The complexity of the Foreign Account Tax Compliance Act (FATCA) requirements is the top hurdle to achieving compliance, according to a Strategies for Achieving FATCA Compliance survey conducted by the technology firm Mindtree.
In an effort to eliminate noncompliance by US taxpayers, FATCA requires foreign banks to identify, report, and disclose US accounts. Before financial firms can even worry about the reporting element (which includes correctness of reporting toward 1042, 1042S, 8966, and W8BEN forms), they have to accomplish the most basic of obligations: Identify the products and customers that fall under the scope of FATCA withholding and reporting.
According to Subhasis Bandyopadhyay, head of capital markets at Mindtree, banks are still struggling with effective account identification. This includes the linking of accounts of an individual or entity across different business units (e.g., banking, custodial, depository, and insurance) and within the same business unit (like individual and joint bank accounts).
Though the tax law went into effect July 1, the IRS announced in May that calendar years 2014 and 2015 would be regarded as a "transition period" for the purposes of enforcement and administration of the due diligence, reporting, and withholding provisions under the act. Helpfully, the IRS says, it "will take into account" the extent to which entities such as foreign financial institutions and withholding agents made "good faith efforts" to comply with their obligations.
Entities that cannot demonstrate that they have made good faith efforts will not be entitled to relief from IRS enforcement during the transition period.
[Read more about the challenges of FATCA compliance: FATCA: A US Regulation That's Having a Global Impact]
Bandyopadhyay says this good faith clause gave some relief to banking and financial companies subject to FATCA, but some firms are falling behind in checking the compliance boxes.
"The majority of the bigger banks are now in control with this complex regulation and completed their product assessment phase and currently undergoing the implementation phase," he says. "But the majority of banking and financial services companies are still facing the heat of the complexities of FATCA requirements to comply. Most of them are reporting that the due diligence procedures are causing a major business challenge for them, mainly in the space of tracking the participating financial institutions and nonfinancial entities."
The Mindtree survey of 45 senior financial executives subject to FACTA was conducted ahead of the deadline in May and June. In the survey, 49% of respondents said FATCA verification and due diligence procedures present a major business challenge. Tracking participating financial institutions and nonfinancial entities presented a major challenge for 42% of respondents.
The survey also alludes to a possible reason many firms are struggling. When asked which department was responsible for FATCA compliance, popular answers included the CFO (24%), the chief risk officer (22%), the chief compliance officer (13%), the tax department (9%) and the CEO or COO (6%). A surprising 27% admitted they didn't know who was responsible.
"One important point is that most of the bigger banks are now working towards the FATCA quality assurance pack that is designed to identify any gaps in the implementation process, report issues to stakeholders, and enable informed decision making," says Bandyopadhyay. "But on the other side, the small and midsized banks are still way behind, and they have to soon pull up their socks to achieve the same at the earliest."Becca Lipman is Senior Editor for Wall Street & Technology. She writes in-depth news articles with a focus on big data and compliance in the capital markets. She regularly meets with information technology leaders and innovators and writes about cloud computing, datacenters, ... View Full Bio