification processIn the case of a US account (1), the FFI must establish whether the more complex. If such information is not available or as long as itaccount holder is a “specified U.S. person”, who must be reported is not able to be obtained, the customer must be treated as a non-to the IRS. If the FFI has already treated this account relationship participating FFI. Conversely, if the banking documents give riseas a US account, the account holder will be given the opportunity to the suspicion that it is a NFFE, then the customer will have theto prove otherwise (e.g. that it is a listed company or a unit which opportunity to prove that it is an exempt NFFE. Otherwise, all directis exempt in some other way). To that end, the particating FFI must and indirect holders of the NFFE need to be checked to see if theysearch its databases electronically for any US indication. The same qualify as a “specified U.S. person”. If this is also unknown, thealso applies to (2) accounts or counterparties that are FFIs. Insofar customer must be treated as a recalcitrant.10 Ernst & Young Foreign Account Tax Compliance Act (FATCA)
  10. 10. Specific definitions and instructions  |Describing all identification steps in detail would be beyond the that will place high attention on the system developers, relationshipscope of this brochure. The above diagram shows the different steps managers and compliance function of an FFI. FFIs consideringneeded to identify existing “entity accounts”. At the very least, it participating in the FATCA system would therefore be well-advisedclearly demonstrates that the identification process required under to think about the redesign of processes and the availability of datathe FATCA is very complex for this type of customer relationship. It at an early stage.is the technical implication of and adherence to these regulations Ernst & Young Foreign Account Tax Compliance Act (FATCA) 11
  11. 11. |  Specific definitions and instructionsExemptions from FFI statusThe definition of the term “FFI” was consciously made as broad as (3) Newly founded companies (“start-up companies”) in thepossible by IRS , with the result that, in future questions regarding non-financial services sector;what the term encompasses will inevitably be raised. Certain entitieswhich would fall within the definition will nevertheless be released (4) Companies in liquidation and recently restructured onesfrom the full obligations of an FFI for reasons concerning data active in the non-finnacial services sector;collection. The notice refers in particular to the following cases: (5) Hedging and treasury companies, insofar as they are part(1) amily trusts and other “small entities” – these are entities F of a group of companies which is not active in the financial with only a small number of account holders or owners who services sector; are all natural persons or exempt NFFEs. These small entities will then be treated as NFFEs. However, if they identify and (6) Insurance companies, which do not run a so-called “cash value”- document the US persons and exempt NFFEs and report all business, i.e. in particular property insurance companies. US persons to the IRS, the small entities can be treated as deemed-compliant FFIs; The notice also provides for exemptions for pension funds and similar institutions, insofar as the retirement plans were set up(2) Holding companies whose investments are not in the area of under local law, they are financed by a non-US employer and US financial services; persons are prevented from participating in the plan. However, an exemption is made for US persons for the term of their employment with a foreign employer.12 Ernst Young Foreign Account Tax Compliance Act (FATCA)
  12. 12. Specific definitions and instructions  |Annual reportingFATCA demands that the participating FFIs submit (at least) annual hand, it appears certain that the notifications must be submittedreporting on the financial investments of the identified US persons. in electronic format. Reporting the total financial investments willIt it currently unclear whether the IRS will stand by its original probably have to continue to be done in such a way that the highestintention to be notified of the annual net inflows and outflows, in amount as per the customer reportings is sent to the IRS (“highaddition to the value of the financial investments. On the other water mark reporting”). 180 160 140 120 100 80 60 40 20 0 Jan Feb Mrz Apr May Jun Jul Aug Sep Oct Nov DecIf, for instance, a bank informs its customers of the status of all possible examples. Here, the IRS also reserves the right to requesttheir financial investments quarterly or monthly, it is expected that account statements and other reports for verification.the highest quarterly or monthly notification, converted into USD,must be used for the reportings to the IRS. If the US account is an Moreover, the IRS wishes to demand regular reporting showinginvestment in a participating FFI (i.e. not an account relationship the number and total volume of all financial accounts held by thebut a relationship with a investor or lender), then the highest participating FFI of recalcitrant account holders (cf. above). In thisof all notifications must be used, which were reported for other way, the IRS intends to identify situations in which US persons makepurposes. In this context, regular reporting to shareholders or above-average investments in participating FFIs, without wanting toinformation used for calculating the fees of an asset manager are disclose their activities appropriately. Ernst Young Foreign Account Tax Compliance Act (FATCA) 13
  13. 13. |  Specific definitions and instructionsBusiness strategy put to the testIssues surrounding the strategic direction of the business segments international clientele and global strategy of asset allocation asunder the FATCA are currently the topic of frequent discussions. opposed to local retail banks with standard products and few or noIn this context, the focus is naturally on the question of whether or US customers and US securities). All financial institutions whichnot a financial institution should sign the FATCA agreement in the collect US withholding payments for themselves or their customersfirst place. Secondly, there are the issues surrounding the target have one thing in common: all up-stream financial institutions mustcustomer group and the products which should be offered to them: participate in the FATCA system, because otherwise the 30% taxshould US customers continue to be served or should the financial penalty is imposed on payments.institution continue to offer US securities? The last issue is alsorelated to the the financial institution’s own holdings. The following table provides an overview of the possible alternative courses of action.Possible answers to these questions depend greatly on the businesssegment of the financial service provider (private banking with US customer No US customer (accounts) (accounts) US securities No US securities US securities No US securities 1 2 Enter into Full compliance, Identification FATCA agreement identification, Makes no economic necessary to confirm Makes no economic and become a reporting sense that no US accounts sense participating FFI withholding are available 3 4 5 6 30% FATCA withholding tax; 30% FATCA Reaction of the IRS? Become a non- “Punishment” of all withholding tax Complete withdrawal Reaction of the participating FFI customers; Reaction supervisors? “Punishment” from the US market of the IRS? Reaction of all customers of supervisors?14 Ernst Young Foreign Account Tax Compliance Act (FATCA)
  14. 14. The two options 1 and 6 are at opposite sides of the spectrum. With This is in complete contrast to the existing QI system, which onlyOption 1, the financial service provider decides on full compliance collects information about US securities. Option 4 in particularand must carry out the entire identification procedure as well as removes the potential threat of a 30% FATCA withholding tax (duereporting of US accounts and deduction of withholding tax. Option 6 to a lack of investment in US securities), but it does give US personsrequires complete renunciation of US customers and US securities. the opportunity to invest without information being sent to the IRS.Accordingly, it is also not necessary to set up a reporting or Although this may well be in line with the Swiss attitude on financialwithholding mechanism. privacy, it is contrary to the intention of the FATCA. Therefore, only time will tell whether the Swiss Financial Market SupervisoryFrom an economic point of view, Option 2 could also be worth Authority (FINMA) is favorable toward such cases, especially sinceconsidering: a participating FFI can convince the IRS that it does the FINMA has already explicitly identified the FATCA as one of thenot and will never manage any US accounts but can continue to risks of cross-border business, which needs to be managed andoffer US securities to its non-US customers. An FFI of this type does controlled. At the same time, FINMA says that foreign laws mustnot require a “reporting machine”, as it does not manage any US also be complied with.accounts which would entail a reporting obligation. If the FFI alsoguarantees that it does no business with non-participating FFIs, In spite of this uncertainty, it should nevertheless be expected thatthen it does not require a withholding mechanism. participating FFIs will be intent on not having any non-participating FFIs in the chain of payment flow. Otherwise, the 30% FATCAOptions 3, 4 and 5 could prove to be more problematic. All of them withholding tax would become applicable up-stream. FFIs whichinvolve not participating in the FATCA system. The imposition of the do not want to build any infrastructure for the withholding will30% FATCA tax penalty on US revenues would be the foreseeable continue to refrain from doing business with non-participating FFIsconsequence. Options 3 and 4, however, are associated with an or uncooperative customers. In this respect, it is by no means wrongadditional risk: the FATCA was developed specifically so that the to assume that the FATCA may well divide the financial system intoIRS gets information on US taxpayers, irrespective of whether or participating and non-participating FFIs.not these tax payers invest in US securities or in other securities. Ernst Young Foreign Account Tax Compliance Act (FATCA) 15
  15. 15. |  Specific definitions and instructionsFATCA and the fund industryDue the fact that the instructions on what to do have yet to be not meet their contractual obligations under the FATCA and wouldprovided for the asset management sector, the specific effects on run the risk of the 30% FATCA withholding tax being deductedthe fund industry are currently still difficult to estimate. Investment from their investments by US withholding agents or up-streamfunds will consitute FFIs under the FATCA regulations. This means FFIs. The lobbying of the industry associations is hence currentlythat funds would have to check their investors for US indicia. also primarily aimed at ensuring that the funds are “deemedWhereas this is theoretically still possible in the case of alternative compliant” and can collect US revenues without FATCA deduction.investments (private equity and hedge funds), such identification Identification of the shareholders would then have to be performedin the European distribution system seems unrealistic: retail funds in by the investor’s custodian bank in the European system, providedparticular do not know their investors. These funds could therefore that it is a participating FFI. Data provider? Information about Information about US and non-US US and non-US Fund management sourced payments sourced payments company 1 2 Investor’s US/non-US US withholding Custodian of Fund custodian bank account? agent fund (PFFI) (PFFI) – “closest Recalcitrant? to client“ Deemed-compliant FFI? (cannot identify the end investors)However, this will then raise the following issue: in the event that the in such a way that there are funds for (exclusively) US investmentsinvestor is an uncooperative customer, his or her custodian bank (the distributed dividends of which all constitute withholdable(2) must be given information by the fund itself or its custodian payments) and funds for non-US investments. Alternatively, an(1) as to whether the fund’s dividends that have been distributed investment company could also urge its sales partners not to sellcontain any revenues from a US source. The customer’s custodian funds to uncooperative customers or other non-participating FFIs.bank may only charge the 30% FATCA withholding tax on these In return, the distributor of the fund or a customer’s custodianpayments in its capacity as a participating FFI. Such information bank can request that the fund management company disclosesis only likely to be able to be provided following great expense and all information relating to the proportion of US source payments.effort on the part of funds, which if necessary reinvest profits or earn If this does not occur, the customer’s bank could stop selling suchrevenues from the sale of US shares – all of which are collectively funds. In this context, it would seem to depend on the specificreferred to as “withholdable payments”. It can therefore be assumed wording of the FACTA instructions on how to act when it comes tothat investment companies will consider restructuring their funds determining which of the two sides will assert themselves.16 Ernst Young Foreign Account Tax Compliance Act (FATCA)
  16. 16. FATCA – views on the projectIn order to be able to better assess the impact of the FATCA, it is Ideally, this should occur as part of an internal project with thenecessary to examine this complex topic in great detail. As the final following stated objectives:guidelines of the IRS on the new FATCA regulations are not yetavailable, there is great uncertainty within the entire financial sector 1) alidate the strategic opportunities and implementation Von the one hand. On the other hand, however, time is running out, scenarios, which facilitate cost-effective and targetedsince the new provisions will already apply to payments from the implementation;beginning of 2013. In other words: initial decisions need to be madedespite the circumstances being shrouded in uncertainty. Action 2) Examine the possible effects of the FATCA on the organization, is thus required based on assumptions; the FFI needs to make particularly consequences for customers, products and business assumptions (e.g. relating to customer and product identification) processes;and question these in the light of the way in which the availableinformation changes, making any necessary adjustments. The 3) Ensure effective internal and external communication.different categories of affected FFIs would therefore be well-advisedto study the FATCA regulations.18 Ernst Young Foreign Account Tax Compliance Act (FATCA)
  17. 17. FATCA – views on the project  |Project approach and procedureHowever, as far as the project is concerned, it would be advisable to adopt a risk-based yetpragmatic approach which is tailored to specific needs. The multi-phase approach can bedivided into the following main steps:Phase 1: MobilizationPhase 2: Strategic considerationsPhase 3: “Impact assessment”Phase 4: ImplementationYour 1| 2| 3| 4| Impact Implemen- FATCAstarting Mobilization Strategic assessment tation compliancepointBelow is a brief explanation of the individual project phases leading to “FATCA compliance”.Mobilization Strategic considerationsIn the mobilization phase, the project is structured internally and At the beginning of the project, it is important to gain an insightthe project organization determined in detail. This also includes into the materiality and complexity of the new regulations in orderidentifying the internal resources and defining the areas in which to understand the extent of the required changes. At the samethey are used. In order to conduct a preliminary study in the parent time, “filters” can already be defined, which are to be applied tocompany, it is essential to put together a broad, interdisciplinary customers, products, processes and systems with regard to “impactteam with specialists from the fields of business/front office, tax, assessment”. They are used to estimate quantity structures, whichlegal, compliance and operations/IT. As a rule, an in-depth analysis under FATCA regulations require treatment which differs fromof foreign locations or foreign subsidiaries is part of a subsequent current practice.phase. Based on the current state of knowledge and the assumptions made, the strategic and defined tactical guidelines are defined. These are particularly important in those areas in which the legislator leaves room for interpretation. It is important to document the underlying assumptions right from the start. Without such documentation, any subsequent validations or amendments will be virtually impossible to understand. Training courses and workshops are advisable in order to ensure that all project staff see the “big picture” and can then break down the requirements into those relevant to their departments. Ernst Young Foreign Account Tax Compliance Act (FATCA) 19
  18. 18. |  FATCA – views on the projectImpact assessment In the workshops, the following issues are dealt with as examples:The “impact assessment” phase serves to estimate the necessary 1. Which customers might be affected? –adjustment processes. During this phase, an in-depth analysis of the “Current US person” without a securities deposit account, main processes will be carried out. The project is usually supported customers of “external asset managers” and US-ownedby a central team. In particular, the coordination and preprations foreign entitiesfor workshops and the consolidation of work results by the centralteam contribute to a successful project. 2. Which business partners are affected? – Custodian banks, external asset managers, data suppliers,A prerequisite for the impact assessment is exact planning involving such as Reuters or Telekursall work streams and corresponding basic documents. Althoughby no means exhaustive, the following documents can serve as 3. Which main processes will be affected by the FATCA? –an important basis for making decisions: overview of customer Establishing customer relations, entering master data for segments and counterparties, processes, product/service catalog securities and settlement of securitiesand applications for the individual booking platforms. Furthermore,documents from the QI rule set present helpful working bases. 4. Which applications/systems may need to be adapated to the new regulations? – e.g. customer relationship management, corporate actions The requirements made of the main processes and applications and any amendments thereto can generally be divided into three areas. As an example, we will show the core requirements, main processes and applications for each area, which the banks focus on most strongly: In this respect, the duties are divided into: 1) Identification of customer relations, 1) Identifi- 2) ith- W 2) Tax deduction and withholding and finally cation holding 3) eporting. Possible punishment of uncooperative customers and R Impact non-participating FFIs automatically results from these steps. assessment 3) Reporting20 Ernst Young Foreign Account Tax Compliance Act (FATCA)
  19. 19. FATCA – views on the project  |Identification This focus on the relevant main topics and the inclusion of the contactsRequirements • Identification of FATCA-related customers and counterparties (“stakeholders”) enables targeted • Inclusion of new FATCA-related information for identification of and efficient execution of the project. US accounts (new standard fields e.g. dual citizens, substantial At the same time, the drain on resources owners in case of “legal entities”) is minimized in ongoing operations. • Customer classification from the point of view of the FATCA e.g. “recalcitrant account holder” A preliminary study concludes the “impactProcesses • Establishment of customer relations assessment” phase. It summarizes the desired “business and operating model” (including management of master data on customers) • Forms and templates and derives from it the necessary changes • Interaction with intermediaries e.g. external asset managers (“change requests” on the basis of the identified actual/target deviations) as wellApplications • Various front office tools (KYC), management of master data as the anticipated costs. Building on that, on customers (“CRM”) an initial implementation plan needs to be • Legal compliance tools (incl. document management) developed to ensure “FATCA compliance” • e-banking status.Tax deduction/withholding taxRequirements • New classification according to FATCA relevance for securties master data • Implementation of warning blocking in case of stock market order entries • Calculation and deduction in case of “withholdable payments”Processes • Order generation processes (purchases/subscriptions and sales/distribution of dividends) • Processing securities transaction (settlement, corporate action)Applications • Management of master data on securities • Stock market order processing (order entry systems) • Settlement and corporate actionReportingRequirements • Annual IRS reporting on all assets • Adjustments to customer statements • Adjustments to specific tax reports (e.g. copy of IRS reporting)Processes • Drawing up the stock exchange settlements • Preparation of IRS reportingApplications • Data pool reporting • IRS e-reporting system Ernst Young Foreign Account Tax Compliance Act (FATCA) 21
  20. 20. |  FATCA – views on the project Initial project findingsImplementation: the final step Initial project experiences show that the FATCA – in spite of its name – is not just a topic relating to taxation law, but particularly also anon the road to compliance operational one. An “impact assessment” creates the necessary transparency in relation to actions taken and implementation optionsThe scope of implementation is primarily determined by working and the associated cost drivers. It thus leads to increased assuranceout the future “business and operating model” and the individual when dealing with the FATCA in one’s own company.initial situation of the company. The crucial factor in this respectis whether or not the standard software providers, up-stream Many financial institutions in Switzerland and abroad have startedcustodians or business partners (insourcing/outsourcing) can FATCA projects and are also investigating the required operationalbe included in the implementation phase. changes to their booking platforms. In this respect, the need for change is considered from the viewpoint of both participation inIt is advisable not to start the implementation phase before the FATCA system and the option of not participating. In additionthere is clarity surrounding the final IRS implementation to the process and system changes, the actual identification ofregulations. The findings from the “impact assessment” can customers (KYC) and follow-up documentation of existing onesbe reexamined on the basis of the established regulations are considered the greatest challenges.and – if necessary – adapted. The “impact assessment” laysout the initial situation for transferring the project to the In order to match the internal processes with the new requirements,“change the bank” organization and provides the basis for the following three principles are of significance.planning the required activities, milestones, and ressourcesfor implementation. Firstly, financial institutions need a clear picture of the current and desired future business model. In principle, involvement as a participating FFI or obtaining the “deemed-compliant FFI” status can be considered. However, not taking part (“non-participating FFI”) may also be considered under certain circumstances. The question of whether or not to consolidate the existing US customer relations and the scope of the product range is still up for debate. Secondly, just as important is a modular and scalable system landscape, so that new requirements as well as additional forseeable country-specific requirements in the context of taxation (e.g. withholding tax) can be taken into account. In view of these facts, synergies need to be found between the different “change the bank” initiatives. Thirdly, a structured yet flexible approach to the project is of significance, because the regulations can continue to change as the goal posts are shifted. Implementation activities should therefore not (yet) be focussed on.22
  21. 21. KontakteGerman-speaking SwitzerlandDr. Hans-Joachim Jaeger, Partner Roger Walter, Senior ManagerTax, Financial Services Performance ImprovementTelephone +41 58 286 3158 Telephone +41 58 286 4697E-mail hans-joachim.jaeger@ch.ey.com E-mail roger.walter@ch.ey.comIqbal Khan, Partner Bruno Patusi, Senior ManagerHead of Private Banking Center EMEIA Financial ServicesTelephone +41 58 286 4254 Telephone +41 58 286 4690E-mail iqbal.khan@ch.ey.com E-mail bruno.patusi@ch.ey.comBernhard Böttinger, Partner French and Italian-speaking SwitzerlandLead Financial Services Performance Stéphane Muller, PartnerImprovement Switzerland Audit, Financial ServicesTelephone +41 58 286 4692 Telephone +41 58 286 5595E-mail bernhard.boettinger@ch.ey.com E-mail stephane.muller@ch.ey.comPhilippe Zimmermann, Partner Mario Mosca, PartnerLegal Regulatory, Financial Services Audit, Financial ServicesTelephone +41 58 286 3219 Telephone +41 58 286 5866E-mail philippe.zimmermann@ch.ey.com E-mail mario.mosca@ch.ey.comCataldo Castagna, Partner Pierre Balsiger, Executive DirectorAsset Management Sector Leader Financial ServicesSwitzerland Telephone +41 58 286 5716Telephone +41 58 286 4757 E-mail pierre.balsiger@ch.ey.comE-mail cataldo.castagna@ch.ey.comAny US tax advice contained in the body of thisdocument is not intended or written to be used,and cannot be used, by the recipient for thepurpose of avoiding penalties that may beimposed under the US Internal Revenue Codeor applicable US state or local tax laws.
  22. 22. Ernst  YoungAssurance | Tax | Legal | Transactions | AdvisoryAbout Ernst YoungErnst Young is a global leader in assurance, tax, transaction andadvisory services. Worldwide, our 141,000 people are united by ourshared values and an unwavering commitment to quality. We make adifference by helping our people, our clients and our wider communitiesachieve their potential.Ernst Young refers to the global organization of member firms ofErnst Young Global Limited (EYG), each of which is a separate legalentity. EYG, a UK company limited by guarantee, does not provideservices to clients.In Switzerland, Ernst Young Ltd is a leading audit and advisory companyoffering services with about 2,000 employees at 10 locations also in thearea of tax and legal, as well as in transactions and accounting.For more information about our organization, please visitwww.ey.com/ch© 2011 Ernst Young LtdAll Rights Reserved.KKL 0411

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