Foreign Tax Compliance Will Cost Banks Up to $80 Million, Each
August 25, 2011
Crossbridge, a London-based consultancy for the investment banking industry, on Thursday offered one of the few public estimates for how much it will cost a bank to comply with the pending U.S. Foreign Account Tax Compliance Act.
The tab: Anywhere from $30 million to $80 million, each.
Plus, that figure doesn’t include any ongoing annual costs of financial firms helping the Internal Revenue System catch U.S. tax evaders abroad.
“FATCA is a huge issue for the banking sector, and one that will far outweigh the costs and challenges of CASS compliance,” says Louise Courtman, associate partner at Crossbridge in London. “With 15 months to go before FATCA is introduced, the industry’s focus on the impact of these new regulations is sharpening. It makes sense for banks to start applying FATCA due diligence now to all new clients that they take on.”
The estimate represents an analysis Crossbridge made interviewing a “handful” of UK investment banks on both the costs of conducting an internal impact analysis of FATCA and changing operational procedures and technology. FATCA will not only affet investment banking but wealth management, retail banking and fund management firms, which often operate under the same parent roof.
The highest implementation costs, says Courtman, will involve changing client onboarding and classifications.
Financial firms which agree to become participating foreign financial intermediaries or PFFIs will need to beef up the documentation and procedures they use to identify US investors or prove they don’t have U.S. investors.
Financial firms which also act as withholding agents must adapt their tax withholding systems to categorize investors in new categories and apply the correct withholding tax under FATCA.
Those categories include PFFI; tax-exempt entity; non-participating FFI; deemed compliant FFI; and non-financial foreign entity.
Current U.S. tax laws require that U.S. investors disclose any accounts in foreign assets and report any income to the IRS. But the IRS couldn't really enforce the rules because it didn't have the necessary information. FATCA will give them just that
Under FATCA, financial firms – those defined as a bank, custodian or just about any entity in the business of making investments – must sign an agreement with the IRS to be designated as a “participating foreign financial institution" or PFFI.
If they don't their U.S. withholding agent will have to withhold 30 percent of any U.S. payment of dividends, interest or gross proceeds made to the fund. If the foreign fund is a PFFI, the U.S withholding agent – typically a prime broker or custodian – will not have to withhold the payment but the PFFI would have to apply the withholding to its investors – both U.S. and non U.S. persons – if it does not have the proper documentation.
Prime brokers, U.S. mutual fund families and fund of hedge funds that have foreign investors or enter into certain derivative contracts with non-U.S. persons will have to collect an FFI number assigned by the IRS to that foreign investor or derivative counterparty and verify that number on the IRS’ database. Without that verification, a withholding tax of 30 percent of U.S. sourced payments would apply.
