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Ernst & Young's Fatca guide: 10 things institutions should consider to mitigate the impact

  • By: Amanda Stone & Eugene Skrynnyk
  • 18 Feb 2013
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Amanda Stone, financial services sector manager, and Eugene Skrynnyk, senior manager in the Asset Management Sector Africa at Ernst & Young, have outlined 10 points for institutions to consider in their response to Fatca.

Foreign financial institutions ("FFI") outside the US should be alarmed by now by the new US Foreign Account Tax Compliance Act (Fatca) rules, which will affect many banks, insurance companies, investment entities and fund managers, and their customers worldwide effective 1 January 2014. These institutions will spend significant time and energy preparing for the new US regime. Investors holding global investment portfolios or investments in funds with exposure to US markets could potentially see an adverse impact on their investment performance as a result of a 30% withholding tax, which will be placed on certain payments from US sources if financial institutions or their account holders are found to be non-compliant with Fatca.

Financial institutions can take the following pragmatic and carefully planned approach to Fatca to reduce disruption to the business and minimise the impact on customers and investors.

• Conduct a Fatca impact assessment

Fatca will impact every financial institution, either directly in their core business or indirectly through relationships with other financial institutions and the financial market infrastructure. Financial institutions should conduct an assessment of the impact by business division, product type (including asset management vehicles which may be considered FFIs in their own right), legal entity (and entities within the Expanded Affiliated Group), customer group, geographic location and third party relationships. Based on the impact assessment, financial institutions can make an informed decision on Fatca compliance and which areas to prioritize.

• Establish a robust Fatca program

Although Fatca is a tax legislation, the implementation process for financial institutions cuts across many functions and processes, from the front office where there is direct interfacing with clients and investors, to other middle and back office functions such as operations, compliance and legal, finance, and IT. In our experience, it is critical that a senior sponsor, such as a COO or head of Compliance, takes ownership of the program to facilitate changes across these functional groups.

• Allocate a budget

All change programs involve cost. Preparing a realistic budget incorporating the program office, development and implementation of new client on-boarding requirements, review of existing customer accounts, establishment of the requisite reporting and withholding systems, contract amendments and associated IT changes, will facilitate a smooth delivery of the program.

• Map-out all requirements

Although some of the Fatca requirements do not need to be implemented for some months yet (for example, reporting will not start before March 2015), some decisions taken now may affect future streams of work. A holistic approach will help to control costs by minimising duplication and redundant effort. It also will facilitate the design of a solution that is least disruptive for all streams of work, both at initial and later stages.

Finalisation of announcements on the registration process and documentation forms is still pending. In addition, more countries are entering into inter-governmental agreements with the US. Thus, Fatca programs will need to be updated regularly to take these changes into account, and solution design may need to be revisited as new information is released.

• Assess strategic options

Identifying the strategic options available will give financial institutions time to determine the most beneficial solution by assessing the potential cost and reputational implications. In our experience, three strategic options stand out: the use of de minimis limits, doing business with non participating FFIs, and treatment of recalcitrant customers.

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