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FATCA is having kittens: prepare now or face years of pain

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By Richard Grint, financial services regulation expert 

Jurisdictions worldwide are cracking down on offshore tax evasion through a wave of legislation. FATCA, the most prominent of these regulations, requires financial institutions outside the US to report information about US persons to the IRS, the US tax authority. Most firms are in the midst of making major technical changes to ensure their systems and processes can meet the act’s 2014 deadlines.

As the G20 and other jurisdictions adopt their own anti-evasion measures, we are expecting a new wave of legislation to be signed in the coming weeks and months, most prominently intergovernmental agreements (IGAs) based on the FATCA model. These ‘children of FATCA’ will create additional requirements for financial services firms. The UK, for example, has recently entered into tax-information exchange agreements with its Crown Dependencies. Despite being based on FATCA, there are certain key differences in the legislation that represent a significant challenge for firms. There may, for example, be complications around the obligations for financial institutions with local client bases in the Isle of Man and the necessary burden of evidence required to be considered a Crown Dependencies person.

To minimise the impact of IGAs on their existing solutions, firms need to adapt their approach to FATCA compliance now, to avoid the need for more costly alterations in the future.

Our work across the industry has led us to propose the following actions:

Immediately assess the flexibility of your model for meeting the obligations of FATCA and the challenges to be set by recent and future IGAs. In particular, firms should look closely at their indicia-processing logic engines to ensure they have been built in a manner that is easily changeable, rather than reliant on hard-coded rules. This review may necessitate a brief cessation of delivery activity, but it is better to assess the suitability of your design now than be forced to undergo expensive and time-consuming rework later.

Make changes to the design of impacted systems and processes now, rather than face rework after implementation. Of particular note will be the downstream processes and business operating model areas that will be affected by any systems changes. Minor changes – such as changing branch or postal documents to accommodate people with multiple tax liabilities, or adjusting core systems to hold multiple tax status flags for customers – are regularly overlooked in the haste to ensure compliance. Through our experience with a number of major FATCA programmes, we can stress that this is an area regularly overlooked.

Assess the customer impact of these changes, to ensure that staff in all appropriate jurisdictions are trained ahead of time. In addition, you should take steps to ensure that any FATCA operations  functions, including any relevant workflow tools, are amended to reflect new jurisdictions affected by these or forthcoming IGAs. This could potentially require a review of terms with any external or offshored providers of support.

It is imperative that financial institutions’ FATCA solutions can deal with the children of FATCA. Now is the time to take a step back and review overall solutions without compromising existing deliveries. Any changes to processes or systems to enable future compliance should be made now, or firms face years of painful re-work.

Contact the financial services team

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