Eugene Grygo,
chief content editor,
FTF News
About three-quarters of the way into putting together FTF News’ special report on the Foreign Account Tax Compliance Act (FATCA), it occurred to me that the legislation meant to curtail offshore tax evasion has evolved into a phenomenon.
Since FATCA became law in 2010, it was clear that it was going to compel firms to rethink and revamp everything from their regulatory report to the Internal Revenue Service to their relationships with clients via know your customer (KYC) due diligence operations. They would also have to reassess internal and external compliance systems, procedures, workflows, IT infrastructures and enterprise-wide operations.
But FATCA has steadily moved beyond its status a major operational challenge for financial services firms. For key Republicans, FATCA has come to represent a threat to the incomes of Americans abroad via an over-reaching IRS and they are hard at work on a legal challenge that, if successful, would render the law unconstitutional.
In the meantime, FATCA has been a boon for lawyers, vendors, consultants, service providers and financial IT providers. Sorting out the consulting advice, systems integration and expertise will be an ongoing struggle for many firms. Yet the phenomenon does not stop there.
In Ukraine, the ongoing crisis between that troubled democracy and Vladimir Putin’s Russia has forced U.S. politicians to look for effective economic sanctions in response to a major international problem. Enter FATCA. Although not intended as a punitive in foreign relations, the legislation if applied as a sanction by branches of the federal government could be a rather painful penalty for Russian financial services firms that want to do business in the U.S.
Yet, while FATCA was flowering, it became clear even to the IRS that it is so overwhelming a change for firms that the IRS had to issue a welcome guidance that gives withholding agents, foreign financial institutions (FFIs) and similar entities some relief this year and in 2015. These two years will be regarded as “a transition period” allowing participants some leeway as long as they make “good faith efforts” to meet the many requirements of FATCA. In fact, things have been moving so fast that the IRS is catching up to provide the instructions and guidances for essential FATCA forms.
But this “FATCA easing” of sorts is not quite a reprieve—just an assurance that the IRS is looking for good faith efforts rather than errors or evasion. Firms had to register with the IRS, conduct know your customer (KYC) due diligence chores, and reassess internal and external systems, procedures, IT infrastructures and operations in order to meet the July 1, 2014 deadline. It’s from this date that firms decide whether to impose a steep 30% withholding penalty on individuals and/or entities that fail to meet stringent requirements.
At the same time, the U.S. government has been busy getting countries and regions to sign intergovernmental agreements that commit nations to work with the IRS and to ease any internal restrictions to FATCA cooperation. The effort is ongoing and highly complicated. Ultimately, FFIs that reside in these countries are abiding by the IGAs or, if they haven’t already, will have to register directly with the IRS if an IGA is unfinished or unlikely to become law.
We explore all of these thorny issues in our report, “Surviving the Phenomenon of FATCA,” as a way to help those affected by FATCA possibly benefit from the experience.
Please click here to check out the report.
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