How often to we hear about Swiss bank accounts for those affluent individuals and companies alike?  For most, it is something that we hear out of a James Bond movie. But the challenge of off shoring assets has certainly been a criticism of this year’s Presidential debates and its impact on the deficit.  Some estimates put offshore “cheating” at a cost of $100 billion a year to the US Government. However in era of increased regulation, the end the era of the secrecy with off shoring to Swiss bank accounts could come to an end with game changing regulation affecting how US entities with strong ties to overseas financial investments and financial institutions interacting with US investors, and its called FATCA.

FATCA is an acronym for The Foreign Account Tax Compliance Act was introduced in 2009, but was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act on March 18, 2010.  The act essentially creates new tax reporting and withholding requirements for payments made to foreign institutions and other foreign persons.

For US taxpayers the impact of FATCA will be made on Form 8938 that needs to be attached to federal income tax returns starting this tax filing season.  US taxpayers holding foreign financial assets with an aggregate value of over $50,000 will report these assets on the new form.  Failure to report could result in a penalty of $10,000 or up to $50,000 for those failing to comply.  Moreover underpayments are subject to a 40% understatement penalty. Ouch!

For foreign persons the impact FATCA will be made on From W-8BEN, which until now was used by foreign corporations, to certify their non-American status.  Under FATCA the form establishes that a person is a non-resident alien in order to avoid or reduce tax withholding from US source income, such as rents, interest or dividends.

FATCA also has an impact on both US-based financial institutions (USFIs) with stakes in foreign non-financial entities and particularly Foreign Financial Institutions (FFIs). For instance both USFIs and FFI now have additional due diligence responsibilities with regard to preexisting or new accounts that fall under the requirements of FATCA. However even more reaching is that FFIs will now need to report directly to IRS/US Department of Treasury and provide information about financial accounts held by US taxpayers or held by foreign entities in which US taxpayers hold a material interest.

For instance, the new W-8BEN-E to be completed by non-US firms includes a list of 24 FATCA statuses (see section 4).  It requires a firm to also register its FFI-EIN and QI-EIN along with the previously requested EIN. If a FFI is certifies that they are a “participating FFI” or “registered deemed-compliant FFI”, the form also requests a FATCA ID, which is obtained from the IRS for verifying is FATCA participation.   Moreover based on the IRS website, to be compliant and be considered a “participating”, FFIs need to enter an agreement with the IRS by June 30, 2013.

As defined by the IRS, “participating” FFIs will be those that -

- Undertake identification and due diligence procedures to identify US account holders

- Report annually to the IRS on this information that are either US persons or foreign entities with substantial US ownership

- Withhold 30% tax on certain payments to non-participating FFIs and recalcitrant account holders unwilling to provide required information

or

- Be subject to a withholding on certain types of payments including US source interest and dividends, gross proceeds from the disposition of US securities and pass thru payments (withholdable payments or payments attributable to withholdable payments):

• FDAP (US Sourced fixed, determinable, annual or periodic) income - effective Jan 14, 2012
• Gross proceeds on the sale of US securities - effective Jan 2015
• Foreign pass thru payments – effective Jan 2017 at the earliest

Moreover, while USFIs may both directly have the same issues as FFIs under FATCA, they may have subsidiaries or other affiliates that are FFIs and clients that are FFIs. So from a monitoring perspective the challenges are also large and clearly an issue especially given the tight timeframe that remains. As part of the preparation required, whether a USFI or FFI, certain steps are needed to become compliant.

Here are some suggested steps -

-          Execute a phased conversion exercise

-          Creation of data governance and process required to manage the effort of FATCA compliance

-          Annual monitoring of changes

-          Enhance US taxpayer information that meets FATCA thresholds

-          Assess numerous unrelated systems (ERP, legacy, etc) currently capturing information on US taxpayer information

-          Address processes, procedures and/or technology that will need to customized or replaced to make process FATCA compliant

-          Validate of existing entities with an organization that fall under FATCA

-          Provide readiness assessments to suppliers/vendors that will fall under the FATCA requirements

The Zeitgeist of regulation does seem that it will not come to an end any time soon.  In fact as part of the FATCA regulation US is also working with five EU nations (France, Germany, Italy, Spain and the UK) in an effort to normalize the process of data disclosure agreements with the IRS and to establish reciprocal agreements.  It is also expected more countries will enter into similar multilateral arrangements in the future and seek their own version of FATCA.

The ultimate benefit of the FATCA regulations may not be known for years; however, it will be safe to say that impact, and loss of productivity, to corporations this coming year will likely be significant.