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Noreen Crowe

By Noreen Crowe, Director of Product Management at eFront

FATCA: The road travelled so far
The Foreign Account Tax Compliance Act (FATCA) was enacted by the U.S. government in March of 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act. It requires financial institutions to identify and report to the Internal Revenue Service on U.S. persons who are investing in foreign financial accounts or entities for the purpose of evading U.S. taxes. The regulations also include a stiff 30% penalty on US source income or proceeds for all non-complaint entities. As such it is easy to understand why FATCA has become so controversial both here in the U.S. and internationally.

Noreen Crowe

Noreen Crowe

The genesis of this legislation can be found in the exceptional position the U.S. holds as one of a small number of nations that tax their citizens on income earned anywhere on the planet, not just within its borders. Quite naturally, the subject of enforcing tax laws and recovering the vast sums of sheltered cash was important, but it took the international financial crisis of 2008 to turn that ongoing concern into concrete political action.

Since its passage, however, the law has had its detractors, not only within the financial community but from expats who feel that they have been unjustly vilified and targeted. Critics have largely pointed the significant burden that the legislation places on foreign financial institutions if they are to effectively comply with the regulation. Financial institutions have created powerful lobby groups and, as a consequence, many governments across the globe are either in active negotiation or have entered into an agreement with the US in order to ease the impact of FATCA on their local entities.

Some governments were quick to identify the inevitability of FATCA and the impact that it would have on their local financial institutions and negotiated Intergovernmental Agreements (IGAs) with the U.S. The U.S. offered up two forms of IGA: Model 1, which allows local institutions to report to their own governments and includes some reciprocal information sharing provisions; and Model 2 which requires local institutions to register with the IRS but also contains provisions to accommodate local privacy laws by requiring the account holders consent to reporting.

Beyond FATCA: Where the global regulatory climate is heading
FATCA – onerous as its requirements are proving for some firms – is only the beginning of much more to come on the regulatory and reporting front. Globalisation and the communications revolution mean that we are moving towards a future regulatory climate characterised by regular collaboration and open sharing of information between organisations and across borders.

FATCA itself is evolving rapidly – the US will almost certainly seek to sign IGAs with many more jurisdictions. US regulators are currently in talks with their counterparts across the globe and have announced that they are at some level of negotiation with more than 80 countries. Despite this, only a handful of countries have signed and, of those, yet fewer have actually imposed any tax sharing regime as a result. We are far from a global consensus on FATCA. Meanwhile, financial institutions in non-IGA countries are facing the prospect of FATCA without a clear understanding of what their obligations will be.

But this isn't just about the US' endeavours anymore – others have started to follow suit. The UK has signed its crown dependencies up to its own 'Son of FATCA' agreement, the EU is moving to consider piloting a similar automatic exchange regime among its member states, and the OECD has proposed a standardised multilateral instrument to facilitate such agreements between states the world over. Tax evasion was a hot topic at the recent G20 meeting in St. Petersburg, with plans to implement FATCA-style sharing mechanisms between member states by as early as 2015. Simply put, FATCA has initiated a broader dialogue about the global issue of tax evasion, and prompted suggestions that FATCA and its IGAs will serve as a precursor to and catalyst for a global automatic information sharing regime. It is unclear what any such regime would look like but we can be sure its requirements will be yet more demanding than those businesses are facing now. The digital revolution has helped make such exchanges possible; the question is now simply one of political will. Smart technological investments now may pay dividends later as the battle against tax evaders expands.

The need to future-proof
So what should firms do to prepare themselves for this shifting environment? Well, in the immediate future, FATCA requires that foreign entities or financial institutions provide reporting on US investors. Furthermore, it requires that they have robust account opening processes in place which must be supplemented by documentary evidence of the investor's US status. In order to satisfy these requirements, institutions will need to have processes and technology in place that can gather, save, verify, audit, query any data collected from investors with the goal of producing accurate regulatory reporting. It is impossible to support such a monumental process without a robust technology platform.

It is already the case that businesses that may have in the past been able to muddle through via manual systems (usually excel spreadsheets) can no longer afford to do so. A robust, modern system for capturing data and building reporting into workflow is now a must. Less discussed, however, is the additional need for such systems to be fundamentally adaptable, scalable, and customisable, in order to accommodate the 'unknown unknowns' of future reporting requirements. A sleek system that can adequately cope with FATCA's requirements will be of time-limited use to a private equity company if it cannot be conveniently configured to cope with any additional changes that follow – and changes will follow.

All participants in our industry will need to maximise adaptability and flexibility. Only nimbleness and the technical solutions to support it can ensure success and compliance.

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