It feels like FATCA has been around for years already, yet some companies are still coming to terms with its implications. However, as Kirsten Morel explains, impending deadlines are now creating a real sense of urgency
It"s four years since US Congress enacted the Foreign Account Tax Compliance Act (FATCA), enabling US Treasury authorities to see into the accounts of its citizens around the world. Since then, the UK has joined in with its own similar legislation, and the OECD is set to announce new global reporting standards which are very much in the same vein.
Seeing the potential threat to their position as international finance centres of high repute, the Channel Islands have sought to deal with FATCA head on, but how are they doing, and will companies in the islands be as ready as they need to be as the FATCA clock continues to tick?
When FATCA was announced, the initial reaction from the Channel Islands was to play down its potential effects and move the focus onto other jurisdictions. However, the reality has turned out to be somewhat more involving for Channel Island businesses. As Karen Haith, Operations Director at fund administrator, Ipes explains: “You have to comply with FATCA even if you know you don"t have US investors.”
FATCA"s all-encompassing regulations put the onus on firms to prove they don"t fall within its remit, and this means almost all Channel Island financial services businesses have had to get to grips with it. This entails looking back through client files to identify those who are or may be identified as US residents, and putting in place processes (on-boarding procedures) to ensure new clients are identified and classified properly.
These processes for identifying new clients had to be in place by 1 July 2014 according to the US FATCA implementation timetable. While this is a serious deadline, it"s not as critical as the 1 January 2015 deadline for those firms that need to apply for a Global Identification Number (GIN) from the IRS, because failure to do so could result in penalties, including the levying of a 30 per cent withholding tax.
“1 July was, in many respects, the least burdensome bit,” says Tony Mancini, Executive Director at KPMG in the Channel Islands. “It was about having one or two extra questions when you take on clients.”
Reporting issues
Still, the signs are that companies haven"t been consistent meeting it. “Channel Island businesses are in a really mixed state. Some are fairly well advanced and some have barely started thinking about it,” explains Wendy Martin, Executive Director, Tax at EY in the Channel Islands.
Quite why some firms have "barely started thinking about it" is puzzling, considering how long FATCA has been around, but Martin is clear that it isn"t too late to get started. “There is time, but time is running out,” she says. “Channel Island financial institutions have until December to register, and they will have a lot of work to do in classifying entities.”
“1 July was a milestone, but at this point people are realising that there"s still plenty to be done,” agrees Daniel Dzenkowski, Tax Director at PwC in London. “It"s like running a marathon. You need to keep the right pace and reach the end.”
Indeed, there are plenty more deadlines to be met after the GIN applications, including reporting deadlines of 1 March 2015 for some businesses and 1 July for others. Reporting is the ultimate aim of FATCA and getting it wrong could lead to consequences beyond those levied by the IRS.
“Now people need to work out how they report. They have to make sure they can collect the appropriate data and ensure it"s right. It"s a reputational risk, so getting it right, along with efficiency and cost-effectiveness, is important,” says Mancini.
It"s easy to understand why the general view is that the real work starts now. But reporting is not just a matter of sending the appropriate information to a single authority - companies have to work out where they have to report. For instance, a fund administered in Guernsey may be domiciled in Cayman, so reporting will have to be via the Caribbean jurisdiction, meaning firms need to know each jurisdiction"s guidelines.
Along with the idiosyncratic reporting regimes, companies also need to appoint a responsible officer who will lead the FATCA reporting and compliance process. There have been fears that responsible officers could be subject to US prosecution if something was amiss, but such fears seem unfounded as Channel Island governments have signed a Model 1 intergovernmental agreement with the US. This means Guernsey and Jersey courts will have jurisdiction with regard to FATCA, as opposed to jurisdictions such as Bermuda and Switzerland where FATCA reporting forms will be signed under penalty of perjury under US law.
Getting the people in
Registering, working out where each client entity has to report, and actually reporting all mean that FATCA demands appropriate resources be dedicated to it. Exactly how much depends on the company in question. Karen Haith points out that Ipes has a small team for FATCA because the fund administrator is looking after clients" responsibilities as well as the firm"s own, but this isn"t the norm in her experience. “From what we"ve seen, we"ve not been aware of people increasing resource,” she says.
While the islands may be prepared for FATCA, in the sense that they"re used to dealing with strong regulation, businesses aren"t clear about where FATCA should fit in with the organisation. “There"s debate and discussion right now about where FATCA should sit, which is why we"re seeing a discussion about whether a FATCA resource is necessary,” Dzenkowski says.
Tony Mancini agrees, explaining that the information required for FATCA compliance is better sourced via relationship managers. “Companies have often had one or two people as a core [FATCA] team but it quickly gets pushed out to client-facing teams.”
Channel Island businesses may be in a mixed state when it comes to FATCA compliance, but they can"t complain about the effort made by the islands" governments and the industry as a whole. One of the key pieces of literature produced on the new regime is the Crown Dependencies" guidance notes, which are a collaboration between the Channel Islands and Isle of Man, and an attempt to help the sector deal with FATCA.
The result has been impressive enough that, as Mancini points out: “other islands, particularly those in the Caribbean, are using our notes.” Although still in draft form, the notes have given clarity where there was little, and will likely have the effect of helping the islands not only with FATCA but also the OECD"s Common Reporting Standard (CRS), which will, Mancini believes, ultimately lead to a global standard, but not before it has caused some frustration first (see box below).
“Forty-two countries have said they will be early adopters of the CRS, but 12 EU countries haven"t,” Mancini says. “Until all EU countries adopt CRS, there is a need for the EUSD [EU Savings Directive, which gives guidance on the taxation of savings]. This adds up to four similar but different reporting systems, which will be frustrating and expensive for business. Will it increase tax revenues? I don"t know.”
Whether FATCA and its like will raise more revenue for government coffers remains to be seen. For finance companies, however, there is no FATCA without pain - but if the end result is a world in which the Channel Islands are seen as fully transparent and compliant, and no longer as dark corners of the global financial system, then that hurt may just be worth it.
Because FATCA isn"t enough
The introduction of FATCA made other jurisdictions sit up. The UK"s adoption of a similar regime is clear evidence of the start of a trend, and now the OECD is getting in on the act with the introduction of the Common Reporting Standard (CRS).
Though modelled on US FATCA, the CRS, which aims to automate the exchange of tax information between jurisdictions, is likely to require different data, and possibly more reporting than FATCA. The upshot of all this is that Channel Island financial services firms have more than just FATCA to comply with.
“CRS and FATCA are 90 to 95 per cent similar,” says Tony Mancini, Executive Director at KPMG in the Channel Islands. “But [CRS] will add cost and frustration for our clients.”
CRS may be the latecomer to the international reporting party, but there"s an impatience to get the regime in place. More than 40 jurisdictions have signed up to be early adopters, and the feeling in the industry is that ultimately CRS will become the global standard.
The key to CRS is the automation of the transfer. It requires financial institutions to automatically report the details of their overseas clients to their national tax authority or an otherwise designated competent authority. These then periodically transfer the data in bulk to other competent authorities in partner jurisdictions.
“For Channel Island businesses, it makes sense to use as much as they can from their FATCA experience,” says Wendy Martin, Executive Director, Tax at EY in the Channel Islands. “Thankfully, the OECD standard is similar to the US and UK IGAs [intergovernmental agreements], so it"s worth trying to incorporate the OECD"s CRS as firms deal with FATCA.”
US and UK FATCA and the OECD"s CRS have all placed a significant burden on financial firms. However, the beauty of the CRS is that it should stop the emergence of individual national schemes. So, once this period is over, it can only be hoped that Channel Island businesses won"t have to deal with implementing such onerous compliance schemes again.