“FATCA – Should Philippine financial institutions be concerned? (2nd of 2 parts)” by Jay A. Ballesteros (August 22, 2011)

SUITS THE C-SUITE By Jay A. Ballesteros
Business World (08/22/2011)

(Second of two parts)

Last week, we presented an overview of the more important provisions of the US Foreign Account Tax Compliance Act (FATCA) as they affect customer identification as well as reporting and withholding systems of foreign financial institutions (FFIs).

This week’s article identifies compliance strategies available to FFIs that must deal with this new US legislation (e.g., issues in identifying customers, affected product offerings, the treatment of withholdable payments, among others), including suggestions on setting up and executing a project once the decision has been made to participate in the new FATCA regime.

FFIs now have effectively 14 to 16 months to deliver on key operational and technology initiatives to be globally compliant with FATCA.

So what should be done now?

First, in order for an FFI to comply with FATCA, the people tasked with FATCA project planning must have a detailed understanding of the new Act and its effects on the operating model. FFIs must have a clear understanding of what their business will look like in the coming years and how they want to position themselves in the new environment.

In terms of strategic direction, the primary question for many FFIs is whether to enter into the agreement in the first place.

There are also issues surrounding the target customer group and the products which should be offered to them.

For example, should US customers continue to be served, or should the FFI continue to offer — or invest in — US securities?

Answers to these questions may depend on the FFI’s business segment.

The pass-thru payment rules make it very difficult for a non-participating FFI to avoid all FATCA withholding tax consequences.

There are also opportunity costs and reputational risks associated with non-participation in the FATCA regime.

Thus, most institutions might actually opt for full compliance.

In any event, whether or not an FFI participates in the FATCA (by entering into an FFI Agreement with the US IRS), it must inform its customers about FATCA-related issues, and here timing is important.

For example, if an FFI participates in FATCA, it may have to obtain a waiver of certain local privacy laws from its US account holders. If an FFI decides not to participate in FATCA, it must notify customers of the resultant costs of noncompliance, including withholding tax.

Accordingly, financial institutions should be addressing FATCA now: first, because of the scope and complexity of the tasks entailed, and, second, in view of the tight time frame, as the new regulations come into effect for payments as of 2014 January 1.

In many cases, external support will be key to this task.

FATCA is not just about tax and it is imperative that the support teams are of an interdisciplinary nature, consisting not only of tax professionals, but also consultants in IT, business advisory and business risk services.

To implement a FATCA project, insights into the materiality and complexity of the new tax law are necessary in order to understand the extent of the required changes.

At the same time, filtering out those customers, products, processes and systems where FATCA impact is minimal — in other words, performing an impact assessment — will help identify how to manage, and potentially shrink, the scope of changes required by FATCA.

A prerequisite for this impact assessment is precise planning involving all affected work streams and corresponding basic documents.

Identifying FATCA impact points on the following categories can serve as a basis for such planning: customer segments and counterparties, current information collection processes, product/service offerings and individual account opening procedures.

Training courses, workshops and consultations with external experts are also advisable in order to ensure that all FATCA project staff see the “big picture” and can then break down the requirements of the regime into those relevant to their departments.

This impact assessment should yield a summary of the FFI’s desired business and operating model, including the necessary changes as well as the anticipated costs.

Building on the assessment, an initial implementation plan can be developed to target timely FATCA compliance.

Though action is required early on, FFIs should act with prudence and foresight.

Planning for potential changes and costs now is important, but implementing large-scale, difficult-to-reverse changes to processes and systems is not advisable until guidance is issued.

The findings from the impact assessment can be re-examined on the basis of that guidance and — if necessary — adapted.

FATCA will have a dramatic impact on the financial sector across the globe.

Time is of the essence as financial institutions may need to make major changes on how they collect customer information, track investments and payments, and in some cases implement entirely new reporting and withholding systems in time for the implementation of the new regulations in 2013.

Nevertheless, affected financial institutions should not act with undue haste.

The first action any financial institution should take is to develop a detailed understanding of the new rules and their effects on the operating model.

By assessing the current state of its FATCA readiness, identifying gaps in comparison to future needs, and engaging the appropriate leadership and support to achieve its goals, an affected FFI will have an excellent start towards achieving FATCA compliance.

(Jay A. Ballesteros is a Tax Senior Director of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.