This week the Foreign Account Tax Compliance Act (FATCA) celebrated its one year anniversary of coming into force.
FATCA is a US regulation which requires foreign financial institutions (FFIs) to identify and report certain information to the Internal Revenue Service (IRS) regarding US accounts. When FATCA first came into effect on 1 July 2014, the act came under criticism for making it harder for international financial institutions to comply. The US Treasury Department, however, was defensive of FATCA and said that the act would bring greater transparency to the banking sector and would help to improve compliancy by US taxpayers – but what has happened over the past year?
Mark Davies, General Manager of Avox says that the last 12 months have been a period of adjustment. “The last 12 months have been a period of testing and adjustment as firms subject to FATCA have overhauled their reporting and data management processes to comply with the regulation.”
Thierry Haensenberger, Senior Vice President, EMEA, AxiomSL believes that most financial firms still have to tackle the reporting requirement and with the scope of the reporting expected to increase significantly in the near future, it is essential that they consider the flexibility and scalability of their reporting technology.
“12 months since the implementation of FATCA, many financial firms have made good progress addressing the client classification, onboarding and due diligence changes necessitated by the regulation. However, most firms are yet to tackle the reporting requirements of FATCA in the scalable, strategic manner needed to deal with the changes that are to come in 2016 and beyond – including the introduction of the Common Reporting Standard (CRS),” Haensenberger said.
According to Haensenberger, FATCA reporting in 2015 has been complicated but firms are being proactive and are building in-house applications to help them comply. “The beginning of FATCA reporting in 2015 has been complicated, in a number of cases, by the late confirmation of important regulatory details. However, the number of accounts that firms must report on this year is limited, as only accounts opened between July and December 2014 are in scope. As a result, many firms have chosen to take a tactical approach to FATCA reporting in 2015, building in-house applications and relying on manual processes in some cases.”
Financial institutions should now be preparing for the global equivalent of FATCA, the OECD Common Reporting Standards, dubbed the ‘Global FATCA’ or ‘GATCA’, which according to Deloitte, was introduced by the OECD to further improve global cross border tax compliance. The CRS have been outlined for the annual exchange of financial information by financial institutions belonging to customers, to the tax authorities of the jurisdictions that those customers are residents in, for tax purposes.
Justin Hayes, Product Manager, at Linedata says because of GATCA, the fund management industry should be turning their attention to the even more expensive and complicated regulations, and only “gives financial institutions just seven months to get their acts together as they will be required to track unprecedented volumes of investor information from the start of next year.”
Davies says that, “With a global equivalent, ‘GATCA’, on the horizon, firms now need to focus on putting robust infrastructures and internal data governance procedures in place that allow them to ensure compliance with tax regulations on a global scale.”
Davies also says that since FATCA, he has seen a change in the way firms engage with data providers. “With reporting under FATCA well underway and an implementation schedule and a reporting framework for GATCA in the throes of being finalised, we have seen that for many of the larger firms, the way they are engaging with their data providers is changing.”
Thierry believes that 2016 will see an even bigger increase in reporting and that firms are currently sizing up their options. “In 2016 I expect this situation to change, as the scope of reporting will increase significantly and it will not be possible for firms to manage this tactically. At the moment, firms are sizing up their own requirements and monitoring what others are doing, in preparation for migrating to a long-term, strategic solution for both FATCA and CRS reporting.”