hot topic: foreign account tax compliance act … handouts/rims 14/lgl011...hot topic: foreign...
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HOT TOPIC: Foreign Account Tax Compliance Act (FATCA)
Overview and Next Steps
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• Denise M Hintzke Global Tax Leader - Foreign Account Tax Compliance Deloitte Tax LLP New York, NY UNITED STATES
Denise works closely with the Global Tax Information and Reporting Practice as well as the Deloitte Member Firms as the Firms deploy cross-functional talent to the global market place in response to the demanding requirements of the provisions of the U.S. Foreign Account Tax Compliance Act. Denise has 30 years of experience advising clients and internal business units on the intricacies of the tax law and assisting organizations in their endeavor to implement the qualified intermediary requirements and put into place best practices with regard to their tax withholding and reporting responsibilities. She has participated on numerous committees and working groups through-out her career, including the Accounting Industry/IRS working group addressing issues regarding the QI Audit procedures. She is a well know speaker on the topic of FATCA as well as on tax withholding and reporting issues and has authored several articles on the topic.
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What to Expect • What is FATCA and how does it apply to your company. • What are the compliance obligations for both incoming and outgoing payments. • What are the implications of these rules, exceptions and frameworks on your business. • What should you do as a Risk Manager to make sure that you are compliant.
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What Are We Discussing
Chapter 61 Chapter 3 Chapter 4
• Documentation, withholding and reporting on payments of U.S. source income to non-U.S. persons
• Forms W-8 • Form 1042-S
• Identification of U.S. persons holding accounts at non-U.S. financial institutions or through non-U.S. entities
• Form 8966
• Documentation, withholding and reporting on payments to U.S. persons
• Form W-9 • Form 1099
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Recording of this session via any media type is strictly prohibited. Foreign Financial Institutions
Equity or Debt in Financial Institutions
Cash value insurance
at
Annuities
U.S. Person
Depository accounts Custodial accounts
FATCA
Holding
The Foreign Account Tax Compliance Act (FATCA) aims to identify U.S. persons trying to avoid U.S. tax obligations by holding assets in non-U.S. structures and products…
FATCA Overview
Enacted in 2010 as a part of the HIRE Act in the U.S. U.S. withholding agents (USWAs) and participating
Foreign Financial Institutions (PFFIs) are required to document account holders and withhold on non-compliant accounts
FFIs are required to enter into agreements with U.S. Treasury to identify and report U.S. accounts annually
Non-Financial Foreign Entities (NFFEs) are required to report substantial U.S. owners or certify no U.S. ownership
Noncompliant payees (e.g., FFIs, NFFEs, Recalcitrant payees) are subject to 30% withholding on U.S. source income and gross proceeds
Compliance includes two key themes: ‒ Classifying your products and entities under FATCA
guidelines, and registering entities when appropriate; and
‒ Documenting account holders and investors to confirm tax status under the regulations.
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Who are the FATCA targets?
FATCA Overview
US Individuals
US entities
Passive NFFEs with US
owners
• Certain U.S. entities (including privately held corporations, partnerships and trusts)
• Non-U.S. Passive Non-Financial Entities with substantial U.S. ownership
• US persons (broad concept that includes US citizens, residents in the US, US nationals, etc.)
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Companies fall into three categories
Foreign Account Tax Compliance Act (FATCA)
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Withholding Agent Foreign Financial Institution (FFI) Non-Financial Foreign Entity (NFFE)
• Foreign or U.S. person that has control, receipt, custody, disposal or payment of any “withholdable payment”
• Not limited to financial services industry • Foreign entity that accepts deposits, holds financial assets for the account of
others as a substantial part of its business, or engages primarily in the business of investing or trading securities, commodities, partnerships or any interests in such positions.
• Includes pension and retirement funds • May include holding companies and treasury centers in certain situations
• Includes any foreign entity that is not a FFI • Excepted NFFEs: • Publicly traded corporation and its corporate affiliates (more than 50% of
vote and value) • Entity organized under the laws of a possession of the U.S. • A foreign government, international organization or any wholly owned
agency thereof • Active NFFEs • Passive NFFEs
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What does FATCA involve for US Entities?
FATCA Overview
Generally U.S. entities are the gatekeepers of the system
Due diligence
Withholding
Reporting
Confirm GIINs
Compliance program
Identify and document clients and counterparties to establish their FATCA status. Due Diligence processes are different in case of: • New accounts • Preexisting accounts
Withhold 30% of withholdable payments made to: • Undocumented payees
Report annually: • withholdable payments to foreign persons • foreign entities with US substantial owners
Confirm Global Intermediary Identification Numbers (GIIN) received from FFIs
Put in place written Policies and Procedures
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What does FATCA involve for FFIs?
FATCA Overview
Generally FFIs are the main focus of FATCA
Due diligence
Withholding
Reporting
Registration
Compliance program
PFFIs are required to identify and document clients to establish their FATCA status. Due Diligence processes are different in case of: • New accounts • Preexisting accounts
FFIs are required to withhold 30% of withholdable payments made to: • Recalcitrant account holders • Non-participating FFIs
FFIs are required to report annually: • US accounts (those maintained by US individuals, certain US entities or
foreign entities with US substantial owners) • Payments made to NPFFI account holders
FFIs are required to register on the IRS FATCA Registration System to obtain a Global Intermediary Identification Number (GIIN)
FFIs are required to appoint a Responsible Officer to certify FFIs compliance with the obligations under the FFI agreement and create a compliance program sufficient to allow the FFI to comply with its requirements under the FFI agreement
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Withholdable Payment Withholding Agent
FFI & Recalcitrant Accounts
1. Withholding tax on payments to FFIs & Recalcitrant Accounts (§ 1471)
2. Withholding tax on payments to NFFEs (§ 1472)
Withholding Agent NFFE Withholdable Payment
Withholding
Foreign Account Tax Compliance Act (FATCA)
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Withholdable Payment
Withholdable Payments
Foreign Account Tax Compliance Act (FATCA)
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In general: • U.S. source FDAP income • Gross proceeds from the sale or other disposition of property
of a type that can produce U.S. source interest or dividends – The term “sale or other disposition” includes “retirements and
redemptions of indebtedness” — FATCA withholding on loan principal repayments!
• Interest paid by foreign branch of U.S. bank • Foreign pass thru payments
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Withholdable Payment
Withholdable Payments
Foreign Account Tax Compliance Act (FATCA)
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More specifically — • Payments in connection with lending transactions (e.g.,
guarantee fees) • Payments in connection with forwards, futures, options,
notional principal contracts or similar financial instruments • Premiums for insurance contracts or annuity contracts • Amounts paid under cash value insurance or annuity
contracts • Dividends • Interest (including substitute interest described in §1.861-
2(a)(7)) • Investment advisory, custodial, bank, and brokerage fees
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Withholdable Payment
Withholdable Payments – Exceptions
Foreign Account Tax Compliance Act (FATCA)
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Exceptions — payments for: • Interest on outstanding accounts payable arising from the
acquisition of goods or services • Services (including wages and other forms of employee
compensation (such as stock options)) • The use of property • Office and equipment leases • Software licenses • Transportation and freight • Gambling winnings, awards, prizes, and scholarships • Effectively connected income • “Grandfathered obligations”
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FATCA Regulations Timeline
Mar 15
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IRS and Treasury Approach
Foreign Account Tax Compliance Act (FATCA)
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Collaboration with foreign governments to: • Remove legal impediments • Allow for alignment and coordination with local law
reporting practices • Reduce the cost of compliance for Financial Institutions
Issuance of two model Intergovernmental Agreements • TIEAs or DTCs are not necessarily required to facilitate
exchange of information under an IGA approach • IGA applies to all FFIs within the local country • May actually complicate the application of FATCA for
organizations that operate in multiple jurisdictions • FFIs in IGA jurisdictions will still need to register with the
IRS and will be issued a GIIN
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Model 1 Model 2 FFI Agreement Not subject to an FFI Agreement
(subject to local IGA implementing legislation)
FFIs are subject to an FFI Agreement with IRS
Reporting FFIs report directly to local taxing authority which will then report to IRS
FFIs report directly to IRS
Reciprocity May require reciprocal reporting between the taxing authority of Model I countries and IRS
No reciprocal reporting requirements
General Terms and Rules
Terms and rules primarily defined within the Model I agreement
Model II Agreement relies heavily on IRS regulations for definition of terms and rules
Choice of Due Diligence Rules
Rules are within Annex I of the Model I agreement.
FFIs (not the jurisdiction) may either choose to follow Annex 1 or the FFI agreement but must definitively choose the set of rules to follow after 2 years from the FFI agreement effective date (may choose different set for each clearly identifiable group of accounts)
IGAs – Model 1 vs. Model 2
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Generally the same due diligence requirements for non IGA payees • Required to collect updated Forms W-8 • Required to validate GIIN (exception: Model I IGA FFIs have until January 1, 2015 to
provide a GIIN)
More Complicated Due diligence • Local law interpretations may mean that entities are treated differently depending on
where they are located • May need separate documentation for chapter 3 and FATCA
IGAs are still a moving target! • Many new agreements are already in negotiation and will be signed • IGAs open for renegotiation in the future and may be terminated • IGAs may be modified by the contracting authorities (Favored Nation Clause)
What IGAs mean to US Withholding Agents
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Chapter 4 Status: Model I vs. Model II • Model I: Reporting Model I FFI = Registered Deemed-Compliant FFI • Model II: Sign a modified FFI agreement = Participating FFI
Reporting • Model I FFIs report directly to their local taxing authority • Model II FFIs report directly to the IRS
FFIs should be familiar with their specific IGA details • Annexes
– Vary by agreement and include due diligence and reporting standards as well as other significant terms of agreement • e.g. Mexico uses average balances for thresholds and reporting, Model 2 FFIs have a
choice of due diligence rules (those outlined in Annex 1 or those in the FFI agreement)
– Annexes also define what local products are in-scope and exempt
What IGAs mean to FFIs
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IGAs in signed or pending to date Signed IGAs Pending IGAs
Canada Cayman Islands Costa Rica Denmark Finland France Germany Guernsey Hungary Honduras Ireland
Isle of Man Italy Jersey Luxembourg Malta Mauritius Mexico Netherlands Norway Spain United Kingdom
Australia Belgium Brazil British Virgin Islands Croatia Czech Republic Estonia Gibraltar India Jamaica Latvia Liechtenstein
Lithuania New Zealand Poland Portugal Qatar Slovak Republic Slovenia South Africa South Korea Romania
Bermuda Chile Japan Switzerland
Austria
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FATCA at the OECD Level
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• Model Competent Authority Agreement “Model CCA” allows countries implementing the CRS to put the exchange of financial account information into practice based on existing legal information exchange instruments such as bilateral tax treaties and the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (“The Convention”)
CRS and Model CAA
What’s CRS?
• Common Reporting Standard “CRS” draws on the US FATCA regime and contains the reporting and due diligence standard that underpins the automatic exchange of financial account information.
What’s Model CAA?
What’s the AEOI standard?
• A standard for the automatic exchange of financial account information between participating jurisdiction - Sets out the financial account information that participating jurisdictions will exchange, the financial institutions that need to report, the different types of accounts and taxpayers covered, and common due diligence procedures for financial institutions to follow.
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Recording of this session via any media type is strictly prohibited. OECD Resident Financial Institutions
Equity or Debt in Certain Financial Institutions
Cash value insurance
at
Annuities
Resident in Signatory country
Depository accounts Custodial accounts
AEOI
Holding
AEOI aims to identify resident persons trying to avoid tax obligations in their countries of residence by holding assets in structures and products…
AEOI Overview
Financial Institutions (FIs) are required to document account holders and establish Due diligence processes to report accounts on signatory countries’ individuals and entities and substantial owners of entities (regardless of the residence of the entity)
Non-Financial Entities (NFEs) are required to report substantial owners or certify residence of ownership
Compliance includes two key themes:
‒ Classifying your products and entities under CRS guidelines, and
‒ Documenting account holders and investors to confirm tax status under the CRS rules.
Big Bang approach – it is recognized that an approach allowing financial institutions to collect information on all or a wider group of non-resident accountholders from a common starting date may be desirable, even where such accountholders are not currently reportable.
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Who are the AEOI targets?
AEOI Overview
Signatory Countries’ Individuals Signatory Countries' entities Controlling persons of NFEs
• Entities that are considered tax residents in the signatory countries
• Resident controlling persons of any passive NFEs, regardless of the place of residence of the NFE
• Individuals that are considered tax residents in the signatory countries
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The timelines and requirements under IGAs and US FATCA Regulations are broadly aligned – “Go-live” dates are the same
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2016
FATCA
IGAs
OECD FATCA
1 July 2014
1 July 2014
2015???
‘Go live’ date
31 May 2015
Before September 2015
2016???
Timelines for global information reporting compliance
Reporting date
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Considerations for Payments
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Interest
Dividends
Investment advisory, custodial, bank, and brokerage fees, fees that are automatically deducted
Loans/revolvers/syndicated debt
Guarantee fees/Intercompany guarantees
ISDA agreements
Derivatives
Private placement debt
Insurance/annuity contracts
Intercompany payments
Payment types to focus on
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What is Required • The rules are based on
– The character of the payment
– The Source of the income
– The status of the payee
• If you are missing appropriate documentation to support these items a complex set of presumption rules apply which often result in withholding and reporting
• Documentation is Key
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Presumption Rules…
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• Presumption rule complexity has increased introducing variations based upon the types of income paid as well as the payee.
• Undocumented individuals are presumed to be US persons
• Without a form, a trust or partnership is presumed to be an uncertified U.S. non-exempt payee subject to backup withholding and Form 1099 reporting.
• Without a tax Form, the “Bad 8” entities must be treated as NPFFI subject to 30% FATCA withholding and Form 1042-S reporting. The ‘Bad 8’ include:
– Corporations, foreign governments, international organizations, foreign central banks of issue, financial institutions, brokerage firms, nominees/custodians and swap dealers.
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Presumption Rules…
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• Without a tax Form, other types of entity payees presumed to be an exempt recipient, but subject to indicia testing (note: added foreign telephone number as type of foreign indicia for accounts opened on or after July 1, 2014).
• ECI Presumption for US branch of foreign bank or insurance company now requires an EIN. If EIN is not provided, the presumption is it is just like any other foreign payee subject to Chapter 4 or Chapter 3 withholding.
• Joint account holders with an undocumented joint payee that does not appear to be an individual are presumed NPFFI.
• If all the joint owners are individuals, and no tax certification form is provided, the account is subject to 28% backup withholding on all Form 1099 reportable payments.
• If all the joint owners are individuals, and any account owner provides a Form W-9, that person must be identified as the primary taxpayer and the account is subject to Form 1099 reporting to that person.
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• FATCA generally applies to financial transactions that entities engage in on a regular basis in support of operations
– Financing – Hedging (e.g., via notional principal contracts)
• Financing: FATCA requires new provisions in credit agreements and other loan documents to address allocation of FATCA risk, including (i) representations and covenants from the parties and (ii) withholding and gross-up provisions for loans that are made (or materially amended) after January 1, 2014
• Special attention must be given to gross-up clauses
– The term “sale or other disposition” includes the retirement or redemption of indebtedness — gross proceeds withholding will make FATCA applicable to BOTH the principal and interest portions of loan payments starting in 2017
Additional areas of focus
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What Should Risk Officers be Considering
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Who must meet the FATCA requirements
FATCA Overview
• All those considered withholding agents under FATCA are required to withhold 30% on withholdable payments. Therefore, the following kind of payors are required to comply with FATCA obligations:
US Financial Institutions US Non Financial Entities FFIs
• Due diligence processes according to Chapter 4 (FATCA)
New documentation requirements for payees
New Standards of Knowledge’s rules
New presumption rules
• Withholding 30% on withholdable payments to NPFFIs/ non-compliant NFFEs
• New reporting obligations
• Classify entities within the group
• Identify withholdable payments
• Withholding 30% on withholdable payments to NPFFIs and non-compliant NFFEs
• New reporting obligations
• Register for a Global Intermediary Identification Number (GIIN) on the FATCA Registration System and agree to comply with the requirements covered in the FFI Agreement
• Identify Responsible Officer
• Develop Compliance Framework
Mai
n FA
TCA
impa
ct
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• What are some risk mitigation strategies you can employ in your organization to limit liability for your organization?
• What are some risk mitigation strategies you can employ in your organization to limit your personal liability?
Risk mitigation strategies
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• Legal Entity Management • Customer Due Diligence • Management and Validation of Customer Tax Documentation • Payments Withholding and Depositing • Reporting (Forms 8966 and 1042/1042-S) • Responsible Officer Certifications • Intergovernmental Agreements Compliance
What areas should a Risk Officer monitor to ensure FATCA compliance?
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A process must be created to manage the classification and registration of new and preexisting legal entities with the EAG. • Review pre-existing legal entities
o Affected lines of business (“LOBs”) must review their legal entities, including special-purpose entities and special-purpose vehicles to determine if the entities should be classified as USWAs, FFIs, or NFFEs.
o LOBs should also identify and review branches (which include disregarded entities) with operations in non-U.S. jurisdictions as they will be included in an FFI’s registration.
• Process for new legal entities o A process must be established for identifying the status of all new legal entities when they
are created. o If a new legal entity is part of a class that requires registration, then notice should be sent to a
responsible officer or a responsible officer may need to be identified.
Legal entity management
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Confirm that appropriate customer due diligence has been performed to collect, verify, validate, and store data on customers (both new and pre-existing) as required by FATCA to classify customers and payees.
These efforts include: • Identification of payments • Performance of due diligence procedures for new and pre-existing accounts, including the
collection of any required documentation • Validating documentation against AML/CDD and other account information • Applying presumption rules when no documentation to classify as recalcitrant, nonparticipating or
noncompliant • Monitoring for U.S. indicia, inconsistencies or inaccuracies in customer data • Obtaining privacy waivers or closing/transferring accounts if not obtained • Verifying GIINs and tracking grace periods • Tracking U.S. ownership in passive NFFE (10%+ owners) accounts
Customer due diligence
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Affected lines of business (“LOBs”) must have procedures to manage and validate Forms W-8, W-9 and associated supporting documentation that must be collected for all accounts. Where discrepancies are identified, we must solicit the documentation or apply the presumption rules. The eyeball test will be limited from July 1, 2014.
At a minimum, the procedures must verify: • That the appropriate form was submitted for an account (including form version) • That the form has not expired • The completeness of the data in the form • The accuracy of the data in the form to ensure no discrepancies • That the form was correctly submitted (original or electronic) • That any modifications to the form (cross-outs, additions, etc.) are initialled and not prohibited
(e.g., crossing out required certifications)
The procedures must be executed whenever a new form is received. Forms may be received due to account opening or a party providing an updated form due to changed circumstances.
Tax documentation
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All withholding agents are required to deduct and remit to the IRS a 30% withholding tax on all “withholdable payments” made to nonparticipating FFIs, recalcitrant account holders, and noncompliant Passive NFFEs, unless otherwise excepted by IGAs. Withholding agents include all persons having the control, receipt, custody, disposal, or payment of any “withholdable payment.”
Notably, FFIs generally are withholding agents under this regulation. However, FFIs are generally only required to conduct withholding in scenarios where they have primary withholding responsibility, such as when acting as the originator of a U.S. source payment or a withholding qualified intermediary to a U.S. source payment.
Additionally, withholding agents will need to establish processes to handle refunds where necessary.
Withholding and depositing
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• Form 1042-S must include chapter 4 reportable amounts made during the year to payees that are: o Recalcitrant account holders o Foreign entities o U.S. persons included in a U.S. payee pool (non-U.S. payors only)
• Chapter 4 reportable amounts generally include U.S. source FDAP payments o Beginning in 2017, this will also include gross proceeds and possibly foreign passthrough
payments subject to FATCA withholding.
• Under the rules of FATCA, FFIs may be required to perform two types of reporting on an annual basis.
• U.S. account and pooled reporting on Form 8966 o FFIs would ordinarily report this information to the IRS under the FATCA regulations, except FFIs
in Model 1 IGA jurisdictions, which would report this information to their local authority • Form 1042-S reporting of chapter 4 reportable amounts
• Participating FFIs that already have Form 1042-S reporting obligations under chapter 3 will continue that reporting and, if the recipient is not subject to FATCA withholding, will just need to reflect the exemption code for payees that are not subject to FATCA withholding.
Reporting
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• The responsible officer (or “RO”) enables FATCA compliance throughout an organization and across a variety of functions.
• He/she has a vested interest in the development and implementation of FATCA compliance policies and procedures.
• The RO determines that governance is in place to provide required supporting documentation and compliance sign-offs.
Responsible officer
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The responsible officer’s duties to the compliance program: • The responsible officer must (either personally or through designated persons) establish a
compliance program that includes policies, procedures, and processes sufficient for the participating FFI to satisfy the requirements of the FFI agreement.
• The responsible officer (or designee) must periodically review the sufficiency of the FFI’s compliance program and the FFI’s compliance with the requirements of an FFI agreement.
• The responsible officer must consider the results of these reviews in making the periodic certifications.
• The responsible officer must also ensure that the participating FFI complies with the IRS’s review of compliance.
A comprehensive compliance program
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Establishing the proper framework for FATCA compliance will be indispensable to mitigating the risks associated with a potential FATCA audit. This FATCA framework should include policies and procedures to comply with the FATCA requirements, as well as procedures for periodic reviews. These policies and procedures should be prepared for a potential audit.
Therefore, it is advisable that financial institutions implement the following: • Written policies and procedures that document the fulfillment of FATCA requirements • Written policies and procedures that verify the FATCA compliance in the financial institution or
compliance group • Testing procedures for the adequacy of the compliance program • Communications/reports to the responsible officer with metrics for assurance in responsible
officer certification sign-off
What will likely need to be developed?
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Written policies and procedures to document the fulfillment of FATCA requirements, including: • The identification processes for payees and account holders • Documentation and due diligence requirements for payees and account holders • How U.S. indicia for payees and account holders are reviewed • Withholding policies • Reporting policies • How the FFI will administer its compliance program and responsible officer certifications
Policies: Fulfillment of FATCA requirements
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Written policies and procedures to verify FATCA compliance in the financial institution or compliance group, including: • Establishing internal audit processes and document them. This will require developing a
methodology, timeframe, and other parameters associated with the internal audit process. • Documenting the findings of each periodic review with written reports that will be presented to
the responsible officer. • Establishing a process for the responsible officer to play an active role in reviewing and managing
the results of the internal audit processes. This active role could consist, for example, of establishing periodic meetings with the internal audit committee, documenting such methodology, and keeping a record of the minutes of committee meetings.
Policies: Compliance measures within the organization
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• Test cases can be developed to challenge any automated or manual processes used to confirm FATCA compliance. o Develop “dummy” legal entities, customers, and transactions. o Identify the desired result for each “dummy” case. o Measure the expected output versus the actual result. o Track the progress at each step within the process to identify weaknesses in the designed process.
• Periodically, review the actual results of a select population once the system is live. o This testing will provide greater confidence for certifications that the results are accurate. o This will also confirm that the system continues to operate as planned in the policies and procedures.
Testing procedures and periodic review
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• Reports from affected areas to measure the level of compliance for each of the various certifications that must be made.
• Internal processes to obtain subordinate certifications throughout the organization. o The main purpose for this process is that the responsible officer can create a chain of accountability
throughout the organization or compliance group. o Obtain and document underlying certifications from other relevant persons within the organization,
including those in each line of business and, in case of compliance groups, in each jurisdiction for each entity.
Measures for testing
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• Governance: Verify that the FATCA program is subject to an appropriate level of governance that includes a clear project sponsor, regular steering committee meetings, progress reports (time, cost and quality), and involvement of risk management and internal audit.
• Risks and issues: Confirm that an appropriate risk and issue management process has been established and that it is reviewed frequently. Key risks inherent in the program plan and the FATCA policy have been captured and are being appropriately managed.
• Plan and scope: Confirm that the scope of the program has been clearly defined. Review the plan to verify that the appropriate workstreams, activities, and tasks have been scheduled to meet FATCA regulation milestones. Confirm scope and plans are subject to a clearly defined change management process.
Areas to develop
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• Assumptions and decisions: Undertake a review of the assumptions and decisions log, including decision-making rationale against relevant guidance to determine that major program decisions are in line with regulations and peers.
• Technical: Assess the program technical requirements and approaches and compare them against the FATCA policy requirements and regulations.
• Controls: Review the controls in place to confirm that they have been designed effectively to address any risks that arise and check whether the controls are operating effectively (i.e., conformance testing).
• Data: Verify that data searches performed are FATCA compliant. Assess the quality of the data outputs that will be used for FATCA reporting.
Areas to develop
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Denise Hintzke Tax Director, Global FATCA Tax Leader Deloitte Tax LLP 212.436.4792 [email protected]