Model proliferation a key challenge to Fatca implementation, says State Street

Martin Dobbins, senior vice president & managing director at State Street in Luxembourg says that proliferation of different Intergovernmental Agreement models is one of the key challenges facing those seeking to implement Fatca requirements.

“The big question right now is the Intergovernmental Agreements  (IGAs), and how they are coming into play. From an industry perspective we are looking at direction on how to meet local requirements and how those local requirements overall tie up to meet IRS requirements,” Dobbins said.

With an increasing number of jurisdictions coming on board as the IRS looks to meet its initial target of some 50 IGAs, there should be “a bit more clarity and direction on what’s going to be expected from the financial services community.”

As of mid-January 2013, IGAs had been signed or ‘initialled’ with Norway, the UK, Mexico, Denmark, Ireland, Switzerland, and Spain, according to a US Treasury statement. Germany, Italy and Japan are other key targets for signing, according to statements from the Treasury last year.

However, it is also the case that there have been at least two different models of IGA put forward for signing thus far. In Model 1 Foreign Financial Institutions (FFIs) report information about US accounts required by Fatca to their respective governments who then exchange this information with the IRS (US Internal Revenue Service). In Model 2 FFIs register with the IRS and report the information directly to the IRS. The US Treasury has not agreed any other model, but it is a risk that remains.

“If we start having multiple models this means we’re going to have to develop more interfaces and reporting for each IGA model,” Dobbins said.

“You can just imagine the exponential challenge if you have too many models out there.”

On a more positive note, Dobbins adds that so far the IGAs have tended to fall to one or other of the two models. Thus as more countries sign, there is more clarity about just what is being singed. This also reduces the scope for negotiations, and should lead to quicker resolutions of future IGA deals. And as more IGAs are signed without more models coming into being, it should mitigate the jurisdictional arbitrage.

“Either way, at the end, within these models, there is still a lot of communality, but there differences within these models which require an agreement on exchange of information – whether automatic or cooperative exchange.”

The point of information is an interesting one, Dobbins suggests, because it works both ways. While there has been a lot of focus on the information that US authorities are attempting to obtain, the IGAs also mean the IRS in turn has to put in place infrastructure that could provide information sought by its counterparties – other tax authorities. This leads to the possibility that other countries could go after their own citizens abroad who are not declaring information, in the same way that the US is going after its citizens.

Despite the uncertainties over IGAs it should not be taken as a sign that the IRS is about to push its work back by another year, Dobbins said.

“We really don’t have an extra year. All they have done is instead of having to start to register US investors as of 1 January 2013, and foreign investors as of 1 July 2013…they are basically piling everything up on 1 January 2014 with the exception of US gross proceeds until 2017 but the withholding on US source income remains beginning 1 January 2014.”

He adds: “On one hand, it’s more realistic to achieve the FFI requirements, but on the other hand it still doesn’t change the fact that in 2013 you are building out systems where you have to have the ability to withhold income.”

“I think it is important for people to understand it did give us some breathing room – it put the monitoring both US and foreign investors and documenting this in a more realistic and achievable time frame for the FFI. It would have been a manual workaround for January 2013 for many. It’s difficult to invest in technology when you don’t have the final laws.”

Further rules were eventually published in mid-January 2013 by the IRS and US Treasury as a 544 page document snappily titled TD 9610 Final Regulations (Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities)

Despite the challenges, Dobbins says that those affected are set on seeing through the changes required.

“Countries and the financial services industry in those countries, want to move forward and come to a more practical solution, so they can address it rather than have uncertainty hanging over their head,” he says.

As to State Street and Fatca, Dobbins says there are two areas in particular in which it feels it can assist clients.

“One, they want to ensure that as an organisation we become Fatca compliant, because they rely on us to become compliant.”

“And then on the other side, our clients are asking ‘where can you help us’. That’s where we’re either sharing information we’ve gathered around the globe, through industry working groups, through other types of working relationships, sharing common concerns around this and have establish solutions to meet the current Fatca requirements.”



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