FATCA: determined to
pierce the corporate veil
Of all the current global regulatory activities,
FATCA, the Foreign Account Tax Compliance Act,
is the biggest according to Deloitte FATCA global
leader, Denise Hintzke. Signed into US law in
early 2010, FATCA seeks to identify US taxpayers
with accounts in Foreign Financial Institutions.
In this article Deloitte experts in Australia and
internationally join forces to identify what FATCA
means for Australian financial institutions.
The new chapter, Chapter 4, signed into US law as part As it currently stands, if an Australian financial institution
of the Hiring Incentives to Restore Employment (HIRE) has US-sourced income or invests in US assets and
Act requires that Foreign Financial Institutions (FFIs) chooses not to enter into the FATCA agreement, their
report the accounts of their respective US investors and respective US-sourced income, whether direct or
customers. The long arm of the US Internal Revenue indirect, will also be subject to the 30% withholding tax.
Service (IRS) intends to enforce these demands by Withholdable payment includes any US-sourced interest,
imposing a hefty 30% withholding tax on US-sourced dividends, royalties, rents, salaries, other compensations,
income of financial institutions that do not comply. as well as the gross proceeds from the sale or disposition
of any property that can produce US-sourced interests or
Foreign Financial Institutions include banks, insurers, dividends.
managed funds, private equity funds, hedge funds,
custodians and trustees. In its determination to achieve So FATCA is not just about US taxpayers, it is about US-
transparency, the IRS has also expanded its definition generated income.
of an affiliate from an 80% owned affiliate to one with
a 50% shareholding by an FFI. These affiliates are also The obligation for the FFI and its affiliates is to report, at
required to enter into a FATCA agreement with the IRS. least annually, the names, addresses, account balances
and account movements of US customer deposit
accounts, custody accounts, equity and debt security
accounts, except for regularly traded listed securities.
For FFIs, this means that they have to obtain sufficient
information and evidence to both identify US account
holders and in fact prove that any account is not a US
Identify, collect, verify Nevertheless, the IRS continues to confirm that there
This, according to our Deloitte experts, is the nub. will be no country carve outs. This is despite the fact
Reporting is, in a sense, a small part of this new that compliance with FATCA’s due diligence, verification
international impost. The big task is to identify the and annual reporting may result in conflicts with local
nationality of not just the customers but that of the privacy laws.
ultimate beneficiary of the account. FATCA requires
collection of information to a level that is well beyond Privacy
the reach of existing Know Your Customer (KYC) Under current Australian law, Australian financial
frameworks. Financial institutions are well aware of institutions may not be able to collect the additional
the efforts required to prove KYC compliance since the information required by FATCA from customers without
legislation was introduced in this country in 2006 for an explicit privacy waiver. This issue may be further
counter terrorism funding (CTF) and to deal with anti- complicated in individual cases by the operation of that
money laundering (AML). financial institution in multiple jurisdictions.
Although KYC has set a good precedent for FATCA The FATCA legislation states that where there is a
compliance for Australian financial institutions, and some domestic legislative impediment to obtaining the
are already well aware of the impending requirements relevant customer information, customers are required
through their own gap analysis, very few have begun the to provide a waiver. For customers where the financial
detailed planning required to meet the demands that are institution is unable to procure a waiver, the financial
due internationally in 22 months’ time, if in fact those institution is required to close the affected accounts.
demands remain. Based on our experience working with large financial
services institutions, institutions can struggle with these
Costs and collections large scale compliance requirements primarily due to
From their knowledge of implementing KYC systems, fragmented governance, inconsistent execution, tax-
several large global financial institutions have estimated driven functional teams, competing compliance priorities
the cost of compliance for FATCA could exceed $100 and significant resource constraints.
million each. In Canada it has been ascertained that the
exposure of just one large Canadian company if it chose Existing systems and processes will have difficulty with
not to become FATCA compliant would amount to the additional data elements, withholding calculations
potentially $26 billion through withheld revenues. and reporting changes to those in place for KYC. The
key difference FATCA imposes on FFIs is information
Based on US Treasury estimates of annual revenue to be management – linking revenues to customers, data
collected under FATCA, the Australian share of this has aggregation and reporting. Given that under FATCA law
been estimated to be in the range of $20 million. The a person is deemed to be a US person unless proven
cost of implementing the system changes required to otherwise, new account and account maintenance
extract the necessary information is estimated at around processes will also be particularly impacted beyond
$1 billion. So the view is that the compliance costs are currently identified US account holders.
way out of proportion to the potential tax take and
associations including the Australian Bankers Association
(ABA), the Financial Services Council (FSC) and ASFA (the
Association of Superannuation Funds of Australia), have
all undertaken correspondence and lobbying on behalf
of their members with the US Treasury and the IRS.
Regulatory Review April 2011 3
Global and cross-jurisdictional data management
Financial institutions that operate in multiple jurisdictions
will also face particular challenges in meeting the
FATCA requirements. The completeness, accuracy and
timeliness of data will inevitably vary greatly between
different jurisdictional operations, as will the ease with
which financial institutions are able to collect certain
information from customers. Maintaining the required
standard across such variable jurisdictions will be one
of the most fundamental challenges and is likely to
necessitate investments in systems infrastructure.
2010 2011 2012 2013
1/1 18/3 27/8 1/1 1/1 18/3 1/1
HIRE Act Signed IRS releases Expected receipt of proposed Grandfathered General
Notice and/or final FATCA regulation obligations effective date
2010-60 of FATCA
Figure 1 Deloitte analysis
What next? So what is the appropriate action?
Some preliminary guidance was published by the US In the short term, and before the detailed regulations
Treasury in Notice 2010-60 on 25 August 2010. More are released, the Deloitte Australia view is that activities
detail on the practical application of the FATCA regime should include:
is expected from the US Treasury/IRS in the next few 1. understanding the operational impacts of FATCA
months, with draft regulations expected – somewhere compliance on your business – technology, systems,
between June and August 2011. The final regulations resources, legal, customer, etc.
are expected by the end of this year – only nine months
2. quantifying the cost/resource/time requirements to
away – and can be seen from the Key Date guide
implement FATCA in its current form (i.e. putting
figure 1. With or without that guidance, the FATCA laws
science behind the lobbying).
will come into effect from January 2013.
3. refining lobbying positions.
4. identifying the project management governance
structure for implementation.
By taking the above course of action Australian financial
institutions should then be able to:
• identify key pressure points for lobbying activities
• identify potential compliance gaps and challenges
• start the process of educating and preparing the
business for the challenges of FATCA.
Banks: In Australia, lobbying is being undertaken by the
banks through the Australian Bankers’ Association (ABA). In Australia, the total
The ABA focused its submission to the US Treasury and
the IRS on the fact that the FATCA provisions should not
be applied to banks domiciled in highly tax compliant, assets as at March 2011
tax transparent jurisdictions with comprehensive tax
treaties and exchange of information networks that are are $1.7 trillion, making
inhospitable to tax evasion. The ABA highlighted the
gross disproportion to any possible additional revenue
Australia the fifth largest
that could be recovered from US tax evaders in such funds management
jurisdictions and the potential breach of Australian
privacy laws when attempting to meet the FATCA industry in the world.
requirements. It asked for a complete exemption from
FATCA, or if this could not be accepted, a proportionate ASFA members include corporate, public sector,
reduction in compliance based on the type of accounts industry and retail superannuation funds accounting for
for example streamlined rules for existing accounts. more than 5.7 million member accounts and 80% of
Lobbying is still continuing. superannuation savings in Australia, as well as providers
of PSTs, ADFs and RSAs. Superannuation funds also
Funds management superannuation and invest in PSTs, with some $70 billion of superannuation
insurance: The funds management superannuation assets invested in such entities, and so are an important
and life insurance industries have focussed on lobbying part of the Australian superannuation system. The FSC
to date through the FSC and ASFA. Due to the ‘pass- represents the retail and wholesale funds management,
through’ nature of the funds management industry, superannuation and life insurance industries within
their ability to complete impact assessments has Australia. The FSC has 135 members which are
been difficult as the regulations are unsettled. The collectively responsible for investing more than $1 trillion
superannuation industry is banking on an extension to on behalf of the Australian public.
the foreign retirement definition to be included in the
final regulations. This would reduce their compliance to Similarly to the ABA, the FSC and ASFA believe that to a
making sure that their banking institutions and funds large extent super funds have already gone about getting
managers/investment houses are FATCA compliant. Pension Fund Managers (PFMs) from their members. The
FSC argues that ‘Managed Investment Trusts that are low
In Australia, the total estimated superannuation assets risk based on investor type or profile, should be excluded
as at March 2011 are $1.7 trillion, making Australia the from the operation of FATCA on the basis that the risk of
fifth largest funds management industry in the world. tax avoidance or evasion is extremely low, if present at
These assets are held by various superannuation entities all… and the same for superannuation policies issued by
including superannuation funds (or retirement funds), the superannuation class of life companies.’
pooled superannuation trusts (PSTs), approved deposit
funds (ADFs) and retirement savings accounts (RSAs). In our view, the intent of FATCA when President Barrack
Obama and the senators were formulating the law
was more about tax-evading US citizens with funds in
Switzerland for example, than Australian superannuation
funds, which in any event would be an unlikely haven for
undeclared US monies. So the situation shifts from, for
instance, a bank in London with continual contact with
New York clearly understanding what matters, to an
Australian superannuation fund with exceedingly unlikely
exposure to US tax evaders.
Regulatory Review April 2011 5
Some guidance for super 3. must not allow US participants and
The IRS and US Treasury have issued some guidance beneficiaries other than those who have
notes outlining three exceptions to FATCA. The fund: worked with an Australian employer to
be exempt – this is an issue from Australia’s
1. must qualify as a retirement plan under discrimination perspective. It would be unlikely that
Australian Law: generally, Australian any trust deed of Australian superannuation entities
superannuation funds, approved deposit funds (apart from PSTs) would exclude US individuals from
(ADF) and exempt public sector superannuation being members of those entities if the member is
schemes would be considered retirement plans and not working for the employer-sponsor in the country
therefore meet this requirement. However, other in which the retirement plan is established. To
superannuation schemes within the industry would amend trust deeds to exclude such members could
not fall within the definition and would not meet be considered discrimination.
this test. For example:
In addition, employers still need to meet superannuation
• pooled superannuation trusts (PST) are required guarantee (SG) requirements for employees if they
to comply with the SIS legislation and are are SG employees, despite the fact that they may be
regulated by APRA but are not retirement plans considered US persons for FATCA purposes.
• life company/friendly society superannuation
business – as it is a component of a life Both the FSC and ASFA believe and have lobbied for
company/life company business are not exposure on a prospective basis for those members that
considered retirement plans might have US exposure. Arguing that FATCA should
apply from 1 January 2013, not retrospectively, because
• retirement savings accounts (RSA) – as they
it is likely to be practically or legally extremely difficult to
are not superannuation funds, they are not
obtain the information required under FATCA for existing
‘retirement funds’ and therefore would not
US account holders.
satisfy this requirement, however, by their very
nature, they represent the retirement savings of So as we move further away from the primary target,
the account holders. there is, we think, a change of thought about the
2. has to be sponsored by a corporate employer: significant implications of FATCA on secondary targets.
corporate funds should qualify, but industry funds The US Treasury has indicated that it is open to
and corporate retail funds are multi-employer funds considering ways to reduce compliance costs but this
and therefore are not technically covered within this must be based on objective criteria, and not on specific
definition. Of self managed superannuation funds country or industry relief. Deloitte believes that there is a
(SMSF) which are regulated by the ATO, it is unclear possibility that some general concessions will be granted
how many of these funds would be considered based on the practical challenges and limitations faced
employer-sponsored. In addition, because of their very by Australian banks and superannuation funds. However,
nature, the following cannot be employer-sponsored we caution that for those concessions to be realised it is
and therefore cannot satisfy this requirement: likely that greater specificity and statistical basis is needed
• ADFs to assist in justifying current claims regarding the cost
of complying, the time effort to comply, and the overall
limitation with regard to the scale of taxable revenues
• life company/friendly society currently under Australian management.
• RSAs. The major Australian industry associations have also
reminded the US Treasury during the consultation
process that the Australian Taxation Office (ATO) requires
comprehensive reporting of customer investment income
and such information reporting may be a useful basis for
compliance with the FATCA requirements.
Start FATCA planning now
As lobbying activities are continuing, Australian financial institutions are encouraged to undertake a preliminary
assessment of the impact of FATCA to enable them to scope and plan for the detailed project work which is likely to be
complex, prolonged and quite extensive. The earlier an organisation begins planning and assessment activities, the better
prepared the organisation will be to address potential system changes and the impact of further administrative guidance
and regulations from the US Treasury.
A proposed project structure • develop a project implementation strategy
The potential project structure should be tailored to the based on the risk assessment performed. As the
complexity and size of the business, level of staff resources risk assessment activities will drive the strategy and
available and sophistication of current technology and ongoing project work streams, it is critical that
control infrastructure. As an illustration, the initial project the risk assessment is undertaken carefully and as
structure could take the following approach: precisely as possible (and on an ongoing basis).
• formulate a FATCA project team management The strategy should incorporate the outcomes of
and governance structure to take leadership, the risk assessment which would have identified
accountability and ownership of the project (this where the key areas of business impact are, the
should include a project management board, project level and extent of stakeholder communication
sponsors, managers and key representatives across (both internally and externally including customers),
the organisation from tax, legal, risk, operations and enhancements to staff training and impact on
resource teams) current compliance framework and processes.
• perform risk assessment activities. Key Beyond implementation, Australian financial institutions
considerations in the assessment would be to will need to adopt a strategy to monitor ongoing
understand the application/scope of the FATCA compliance with the FATCA regime. This should include
legislation, the organisation’s group structure reviewing data collection and reporting systems, as well
(including affiliates), nature of the business (i.e. as the internal processes required to confirm compliance.
customers, products/services provided, local legal Deloitte expects the IRS to develop a program to
frameworks, etc.) and existing operations (both undertake checks on compliance with the FATCA regime.
technological infrastructure, tools, management
information, policies and procedures). Another
There are opportunities from the work required to
key consideration would be to identify where the
become FATCA compliant that could enhance a financial
potential overlaps or gaps are within the FATCA
institution’s competitive advantage when it comes to
requirements and other regulatory obligations
attracting customers that do business in the US. These
(such as AML/CTF) from both a compliance/
include customer mastering, where consolidating and
legal obligation perspective and existing control
remediating multiple and often overlapping legacy
infrastructure. Note that these activities should not
customer data systems, could provide an opportunity
be considered only at a point in time, but should
to ‘future proof’ any customer data system capabilities.
be continuously revisited and challenged as new
We see opportunities for financial institutions to provide
information is provided both internally and externally
customers with investment portfolio management advice
that would impact the risk assessment undertaken.
taking into account FATCA. In addition, continuous
development and training for employees also builds a
more skilled and valued workforce.
Regulatory Review April 2011 7