FATCA Poised To Go Global
Just as financial institutions started to come to grips with the fact that the Foreign Account Tax Compliance Act (FATCA) went into effect last month in the U.S., the Organization for Economic Cooperation and Development (OECD) unwrapped a new global version. The OECD proposal is called the Global Standard for Automatic Exchange of Information and it’s meant to facilitate the exchange of detailed account information between governments.
If you listened hard enough, you could hear the collective sigh of global financial firms as they prepared to confront yet another complicated administrative hurdle.
As I wrote back in April, FATCA has been a major pain point for large financial institutions. The law, which formally took effect in July but won’t be rigorously enforced until 2016, requires all foreign financial firms to report their holdings of U.S. citizens’ money to the IRS. The goal of the law is to limit the use of offshore tax shelters by U.S. investors.
But it’s not quite as simple as handing over a spreadsheet. Multinational banks are subject to different reporting requirements under several different jurisdictions. Some fall under intergovernmental agreements because they are based in or have affiliates in countries that share information with the U.S. Others fall under direct reporting structures with the U.S.
Meanwhile, there are currently five IRS forms required for foreign banks to keep track of their U.S. customers, addressing everything from individuals who claim foreign status to foreign tax exempt foundations. All of these are English-only. And all of this needs to be reconciled on a global scale for portfolios of holdings that are constantly in flux.
It is estimated that compliance with FATCA has already cost Canada’s five largest banks approximately $700 million dollars. And that’s just five banks in Canada! According to The Wall Street Journal the costs were racked up on things like employees to manage the process, training and technology. The investment bank consulting firm Crossbridge estimates that medium-sized banks will each spend between $150 and $200 million to comply with FATCA before all is said and done.
That is not an immaterial sum. With the OECD’s release in July of its new Global Standard, which some in the industry have taken to calling “GATCA”, it became clear that the administrative challenges for global financial firms are just beginning. According to an OECD statement, the new Standard will put an end to banking secrecy in tax matters:
“The Standard provides for annual automatic exchange between governments of financial account information, including balances, interest, dividends, and sales proceeds from financial assets, reported to governments by financial institutions and covering accounts held by individuals and entities, including trusts and foundations. The new consolidated version includes commentary and guidance for implementation by governments and financial institutions, detailed model agreements, as well as standards for harmonized technical and information technology solutions, notably a standard format and requirements for secure transmission of data.”
More than 65 countries have publicly committed to implementation with 40 more committing to implementation by 2017.
Eventually, this kind of standardized information sharing between tax jurisdictions and large corporations will be automated into ERP processes and the data will pretty much flow seamlessly. But it’s going to take years to get there.
As things currently stand, several regional data privacy laws conflict with the proposed global data-sharing proposals, financial institutions all have different ways of reporting, and the prospect of sorting and systematizing all of that data into a global template that works for everyone is downright daunting. Companies will get there because they have to, but expect growing pains along the way as financial firms wrestle with the compliance challenges of FATCA, GATCA and other acronyms that will keep the IT and compliance departments working overtime into the foreseeable future.
