This is a guest post by Hassaan Bhagat

The Foreign Account Tax Compliance Act (FATCA) is a US Federal law which was introduced as a part of the Hiring Incentives to Restore Employment (HIRE) Act in 2010 to increase tax transparency/revenues. The regulation requires all Financial Institutions (FI) (banks, funds, brokers, custodians, asset managers, insurers, etc,) outside of the US to search their records for any listed US persons and report their assets and identities to the US Treasury.

There are thousands of US citizens with non-US assets such as astute investors, dual citizens or legal immigrants. FATCA is aimed at obtaining information about them and bringing them in the US tax net. During a discussion at the US Congress, it was revealed that approximately $100 billion is lost by the US annually due to tax evasion and avoidance by citizens residing outside the US.

As per the regulations, all FIs are required to comply with FATCA requirements else they will be subject to 30% penal withholding on specific types of incomes received from US sources.

Implementation of FATCA has evolved since the enactment of the statute, but it is clear that the implications surrounding this new regime are wide-ranging for foreign FIs.

There are several practical implications which FIs face or are currently facing in implementing FATCA. These are divided into two board categories:-

(a) Implications on business models / operations

(b) Implications on Information Technology (IT) systems.

Let’s analyze both of them.

Implication of FATCA on business models

FATCA will have an impact on several operational aspects of any FI. It will entail them to assess the impact on their operations, register with the Internal Revenue Services (IRS) i.e. tax authority of the US and devise a detailed implementation framework. Foremost is the change in account opening documents (account opening form, AML / KYC Form, Terms & Conditions etc) to attract new customers in accordance with FATCA regulations.

FIs will have to conduct a detailed impact assessment to identify the implications of FATCA and prepare adequate strategies in response.

As FATCA targets information disclosure from FIs, it will also compel changes in existing data privacy and disclosure legislation of relevant jurisdictions.

Will FATCA affect Financial Institutions?

Under FATCA, different FIs will have varying requirements which will be identified by appropriate entity classification of the FI. In order to be compliant with FATCA requirements, an FI will need to perform its legal entity analysis to understand what obligations it will have. The FI will then have to assess the applicability of FATCA on them according to the guidelines issued by the relevant government authority.

On a practical note, this can be a very challenging task for any FI as all the subsequent requirements for particular FIs varies according to their entity classification. Giving an example of such difficulties, ‘Piraeus Bank’ in Greece had to perform entity classification analysis for 250 of its entities in 7 countries for FATCA classification.

Registration with IRS mandatory for compliance with FATCA

After entity classification, FIs will need to register with the IRS to commence FATCA implementation. Once this is done, its obligations under FATCA officially commence.

Not all FIs though, are required to register with the IRS. FI’s classified as ‘Exempt FIs’ under FATCA regulations will not be required to register themselves with the IRS. However, they will still have to submit and claim their exemption from FATCA regulations.

With regards to FIs which are neither exempt nor complying with FATCA regulations, they will be classified as ‘Non-Participating Financial Institution’ by the IRS and will be subject to penal withholding of 30%.

Smooth Implementation or Chaos?

Implementation of FATCA necessitates an appropriately defined framework or it may result in chaos. It requires FIs to set up a FATCA implementation landscape to ensure smooth implementation across the board. The relevant government authority may develop and provide procedural guidelines to facilitate the management of FIs in their efforts towards FATCA implementation.

FATCA – A burden?

FATCA will definitely result in increased compliance, operational and technological costs. FIs may require improvement in their documentation/record keeping procedures for all documents obtained, to determine whether their clients should be classified as ‘US’ or ‘Non-US’ persons.

Obtaining the initial information does not conclude the FIs’ obligation for compliance. A continuous monitoring of client/payee’s information for FATCA status is required which may well be seen by the entity as additional cost.

Launching new products will be harder than ever

To avoid inconvenience or additional costs, FIs may require strategic shifts regarding their targeted client segments, products and investment options. Analyses will need to be performed to take into account different products and services offered by the FIs.

FATCA regulations impact certain types of financial accounts maintained by FIs and product analysis should be performed to evaluate whether the FI’s products and services fall under the prescribed ambit.

Legal aspects of FATCA

Legal consultants of the FI will be required to mend/update/modify terms and conditions of various service offering of the FI to include specific terms which allow the FI to disclose their information to the IRS.

Many countries have already amended their local laws to cater to FATCA’s requirements including the Republic of Azerbaijan which has already amended its Banking Law, Tax Code, Law on Personal Data and Insurance Regulations to embed necessary the FATCA requirements in its legislation.

Don’t just implement it, train yourself too

Training of client representatives and compliance/risk management personnel and other relevant members of the FI will be required on immediate as well as on continuous basis. It will be essential to ensure technical advice on FATCA and subsequent developments are understood and disseminated appropriately across the entity/group.

FIs will be required to develop awareness programs and implement procedures to ensure that training is provided to all requisite staff. In addition, the nominated responsible officer will need to ensure that training sessions are held regularly, as appropriate and for all relevant new staff.

IT Systems will be under FATCA Clouds

As mentioned earlier, FATCA will impact almost every activity/function of FIs and IT systems are no exception to this. FATCA will have a significant impact on IT systems of the FIs. As the basic data capturing documents will evolve (account opening form, AML /KYC Form), IT systems will need modification to capture FATCA-related information of customers.

Databases will need modification to store FATCA-related data and produce reports as per the requirements of relevant forms and relevant government authorities.

FIs will have to assess and address implications of FATCA on their IT systems keeping in view the following abilities to:

  • comprehend new information requirements and on-boarding requirements;
  • withhold payments when required;
  • report certain information to the IRS and local authorities;
  • accommodate changes necessitated by other global tax regulations.

Collect customer information

The elementary implication will be on the front-end IT systems of FIs. These will require significant modifications to include US indicia (indicators to identify US account) and FATCA fields for new customer on-boarding. FIs will be required to obtain and store static data on account holders that is not required today.

Oracle and many other ERP providers have already launched their FATCA compliant system interface for FIs.

Store the information and generate reports

Changes in account opening and other documents are likely to require changes to underlying customer systems and databases to store additional data items. The FIs will be required to update their system database to store and recreate information captured by front-end IT systems.

MIS generating system modules of the FI will require modification to generate relevant customer reports and details.

Penal Withholding – A cost of non-compliance

A most common misunderstanding under FATCA is with regards to penal withholding of 30%. It should be duly noted that this is not the regular withholding, it is meant to penalize only the non-compliant FIs and customers.

However, new withholding responsibilities are required in this regulation and therefore additional systems capabilities and infrastructure will need to be developed to track for transactions producing withholdable payments to ensure that necessary business rules are applied.

Consistency at all times

All the front-end and back office systems will require integration to cater to FATCA’s requirements. FIs will have to ensure that all information captured via front-end systems is adequately transferred to the back-end systems and properly maintained in the database management system.

FIs with branches in multiple jurisdictions may face greater difficulties in this regard since they will need to ensure that front-end systems across all their worldwide branches capture the same (required) information.


FATCA has emerged as one of the most impactful tax legislation with far-reaching consequences. It has already impacted a large number of FIs across the globe. As elaborated above, compliance with FATCA is complex, may involve additional costs, is time consuming and requires co-ordination of several business units of the organization.

Nevertheless, FIs opting to comply with FATCA requirements in full should consider the above-mentioned implications of FATCA for their impact assessment and FATCA readiness.

Lastly, while implementing FATCA, FIs will need to ensure readiness for another tax transparency regulation i.e. Automatic Exchange of Information (AEOI), commonly known as the Global Account Tax Compliance Act (GATCA) which may come into effect in next couple of years.