The draft regulations for the Foreign Account Tax Compliance Act (FATCA) have been further refined in a February 2012 IRS update release. Foreign financial institutions (FFIs) now have improved guidance on how U.S. customer and entity data should be inspected and classified for withholding and reporting purposes. It’s clear that the IRS is seeking to improve transparency in the process. But does it go far enough?
The updated regulations propose to reduce the burden on financial institutions when conducting due diligence procedures for accounts with U.S. indicia. (For example, how to treat depository vs. custodial accounts) But, these procedures still present a nightmare for compliance officers and tax professionals in financial institutions when data is outdated, flawed, or inaccurate.
If data is incorrect, banks could potentially report erroneous information and fail to identify U.S. accounts that fall within the scope of FATCA. This will then impact a participating FFIs ability to implement the proper withholding, which will lead to a significant monetary penalty for the institution itself.
To avoid this, here are some helpful tips to ensure quality of your data for FATCA purposes:
- Ensure individual accounts are differentiated and separated from entity accounts, particularly individual accounts that may be associated with entity accounts. For example, X may have a joint deposit account of $50K with Z, his wife, but Z is also listed on the signature card for her solo proprietorship, Mega Software, which has an account balance of $500K. Your institution’s data should reflect the clear divide between these accounts.
- Make certain that fields populated with potential US indicia are formatted consistently to enable identification in an electronic search. For example, a US tax ID number and social security number can be easily interchangeable if not formatted correctly, due to the same number of digits contained in each set. In addition, if data is being collated centrally (head office) from multiple regions, the formats and structures of data feeds are likely to vary by region.
- Maintain original documents for individual and entity accounts with account balances that exceed $1M. Pursuant to the draft regulations, such accounts will have to undergo electronic and manual document searches, so it is important that data is identical in both sources for accurate reporting. Manual remediation of electronically stored information [from paper documents] may be required if key data is missing or incomplete.
Vice President, Strategic Consulting, Trillium Software
Jon has over 12 years experience in information management and data analysis, where he has worked for both global consultancies and software vendors in many international clients. Initially working within direct marketing operations, assisting clients to build a single customer view and optimise customer analytics, Jon developed a detailed understanding of managing disparate data systems. Most recently, Jon has focused on data quality management and has advised clients to plan their data quality strategy and build business case justifications for data management initiatives such as Data Governance and MDM. Jon has held senior consulting positions at both HP Consulting and Deloitte.