As FATCA enters its second year, firms have big decisions to make about reporting

June 18, 2015 – By Thierry Haensenberger, Senior Vice President, EMEA, AxiomSL

The implementation of the Foreign Account Tax Compliance Act (FATCA) on 1 July 2014 marked a major change in the way governments approach offshore tax evasion and has become the inspiration for a number of new regulations. As we AxiomSL - Thierry Haensenbergerapproach the first anniversary of the introduction of the US Internal Revenue Service’s (IRS) requirements, it is therefore worth taking stock of the work firms have done in order to comply and the challenges that still remain.
FATCA is wide-ranging in its requirements and firms have carefully prioritized the changes they need to make. So far it is clear that most firms have focused their energy on classifying accountholders according to the IRS’s definitions, updating their onboarding processes and ensuring they have due diligence procedures in place to identify US taxpayers on an ongoing basis. While doing this work, one key component of FATCA compliance that has taken a back seat is the reporting of in-scope accounts.
FATCA reporting began at the end of March for firms in countries that have not signed an Intergovernmental Agreement (IGA) with the IRS and for those in countries that have signed a Model 2 IGA. Firms in IGA 1 countries will need to report before the end of September.
In a number of cases, reporting has been complicated by the late confirmation of important details, such as the formats and validation rules that firms must use to submit their reports, and the balance they should report for accounts that have been closed. As a result, the IRS has provided a 90-day grace period for 2015 reporting and, in Luxembourg (where I am based), the official reporting deadline has been extended by a month.
Despite these issues, it has to be said that the overall burden on firms has so far been limited because, in 2015, they only need to report on accounts opened by US taxpayers between July and December 2014.
Due to the limited number of reportable accounts in scope in 2015, most firms have taken a tactical approach to FATCA reporting, relying on internally-built applications and even manual processes to prepare and submit their reports. Firms have also put off addressing FATCA reporting strategically because there are still a number of moving parts in play, including the finalization of report formats and the development of FATCA-related regulations, such as the Common Reporting Standard (CRS) and ‘UK FATCA’.
In 2016, things are going to change. Not only will the scope of accounts reportable under FATCA increase significantly to include those that predate July 2014; the beginning of reporting under ‘UK FATCA’ will also add to the pressure on many firms, by requiring disclosures to the UK authorities about UK taxpayers with accounts in the Crown Dependencies and Overseas Territories. In order to manage the increased volume of reporting in 2016, firms realize they will need to migrate from the fragile, tactical systems they have used in 2015, to robust, strategic systems that will enable them to automate their reporting.
As they weigh up their options and prepare for increased reporting volumes next year, it is important for firms to carefully consider their ability to manage change. Like all regulations, the specific requirements of FATCA will be continually amended. As well as the changes introduced by the IRS, firms will need to be able to manage changes made by local tax authorities in IGA 1 countries. These tax authorities have introduced amendments to the IRS’s reporting requirements, including additional fields, mandatory validation checks and submission procedures – all of which are likely to be tweaked and updated on an ongoing basis.
Many firms have struggled in the past because their reporting platform cannot easily manage the changes regulators make to their requirements. Firms have often found that when a regulator announces a small change (such as the addition of a new field to a report template), they can only accommodate it by undertaking a complete software update of the platform, which impacts all of the platform’s functionality and often has unpredictable side-effects.
Implementing a wholesale software update is an expensive, labor-intensive process, and is completely impractical for firms that face multiple regulatory changes each year. The time required to complete a software update (including regression testing) means firms can only undertake a limited number each year. This leaves them exposed to the possibility of not being compliant with regulatory changes that are announced in the periods between their software updates.
If firms are going to manage FATCA reporting effectively in 2016 and beyond, they will need a platform that allows them to isolate regulatory changes from modifications to their core platform functionality. This will mean that if a tax authority in one of the IGA 1 countries announces a change to the way FATCA reports must be submitted, the firm can quickly and easily implement that change without impacting the wider operation of the platform. It will also mean there will be no impact on the end-to-end logic used for reporting in other countries.
Flexibility and the ability to quickly accommodate changes will also be important in enabling firms to leverage their FATCA reporting platform for both CRS and ‘UK FATCA’. The processes involved in reporting for all three regulations are very similar. However, different report formats are required in each case. CRS, in particular, is likely to involve the use of a multitude of slightly different formats, as more than 100 countries are expected to participate in the data sharing initiative and each of these countries is likely to make its own amendments to the standard report format developed by the Organisation for Economic Co-operation and Development (OECD).
The past 12 months have, with good reason, been treated by most firms as a dry run for FATCA reporting. With the bar now set to be raised significantly, the time has come for firms to make important decisions about a long-term, industrial solution to reporting that can keep pace with evolving requirements.
This article was originally published by Tabb Forum.
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