Introduced as part of the Hire Act in 2010, Fatca requires all foreign financial institutions to enter into an agreement with the IRS to identify and annually report details of US account holders.
As a result, wealth managers will need to implement solutions that comply with these regulations to protect themselves and their clients from potential withholding tax penalties for non-compliance.
Numerous countries have sought Inter Governmental Agreements (IGAs) with the IRS as a means of reducing the impact of Fatca. Many of these are yet to be finalised, and this is seen as a primary reason for the recent push back from the initial 2013 deadline.
The delay offers brief respite, but does not reduce either the scale or the complexity of the challenge ahead. Final details are yet to be disclosed, but we know that action will have to be taken, processes will need to be revised and systems will need to be implemented.
Firms must adopt a forward-looking strategy to ensure that decisions taken now support future requirements. To use a well-worn phrase, firms must see compliance with Fatca not as a destination, but as the first step in a bigger journey to enhance the process and structure relating to client classification controls.
Client classification
Fatca will turn the spotlight squarely on this whole area, which encompasses a number of functions including rule-driven reporting and flexible case remediation.
It will require the capture and reporting of information that most firms hold, but may currently be unable to track or access instantaneously. Firms will also need to obtain and store static data on account holders, and many will need to automate the withholding and depositing of tax.
This can be integrated with the payments system, with a gateway to open the door to tax and compliance reporting.
These challenges, coupled with the need to deliver a solution against a draft specification (the final details of Fatca and IGAs are still to be firmed up), means it will be imperative that firms employ a flexible solution that complements their operational infrastructure.
A solution that can slot in alongside existing systems and processes, and leverage the capabilities of these existing core technologies, will generate significantly fewer implementation challenges than one requiring a complete architectural rethink. In this regard, modular solutions carry significant benefits.
Think smart
One thing is certain though – the delay means financial firms will follow one of two paths. Some will push the requirements to one side for six months or so, returning to them further down the line with a shorter timeframe in which to get systems and procedures in line with the requirements.
Others – the smarter firms – will use the time to think about what solution needs to be deployed strategically to handle the future, rather than implementing a tactical solution that will need to be updated.
In reality, once the appropriate systems are in place, these regulations should have limited impact on wealth management firms.
The vast majority of US citizens living abroad are already reporting their taxable income as required.
These laws are simply being implemented to ensure this is happening across the board.
