Tax evasion is commonplace across the globe and every country is trying to curb this malpractice by enacting stiff laws and regulations. To counter this, in 2010, the US announced a federal law, the Foreign Account Tax Compliance Act (FATCA), with the objective to minimize offshore tax evasion by US persons and US-owned foreign entities. Such a law can be effective only if it is easy to implement and well accepted across jurisdictions.
To address legal impediments such as conflicts with respect to region-specific data privacy laws, and help financial institutions ensure compliance, the US treasury has adopted a collaborative approach for FATCA implementation through Intergovernmental Agreements (IGAs). It has issued two Model Intergovernmental Agreements (IGAs) Model I and Model II in this regard. In a broad sense, under both IGA models, Foreign Financial Institutions (FFIs) would have to develop new capabilities and solutions to meet FATCAs reporting requirements pertaining to the accounts of US nationals. FFIs are now required to be FATCA compliant, failing which, penalties for regulatory non-compliance or tax evasion may apply.
Challenges faced by financial institutions in FATCA reporting
From the perspective of financial institutions, many challenges may arise in the course of ensuring FATCA compliance, such as:
- Data integration and aggregation issues resulting from data residing in varied and numerous source systems
- Complexities arising from varied reporting requirements due to the spread of operations across geographies
- The need to future-proof solutions and make them flexible to handle similar tax reporting requirements that may be introduced in the future
The need for an extensible solution
Based on intergovernmental agreements with the US, FATCA has already been enacted by several countries and is in some stage of adoption by others. In this regard, one such development is the Automatic Exchange of Information (AEOI), also referred to as the Common Reporting Standard (CRS) or the Global Account Tax Compliance Act (GATCA), issued by the Organization for Economic Co-operation and Development (OECD). This is a global standard for the automatic exchange of financial information in tax matters, which requires regulatory authorities to obtain information from the financial institutions in their purview and automatically exchange this with other jurisdictions. The standard developed by OECD is in response to a mandate by G20 for a global model for automatic information exchange. Financial institutions would therefore benefit from having an extensible FATCA reporting solution, which can be easily enhanced to cater to OECD reporting requirements and similar requirements that may arise in the near future.
To enable this, it is extremely important to look for a generic approach for data integration or consolidation and data modeling. Financial institutions need to focus on the following two factors to be able to ensure compliance with FATCA and any other similar law in the future:
Flexible data integration: FATCA will require data to be consolidated from different business entities within a banking organization. A data integration approach based on common interface file formats (CIFF), to receive and process data from diverse source systems, is therefore desirable. The flexibility of this approach allows organizations to add, modify, or delete data entities and elements in accordance with changing requirements.
Extensible data modeling: As of now, a data mart containing all the data required for FATCA reporting will suffice for FATCA implementation, but in case of future enhancements, this data model will need to accommodate new data entities or elements. This means that organizations should look at introducing scalability and flexibility into their data models by either revamping the existing systems or replacing them altogether.
In summary, banking organizations across the globe should not treat FATCA as one of the last few laws to be enacted, but should preempt that similar requirements and standards may be introduced in the future. In order to be better prepared for evolving regulatory requirements, a well-defined, extensible, and flexible approach to data integration and analysis, is unarguably the best step forward.