FATCA – How It Impacts Technology & Operations 3 May 2012• FATCA will affect . customer...
Transcript of FATCA – How It Impacts Technology & Operations 3 May 2012• FATCA will affect . customer...
3 May 2012
FATCA – How It Impacts Technology & Operations
Circular 230 Disclosure: This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties that may be imposed on any taxpayer.
FATCA Basics
• Key term is FFI, which generally includes:
Banks
Insurance companies
Investment funds, including hedge funds and private equity funds
Custodians
• Banks need to sign a contract with the US Government in 2013
• Proposed US Treasury regulations issued 8 February 2012
A US tax law to prevent US tax evasion by US persons through offshore accounts held at foreign financial institutions
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New US Tax If Bank Not FATCA Compliant
• New 30% US withholding tax applies on specified payments received by Bank that does not comply with FATCA
Withholdable Payments (from 2014 onwards) Foreign Passthru Payments (from 2017 onwards)
• Withholdable Payments include:
Interest income and dividends on US stocks and US securities (including US Treasuries)
Gross proceeds on sale of US stocks or securities
• Passthru Payments are payments from another FFI that complies with FATCA
Even non-US assets can be affected by Passthru Payments
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Impact if a Bank Does Not Comply with FATCA
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Gross Sales Proceeds $2000
US WithholdingTax $600
• Bank invests in US Treasury securities that generate US source interest income and eventually gross proceeds from sale
• If Bank does not comply with FATCA, a new 30% US withholding tax will apply to payments of interest income and gross sale proceeds
Interest Income $100
US WithholdingTax $30
Bank (FFI)
US Treasury Securities
Withholding on Foreign Passthru Payments by Bank Complying With FATCA
• FATCA can require Bank complying with FATCA to implement a new 30% US withholding tax on even non-US payments that it makes to another FFI not complying with FATCA
• Starting no earlier than 2017 5
US Investments
40% 60%
Payment from Participating Bank = $1000
Passthru Payment = $1000 x 40% = $400
Participating Bank
Non-Participating
Bank
Non-US Investments
How Does a Bank Comply with FATCA?
• Under an FFI Agreement, Bank agrees to meet:
Enhanced due diligence procedures to identify: – Existing US account holders – Non-US accounts that have substantial US owners
Collect more information when opening new accounts if US indicia or other conditions are identified during the onboarding process
Report to the IRS the US accounts and US-owned accounts identified, as well as account holders who do not provide information
Withhold US tax on certain payments and pay over to the US Government on: – Account holders who do not provide information – FFIs that do not comply with FATCA
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“Bad Apple” Bank Sub or Branch that Does Not Comply with FATCA Can Taint Affiliates • A sub or branch that fails to comply with FATCA can prevent all other bank
affiliates within its affiliated group from complying with FATCA
Even if the failure to comply is because of local country legal prohibitions
“Bad apple” taints affiliated bank entities starting from Jan 2016 if there are local prohibitions; otherwise taints starting Jan 2014
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Non-participating FFI -- Brunei
HK
Sing Taiwan Korea PRC Malay-sia
Shen-zhen
Shang-hai Beijing
Thai-land
FATCA Compliance Timeline under Proposed Regulations
• Key dates:
1 July 2013 Initial effective date of all FFI agreements signed before this date; Banks need new customer account identification procedures in place
1 January 2014 FATCA withholding commences on certain withholdable payments (i.e. US source interest, dividends, etc.)
1 July 2014 Need to certify due diligence is complete on “high value” accounts
30 September 2014 First FATCA reporting is due
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FATCA Compliance Timeline under Proposed Regulations (Cont’d) • Key dates:
1 January 2015 FATCA withholding commences on gross proceeds from sale of US stocks or securities that could produce US interest or dividends
1 July 2015 Need to certify due diligence is complete on all pre-existing accounts
1 January 2017 FATCA withholding scheduled to commence on foreign passthru payments no earlier than this date
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Time for Banks in Hong Kong to Mobilize Now
• A Bank can readily take more than one year to eighteen months to get FATCA ready
• US withholding tax begins January 2014 Banks in Hong Kong should mobilize now
• Unlike other Tech and Ops projects, a key criterion for a successful project is adherence to detailed, complex US tax rules
• There is no “good faith effort, but we didn’t timely comply” or “we are 90% done” relief for FATCA
• Hong Kong regulators are alert to FATCA
• Reputational and strategic consequences to FATCA decisions
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Some Operational Aspects to Consider …
• Complying with the proposed FATCA regulations may impose significant financial costs and operational burdens on Asia Pac banks
• Institutions will be required to successfully manage large multi-dimensional transformation projects covering multiple jurisdictions (and their related privacy and contractual legal requirements), operating units, business lines and support functions.
• Banks will need to interact with their customers, service providers, counter parties and other third parties with which the institution has a relationship in order to attain compliance.
• The time available to institutions to ensure compliance is limited
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Some Operational Aspects to Consider … (Cont’d)
• Projects will need to involve multiple stakeholders within Banks, including:
Technology / Operations Compliance Tax Legal Client relationship management Strategy Product development Business units Finance
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What functional areas in a Bank are impacted?
Client Identification
Customer Master
Document Storage
Acco
unt M
aste
r
Prod
uct M
aste
r
Coun
terp
arty
M
aste
r
Transaction Processing / Payments
Withholding System
Reporting System
IRS
Other (FFI)
Client
Deposit (to the IRS)
Review of FFIs/NFFEs
Busin
ess V
iew
AML/KYC
Account Setup
Credit Approval / Review
Tax Review
Enhanced W-8 / W-9
Monitor Change in Circumstances
Customer / Account Profile
Legal Entity and FFI Management
Documentation Withholding &
Deposits Reporting
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1 2 3 4
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FFI Agreement Window
2017 2016 2015 2014 2013
What order and by when do you need to implement?
2012
Legal Entity Classification Legal Entity Maintenance
Pre-Existing Accounts Analysis Pre-Existing Accounts Remediation (1)
Pre-Existing Accounts Remediation (2)
Product Analysis
New Accounts Technology (On-boarding)
IRS and Client Reporting Passthru Payments Percentage Calculation*
FFI Certification FFI Management and Periodic Retesting
Withholding Calculations, Deposits and Refunds Withholding Calculations, Deposits and Refunds
Payee Classification
IRS and Client Reporting
Selected key dates: • July 1, 2013 – FFIs new account procedures • Jan 1, 2014 – FATCA withholding (US FDAP) • Jul 1, 2014 – FFIs due diligence preexisting high value accounts • Sept 30, 2014 – FFIs First FATCA reporting due
• Jan 1, 2015 – FATCA withholding (gross proceeds) • Jul 1, 2015 – FFIs all other pre-existing accounts due diligence • Mar 15 & 31, 2016– Expanded form reporting • Jan 1, 2017 – FATCA withholding (foreign passthru payments)
Account Maintenance and Monitoring
FATCA Document Management
Monitoring
Maintenance
Maintenance
Periodic Retesting
Example Implementation Timeline
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What are technology challenges for new accounts and account maintenance and monitoring?
Key Considerations • Monitoring change in circumstance • Where / how to store new attributes • Reason to know • Treatment of recalcitrant accountholders • Jurisdictional differences in KYC
Relevant Technologies • Account opening technologies • Account maintenance technologies • Monitoring • Workflow • Digitizing unstructured data
Tax Credit* Account Setup AML/KYC Client
Identification
FATCA Requirements
Account Master
Customer Master Monitor Change of Circumstance
New Account On-boarding
Account Maintenance
*May apply in some instances
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What foundational data efforts help prepare for building withholding capabilities?
Key Considerations • Grandfathered obligations – Monitoring for
material changes • Track new withholdable payments • Leveraging current capabilities • Handling of limited FFIs
Relevant Technologies • Monitoring • Matching and data quality • Notification / workflow • Withholding calculations engine
FATCA Requirements
Monitor for Material Modifications and Change in Circumstance
Product Analysis Grandfathered
Obligations
Product Processors
Security Masters
Customer Masters
Withholding System
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What are technology challenges for pre-existing accounts analysis and remediation?
AML/KYC
Tax
Customer/ Accounts
Electronic Indicia Search
Non-Electronic Indicia Search
Missing Docs?
Investigate / Remediate
Classified & Documented
Key Considerations • Identification of data sources • Multiple data sources, quality, consistency • Reason to know • Balance aggregation • Data privacy
Relevant Technologies • Data Profiling, Quality, Matching • Rules Engine • Scanning / OCR • Indexing / Search • Case Management and Workflow
Yes
No
Credit
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In summary why FATCA Impacts Tech and Ops
• FATCA requires electronic search of databases on existing individual customers
• FATCA will affect customer onboarding and what customer info is requested and stored
• Identified US customers and non-US customers with substantial US owners have to be tagged on systems
• FATCA requires classification of entity customers into new FATCA categories and storage/retrieval of this info
• FATCA asks a Bank to report info on US customers and US-owned customers to the US Govt. Reporting has to be generated by systems
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In summary why FATCA Impacts Tech and Ops (Cont’d)
• In some cases, FATCA requires a Bank to withhold on some payments made to (1) a customer who refuses to provide info to the Bank and (2) FFIs that do not comply with FATCA
• Chief Compliance Officer or other Responsible Officer has to periodically certify FATCA compliance to US Govt. They will want to know that Tech and Ops support is in place
• FATCA requires certain written policies and procedures on FATCA to be in place. Tech and Ops are an important part of meeting this requirement
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PwC contacts if you later have questions
Tim Clough Risk & Controls Solutions Partner +852 2289 1955 [email protected]
Angelica Kwan US Tax Partner +852 2289 3966 [email protected]
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Questions
Circular 230 Disclosure: This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties that may be imposed on any taxpayer.
No reliance permitted -- These materials are for educational purposes only and are not intended, and should not be relied upon, as advice to any party. The application of FATCA to any particular party is dependent on the facts and circumstances relevant to such party. PwC has no responsibility for the accuracy or completeness of any discussion included in these materials.