FATCA determined to pierce the corporate veil

Document Sample
FATCA determined to pierce the corporate veil Powered By Docstoc
					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

                                                                                                         In practice

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.

    Key dates

     Key Dates
     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.

                                                                                                        In practice

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
                                                           estimated superannuation
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
        •	 PSTs
                                                                limitation with regard to the scale of taxable revenues
        •	 life company/friendly society                        currently under Australian management.
           superannuation policies
        •	 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.
                                                                                                             In practice

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

Shared By: