The cost of compliance and impact on customers, investors, counterparties
Initial criticism of the FATCA regime included references to the burden of compliance on companies, in both financial and operational terms.
There was also significant concern over the need to acquire detailed personal information from clients, investors and counterparties and pass this information to US authorities. In addition to the general data and privacy implications, legal constraints faced by institutions in many jurisdictions would prevent them from revealing the relevant customer information.
In response to these concerns, the Internal Revenue Service (IRS) has been working constructively with the industry and non- US governments in recent months to allay concerns and to develop an implementation regime which will be both practical and require more proportionate (i.e. lower) implementation costs. Nevertheless, FATCA will still entail a profound reorientation of the relationships between national tax authorities, financial services providers and their customers. And those customers will increasingly be feeling the consequences.
New implementation proposals
In February 2012, the US Department of the Treasury and the IRS issued proposed implementation regulations for FATCA. These lay out a step-by-step process for US account identification, information reporting and withholding requirements for (FFIs), other foreign entities and US withholding agents. They aim to minimize the burden and cost of compliance consistent with achieving the core objectives of the Act. The rules and implementation schedule have been extended to allow additional time for resolving local law limitations – especially on data protection and confidentiality – to which some FFIs may be subject.
The proposed regulations:
- calibrate due diligence requirements according to the value and risk profile of the account and by permitting FFIs in many cases to rely on information they already collect, for example under anti-money laundering or ‘know your customer’ rules;
- enlarge the scope of ‘deemed compliance’, in order to focus the application of FATCA on higher-risk financial institutions that provide services to the global investment community.
- extend the transition period to provide sufficient lead time for financial institutions to develop the necessary systems and maximize the number of financial institutions that will be able to comply with FATCA.
The governments of France, Italy, Germany, Spain and the UK have announced an intent to pursue bilateral agreements with the US to implement FATCA for their local FFIs.
These will allow FFIs to report the necessary information to their respective governments, and thus dispense of the requirement to amend conflicting national legislation, such as national privacy laws. In return, the US will provide similar information on the European government’s nationals with accounts in the US and refrain from imposing withholding tax obligations on local FFIs on payments made to entities in those and other FATCA agreement countries.
The core impacts on customers and investors, however, remain the same: in certain instances they may have to provide additional personal information to their financial services provider where they do not currently do so.
As the FATCA rules are clarified, financial services firms will need to determine their compliance model strategies. For many, the deemed compliant route appears to offer the benefits of a light-touch regime, with lesser impact on customers. However, multinational companies with operations in a number of jurisdictions, both those currently pursuing bilateral agreements and others face the prospect of dealing with complex and inconsistent local FATCA regimes in different countries – not a recipe for simplicity or low-cost implementation.
For many institutions deemed compliant status is not an option. Their customers may face greater information related reporting requirements and could face account closure in the event of non-compliance.
In general, though, there seems to be the beginnings of recognition in the industry that FATCA compliance, in the form which is now emerging, may not be as burdensome as previously thought. Now, attention is starting to turn once again to how to best exploit the competitive advantage of continuous access to the enormous US market for financial services.
Customer and investor relationships
It is clear that in many instances customers and investors will be asked questions about their US tax status during first contact and account-opening processes. Firms may also have to ask for new information from existing customers. This may be easier for banks, which tend to have relatively frequent interactions with their customers. But insurance companies, which may have no direct contact with customers for years or even decades, could find it especially challenging. How will they respond to clients’ queries?
As we have seen, one consequence of the bilateral agreement model is that FATCA requirements will vary from one jurisdiction to another. Add to that the variation in compliance strategies to be adopted, and customers and investors will face a bit of a lottery over the extent and depth of the impact they experience. Firms will need to consider the impact FATCA’s implementation will have on their customers and investors. If firms are clumsy in how they implement FATCA, this could damage customer and investor relationships.
A new world of tax data transparency
FATCA will potentially open the financial affairs of an untold number of consumers and investors to the US fiscal authorities. Furthermore, because the stated policy objective of FATCA is to improve transparency and reporting, not to collect withholding tax, the US government recognizes that FATCA partner countries have the right to reciprocal action. So the US is open to adopting an intergovernmental approach to improve international tax compliance. Initially, this will involve the US and its five European partners in collecting and exchanging on an automatic basis information on accounts held by residents of the six countries. The US also intends to “work with other FATCA partners, the OECD, and where appropriate the EU, on adapting FATCA in the medium term to a common model for automatic exchange of information, including the development of reporting and due diligence standards.” 1
Financial services providers and their customers and investors alike are going to have to get used to a very different world of international tax data transparency.
1Joint statement from the United States, France, Germany, Italy, Spain and the United Kingdom regarding an intergovernmental approach to improving international tax compliance and implementing FATCA, US Treasury Department, February 2012