Foreign Account Tax Compliance Act (FATCA)

FATCA stands for the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign financial institutions (FFIs) to use greater due diligence to identify US citizens and residents who have invested through use of offshore accounts. It is the US government’s attempt to combat tax evasion by US citizens hiding income and assets overseas.

The Implications on Business

FATCA requires all US taxpayers with financial assets held in accounts outside the US to report those assets to the Inland Revenue Service (IRS). In addition, and of more importance to UK and European banks, insurers, and other financial intermediaries, FATCA also requires FFIs to report directly to the IRS with information on financial accounts held by US citizens, or by foreign entities in which US citizens hold a substantial ownership interest.

To properly comply with these new reporting requirements, an FFI will have to enter into a special agreement with the IRS to:

  • Identify US accounts.
  • Report certain information about those accounts to the IRS on an annual basis.
  • Withhold 30% tax on certain payments to non-participating FFIs and account holders; unwilling to provide the required information.

Challenges to the implementation of FATCA

To avoid being penalised by the 30% withholding tax, FFIs will need to make significant process and technology changes to comply with FATCA . Financial institutions should consider steps such as:

  • Asset identification: perform a current state assessment of the assets that generate US source income; this is especially difficult for structured investment products that may be partially based on US products.
  • Proof of identity: conduct a retrospective review of all existing account holders to establish whether they are American citizens or foreign entities that are substantially owned by Americans. This will include the storage and visual check of proof of identity documentation.
  • Customer on-boarding: upgrade or establish customer on-boarding and Know-Your-Customer (KYC) procedures to comply with IRS requirements.
  • Account registration: understand whether US account holders are registering their holdings with the IRS.
  • Data protection: circumvent local data protection or banking security legislation in order to provide the information the IRS requires.
  • US citizen identification: FFIs have to assume that unless proven otherwise the account holders are Americans – according to the US government’s 6 point rules.
  • Management: successfully complete the full change programme by January 2014.
  • Payments: change payment systems to withhold tax where necessary.

Logica helps you take one FATCA step at a time

FATCA delivery requires individuals that understand and have experience of a much broader range of disciplines than is common in a project in financial services. With our unique depth and insight into financial services, we really know how to do this.

We have designed a phased approach that will help you to progress quickly, understand the dependencies between the phases and use agile methods to change systems quickly. Our experienced financial and regulatory consultants understand the full lifecycle of the programme and of all of the operational and technical content required to deliver FATCA .

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