Developing Compliance Program
The tax reporting landscape changed drastically over the course of time and has now become more competent and reliable. However, it has not turned out to be more complicated than earlier procedures. With FATCA in line, the new system has become more sophisticated and has more demands and requirements. Having introduced a law like FATCA to accomplish a goal of acquiring revenue from foreign US accounts, it required all the US and non-US entities to comply with this newly introduced law. They were required to report information of all the US accounts in the FFIs’ and submit all the withholding amounts to the IRS. Non-compliance could cost high too.
Although the provisions of FATCA came into acknowledgment and force from March 2010, they provided a very basic framework of FATCA requirements. The rest of the discretion was left to be done by the US Department of Treasury and the IRS. The regulations were issued by the IRS and the US Department of Treasury, as final regulations, on January 17, 2013. The Intergovernmental Agreements (IGAs) that work on the number of foreign jurisdictions around the globe is taken care of by the US Treasury. It works for improving international tax compliance and its ways of enabling and complying with FATCA. For certain jurisdictions, the IGAs are leveraged to change a few complying activities that work differently depending on their jurisdictions. The company is responsible to monitor these changes to ensure the end result remains the same.
FOUR FACTOR REQUIREMENT of FATCA
- Enhanced due diligence on the account holders and investors
Financial institutions are asked to employ prescriptive due diligence procedures on their account holders, investors, and other persons for obtaining required documents.
- Tax Reporting
The financial institutions are required to report not only the transactions but even the financial account relationships to the IRS and/or their local government.
- Tax Withholding
The Financial institutions are asked to withhold US tax from varieties of transactions and payments made to recalcitrant accounts and non-participating foreign financial institutions or the NPFFIs’. A recalcitrant account holder is an account holder of a participating FFI that does not provide adequate and proper documents in the given timeframe.
- Governance
This law of FATCA requires many foreign financial institutions to enter into an agreement with the IRS. The FFIs may appoint the RO in order to report to the IRS with the certifications of all the FATCA compliances.
CERTIFICATIONS
The law of FATCA is applicable on the FFIs and on the US withholding agents, known as USWA. There are certain FFIs’ that must get into an agreement to show their compliance with the law. To get into this agreement, these FFIs’ are required to provide a certificate of compliance to the IRS. Hence, the IRS states that to get into this agreement and provide the certificate, the FFIs’ must appoint an RO who would be responsible for making these certificates. If the FFIs’ fail to provide these mandatory certifications, they could be considered as the defaulters whose agreement would be terminated by the IRS. This would also imply that the FFIs’ would be liable to pay the withholding tax penalty under FATCA. Although the compliance certificate is not included in the IGA model, the global organizations that exist in FATCA and IGA jurisdiction must be a part of the global compliance program. A local control framework must be provided in the jurisdiction to avoid being questioned for their compliance or showing signs of non-compliance.
Suggestions have been made to make a sub-certification program implemented internally while a separate program must be introduced for the USWA that need not certify. This industry could independently ensure the compliance of law as per the regulations and could save hefty penalties charged on failures due to the unknown in compliance.
Final Regulations outline the following one-time certifications that are mandatory-
- The Completion of due diligence and documentation requirements on pre-texting accounts – that needs to be created 60 days after the 2nd anniversary of the FFIs’ agreement.
- No formal or informal practices are in place from August 6, 2011, through the date of such certification to assist account holders in the avoidance of chapter 04 – which needs to be created 60 days after the 2nd anniversary of the FFIs’ agreement.
Along with the above-mentioned certificates, the RO must regularly certify with the IRS to show the effectiveness of all the regulations. It should also maintain effective internal control and some of the duties performed by the RO include –
- The RO established a compliance program that has been in force to date for the FFI agreements and has been subject to review of its effectiveness.
- There were no or very few failures during the certifications and even these failures were taken to remediate such failures and prevent them from recurring.
- The withheld payments, deposits, or reporting of their failure under the FFI agreement could be corrected by the FFI through payments of the taxes, dues, interests, and penalties. Along with that, an appropriate return is also filed with the help of these ROs’.
To ensure these agreements are followed and their requirements are fulfilled and adhered to, RO comes with great responsibilities. As there is about time for certifications to start post coming into an agreement, there is a controls framework established to comply with the periodic certification requirements.
The Final Regulations do not specify a person who could be entitled to the RO position but this is the responsibility of PFFIs’ to determine who fits the shoe best. FACTA is a tax regulation but its effect is far beyond the reach of taxation. It has affirmatively shown its impact on client onboarding, maintenance, and transaction processes with year-ending reporting. Hence, an RO is not necessarily required to be from a tax background. Any powerful individual in the firm that holds access and capabilities of implementing regulations of compliance in various departments of a firm is the best fit for the position. Showing compliance certification, an RO indicates his/her interest in providing a helping hand in the development and implementation of FATCA and its policies.
The organizations are more concerned with the technological changes that need to be adapted in order to fit the FATCA requirements. However, it requires more than just technological advancements, a proper controls framework. The FFIs, the USWA, and the multinationals that have started paying more attention to check if their activities are efficient and adequate for the FATCA regulations have come to the realization that their existing policies and tax controls were barely efficient or even real. With the introduction of a proper controls framework, it is estimated that the organizations would not only tackle the previous issues but even control the estimated challenges to come post implementation of the regulations. The whole idea of introducing a new framework for the sake of complying with just 1 regulation is relatively new for the FFIs but that is not exactly how IRS sees this. The IRS, in fact, has noted in its IRS Internal Revenue Manual that, “Evaluation of the written procedures (or lack thereof) may provide the examiner with an indicator of the overall reliability of the US entity’s existing withholding tax functions such as withholding and reporting of the non-resident aliens. The assessment may help in the determination of the extent of additional audit procedures, such as the review of account files statements and withholding certifies.” Hence, having a potential framework is considered to be an important factor for the US.
While building an effective controls framework, the organization must know the following information for having a better understanding of the FATCA regulations.
Since an organization would be affected in all ways, a FATCA controls framework must be designed in such a way that it spins around the foundation, business, and regulatory requirements. It must cover the FATCA impacted areas like creation, purchase, sale, and liquidation of the legal entities, client account due diligence, transaction process, tax withholding, reporting, and certification/governance. The objective is to bring into light the risks of non-compliance and provide a leading practice that could be followed with uniformity. It must not only define the controls but help to fill the gaps if any.