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Foreign Account Tax Compliance Act

The Rise of the Reporting ChallengeJuly 2014

Connected Banking

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US FATCA Reporting Solution Considerations

Reporting Requirements

GlossaryFATCA and FATCA-like Regulations

Meaning for Financial Institutions

SummaryConnected Banking

Connected BankingThought Leadership for the UK Banking Industry

Accenture’s UK Banking practice welcomes you to the Connected Banking thought leadership series.

Why Connected Banking? To fulfil their historical core role, banks have always had to be connected to a wide range of stakeholders. And today more than ever, banks cannot operate in isolation. In a fast-moving and increasingly transparent environment, they are now part of everyday life – and connected to most things people do. To grow and build trust in such an environment, banks must connect in new, more responsive and more seamless ways – not just with customers, employees and other banks, but also with regulators, business providers and society as a whole.

Being a Connected Bank today means change is the norm. This change requires banks to have viable and profitable business models that are constantly enhanced through agile innovation. But as they develop and deliver this innovation, banks must also demonstrate continuously that they are aligned with – and committed to supporting – the interests of the wider economy and society.

Against this background, the Connected Banking series focuses on addressing banks’ challenges in three key dimensions:

The Future of Banking: The move to Connected Banking will bring new rules, new economics and new customers. In response, banks have to design and create new business and operating models that enable them to connect in a frictionless way.

The Digital Revolution: The need to connect intimately with the evolving customer requires banks to progress from being ‘utility’ providers of transactional banking services to becoming value-adding partners at the heart of their customers’ everyday digital lives.

Risk & Regulation: A well-connected strategic regulatory response can help banks switch from reactive survival mode to leveraging regulatory change in ways that support profitable growth.

FATCA: The rise of the reporting challenge’ the latest point of view in the Connected Banking series provides a perspective on how the complexity of reporting could be approached given all the recent and upcoming regulatory requirements.

What’s next in the Connected Banking publication series?Over the course of the coming months, we will be issuing points of view addressing different aspects of each of the three key themes identified above.

The recently released publications in the series are:• Next Generation SME Banking

• The challenge of Regulatory Implementation – a strategic approach

• Time to grasp the nettle - How banks can make their core systems fit for purpose

• Preparing for Growth – Banking Chief Financial Officers Look to the Future with Cautious Optimism

The forthcoming publications are:• Remediation: robust service management

• Evolving the core – bite size chunks

• Replacing the core – game changing

• Tackling the ‘Too Big to Fail’ problem

• 2014 UK Financial Services Customer Survey

Contact UsTo find out more about the Connected Banking research, upcoming events or future publications please contact:

Robert Stubbs Financial Services, Banking Research + 442078449845 [email protected]

Geetika Rai Financial Services, Marketing + 442078445982 [email protected]

mailto:robert.a.stubbs%40accenture.com?subject=

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Reporting Solution Considerations





US FATCA

US Foreign Account Tax Compliance ActFATCA and the Inter-Governmental Agreements have created a real momentum for driving enhanced reporting for increased customer data transparency, fair taxation and better conduct. This point of view provides a perspective on how the complexity of reporting could be approached given the requirements precipitated by the US Foreign Account Tax Compliance Act (FATCA), and the FATCA-like legislation likely from a number of other governments.

IntroductionThe primary goal of FATCA was to bind US Financial Institutions (USFIs) into a new agenda of reporting, or disclosure, of data for customers that hold assets in jurisdictions outside of the US. This was seen as a way to drive fairer taxation, and a demonstration of a systematic ability to root out the non-disclosure of such assets by US tax payers. USFIs are compelled by law to comply with this requirement to disclose customer data.

However as part of the clever design of FATCA, non-US Financial Institutions (FIs) that either have a US presence or conduct business in the USA or with US counterparties are also compelled to comply by inference. Given the globally connected nature of banking today they too will need to disclose details of anyone who could be liable for US taxation. This has become the near universal challenge of categorizing existing and new customers as US

Persons which has highlighted issues in the way customer data is managed and stored. It is also important to note that, while non-USFIs have had to make the greatest effort to comply, there is still the need for USFIs to apply complex withholding rules whenever a payment is made to a foreign institution or entity.

The global compliance issues created by FATCA initially required FIs and their legal advisors to focus on understanding tax and legal requirements. Many, however, have struggled with interpreting these requirements into tangible changes in ways of working, especially while the guidance notes and subsequent legal provisions were being developed and released from 2010 to 2013.

With the legislation now published, the major focus is now on how to quickly design and, for some, re-design solutions that are not commercially onerous or operationally disruptive. The obligations impact most FIs in a number of ways including the consistency and method of how new accounts are opened, how Know Your Client (KYC) processes operate, how customer data is stored, and how business processes support customer identification and disclosure. More significantly, the legislation has prompted FIs to consider strategic options such as whether the cost of segregation of US activities is economical, whether there are benefits into re-organising business functions to achieve compliance more easily, and even whether certain types of business should be foregone altogether.

The legality of whether an FI incorporated in one country can release customer data to another government has also been an area of intense debate, negotiation and agreement. This has led to the concept of Inter-Governmental Agreements which allow for an FI to comply with local laws by sharing customer data with the government in their home country, and for the legal responsibility of sharing with US authorities to then be undertaken on a government-to-government basis. This arrangement itself has evolved into two distinct approaches which are explained later in this paper.

The advantages provided by some countries’ banking propositions are being sorely tested: this will lead to a period of upheaval in the banking industry.

IGA1 Signed IGA2 Signed Advanced IGA discussions with the US

Initial Discussions with the US

Australia Belgium Canada Cayman Islands Costa Rica Denmark Finland France Germany Gibraltar Guernsey Honduras Hungary

Ireland Isle of Man Italy Jamaica Jersey Malta Mauritius Mexico Netherlands Norway Slovenia Spain UK

Austria Bermuda Chile Japan Switzerland

Argentina Cyprus Estonia Israel Korea Liechtenstein Malaysia New Zealand Poland Singapore Slovakia Sweden

Brazil Czech Republic India Lebanon Luxembourg Romania Russia Seychelles South Africa St. Martin Virgin Islands

Position as of 29/05/2014

FATCA IGA Map

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US FATCA

The development of the Inter-Governmental AgreementsOriginal FATCA legislation has been subsequently enhanced by bilateral agreements (so called Inter-Governmental Agreements or IGAs) between individual governments and the US, as the incentives to tackle tax evasion are of a global nature. Starting with a joint declaration between the US and five major European countries, currently over 50 countries have engaged in talks regarding such IGAs.

For the reasons indicated already, not least of which has been the FATCA timescales themselves, it has taken a shorter than usual time for these early IGAs to become part of the standard implementation of FATCA, and two different IGA models have evolved to date.

In summary IGA Model 1 (IGA1) focuses on:• Legal certainty concerning

data transmission

• Numerous reliefs and simplifications

• Direct reporting to local tax authorities

• Data exchange between local tax authorities and IRS

• Significantly reduced withholding impact

IGA Model 2 (IGA2) differs from Model 1 as it:• Retains many of the provisions of

the original FATCA requirements

• Focuses on providing a legal basis for the direct exchange of data between FFIs (Foreign [i.e. non-US] Financial Institution) and the IRS

Enhanced reporting for IGAs: a critical and complex driverAs most jurisdictions have chosen to follow the IGA1, the focus of FATCA at an FI level has shifted from taxation to fostering the correct reporting of non-domestic income.

Additionally the introduction of IGAs has had a significant impact on FATCA implementation timelines. Countries currently negotiating IGAs need to understand the significant amount of time needed to agree and sign an IGA, which then needs to be translated into national law by the local government. These issues, combined with details of reporting requirements that are still outstanding and yet to be defined, mean that reporting timelines may vary from jurisdiction to jurisdiction and are subject to change. This presents considerable complexity and cost to the challenge of accurate, consistent and timely reporting. These matters are further exacerbated by the forthcoming FATCA-like regulations (see last section: FATCA and FATCA-like regulations).

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US FATCA Meaning for Financial Institutions

What does this mean for Financial Institutions now?As FATCA has embedded itself as a major and mandatory spend item in the budgets of many PFFIs (Participating Foreign [i.e.non-US] Financial Institution), the concept that FFIs need to understand the nature of their customers, their relationship with these customers, and then disclose information of the taxable assets held by these customers offers many governments a way of applying the FATCA concept to their own citizens, and therefore is a solution to their own quest for fair taxation—hence the rise of FATCA-like legislation. FATCA has thus set a global precedent for greater tax transparency. This has recently been expressed at the G8 Summit (17 June 2013) with the statement that “It is widely accepted worldwide today that the era of bank secrecy is over”. This has been further supported by the announcement of the Crown

Dependencies and Gibraltar Agreements (UK FATCA), OECD Common Reporting Standard, EU Directive of Administrative Cooperation and EU Savings Tax Directive, with reporting due dates as early as 2015.

So PFFIs are now challenged by the “multiplicity” effect of reporting, as shown in the figure below, which will increase depending on how many jurisdictions a PFFI has to deal with, and the approaches to data classification, customer engagement and reporting.

It is for this reason that the need for enhanced, consistent and robust customer reporting has become a fundamental business driver of change for many PFFIs, and there are already signs that centuries old ways of banking will have to adapt dramatically to enable such disclosures.

The multiplicity challenge for reporting

Delivery & Quality Risk Management

Each step of the reporting process ... ... can be impacted in multiple ways

Exception Management

Classification & Repair

Regulatory & Tax engagement

Reporting Mechanisms

Reporting Standards

Data & Systems

Legal Jurisdictions

Business UnitPreparation & Remediation

Governments & Regulators

This all needs to be supported by a degree of consistency for report production and a method for handling exceptions management.

The multiplicity challenge for PFFIs is to develop efficient and consistent reporting when faced with:

• Multiple local laws

• Local data storage and management

• Local reporting standards,

• Local banking conduct requirement vs national and international requirements for aggregation, computation and analysis

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US FATCA Reporting Requirements


FATCA introduces extensive reporting requirements

The IGAs compound this complexityIn addition, where an IGA2 or non-IGA model is followed, aggregated values for recalcitrant customers will need to be reported. Finally, if a PFFI happens to collect a FATCA withholding tax, the amounts need to be transferred to the IRS, and a proper reporting of the amounts withheld needs to be performed. Initial guidance on how this may be handled can be drawn from the current US Withholding Tax reporting via the form 1042-S. At least for the first years of FATCA, the reporting of taxes withheld may require the filing of a 1042-S form, which will be adapted to Chapter 4 withholding.

The IRS announced on 19 December 2013 that Intergovernmental FATCA XML Schema (version1.1) will be the format in which the FATCA reports will require to be submitted. The schema has been developed in close cooperation with the OECD with an aim to align it to the reporting schemas currently used by the OECD and the European Union. The IRS continue work on finalising the Data Exchange Service that will enable the automated data exchange between IRS, PFFIs and the local tax authorities in the IGA countries.

The reporting mechanism and the possibility of further changes to the reporting dates coupled with new reporting requirements such as Crown Dependencies introduced within the same

timeline constitute a major challenge for the Participating Foreign Financial Institutions who are planning to develop and implement their reporting solutions ahead of the Year One reporting. FFIs will need to consider these alongside the detail of their own reporting solutions and implementation timelines.

The challenge seems far off with Participating FFIs having an obligation to file FATCA reports annually, starting from March 2015 (covering the previous calendar year). The scope of reporting obligations has been staggered over a three year period and covers a granular level of data at customer account level.

20151. Name2. Address3. US Taxpayer Identification Number

(TIN) where applicable4. The account number or functional

equivalent5. The name and identifying number of

the reporting Financial Institution6. The account balance or value as of

the end of the calendar year or other appropriate period

20167. The total gross amount of interest

paid or credited to the account (custodial a/c)

8. The total gross amount of dividends paid or credited to the account (custodial a/c)

9. The total gross amount of other income paid or credited to the account (custodial a/c)

10. The total gross proceeds from the sale or redemption of property paid or credited to the account (custodial a/c)

201711. The total amount of gross interest

paid or credited to the account in the calendar year or other appropriate reporting period (depositary a/c)

12. The total gross amount paid or credited to the account including the aggregate amount of any redemption payments made to the account during the calendar year or other appropriate reporting period (other than custodial / depository a/c)

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US FATCA Reporting Requirements


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Data gathering

Data validation and enrichment

Handling of exceptions

Report generation and verification

Dispatch and tracking of reports

Audit andgroup requests

• Identify reportable data in various data sources and /or data warehouses• Implement e�cient algorithms for pre-filtering the information which may be relevant for reporting• Build dedicated reporting data warehouse with a full history of data

• Apply pre-defined rules to check for data integrity and completeness• Amend information which is specific to reporting, e.g. IRS Income codes, exemption codes

• Bring exceptions to the attention of a responsible person (To-do-list)• Resolve by modification of data and/or trigger process in other departments (e.g. alert relationship

manager about a missing TIN)

• Create (electronic) reports according to specifications• Create notification and copies of reports for account holders who have been reported to the IRS• Verification and signing by Responsible O�cer

• Dispatch reports to competent authorities / IRS• Track status• Correct and re-submit if necessary

• Provide structured data and statistics for internal and external audit purposes• Provide historical data and as-of-queries• File responses to group requests

To meet FATCA reporting requirements, Participating Foreign Financial Institutions must decide upon an appropriate solution.

The fundamental process for FATCA and FATCA-like reporting will be similar to other regulatory reporting tasks. The basic steps are:

• Data gathering (from a central data warehouse or directly from various sources)

• Data validation and enrichment

• Handling of exceptions

• Verification of the final reports

• Dispatch and tracking of reports

• Audit and group requests

Regardless of the reporting processes and solutions adopted, rigid standards must be followed for data protection and traceability of user actions.

The complexity of FATCA and FATCA-like reporting stems primarily from the level of granularity and extent of information to be reported, coupled with the high quality of report submissions that will be expected by the IRS and respective local tax authorities.


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Key parameters drive the decisionsThe following parameters will inform the decision about the FATCA reporting solution, and in particular will determine the necessary degree of automation:

Size and Scale: Operational size and jurisdictional coverage of PFFI operations and associated FATCA and FATCA-like regulatory environment – the larger the size of operations across single or multiple geographies the greater the driver to automate and standardise the reporting process to realise operational synergies.

Volume and nature of clients: The number and type of US and other international clients to be reported (retail clients / high net worth clients / corporate clients) will impact the level of automation required to support timely and accurate reporting. In particular, the reporting of corporate customers and their beneficial owners will be more complex due to the nature of data and customer set up on the systems, potentially requiring automated solutions to support accurate reporting.

Product types: The type of in-scope products offered (e.g. cash products only, wealth management / custody etc.). The reporting of custodial accounts and their transactions will be significantly more complex than the reporting of depository accounts.

Current state of reporting: Existing reporting capabilities for other regulatory or tax purposes, e.g. for QI (Qualified Intermediary) reporting or EUSD (European Union Savings Directive) reporting that can be leveraged for FATCA and FATCA-like reporting or encompassed in a strategic reporting solution.

Designing for the future: Solution future-proofing to accommodate similar reporting requirements – dependant on the expected impact of other reporting requirements and appetite to invest in a flexible solution, to cater for FATCA-like requirements in other countries.

PFFIs fall into three basic models which support specific reporting solution decisions:

• Global PFFIs / Large PFFIs with strong multinational presence.Such PFFIs are likely to operate an extensive expanded affiliated group and may

fall in the scope of several different IGA models and will be likely to have a substantial number of customers / accounts that will be subject to FATCA reporting. Such PFFIs may have specialised reporting capabilities already in place or consider group wide automated solutions for reporting.

• Large PFFIs with core operations in a single jurisdiction and some international presence.In comparison to the large multinational PFFIs, such PFFIs may have more varied exposure to FATCA reporting obligations, particularly in the smaller locations, which may lead to the adoption of a mixed approach to the reporting solution.

• PFFIs operating in a single jurisdiction with a mainly local client base.Such PFFIs are likely to have limited exposure to customers that will be subject to FATCA and FATCA-like reporting, as well as limited obligations for wider international customer data exchange. They are therefore most likely to opt for a manual solution. Certain FFIs in this group may qualify as deemed compliant FFIs and therefore would not be subject to FATCA reporting at all.

Scale and size Volume and nature of clients

Current state of reporting Product Types

Designing for the future

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Automated solutions are critical for large FFIs and multinational groupsThe more standardised the automatic information exchange becomes, the more attractive it is for international affiliated groups to go for group-wide, standardised processes and applications for reporting, supported by a single centralised solution. Due to their size, large FFIs may be able to utilize several advantages of an automated reporting process:

• Ideally, reporting is carried out in a central application using a common data pool where business data is collected for foreign clients subject to reporting. A centralised service unit with a multi-client capable application and competent staff can reduce internal process costs and minimise the economic and legal risk of erroneous reporting.

• Data validation and generation of reporting data in electronic formats can be extensively automated, minimising errors resulting from manual processes.

• Well-structured software, designed for maximum modular expansion, can easily handle future reporting agreements - as long as they are based on the same standard. This makes investment in a standard product particularly appealing.

• A feasible approach would be to handle tax reporting for residents and non-residents separately. The advantage of such an approach is the ability to implement changes to reporting for specific client groups only, without compromising the tax reporting for the unaffected groups of clients.

These solutions can either be developed in-house or acquired on the market as a standard solution, which may bear significant advantages in terms of development cost, availability and ongoing maintenance costs.

Scale and efficiency opportunities exist for many FIsBesides implementing common standards and software, it is also worth considering the implementation of FATCA and FATCA-like reporting as a group-wide shared service.

Such service centres require software solutions capable of processing the data of multiple FFIs simultaneously, while keeping data strictly segregated per FFI. Such solutions already exist for typical back office tasks like payment processing, settlement and custody, and their basic concepts and design can be re-used to create FATCA and FATCA-like reporting facilities for affiliated groups.

Several issues may limit the implementation of centralised services:

• Poor data quality bears a significant risk when using fully automated reporting solutions. The reporting of contradictory data or the reporting of “false positives” may significantly damage a client relationship and the reputation of an FFI. As with any other data quality issues, the best remedy is to improve data quality at source. However, in many cases, this may prove difficult.

To address this problem, automated reporting tools should be able to

perform a final verification step after collecting and enriching the reportable data, and provide an adequate exception handling mechanism. In addition to this, FFIs may want to apply an extra validation step for the reporting of sensitive clients, and/or of high value customers. Finally, it is the Responsible Officer’s responsibility to sign off the reports prior to transferring them to a tax authority. The sum of those steps may significantly reduce the fully automated flow of information.

• Heterogeneous environments within an affiliated group may drive system integration costs, and may make the communication of the individual FFIs with the reporting centre cumbersome. A more significant challenge may be placed on cross-border implementations: data secrecy laws within many countries forbid the transfer of sensitive and client-identifying data outside their own jurisdiction.

Affiliated groups therefore may need to implement a reporting tool at several sites, with the precise number depending on their individual situation. A decision about the number of sites needed would be dependent on the outcomes of a detailed analysis.






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Scope exists for handling small entities with semi-automated and manual solutionsIt is true that, in many cases, international affiliated groups with local subsidiaries that have low (US) business volumes may not have the appetite for an expensive IT implementation project. As a result, PFFIs may choose to adopt a centralised / automated solution for their main area of operations and a manual solution for such international locations. This could be more justifiable from a cost perspective, given the fact that sometimes the number of US clients to be reported may come down to a double digit number per entity.

In the same way, PFFIs with a mainly local client base, who were not able to obtain a deemed compliant status, may be better off choosing a more manual approach to FATCA reporting. It is worth considering the use of a semi-automated solution, e.g. using flat files, csv, etc. or manual data import. Here it is worth noting that a fully manual process is not supported by FATCA, as the reported files need to be in electronic (XML) format. This is in contrast to QI which, at least for very small entities, allows for manual 1099 reporting.

Further considerations drive the design of FATCA reporting solutionsThe number of clients to be reported under Chapter 4 may dramatically differ from FFI to FFI, as well as the number of accounts and transactions will be a primary factor when deciding on a FATCA reporting solution.

FFIs expecting an increasing number of clients to be reported, due to the upcoming requirements for other reporting regimes beside FATCA, will need to consider future-proofing and the scalability of the chosen solution, which could be expanded to cover all non-domestic reporting.

Finally, when making a decision regarding the FATCA reporting solution, PFFIs will need to consider their existing regulatory reporting capabilities and the extent to which these can be leveraged or will be considered for enhancement through a dedicated FATCA reporting solution.

Case StudyAn example of how an automated reporting solution can benefit a multinational financial institution is an affiliated group of three Austrian banks with a small number of subsidiaries in neighboring countries.

The Group has introduced a group-wide reporting solution within a multi-entity setup in response to the challenges of managing manual reporting under the QI regime. The Group managed and produced QI reports through partially manual processes and paper based output. It was a costly process, given a high number of reports, bearing a high risk of errors and limited ability to trace the reported data from the source to the final output. The Group decided to introduce a group-wide reporting solution for QI reports generation and submission, which has allowed it not only to reduce the cost per report (as reports, reaching several thousands, can be generated in overnight batch runs), but also to improve the accuracy and auditability of the reports generated.

The Group is now implementing changes to accommodate FATCA reporting requirements, and is evaluating an expansion of the solution to meet future EUSD reporting obligations. Given that the automated reporting solution and supporting processes are already in place for similar reporting requirements, the solution needed only to be modified (largely through parameter settings / process adaptation) and enhanced with additional interfaces to accommodate new requirements. It has been estimated that the cost of adapting the existing solution will be in a range of ca. 10% of the total development cost of the solution, and it will enable FATCA reporting for several thousand accounts in parallel to the QI reporting for ca. 700,000 reportable transactions.

Connected Banking




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Summary


Connected Banking




Summary

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A future solution to meet the FATCA and FATCA-like reporting requirements strongly depends on the size and the nature of the business that a PFFI is undertaking with customers covered by such regulations.The reporting process may be covered by manual, semi-manual or automated solutions, depending on the volumes to be processed. Affiliated groups may try to roll out group-wide solutions and centralised services as much as possible, but may find the approach limited by heterogeneous infrastructure, data privacy laws and the high cost of implementation. A careful consideration of all these aspects is required before deciding on a specific approach.

FATCA and FATCA-like regulations will lead to drastic changes in the international data exchange relating to the capital income of non-resident tax payers. The individual action of the USA has led to a global trend towards an automated data exchange network which will increase in the coming years. The Common Reporting Standard has been endorsed in February 2014 and supporting guidance notices are expected to be published in September 2014. Over 40 countries have since supported the initiative and committed to an early adoption of the CRS. This will significantly increase the complexity of the reporting and a scalable automated solution could help multi-national banking groups manage this in a cost-effective manner.

Although certain reporting requirements remain unclear, financial institutions should be able to start work on their reporting solutions now to hit the challenging FATCA and FATCA-like reporting timelines.Based on the known regulatory requirements for reporting, financial institutions can start mobilising their activities targeted at the delivery of suitable reporting solutions. These include:

• Analysis of the reporting processes and capabilities already in place to identify opportunities to leverage / modify these or to define strategic decisions for customer data reporting

• Documentation of a Target Operating Model specifically for FATCA and UK FATCA Reporting

• Definition of the governance framework for FATCA and UK FATCA reporting

• Documentation of the regulatory and solution-specific requirements

• Progressing the decision making process focused on the strategic approach to customer data reporting – going beyond FATCA, as appropriate, for example to include thinking around FATCA-like arrangements for other countries, and other processes such as customer on-boarding, KYC, Management Information, etc.

Where there is greater confidence in the requirements and date stability, financial institutions can:

• Start the build of internal processes and governance to support reports delivery

• Conclude vendor selection processes (as appropriate – where an automated solution has been chosen, taking into account future considerations for external reporting)

• Start the build of automated reporting solution(s)

Thus once the regulators confirm outstanding reporting requirements, in particular the mechanisms for reports submission, financial institutions will be able to:

• Finalise requirements and design for the final external report generation, submission and storage

• Refine the manual and / or automated solutions to meet these additional requirements and progress their build

By mobilising their reporting projects and teams now, financial institutions have an opportunity to get on the front foot to deliver a fit-for-purpose FATCA reporting solution and to take the opportunity to determine a strategic roadmap for all their reporting functions.

There is a need for FIs to address the challenge of reporting sooner rather than later, as the cost of sub-optimal, tactical and localised solutions will be significant and will increase operational risk.

Summary

GlossaryConnected Banking



FATCA and FATCA-like Regulations


Summary

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FATCA obligations timeline as per the IRS Notice 2013-43, 12 July 2013 and IRS notice 2014-33, 1 May 2014

FATCA Compliance

Required by Obligation1

1. FFIAgreement

2. Governance & Compliance

3. New Customers(identification and classification)

4a. Classify prima facie FFIs3

4b. Pre-existingcustomer (identification and classification)

5. Reporting 6. Withholding

1st July 2014 1st July 20142 1st July 2014 30th June 2015

(HV4)30th June 2016

(Non HV4)

31st December2014

March 2015 onwards/May 2015 (UK)5

Limited withholding from July 2014/Full from July 2017

1 The IRS will treat calendar years 2014 and 2015 as a transition period for purposes of enforcing and administering implementation of FATCA due diligence, withholding and reporting by all FFIs and withholding agents

2 Six month transitionary period, enabling FFIs to treat new entity accounts as pre-existing accounts before 01 Jan 20153 Only applicable to countries operating under final regs4 HV = High Value5 UK HMRC will report data to IRS in Sep 2015

Apply up to 30% withholding tax to US payments made to recalcitrant customers and non-participating foreign financial institutions (NPFFIs). Withholding obligations can be passed to US withholding agents and not all FIs will need to withhold directly

5. Reporting

6. Withhold

Apply up to 30% withholding tax to US payments made to recalcitrant customers and non-participating foreign financial institutions (NPFFIs). Withholding obligations can be passed to US withholding agents and not all FIs will need to withhold directly

1. FFI Agreement

2. Governance & Compliance

3. New customers classification

4. Pre-existing customers classification

Register with the IRS or enter into individual agreements with the IRS. This will be achieved through the IRS's online portal and will give FIs a unique Global Intermediary Identification Number (GIIN) to provide to others and use for reporting purposes

Create an environment to provide governance and attestation mechanisms to manage ongoing FATCA compliance activities

Establish processes and procedures for ongoing identification, classification and maintenance of new customers with certain products

Classify backbook customers within a two year period

The Hiring Incentives to Restore Employment Act, also known as HIRE, was enacted in March 2010 by the US. The act included FATCA (Foreign Account Tax Compliant Act) provisions, which affect the financial industry around the globe. Essentially, FATCA is a system intended to tackle tax evasion of US nationals. It aims to achieve this by compelling financial institutions to identify US customers and report on their assets. In its original form, FATCA regulation imposes a 30% penalty tax on certain US-sourced payments made out to recalcitrant customers (i.e. customers who failed to comply with FATCA requirements) and, under specific circumstances, to other Participating Foreign Financial Institutions and to Non-participating FFIs.

In order to comply with FATCA, financial institutions need to undertake the following:

Background to FATCA and the HIRE Act

GlossaryConnected Banking



FATCA and FATCA-like Regulations


Summary

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Predecessors to FATCA and FATCA-like legislationFATCA has not been unique in attempting to introduce fairness in taxation for cross-border investments. The Qualified Intermediary (QI) regime is a US system to promote tax honesty by providing an incentive for US taxpayers who agree on automatic reporting of their income, while protecting the anonymity of non-US investors in US assets. However the QI regime had a number of deficiencies that were being exploited systematically for tax evasion and this was one of the triggers for the development of FATCA.

In terms of information sharing, other examples of automatic exchange of customer data include the European Union Savings Directive (EUSD) and a range of initiatives that have developed on the back of FATCA – IGA negotiations, including the British Crown dependency agreements and the G8 and G20 initiatives for automated information exchange, further supported by the OECD’s Common Reporting Standard (CRS) initiative.

The EUSD introduced automatic information exchange between EU

member countries in 2005, and is currently limited to reporting certain types of interest, and not all EU member countries participate fully. EUSD has been extended to include new types of savings income, products that generate interest or equivalent income, life insurance contracts and a broader range of investment funds. The member states have until 1 January, 2016 to adopt the national legislation necessary to comply with the extended EUSD (ii). This is further supported by the Directive of Administrative Cooperation (DAC), which was introduced in January 2013, and foresees, amongst other things, the automatic exchange of available information on five categories of income from 1 January, 2015 (please refer to the table below for more detail). This will go hand in hand with a global model for information exchange, based on the recent G8 and G20 initiatives and the subsequent work of the OECD group, which have evolved into an Standard for Automatic Exchange of Financial Account Information - Common Reporting Standard (CRS), announced on 13 February 2014. The due diligence standards are to be introduced in 2016 and reporting starting from 2017 with further guidance notes, to help

ensure the consistent application of the standard and guidance on technical modalities related to reporting format and exchange mechanisms, expected to be published in September 2014.

On 3 February 2014, HMRC released selected draft guidance notes covering the obligations for UK Financial Institutions under the International Tax Compliance (Crown Dependencies and Gibraltar) Regulations 2014, which is widely known as “UK FATCA”. Reporting obligations under this regulation will require Financial Institutions to report from 31 May 2015 limited information about Crown Dependency or Gibraltar Persons / Controlling Persons of Entities holding a Reportable Account, equivalent to the information type required under FATCA in the first reporting year.

Switzerland, in particular, has entered into individual agreements with several countries for the reporting of non-domestic clients to their respective tax authorities. As these agreements introduce reporting with a high complexity of data content and tax calculation, and therefore very high implementation efforts, it is unlikely that such agreements will develop into an international standard.

Comparison between the existing EUSD, extended EUSD(II) and the proposed DAC

Current EU Savings Directive

Revised EU Savings Directive agreed on 24/03/2014

Directive of Administrative Cooperation (DAC)

Applicable since 1/7/2005, automatic exchange on:

• Interest Income

• Sales proceeds on debt claims

• Distributions of UCITS that invest in debt claims

From 1/1/2016 expands automatic exchange to cover the following items:

• Distributions of all investment funds that invest in debt claims

• Income from innovative financial instruments

• Income from life insurance products

From 1/1/2015*, automatic exchange on following items, provided they are paid, secured or held by a FI:

• Income from employment, Director’s fees and Pensions

• Ownership of and income from immovable property

• Life insurance products not covered by other EU laws

• Dividends

• Capital gains

• Account balances

Review of directive foreseen in 2017 to further widen the scope of automatic exchange of information

Note : The items that are in italics correspond to items that are covered under US FATCA as well.* These are the proposed timelines, which have not been confirmed yet.

Connected Banking





Summary

15

Glossary of terms

Term Definition

Chapter 4 FATCA provisions of the US Internal Revenue Code sections 1471 - 1474

DAC Directive of Administrative Cooperation introduced by European Union in 2013

EUSD European Union Savings Directive came into effect in 2005

FATCA The US Foreign Account Tax Compliance Act introduced through HIRE

FFI Foreign Financial Institution

HIRE The Hiring Incentives to Restore Employment Act, also known as HIRE, was enacted in March 2010 by the US. The act included FATCA (Foreign Account Tax Compliant Act) provisions

IGA Inter-Governmental Agreement - bilateral agreements between individual governments and the US

IRS Internal Revenue Service – tax authority of the USA

KYC Know Your Customer – set of policies and procedures aimed at proper identification of customers to whom financial institutions provide services to

NPFFI Non-participating Foreign Financial Institution – a foreign financial institution (i.e. non-US financial institution) which is deemed non-compliant with FATCA

OECD Organisation for Economic Co-operation and Development – an international economic organisation of over 30 countries promoting sustainable economic growth, development and trade

PFFI Participating Foreign Financial Institutions – non-US financial institutions which are compliant with FATCA and have either signed the FATCA agreement with IRS (in non-IGA / IGA Model 2 jurisdictions) or have registered with IRS (in IGA Model 1 jurisdictions)

QI Qualified Intermediary - refers to an entity that acts as an intermediary qualified under certain sections of the U.S. Internal Revenue Code to undertake specified activities

XML Extensible Markup Language – a markup language that defines a set of rules for encoding documents that can be read both by humans as well as machines

AuthorsSulabh Agarwal Head of Regulation UK&I Banking +447768142370 [email protected]

Rav Bains Managing Director, Risk & Regulation +447753928139 [email protected]

Andrew Strong Senior Manager, Banking +44 07779611812 [email protected]

Magdalena Luczak Manager, Banking Risk & Regulation +447878142057 [email protected]

We would like to thank Wolfgang Goeb, Head of Business Development at SDS for his input into this POV. Software Daten Service (SDS) is a longstanding, experienced vendor of standard software for the financial industry, with a particular focus on the back office processing and capital markets, international tax reporting and automatic exchange of information.

About AccentureAccenture is a global management consulting, technology services and outsourcing company, with more than 323,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the fiscal year ended Aug. 31, 2014. Its home page is www.accenture.com.

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