FATCA Compliance And Data Protection

Complying with USA FATCA and UK/EU Data Protection
Requirements

The US Foreign Account Tax Compliance Act (FATCA), passed by
Congress in March 2010, was finally implemented in July 2014. The
Act makes the US the only large economy to tax its nationals on all
of their earnings anywhere in the world, although the Organisation
for Economic Co-operation and Development (OECD) has developed a
similar regime and the EU likely to follow suit. The anti-avoidance
tax law requires financial institutions around the world to report
on assets held by American clients. Initially this had raised
serious privacy issues but with over 30 jurisdictions signed up to
bilateral intergovernmental data sharing agreements with the US,
financial institutions affected should make sure they are ready to
comply with this extra-ordinary extra-territorial law.

A brief overview of FATCA

FATCA aims to stop US citizens (including those not resident in
the US) avoiding paying tax by holding offshore investments. To
this end, FATCA requires foreign financial institutions (FFIs), to
provide information to the US Internal Revenue Service (IRS) on
their US accountholders or accounts that are held by foreign
entities in which a US tax payer holds a substantial ownership
interest. The wide definition of FFIs includes not only banks, but
also investment funds, hedge funds, private equity funds and other
forms of financial intermediaries. Should a FFI fail to meet the
disclosure obligations or refuse to produce the information, the
IRS can sanction them by imposing a 30% tax on certain payments
made to a FFI.

Implementing FATCA

FATCA#39;s extra-territorial provisions require FFIs based
outside the US to report client information to the IRS. However,
due to data protection laws, the FFIs will instead provide this
information to their national tax authorities, in the UK Her
Majesty#39;s Revenue and Customs (HMRC), which have individual
agreements to share data with the IRS. Nearly 40 jurisdictions
(including renowned tax havens such as the BVIs, Cayman Islands,
Jersey and Luxembourg) have signed up to intergovernmental
agreements (IGAs) that apply and enforce the provisions of FATCA
locally, and almost the same number again have #39;agreements in
substance#39; with the US Treasury. The agreements mean that
registered FFIs in these countries will not suffer the 30%
withholding tax.

On 30 June 2014, the International Tax Compliance (United States
of America) Regulations 2014 (UK Regulations) came into the force
and implement the agreement between the UK and the US that enables
UK FFIs to satisfy FATCA obligations without having to enter into
an individual agreement with the IRS; and on 28 August, HMRC
released updated guidance on the UK Regulations; however, these
will need amendments due to changes to the US Treasury FATCA
regulations. The next review of the guidance will be February 2015.
The UK Regulations stipulate that UK financial services
type-entities are obliged to register with the IRS and ascertain
and submit returns on their US account holders to HMRC. In
addition, certain UK entities that are technically outside the
scope of FATCA are still required to register with the IRS, as well
as comply with identification and HMRC reporting procedures.

All applicable FFIs should obtain a Global Intermediaries
Identification Number (GIIN) from the IRS before 25 October 2014,
which they will need to provide to US costomers to show that they
do not need to withhold tax on payments they want to make. In the
UK, FATCA-registered institutions will then need to register with
HMRC before the first reports are due on 31 May 2015.

These deadlines are fast approaching, and while we all come to
terms with the 181 page guidance released by HMRC at the end of
August, here are some tips to facilitate compliance:

1. Appoint a person in-house who is responsible for
FATCA-related issues

There are many different departments likely to be involved in
complying with FATCA, for example IT and tax, and so having a
central figure can aid in co-ordinating the different functions and
raising awareness of their responsibilities. It is important that
the appointed person is a senior figure in the company able to make
information requests and demand a quick response.

Further, as well as grappling with FATCA, institutions may also
need to comply with other #39;FATCA like#39; legislation: this is
under consideration in the EU, while the OECD has already produced
the Common Reporting Standard, nicknamed the Global Account Tax
Compliance Act (GATCA), which a total of 47 countries (all OECD
members and countries such as Brazil, China and India) have agreed
to implement, likely from 2017.

2. Extend the scope of know-your-customer (KYC)
requirements

FATCA requires FFIs to know exactly who their customers are, to
keep up-to-date and accurate information about them and to report
this information to either directly to the IRS or to national tax
authorities.

Current KYC requirements under anti-money laundering regulations
worldwide accept a risk based approach to determine how much
information is collected in the first instance and how often this
information is reviewed.

FATCA rules go beyond current KYC requirements, requiring more
information to be collected, reviewed and authenticated,
specifically: it requires that all accounts (subject to de minimis
thresholds) be reviewed for US indicia, not just those with certain
risk factors; it requires the institution to know whether a 10%
owner is a US person, lower than the usual threshold of 25% for low
risk customers; and it means that monitoring for change in
circumstance is also not risk based, any change for any customer
must be monitored as it occurs.

3. Audit the management of client data

All client data should be kept in a centralised department to
avoid repetition of work and duplication of document requests from
the client. Often, use of client data differs across different
departments within an institution. To facilitate efficient
compliance, all departments should have an understanding of how
FATCA will affect the use of client data and, if possible, an
institution-wide approach should be developed which takes into
account the differing requirements for each department.

Data should also be accurate, this requires a dedicated team
with the knowledge of where such data can be sourced, verified and
then efficiently stored.

Consequences of non-compliance

Although FATCA was only implemented a few months ago, US federal
prosecutors in New York have already brought the first FATCA
enforcement case before the courts. Many have seen this as a show
of the readiness of the American tax authorities to enforce strict
compliance with the new law.

The prosecutors claim that the alleged offenders in Belize and
Panama conspired inter alia to submit false FATCA documents by
setting up 5,000 shell companies to avoid FATCA reporting. The
defendants are accused of laundering $500 million through this
complex network of shell companies. Panama has an agreement with
the US government to swap tax information between the two countries
and so is considered to be a FATCA compliant financial
jurisdiction; whereas Belize is not, although some 228 financial
institutions there are listed on the FATCA database.

Arrests have already been made of defendants located in Miami
and New York and the US Department of Justice has started
extradition proceedings to bring others from Panama and Belize. A
criminal action to seize the ill-gotten money is also underway.
Allegedly, among the evidence are taped conversations where the
defendants openly boast that they set up the network to avoid
FATCA.

IRS-Criminal Investigation Acting Special Agent-in-Charge
Shantelle Kitchen said: #39;This inquiry shows offshore tax
evasion and money laundering are top priorities for us. FATCA is an
example of how it is becoming more and more risky for US taxpayers
to hide their money offshore.#39;

Previously published – DataGuidance Guidance Note

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.