Understanding the United States Foreign Account Tax Compliance Act (FATCA)

Date: 04 Aug 2011


Advent Software, the leading global technology provider to the investment community, has compiled a new industry intelligence report explaining the main things to look out for in FATCA (Foreign Account Tax Compliance Act):

What FATCA is:

New US regulation, the Foreign Account Tax Compliance Act (FATCA), which goes into effect on January 1, 2013, represents a significant modification of the US foreign withholding tax system. Under FATCA, non-US
financial institutions and non-US non-financial entities (respectively referred to in the Act as ‘foreign financial institutions’‚Äîor FFIs‚Äîand ‘non-financial foreign entities’‚Äîor NFFEs) that fail to identify and disclose their US account holders and investors will be subject to a 30 percent withholding tax on certain types of payments. Payments of interest and dividends, gross proceeds from sales, and many royalties and rents will be subject to withholding if an institution is non-compliant.

Why it’s important to learn about FATCA:

FFIs and NFFEs can avoid withholding only by complying with the disclosure requirements. As
such, FATCA will have far-reaching repercussions, affecting‚Äîby some estimates‚Äî250,000 institutions. Compliance with FATCA will require institutions to follow due diligence procedures and to effect withholding on “recalcitrant accounts,” which in turn will likely require institutions to implement new systems, procedures, and processes and to automate them as much as possible within the next 18 months.

Why FATCA is happening:

FATCA was signed into law in an effort to uncover taxable assets that are owned by US citizens and held in foreign institutions. The legislation is intended to prevent offshore tax abuses. The US government could raise as much as $10 billion in annual revenue as a result.

Who’s affected by FATCA:

A broad swath of FFIs will be affected by FATCA. Banks, other traditional entities, and institutions that manage investments, including alternative investment organizations and insurance companies, must eventually comply with FATCA. Withholding agents, including US operating companies, are affected, as failure to comply with the new rules may give rise to significant withholding tax liability. And because so many types of US payments to foreign entities will be subject to withholding, multinational corporations and individuals must also comply.

How institutions are responding to FATCA:

Institutions may require 18 months or longer to become FATCA-compliant, so many are starting the compliance process now. Because of the size of many of the affected FFIs and the far-reaching nature
of the regulations, institutions are considering changes to their systems and processes to achieve FATCA compliance sooner rather than later. Systems and processes must be in place to allow for the following:

ƒÂ´€€€ Identification of FFIs and NFFEs

ƒÂ´€€€ Identification of compliant and noncompliant institutions

∆í√Ǭ¥‚Ǩ‚Ǩ‚Ǩ Tracking of “withholdable” and exempt payments

ƒÂ´€€€ Withholding of tax on recalcitrant accounts

ƒÂ´€€€ Payment of withholdings to the US government

ƒÂ´€€€ Filing of tax returns and payee statements related to withholdings

ƒÂ´€€€ Requests for information about US individuals who own more than 10% of an NFFE directly or indirectly

∆í√Ǭ¥‚Ǩ‚Ǩ‚Ǩ Review of US individuals’ activities that involve bankaccounts, trusts, and other entities outside the US

What institutions can do to prepare for FATCA:

FATCA rules are still evolving. Many issues, ranging from the definition of FFIs to standards of documentation, are still cloudy, but this much is clear:

ƒÂ´€€€ Institutions should monitor communications from the US Department of the Treasury, the agency tasked
with implementing FACTA compliance.

ƒÂ´€€€ Institutions should learn about FATCA tax law andgain an understanding of how to develop processes
to better understand their US clients.

ƒÂ´€€€ Institutions should evaluate and revamp processes,where necessary, in such areas as corporate actions,
tax operations, and account structures.

ƒÂ´€€€ Institutions should consider the types of systems and solutions required to deliver the automated efficiency that will ensure initial and subsequent FATCA compliance.

FATCA time-line:
ƒÂ´€€€ March 18, 2010: FATCA passed

ƒÂ´€€€ August 27, 2010: Initial guidance on FATCA (Notice 2010-60) provided

ƒÂ´€€€ April 8, 2011: Additional guidance on FATCA (Notice 2011-34) provided

ƒÂ´€€€ November 2011: Proposed FATCA regulations to be released

ƒÂ´€€€ January 1, 2013: FATCA legislation goes into effect

About Advent Software:

Advent Software, Inc., a global firm, has helped the world’s financial professionals since 1983. Firms in more than 60 countries use Advent technology to run their operations.

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