M E M O R A N D U M
February 8, 2010
TO: Distribution
FROM: Burt, Staples, Maner, LLP
RE: Do You Have a 2010 Strategy to Deal with Cost Basis Reporting and FATCA?
Proposed regulations mandating cost basis reporting (“CBR”) and
potential passage of the Foreign Account Tax Compliance Act (“FATCA”)
constitute the biggest operational and systemic challenges that U.S. and
non-U.S. financial institutions have had to face since the inception of
the section 1441 regulations a decade ago. Implementing either one of
these new requirements would be a major challenge for any organization.
Do you have a strategy on how to reach compliance on both fronts without
incurring unnecessary costs?
To briefly recap the situation, CBR
for corporate stock goes into effect January 2011 and expands to cover
all stock and debt by 2013. In addition, Congress is likely to pass
FATCA this year which would create an entirely new layer of
documentation, information reporting and withholding requirements on
payments, including certain gross proceeds, made to (and through)
non-U.S. persons. Although the current version of FATCA would not go
into effect until 2013, the operational, systemic, and raw data
implications of FATCA are so extensive that U.S. withholding agents,
qualified intermediaries and non-qualified intermediaries should begin
their compliance efforts as soon as FATCA passes in order to have any
chance at keeping their efforts on track and timely.
Four-Step Phased Implementation Process to Save Costs: We have
found that our clients have been able to best contain costs and comply
with reporting rules like CBR and FATCA through a four-step phased
implementation program that:
- Defines what is required versus what is “nice to have”, i.e., nonessential;
- Leverages existing systems and procedures where possible;
- Avoids costly changes because an issue was not recognized in time; and
- Assures that the final system is in full compliance with the law (thereby avoiding the expenses of penalties, bad press and adverse customer reactions).
Step 1: Define What Is Required For Your Specific Business:
The first step is to understand the two regimes and more importantly
what changes will – and will not – be necessary for you to make to
existing systems and procedures. For CBR, some details of the proposed
regulations may change upon finalization, but that is not a reason to
delay planning, given the statutory requirement to do such reporting for
stock next year. The regulations are lengthy and complex and it is
important to parse them thoroughly to determine what is relevant for
your business lines.
We expect the final FATCA legislation to
bear a close resemblance to the “extenders” bill that passed the House
in December 2009. FATCA’s main concept – to force the disclosure of the
identities of U.S. investors in offshore entities and accounts on pain
of a substantial withholding tax on U.S. source income and gross
proceeds – has strong bipartisan support. As with CBR, the necessary
changes to systems and procedures are comprehensive and the timeframe to
make them likely will be short.
Step 2: Assemble
Integrated Project Teams: The second step is to assemble a
specific team to deal with the new requirements of each regime. The
nature of the changes will require integrated, multidisciplinary efforts
- not just an isolated tax or IT project. Each regulatory regime merits
its own team and budget and will require the support of senior Client
Letter: CBR and FATCA February 8, 2010 Page 2 management. The project
teams should comprise not just tax and IT professionals, but also
relationship managers, back office personnel and project management
specialists. We have found that those organizations that appoint a
senior executive to be responsible for the successful result of the
project tend to be the ones that reach their goal of implementing a
compliant system.
Step 3: Perform “Gap” Analysis:
The third step is for the project teams to perform a “gap” analysis to
determine the difference between what the institution’s current systems
and procedures are capable of performing and what they will be required
to do with respect to the new legal requirements. This should be done
from a tax, operations, and systems perspective in order to be
effective. The goal is to determine whether existing systems and
procedures can be modified or adapted to meet the new requirements (and
hopefully save costs) or whether it makes better sense from either a
cost or risk perspective to purchase new systems.
Step
4: Implement Measures to Close the “Gap”: The fourth step is to
implement the operational processes and systems changes to bridge the
gaps identified in Step 3 between current capabilities and what is
required. It is important to evaluate objectively and realistically any
proposed solutions, whether developed in-house or by third parties.
Given the amount of investment dollars required – coupled with potential
penalties if the implementation is wrong – proper due diligence now
could prevent expensive changes, delays in production schedules,
unnecessary re-engineering of processes and systems, and penalties.
Conclusion: It is never easy to implement complex
new withholding and reporting regimes such as CBR and FATCA. However, we
hope that you may find our brief description of a phased implementation
process to be of some help in addressing what you will have to do. With
proper planning and a sound approach, you should be able to save costs
and headaches down the road.