Altus

The US Congress estimates that $100 billion in tax revenue is lost every year because of offshore tax abuse. From January 2013 the US starts fighting back with the Foreign Account Tax Compliance Act (FATCA). The legislation will affect financial institutions and customers around the world over the coming years as different aspects of the act come into play ensuring loopholes and workarounds are closed to US tax evaders.

FATCA will require foreign financial institutions (FFIs) to enter into an agreement with the Inland Revenue Service (IRS) to report information about financial accounts held by US taxpayers, or by non financial foreign entities (NFFEs) in which US taxpayers hold a substantial ownership interest (10%).

Failure by FFIs, NFFEs or US taxpayers to participate or obtain a waiver will result in a 30% tax withholding on any payments of US source income, as well as gross proceeds from the sale of securities that generate US source income or having their account closed. Initial reaction to such draconian measures was understandably defensive with talk of divesting US clients and holdings but even this is not necessarily an easy solution. Non participating FFIs can still be caught up in FATCA as participating FFIs are required to withhold taxes on payment to non participating FFIs by based on passthru payment percentage of the participating FFI.

However for those foreign financial institutions that do decide to participate, the journey will be even more challenging:

• They will need to search across all their disparate systems to find information that indicates if accounts have US status or not.
• They will need to contact existing customers where there is insufficient data to determine US or non US status and change their account opening process to collect this information from new customers.
• They will need the ability to report on all accounts deemed to be held by a US person or entity, as well as those accounts that cannot be determined to the IRS.
• They will need to understand their investment income from US sources and calculate their passthru payment percentage.
• And they will need to withhold taxes for the IRS.

No doubt all these challenges could be met by a dedicated FATCA solution but is that really the answer? Will such regulation remain the exclusive preserve of the US or might we see other jurisdictions attempting their own versions to clamp down on tax avoidance?

The truth is that nobody knows but it would be prudent to architect a solution based on some solid building blocks which could be adapted beyond FATCA compliance and maybe even add business value in their own right. For example, rather than writing specific reports to detect US accounts, why not enhance ID&V capability to deduce nationality. Build a single view of the customer portfolio rather than developing a new process to trawl through multiple product systems. Extend your fund analysis to cover geographical composition. This kind of thinking requires a robust business architecture which clearly distinguishes the different capabilities of an organisation from the numerous business processes which may employ them.

Altus understands this kind of operational complexity and our architectural approach addresses it in a holistic way that can help clients deliver solutions that are not just FATCA compliant, but build in resilience to future demands at the same time.