By Mark Wilton Initiated by the United States, FATCA (Foreign Account Tax Compliance Act) was intended to minimize offshore tax evasion and regulate financial institutions. But the reality is a far-reaching global impact and the fact that many businesses fall under the FATCA obligations based on their entity structures and financial flows. Moreover, the recent release of the Panama Papers has drawn into the limelight the ways in which individuals and companies are hiding money. Originally published a year ago, the article “FATCA: The Era of Tax Transparency” (reprinted on page 2 of this special report) looked forward and attempted to set expectations. Although we aren’t yet able to take full stock, the issues brought to bear are still relevant. We address here the many important milestones and unanswered questions about FATCA implementation. FATCA IN THE U.S. AND U.K. Since this article was written, the reporting of financial data from local Financial Institutions to the IRS under FATCA began last year, and it will continue to increase in 2016 and 2017. But what wasn’t clear one year ago, and is still being sorted out, is the actual format of the reporting. When initially proposed, many observers thought there would be a common reporting standard for FATCA. What actually transpired is that more than 20 countries that signed agreements with the IRS have released their own or modified reporting schemas. From the initial single reporting Schema (IRS 8966), now we find that of the Top 20 Jurisdictions (ranked by total number of registered FI’s on the GIIN list), more than 30 percent have released their own or modified reporting schemas. These reporting standards range from slight alterations to being completely different from those the IRS issued. Therefore, MNIs potentially have to manage reporting not only for 20 different regions, but also for potentially 20 different formats, which is a terrifying prospect for any institution. FATCA & CRS THE ERA OF TAX TRANSPARENCY ONE YEAR LATER Mark Wilton, product manager for Thomson Reuters Tax & Accounting, specializes in FATCA & CRS solutions. Based in London, he oversees all aspects of product development. He is a chartered accountant, a member of the The Institute of Chartered Accountants in England and Wales (ICAEW) and has a master’s degree in electronic engineering.
Transcript
By Mark Wilton
Initiated by the United States, FATCA (Foreign Account Tax Compliance Act) was intended to minimize offshore tax evasion and regulate financial institutions. But the reality is a far-reaching global impact and the fact that many businesses fall under the FATCA obligations based on their entity structures and financial flows.
Moreover, the recent release of the Panama Papers has drawn into the limelight the ways in which individuals and companies are hiding money.
Originally published a year ago, the article “FATCA: The Era of Tax Transparency” (reprinted on page 2 of this special report) looked forward and attempted to set expectations. Although we aren’t yet able to take full stock, the issues brought to bear are still relevant. We address here the many important milestones and unanswered questions about FATCA implementation.
FATCA IN THE U.S. AND U.K.Since this article was written, the reporting of financial data from local Financial Institutions to the IRS under FATCA began last year, and it will continue to increase in 2016 and 2017.
But what wasn’t clear one year ago, and is still being sorted out, is the actual format of the reporting.
When initially proposed, many observers thought there would be a common reporting standard for FATCA. What actually transpired is that more than 20 countries that signed agreements with the IRS have released their own or modified reporting schemas.
From the initial single reporting Schema (IRS 8966), now we find that of the Top 20 Jurisdictions (ranked by total number of registered FI’s on the GIIN list), more than 30 percent have released their own or modified reporting schemas.
These reporting standards range from slight alterations to being completely different from those the IRS issued.
Therefore, MNIs potentially have to manage reporting not only for 20 different regions, but also for potentially 20 different formats, which is a terrifying prospect for any institution.
FATCA & CRSTHE ERA OF TAX TRANSPARENCY ONE YEAR LATER
Mark Wilton, product manager for Thomson Reuters Tax & Accounting, specializes in FATCA & CRS solutions. Based in London, he oversees all aspects of product development. He is a chartered accountant, a member of the The Institute of Chartered Accountants in England and Wales (ICAEW) and has a master’s degree in electronic engineering.
Moreover, although it is in force this year, UK FATCA has not been fully implemented. When it is, a Bermudan bank, for example, will have to file a UK FATCA return using the UK Schema, and then turn to US and use the IRS 8966 standard. In jurisdictions using the IRS schema, some will have no choice but to have two schemas for Financial Institutions to report.
CRS LOOMS LARGEThe biggest unanswered questions relate to the pending Common Reporting Standard (CRS).
Although the industry has called for a truly unified reporting standard, no one is expecting it to come out in a truly common way.
The main issue is that tax authorities have established processes and procedures in place, and rather than rework the process, they will use a limited budget to build upon what they have. For example, the IRS has said that they currently have no plans to modify the FATCA schema to adapt to CRS. Larger European economies like the U.K. and Germany are expected to do likewise. While the information in total will be similar, the formats will likely be different.
Regardless, countries have been passing CRS guidance as recently as April 2016. While other elements are coming into play, actual reporting will start in 2017.
The upside of all of this is greater tax transparency, which is desirable for the common citizen. Increased regulation can mean less tax evasion and payment where it’s due.
However, the question remains: When tax authorities receive this myriad of data in the name of transparency, will they have the people in place to analyze it? Will they be able to make anything come of it? That remains to be seen.
See below for the original article published in Compliance Complete on May 17, 2015.
THE ERA OF TAX TRANSPARENCY
By Nick Mathews
In a step towards boosting the transparency of the financial services industry and preventing tax evasion, the Foreign Account Tax Compliance Act (FATCA) was enacted in the United States on March 18, 2010. The US model has since been copied by other nations. Consequently, virtually all financial institutions (FIs) could be affected in one way or another, including banks, custodians and investment vehicles.
In a drive to clamp down on US persons who seek to shelter income from the US Treasury by investing overseas, FATCA has imposed due diligence, on-boarding, compliance, reporting and, in some cases, withholding obligations on firms. The legislation requires foreign (non-US) financial institutions (FFIs) such as banks, funds, certain brokers, trusts and trust companies to disclose details of all reportable accounts. Reportable accounts are financial accounts maintained by the FFI where the account holder is either a specified U. person (which includes any individual who is a citizen or resident of the United Sates) or is a non-US entity with controlling persons that include one or more specified US persons. Controlling persons are individuals who exercise control over an entity.
As of December 31, 2014, all FFIs that need to be compliant with FATCA, or one of the many bilateral U.S. intergovernmental agreements (IGAs) supporting it, should have registered with the IRS unless falling into certain exception. However, this deadline was just the beginning and now firms must turn their attention to the next phase of FATCA compliance. (For FFIs in non-IGA countries, withholding tax obligations kicked in on January 1, 2015; these are not covered in this article, however, as most FFI readers will be in IGA Model 1 or Model 2 jurisdictions.)
ACCOUNTS MANAGEMENT AND REPORTING REQUIREMENTS First and foremost it is important that all FFIs continue to perform due diligence on existing accounts. FFIs must complete review of pre-existing (June 30, 2014) highvalue individual accounts (more than US$1M) by June 30, 2015. Starting now, any new accounts taken on by an FFI must be done so in accordance with FATCA or IGA requirements. What is more, if a firm sets up a new entity (e.g., a bank opens in a new country), it must take steps to ensure that it is wholly FATCA- or IGA-compliant from inception.
Nick Matthews is Managing Director and UK Head of Dispute and Legal Management Consulting at Duff & Phelps. Previously, Nick was a principal at a Big 4 firm in London.
FFIs must also prepare for reporting obligations. The first FATCA reporting deadline for FFIs in non-IGA Jurisdictions and FFIs in Model 2 IGA jurisdictions (requiring FFIs to report information directly to the IRS) is March 31, 2015.
For many Model 1 IGA jurisdictions (where FFIs report to their home tax authority for forwarding to the IRS), the first reporting deadline is May 31, 2015. However, while these two key dates mark the start of reporting, it is important for FFIs to realise that the reporting obligations will significantly increase in 2016 and 2017.
UK FATCAThe United States is not alone in being set on tackling tax evasion although currently only the US has introduced a withholding element. The UK has also introduced FATCA-style measures. This would mean that Her Majesty’s Revenue & Customs (HMRC) will receive information about accounts held by UK taxpayers in its Crown Dependencies (Jersey, Guernsey and the Isle of Man) and Overseas Territories (Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat and Turks and Caicos Islands), with the authorities in the Crown Dependencies receiving information on their own taxpayers with UK accounts.
For UK FATCA, the due diligence dates will be the same as US FATCA, but reporting will begin a year later in 2016. As such, while firms are putting in an enormous effort to be compliant with reporting requirements for US FATCA, it is likely that these efforts will help firms future-proof their systems in anticipation of further proliferation.
WORKING TOWARDS GLOBAL TAX TRANSPARENCYAs financial institutions and withholding agents work to implement the details of FATCA, the legislation has paved the way for the Organisation for Economic Co-operation and Development (OECD) Common Reporting Standard (CRS) and serves as a model for automatic exchange of information (AEOI). Some 44 OECD member states, including the UK and other European Union member states, UK Overseas Territories and Crown Dependencies, will begin to implement the CRS on January 1, 2016, with reporting beginning in 2017.
The CRS is broader than FATCA and many financial institutions are already starting to include the classification questions in their account opening forms and are preparing for reporting on multiple jurisdictions’ taxpayers.
The groundwork has certainly been laid for previously unseen cross-border information sharing and global tax transparency. Ultimately, understanding FATCA requirements and having a comprehensive FATCA compliance programme is essential for financial firms to limit non-compliance risk and meet their obligations set out by relevant IGAs, the IRS and the OECD. Beyond mere compliance, however, and making a virtue out of a necessity, FATCA represents a prime opportunity for firms to demonstrate conscientious business culture and reduce illegal tax evasion globally.
