Capco: Impending and Imperative, FATCA Demands Immediate Action

Aggressive, onerous and costly, FATCA is set to challenge the banking secrecy laws and shake up the financial services community worldwide. At the same time, the new U.S. regulation is a precedent and an opportunity for financial institutions to prepare for the inevitable surge of reciprocal demands by governments, driven by the common goal of arresting tax evasion.

The financial services world is trending towards a global tax-information exchange, either through collaboration or as a result of tit-for-tat regulatory acrobatics by governments. The European Commission has already proposed - in response to FATCA - a tax cooperation agreement between the U.S. and E.U. as a long term solution. Ignored by the U.S., how long will it be before Europe retaliates with an initiative affecting U.S. institutions?

FATCA is likely to be a standard-setter and the resources invested in achieving compliance will lay the foundation for an infrastructure capable of reacting quickly to FATCA’s European and other cousins and FATCA itself as it continues to evolve.

“A major undertaking,” in the words of the IRS Commissioner Doug Shulman, FATCA is also a great opportunity for financial organizations to refine customer data quality and availability, boost customer communication and transform compliance into a source of operational improvement.

What is FATCA?

FATCA (Foreign Account Tax Compliance Act), the recent U.S. initiative to prevent offshore tax abuses by U.S. persons, will force financial institutions around the world to report their U.S. clients to the IRS. The majority of financial firms are affected, not just banks. Around 200,000 companies are facing the dilemma of whether to:

• Embrace the new law and sign an agreement with the IRS to disclose required information on U.S. citizens and companies; or
• Impose a 30% withholding tax on all U.S. and certain non-U.S. payments; or
• Exit from U.S. business (and the IRS would require proof of that on a regular basis).

In reality, for most financial institutions complying with FATCA is the only option.

Key issues with FATCA implementation

FATCA is a timing challenge and is not going away, despite banks and governments lobbying against it. U.S. officials have stressed that they cannot undo a law enacted by Congress. Having realized the magnitude of implementation challenges for affected organizations, the only leniency the IRS has shown so far has been to announce its plans to phase in the requirements and postpone the start date, but only by 6 months.

Although the full power of the new legislation will not kick in until January 2014, organizations must be FATCA-equipped by June 2013, when they are expected to enter into an agreement with the IRS.

As of today, financial institutions have less than 22 months to define, design, and implement the processes and systems necessary to cope with FATCA’s front-to-back impact, from customer awareness and data quality to deep infrastructure readiness.

Compounding matters, FATCA is not yet fully defined. The complete legislation is not available in a single document. It keeps evolving and further IRS announcements need to be closely tracked.

We have been monitoring FATCA since its enactment and developed a roadmap to successful implementation. Formulating hypotheses around as yet unspecified aspects of FATCA to ‘operationalize uncertainty’ is one of the key success factors we identified.

View full analysis of FATCA and the required action plan