Compliance

05:50 PM
Mark Davies
Mark Davies
Commentary
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FATCA: A US Regulation That's Having a Global Impact

FATCA has raised the stakes for data quality and the need for "clean data."

Enacted as part of the Hiring Incentives to Restore Employment Act of 2010, the US Foreign Account Tax Compliance Act (FATCA) has been one of the most widely discussed pieces of regulation in recent years. In simple terms, it aims to thwart tax avoidance by US citizens by preventing them from hiding income and assets in other countries. However, the impact is truly global, encompassing most foreign financial institutions (FFIs) and investment firms with US clients.

FATCA requires participating FFIs to identify and report certain information about US accounts to the Internal Revenue Service. The reporting measures are considered so complex that policy makers agreed to extend the compliance deadline. The FFI reporting deadline is now fixed at July 1, 2014, but the Treasury Department announced in May that the IRS will adopt a soft approach to enforcing the rules. As a result, penalties for failing to comply with the rules are unlikely to be in full force until next year. That said, the IRS has stated in no uncertain terms that it fully expects firms to make every effort to comply with the requirements and iron out any issues.

This temporary relief does not mean FFIs can slow down their preparation. Institutions not only need to develop action plans for implementation, but they must also pay attention when enforcing these measures. Here are several areas that FFIs must consider.

Legal entity identification
FFIs must identify and classify entities in order to comply with the regulation. To be compliant, they will need to identify US and non-US persons and create new US accounts. This classification is based on a number of legal entity criteria related to geography, industry sector, and ownership. The legal entity data required includes global intermediary identification number (GIIN) codes, entity types (and exemptions), affiliation, public listing data, and ownership information -- to 10% shareholding in some cases.

Considering the thousands of entities that institutions have on their books, FFIs face a significant administrative and financial burden to source, validate, and maintain this legal entity data. An effective sourcing of accurate legal entity data can streamline this effort and remove multiple unnecessary requests for client documentation.

Due diligence and onboarding
Institutions must continue to strengthen their know-your-customer processes in order to meet more extensive requirements. FATCA compliance is an ongoing process requiring proactive monitoring of client information, and FFIs are required to report any changes to the IRS.

Though typical know-your-customer rules require some accounts to be reviewed periodically (depending on customer risk ratings), FATCA compels institutions to identify any changes in circumstance for all clients on a continuous basis in order to ensure these changes do not trigger a review of the US or non-US status for that specific customer.

Auditing and monitoring
Many institutions do not store customer data and documentation centrally. Privacy considerations and complex architecture often mean that data is stored across technology silos and operational processes, leading institutions to have multiple and partial views of a customer. This invariably increases complexity, costs, and risk of errors.

Functions across institutions must share their understanding of how FATCA will impact their use of client data in order to optimize budgets and resources and increase overall efficiency. FFIs need to develop and execute an institution-wide action plan that takes into account each function's client data requirements and how they can be leveraged across the business.

Accurate data
FATCA has raised the stakes for data quality and the need for clean data. Many FFIs will tackle FATCA data sourcing together with other pieces of regulation, such as EMIR, the Dodd-Frank Act, MiFID, and AIFMD. The level of field overlap can be significant, while the need for efficiency and consistency is increasing.

Data quality is critical to meeting FATCA requirements. Any flawed information likely will directly impact the accuracy and validity of the reporting itself. To ensure full compliance, FFIs must validate the data they use on an ongoing basis. Despite perceptions, automated data processing alone is not enough. It requires dedicated teams with solid expertise and knowledge of data sources and languages and, ultimately, human oversight to find the definitive answer where sources conflict. For these reasons, firms are turning to external providers to help with this process.

Though this regulation is undoubtedly complex, the burden of FATCA compliance both today and in the future can be reduced by adopting the right strategy at the outset. And if that strategy has quality data management practices at its core, then the benefits can flow through to other initiatives and tax regulations that will follow this. As it is with all regulations, when it comes to reporting client data, it is essential that institutions ensure there is a full understanding of the requirements and opportunities across the organization while keenly focusing on timeliness, accuracy, and momentum.

Mark Davies joined Depository Trust and Clearing Corporation (DTCC) in 2012 to lead its European efforts around the development of the legal entity identifier, a global initiative created in response to new regulations for reducing systemic risk. In January 2013, in addition ... View Full Bio
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JCDoubleTaxed
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JCDoubleTaxed,
User Rank: Apprentice
8/5/2014 | 8:52:02 PM
FATCA's consequences not considered
Yes FATCA is here.  Aspects of FATCA not covered by the article are that the FFI of the world were obliged to agree to FATCA and IGA agreements making FATCA law within their own countries, under threat of being closed out of the global banking system - all from a law that was not debated by Congress, had no cost/benefit analysis, is oblivious to the implementation costs by FFI, and does not have the conscent of the US Senate as is required of international treaties. 

FATCA is not a negotiation it is a decree by the US government - that all foreign governments must adhere to.  Note the UScentric language of it - "Foreign Financial Institution." If you represent a FFI in another country do you consider your institution "foreign?" The US acts as if the nations of the world are US territory upon which US law may freely apply.

A word of caution from a US citizen long term living overseas, the laws may get changed every year, once again not by negotiation but by US decree, without regard for any compliance costs in other countries. 

News is out that Canadian FFI will spend 600-700 million just to implement FATCA, the U.K. several billion dollars.  This does not include costs for vetting all their customers if they are US Persons (and this definition of US Persons is subject to change), and ongoing vetting of new customers.

FATCA is part of "Obama's Executive Overreach" and bypass of Congress:

http://www.forbes.com/sites/realspin/2014/07/28/unauthorized-fatca-intergovernmental-agreements-are-part-of-obamas-executive-overreach/

The Economist: FATCA's Flaws    28 June 2014:

http://www.economist.com/news/leaders/21605907-americas-new-law-tax-compliance-heavy-handed-inequitable-and-hypocritical-fatcas-flaws/

The Wall Street Journal reports that FATCA worsens the already profoundly unjust tax treatment of millions of middle-class Americans living abroad. FATCA rules were intended to correct a tax loophole. Applied to Americans living abroad they are absurd. Why does the Wall Street Journal use this word "absurd?"

Perhaps those thinking about applying technology should have a consideration for privacy and discrimination concerns.  FATCA forced countries of the world to disregard their own privacy and discrimination laws by making exception in case of "international treaty." 

The Canadian Charter prohibits discrimination based on race or "national origin."  The Alliance for the Defense of Canadian Sovereignty is dedicated to legal challenge of the Canadian IGA laws that violates the Charter: http://www.adcs-adsc.ca/

The U.S. Republicans have in their platform the repeal of FATCA.  James Bopp, attorney, has launched a legal challenge that FATCA violates the Senate's sole possession of foreign treaty power, the Eighth Amendment's ban on cruel or unusual punishment and the Fourth Amendment's personal privacy guarantee, regarding unreasonable search and seizure.

See the Isaac Brock Society for updates in regards to the controversy of FATCA:

http://isaacbrocksociety.ca/
IvySchmerken
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IvySchmerken,
User Rank: Author
8/6/2014 | 10:41:01 AM
Re: FATCA's consequences not considered
The U.S. has taken a heavy handed approach to FATCA as you point out and painted Americans working abroad with a "Scarlet Letter."  I wasn't aware of all the ramifications of this legislation, but I can see why it is highly controversial and has become a political hot potato.  As for Americans working overseas, you say they are having difficulty seeking financial services abroad since they require a lot of paper work. Wouldn't FFIs charge the American clients extra fees for reporting to the IRS?

From a technology standpoint, FATCA along with a host of other regulations - AIMFD, MIFID, MiFIR, EMIR — is creating a boom in regulatory reporting technologies because obviously this is a major undertaking for FFIs.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
8/6/2014 | 3:42:20 PM
Re: FATCA's consequences not considered
I've heard a great many complaints from US citizens living abroad about onerous tax codes and rules that require a tax expert to figure out. While it is true that many people hire a tax advisor to do their taxes while living in the US, it isn't required. In fact, it's fairly simple to do your own taxes (even if you have a complicated financial profile).

But, if you live overseas...you definitely need some outside help.
JCDoubleTaxed
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JCDoubleTaxed,
User Rank: Apprentice
8/6/2014 | 7:44:09 PM
Re: FATCA's consequences not considered
@Greg Mac Sweeney

Once you are living abroad you then have to file two tax retrurns.  One to the country in which you live, and many of these have much higher marginal tax rates than the U.S.  Then you must file in the U.S. every year.  There is a tax treaty and for my country there is no U.S. tax owed on earnings and interest as the tax rates here are higher.  However, the U.S. has some taxes that other countries do not and vice versa that knock out the best tax breaks of either country. 

Then there is a different currency and depending on the country a different tax year.  The exercise involves  a lot of credits going back and forth between the two countries and of course some credits are disallowed.  On top of this there is really massive penalties if you get it wrong or don't report right.  For instance if you don't make one FBAR report the fine could be 50% of the high account balance going back 5 years (better report your share account!), then a second 8938 report that indicates the line of your 1040 that income from the account is reported - if not filed could be a $10,000 fine with up to an additional $60,000 fine.   ALL THIS IS NOT FACED BY US CITIZENS LIVING IN THE US.  So potentially crippling/bankrupting fines is another reason to go with expert tax advice.

Because of FATCA I may say that the reporting requirement has increased quite a bit.  The 8938 form is new. In the last few years the compliance cost of expert tax advice has doubled for me.  The Wall Street Journal reports that the cost of this tax advice is anywhere from 3 to 20 times that required for return prepartaion in country of residence. So we see it is not only the FFI compliance costs that the United States government does not care about, it is also the compliance costs of United States Citizens living abroad that the U.S. does not care about.  So much for the Constitutional rights of liberty and the pursuit of happiness for those Americans living abroad.  And let's remember they are not receiving government services from the U.S. but from the countries they live and also pay tax to.

While we are on the topic of FATCA.  You live overseas, all your accounts are "foreign."  If something is not reported right in regards if you are a US person then you could get 30% of your account value witheld, just for noncompliance and this has nothing to do with any tax owed.  There is a U.S. Bill of Rights provision against unreasonably high fines - and guess what, the aim of FATCA violates this and there will be lawsuit in the U.S. that will go to the Supreme Court.

One aspect of FATCA I am particularly pissed off about is that along with this came the taxing of my overseas pension.  The tax is on the account gain every year at my marginal U.S. rate.  No doubt the gain of my pension will be added to my income to reach the thresholds for the new 3.8% Obamacare tax for all of which there will be no credit against taxes paid in my home country.

Overseas pension: (you live overseas and local law does not have 401K, it is not legal there as it is not U.S. territory, they have a different plan).   The U.S. tax on my pension, is like the U.S. now saying to all of you who have a 401K that, the rules are now changed, we are now going to tax the account gain each year at your marginal tax rate.  You are not allowed to withdraw from your 401K to pay the tax liability. And if you don't report your 401K right we will fine you 50% of the maximum value of the account for the past five years, plus $10,000 each year for 8938 if you don't complete this right.

I have only gone over part of it.

So you might see how the U.S. government may be considered very anti-American in regards to the poor souls, for what ever reason, have ended up living overseas. Do the phrases: "double taxation without representation" and "freedom from the tyranny of an overseas sovereign" sound familiar?

The answer and fairness of it all could involve the folloing changes:

1) Exemption to FATCA requirements for the country in which you live - "same country exclusion."

2) Abolish "Citizen Based Taxation"   The U.S. wants to tax its citizens no matter where they live.  All other countries in the OECD have residency based taxation (only tax you in your own country you live in for your earnings there).

In the next week or so there will be a Human Rights Complaint against the US government on behalf of US citizens living abroad.

 

 

 

 

 
JCDoubleTaxed
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JCDoubleTaxed,
User Rank: Apprentice
8/6/2014 | 8:03:35 PM
Re: FATCA's consequences not considered
In regards to the unfairness and Human Rights Abuse of the U.S. tax laws on U.S. citizens abroad:

Picture the case of the Canadian Citizen who lived near the border of the U.S. and was born in a U.S. hospital as that was closest. They lived only a few days in the U.S. but then face FATCA, and all the U.S. tax and compliance issues and more I mention below.  How fair is that?

Then there is the case of the Canadian who always lived in Canada but got U.S. citizenship through a parent.  The person is mentaly disabled.  Canada has a tax advatageous account through which a family may save for the care of that disabled person.  The U.S. wants to tax that account in a punative way and treat it as a vehicle for U.S. tax evasion. People may renounce or relinquish citizenship, but as the person is mentally disabled the U.S. will not accept their renouncement of citizenship.

It is not easy to renounce citizenship. The U.S. wants to see 5 years of returns.  There are taxes, penalties, compliance costs, exit taxes.  So not free to leave the U.S.  Many U.S. citizens abroad are not wealthy at all and have thought for decades that they do not owe U.S. tax. FATCA is out to smoke these people out, and get their governments to report them to the IRS and bring them an unimaginable IRS nightmare.

See Issac Brock Society for more infomation and The Alliance for the Defence of Canadian Sovereignty
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
8/7/2014 | 8:12:53 AM
Re: FATCA's consequences not considered
As you point out, FATCA is far reaching and will definitely catch a lot of US citizens by surprise.
SwissTechie
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SwissTechie,
User Rank: Apprentice
8/11/2014 | 3:28:46 PM
Re: FATCA's consequences not considered
Well, as a former US citizen working for a former American company, FATCA is quite former to me.  I'm quite happy that I'm not troubled with former American problems and can focus on making the mortgage payments without being discriminated against like I was when I used to be a US citizen.  I guess that everything has its reasons and benefits.  Getting rid of US citizenship means getting rid of former problems for the better.

You know, before FATCA, one couldn't even e-file US tax returns for free without running into problems.  Various errors made the process annoying, if not impossible.  It didn't accept the address, woudn't file with no tax due, didn't like the age, etc.  So, instead of making filing possible, the US made fines possible instead.  That kind of a system just won't work and I doubt that much has changed since.

At the very least, one would expect that a nation which goes through the trouble of annoying its unrepresented expats with tax issues would at least make every effort to avoid creating situations where they are discriminated against.   Yet, the US can't even do that.
JCDoubleTaxed
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JCDoubleTaxed,
User Rank: Apprentice
8/11/2014 | 6:59:18 PM
Re: FATCA's consequences not considered
Congratulaions SwissTechie for dropping US citizenship.  It can be quite emotional - even if you have lived in your country for decades. Americans living in the U.S. can not fathom how intolerable the U.S. may make trying to live a normal life for yourself and your family in another country. 

It would be quite costly for me to renounce, while also potentially more costly to stay a U.S. citizen.  Americans have limited freedom to leave the U.S.  Perhaps I may afford being a U.S. citizen living in another country for now.  However, there are millions living overseas who are ordinary middle class people who could not afford the compliance costs that may be thousands of dollars each year for just basic stuff.  And they may have been mislead by slippery language by the U.S. Treasury, parroted by their own governments, that the tax treaties "prevent double taxation" when in fact the U.S. has a number of taxes your host country does not and these just get added on top with the best tax breaks of either country getting cancelled out.

At least you now may avoid the new 3.8% Obamacare investment tax in addition that may have been put on top all the taxes you pay in Switzerland, without any tax credit for this against the taxes you pay in Switzerland.  And this is a lesson that may translate to FFI, that the rules may easily change, you have no representation/negotiation ability with the United States Government, and the US does not care about your compliance costs or the time it takes you to comply.

The Isaac Brock Society has message boards on renouncing/relinquishing U.S. citizenship.  Their motto is "Liberty and Justice for all United States Persons Abroad" :  http://isaacbrocksociety.ca/
JCDoubleTaxed
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JCDoubleTaxed,
User Rank: Apprentice
8/11/2014 | 7:46:55 PM
Re: FATCA's consequences not considered
Breaking News: Lawsuit filed in the Federal Court of Canada against Canadian IGA laws supporting FATCA.  The Canadian Charter outlaws discrimination based on national origin.  Guess what singling out American citizens  and having them reported to the IRS is?  It is discrimination based on national origin. So there will likely be changes to FATCA based on legal action:  Alliance for the Defence of Canadian Sovereignty: http://www.adcs-adsc.ca/.  There is legal action in the works in the U.S. as well.  The Republican Party has in their platform the repeal of FATCA.
Greg MacSweeney
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Greg MacSweeney,
User Rank: Author
8/13/2014 | 3:42:07 PM
Re: FATCA's consequences not considered
Interesting. ADCS seems like it is on to something. It will be interesting to see how this plays out. The Canadian banks, not wanting to ruffle and global financial system feathers, will probably remain silent on this. A court ruling in Canada that forbids banks from sharing account information with the US would be a huge blow to FACTA. And other countries (in the EU?) may follow Canada's lead (if their laws allow it).
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