US IRS Launches Data Exchange Service for Fatca Reporting

The Internal Revenue Service (IRS) announced yesterday that it has launched the International Data Exchange Service (IDES), a new online platform for reporting under the Foreign Account Tax Compliance Act (Fatca).

Fatca requires foreign financial institutions to report the information of certain clients who are US citizens. Firms had to register with the IRS by the last day of 2014, and this year the focus of firms shifts to reporting the client data. The first reporting deadlines fall in March and May, with a due diligence review due at the end of June.

IDES allows registered firms and national authorities that have signed Intergovernmental Agreements (IGAs) with the IRS to securely report the relevant data.

In a statement, IRS commissioner John Koskinen called the launch of IDES a "milestone" in Fatca implementation. "With it comes the start of a secure system of automated, standardized information exchanges among government tax authorities. This will enhance our ability to detect hidden accounts and help ensure fairness in the tax system," he said.

For some firms, getting ready to comply with Fatca has been challenging, as they have had to review their client base and change their onboarding processes. But the penalty for non-compliance-a 30% withholding tax on US-sourced payments-has ensured that 145,000 financial institutions have registered, says the IRS, and more than 110 jurisdictions agreed to IGAs.

Fatca has also inspired similar initiatives, such as so-called "UK Fatca" and the Organization for Economic Co-operation and Development's Automatic Exchange of Information (AEoI).

With these added layers of complexity, firms need flexible, adaptable systems, says Steve Engdahl, Boston-based senior vice president of product strategy for GoldenSource. Many of the early issues around Fatca, such as legal issues at a national level, have been ironed out, he says. "But there are still issues around how firms want to capture the data, encrypt the data, maintain it and how does it need to be formatted to be reported to the IRS," says Engdahl.

Some firms have adopted a tactical approach to compliance, he adds, and this "creates too much of a burden on the end-consumer, which is not good customer service. We are seeing situations where customers who might have multiple relationships with a bank-different sets of accounts and lines of business-are being sent multiple, identical questionnaires because the different parts of the bank don't realize they're dealing with the same person."

The reporting formats add another level of complexity, Engdahl adds. "There are many different forms that are very particular in their rules and yet in some cases, leave room for ambiguities. Firms need to gain a lot of experience just purely in what the formats are and what are the IRS's rules for how the fields need to be populated. And then they need to figure out where to gather that information from within their organization."

Much of the complexity of reporting to AEoI and the various versions of Fatca is mitigated for firms by the IGAs or standardization effort like the OECD's Common Reporting Standard (CRS) framework. But that may not reduce the burden entirely, says London-based Mark Davies, general manager of Avox: "The CRS is absolutely critical, but even with that in place, we are going to witness very different approaches to the implementation of Gatca due to different currencies of each country and the fact that legislation will have to be passed in every country that wants to sign up.

"Even though Gatca is likely to be implemented no earlier than in 2017, I think it's fair to say that it looks like an ambitious target. Similar to Fatca, we expect to see a similar phased-in approach to the implementation of Gatca."
Colin Camp, Hong Kong-based managing director of products and strategy for Dion Global Solutions, says: "Firms need to make sure their systems are enhanced enough to carry the extra static data required, including the additional jurisdictional information. The problem is that regulations keep getting changed and new ones come along. Solutions that can sit alongside firms' core systems mean they don't need to be constantly updating their accounting systems."

For Engdahl, it is important that financial institutions have a consolidated entity master that contains the Fatca attributes, as well as other information, such as minimum balance of an account, "since many of the rules are driven by the size of the account or the overall extent of the customer's relationship with the firm across all their accounts.

"It's best not to take a hard-coated, Fatca-specific approach, but rather to implement a platform that has the flexibility to support changes to rules and requirements in different jurisdictions and the potential to report to another country that has a Fatca-like requirement in the future," he added. "This is not a single regulation that gets set down, is done, and everyone goes on to another project. Fatca is still a moving target."