Countdown to FATCA Registration: Identify and Tell IRS Who's on the Hook
With just six months before financial firms must begin implementing a new U.S. law designed to catch potential U.S. tax evaders living overseas, they need to make some tough decisions on just who will be on the firing line to ensure compliance, warn tax experts.
The U.S. Internal Revenue Service wants to ensure it gets its fair share of taxes and U.S. persons aren't shirking their responsibilities to report taxable income. But it has enlisted financial firms such as investment funds, broker-dealers and banks -- to help out.
Under the new Foreign Account Tax Compliance Act, as of January 1, 2013 financial firms will need to file paperwork online with the Internal Revenue Service agreeing to disclose to Uncle Sam certain information about U.S. persons who have ownership interests in foreign financial assets. If they don't, they will be subject to a 30 percent withholding tax on U.S. sourced income and gross proceeds, which may not be recoverable. Beginning in 2014 and over the next several years, PFFIs will be required to cough up the names of account holders exhibiting US indicia to the IRS.
While financial firms are spending much of their efforts to make the necessary operational changes to find and disclose U.S persons who have ownership interests in foreign financial assets, they may have accidentally shortchanged one key -- and immediate requirement. That is designating and telling the IRS who will ultimately bear responsibility for filing out the initial registration documentation as a PFFI and who must certify compliance with FATCA.
There are three types of individuals who can potentially participate in the process of registering as a PFFI: a responsible officer (RO); up to five point of contacts (POC) and an authorized third party (ATP).
"Identifying the responsible person and others within an organization needs special consideration," recommends Brent Lipshultz, a tax partner in the accounting firm of EisnerAmper in New York. "Educating those within the organization who will be considered for the roles early will be one less compliance headache."
The task has to be done sooner rather than later if the financial firm is to meet the January 1 deadline to file out the PFFI paperwork. The selected individuals will likely need to undergo some rigorous training on the overriding principles of FATCA and the devil is in the detail. The legislation is pretty mindboggling when it comes to how PFFIs can receive their privileged designation and come up with names of relevant U.S. persons for the IRS. PFFIs, which have multiple affiliates, must select separate ROs and each one must register with the IRS.
Among the group of designated parties, the RO carries the greatest liability. He or she will be the one signing off on the PFFI registration agreement with the IRS under penalty of perjury -- and the one who will be questioned by the IRS if any erroneous information is discovered.
Lipshultz wouldn't specify the criteria for who should be selected as a RO but says it is likely to be a compliance officer, in the case of a hedge fund or private equity fund. A random telephone poll just conducted by www.iss-mag.com of a dozen custodian banks and alternative investment funds shows that custodian banks are having the hardest time making the necessary selections. While all of the hedge funds had tapped their compliance officers as the ROs, the banks were struggling between whether the designation should fall to a compliance, legal expert, or tax expert.
"It's a lot easier for hedge funds because they typically have only dedicated compliance executives to fill out regulatory paperwork, but the task falls on overlapping jurisdictions at banks," says a compliance manager at a non-U.S. custodian. "Because the potential for error -- and liability -- is likely far greater due to the possible large number of U.S. accountholders, banks face a far more difficult challenge in picking who will take the heat."
PFFIs must register for that designation online and the paperwork will require information such as the types of accounts maintained by the PFFI; the mailing and physical address of the financial institution, the date and country of incorporation, the country of tax residency of the FFI, and the identity of the countries in which the institution has branches. Each member of an expanded affiliate group must register in order for any of the others within the group to do so.
The next related task: to validate its identity the RO must also include its social security or Individual Taxpayer Identification Number (ITIN) so the IRS can assign a special FATCA individual identification number which will be needed to sign the agreement. If the individual does not have a U.S social security number or an ITIN, a new form 8956 can be provided to the IRS to verify the RO's identity.
An RO could designate a so-called authorized third party or ATP to perform all of the registration duties which include signing the FFI agreement and certification process. That person could be another in-house employee or a US licensed tax professional, with the proper means to verify his or her identity.
"ROs might consider applying for an ITIN now or file Form 8956 when it becomes available so that they will be able to register on behalf of the financial institution with the IRS when the registration system becomes available," says Lipschultz. "ROs who don't want to apply for a US ITIN or file Form 8956 should start thinking about who they want to designate as a third party and discuss it with them to avoid a delay in their ability to register." It can take a few weeks for the IRS to issue a FATCA individual identification number.
While the legal buck stops with the RO, he or she is unlikely to be the one doing the nitty gritty work of filling out the registration documentation. The IRS also wants PFFIs to name up to five “Point of Contact” persons who are assisting the RO in completing the registration process and are able to receive otherwise confidential tax information that is needed in carrying out responsibilities related to FATCA, aside from signing the agreement or certification or responding to IRS communication, relating to the institution’s compliance with FATCA. There must be one in house executive as a "Point of Contact" and certain U.S third parties can be named.
"We will likely choose a combination of tax and operations executives as points of contact as they are the ones who have the most knowledge in retrieving the data," an operations executive at a global custodian bank tells www.iss-mag.com. "They are the logical choices and we will be completing an extensive education program." He won't provide too many details other than to say it will last for five months this year and resume next year when the IRS irons out further details on how to implement FATCA.
written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com)