In a recent article that first appeared in Irish Tax Review Vol.27 No.2, Amanda Murphy, FATCA Lead for Ireland, and Lisa McCleane, Tax Assistant Manager, discuss the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS).  These two regulations promise to have a serious impact on the financial services landscape, both here and abroad.

The Foreign Account Tax Compliance Act (FATCA) is rapidly becoming one of the more pressing concerns for financial institutions (FIs) worldwide, with the 5 May registration deadline for inclusion on the first list of FIs recently passed and the “go live” date of 1 July fast approaching. However, it is not only the Irish financial services industry that needs to be aware of FATCA.

Background
FATCA was introduced in 2010 by the US Government as a means of stemming the perceived loss of billions of dollars in US tax revenue due to offshore tax avoidance. Its objective is to implement improved information reporting to counter tax avoidance by US persons investing or living abroad. FATCA aims
to achieve this goal by requiring FIs worldwide to report to the Internal Revenue Service (IRS), either directly or via their local authority, details of any customers who are (or may be) US tax  residents, US citizens or US entities.

As FATCA has developed, a number of countries, including Ireland, have entered into inter-governmental agreements (IGAs) with the US, thereby implementing FATCA into local law and requiring compliance for locally domiciled companies. The Ireland–US IGA was signed in December 2012 and has been followed by the introduction of draft Financial Accounts Reporting Regulations, which are expected to be finalised before 1 July, and draft Guidance Notes.

How financial institutions are affected by FATCA
The most onerous FATCA burden will lie with non-US FIs (mainly banks, life companies, stockbrokers and other asset/wealth managers) by requiring them to: ascertain their FATCA classification; satisfy registration requirements with the US; identify the FATCA classification of existing account holders; update new-customer on-boarding procedures to include FATCA self-certification requests; and report annually to Irish Revenue.

The fact that an entity believes that it does not transact with US persons will not preclude it from FATCA obligations, in particular due diligence on customers.

FIs wishing to appear on the first published IRS-compliant FI list on 2 June 2014 must have registered on the US IRS portal by 5 May 2014. In order to be included on the second published list, which will be available on 1 July, FIs must have registered by 3 June.

Existing customers at 30 June 2014
Subject to certain de minimis limits, FIs must examine their customer base as at 30 June 2014 for indicators of US status. If such indicators are found, the relevant customers will be contacted by the FI for certain documentation or certification.

New accounts from 1 July 2014
Customers opening new accounts from 1 July 2014 will generally have to provide some form of self-certification.

How Companies Other than Financial Institutions are Affected by FATCA
Where an entity does not fall within the definition of an FI, it will be a “non-financial foreign entity” (NFFE). An NFFE will not have any of the obligations of FIs under FATCA. However, where an NFFE is transacting with a bank or other financial institution, it will be subject to the bank’s new FATCA obligations requiring the bank to identify the FATCA classification of all its account holders. Therefore, the NFFE must be in a position to provide certification of its FATCA classification when requested (typically, on the first occasion after 30 June 2014 on which it opens a new account with an FI). In certain cases, the entity may also be required to provide details of its ownership structure.

NFFEs must first determine whether they are an “active NFFE” or a “passive NFFE” according to Irish FATCA guidance. It is important to note each entity that opens accounts with an FI must determine its own status. To qualify as an active NFFE, the entity must satisfy one of the conditions laid out in the Ireland–US IGA.

There are nine possible ways to fall within the definition of an active NFFE, of which the two main ones are:

• Less than 50% of the NFFE’s gross income for the preceding calendar year or other appropriate reporting period is passive income, and less than 50% of the assets held by the NFFE during the preceding calendar year or other appropriate reporting period are assets that produce or are held for the production of passive income.
• The stock of the NFFE is regularly traded on an established securities market, or the NFFE is related to an entity the stock of which is traded on an established securities market.

A passive NFFE is any NFFE that is not considered an active NFFE. Passive NFFEs will also be required to provide certification of the FATCA status of any controlling persons, as determined for anti-money-laundering (AML) purposes.

How Individuals are Affected by FATCA
Individuals may also be asked to provide certification of whether  or not they are US persons. If an individual is a US person, his or her details will be reported by the FI to Irish Revenue. If the self-certification is contradicted by information obtained by the FI for AML purposes, the individual should expect to receive further requests for clarification from the FI. For example, where an individual certifies that he or she is not a US person but the FI has a US passport for the person on file, the FI will be required to investigate the status further.

In addition, any individual who has an existing account with an FI at 30 June 2014 may be required to provide documentation to the FI supporting his or her status. This could occur where the FI is in possession of information that indicates that the customer could be a US person.

FATCA and Beyond: Expanding Landscape of Financial Information Reporting
Although FATCA is the current tax-reporting concern for Irish FIs due to approaching deadlines, recent OECD and G20 releases show the landscape of tax information reporting is expanding even further. On 13 February 2014 the OECD issued a FATCA-like framework for the multilateral automatic exchange of taxpayer information (for both entities and individuals) – the Common Reporting Standard (CRS). Similarly to FATCA, this framework will require non-financial entities to be in a position to self-certify their status on request.

The timeline for implementation of the CRS by the 44 early adopters, including Ireland, is intended to be 18 months after the equivalent FATCA deadlines. This means an effective start date of 1 January 2016.

FIs and NFFEs must embrace the effects of FATCA and prepare for its implementation now, while considering options to leverage this effort to ensure a seamless transition to the new world of greater tax transparency. FATCA is just the beginning of what in the space of just a few years will be a revolution in the international landscape for exchange of taxpayer information.

_{Copyright of Irish Tax Institute.}
Authors
Amanda Stone, Director, EY Financial Services
Lisa McCleane, Assistant Manager, EY Financial Services