The Fact on FATCA: How Third-Party Data Can Ease the Process

By its very name, “big data” sounds like something that always makes business more complex. But here’s one instance, from the world of tax compliance, where the opposite is the case.

The Foreign Account Tax Compliance Act, or FATCA, requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. The June 2016 deadline for FFIs to review existing accounts is fast approaching at the same time as many of the institutions are also planning their Common Reporting Standards (CRS) account review approach.

The time is now for them to determine the best way to use data to improve efficiency and process. Why? The main reason: customer service. A large portion of the FATCA and CRS effort requires financial institutions to reach out to preexisting account holders for new tax forms. Obtaining this client tax documentation presents numerous challenges to a financial institution and often leads to a process of multiple iteration that frustrates clients.

FATCA and CRS allow an alternative to the standard approach of soliciting and validating client tax documentation, which can also assist in automating changes in circumstances monitoring and, on top of that, further improve an FFI’s data quality. Third-party data can be leveraged to classify certain types of entity statuses for FATCA and CRS, which can ease the effort by eliminating the need to collect and validate IRS Tax Forms W-8/W-9 or entity self-certifications. Classifying accounts without the need to obtain tax documentation can save organizations the cost of soliciting and validating tax documentation and improve the customer experience.

Dun & Bradstreet is working with global tax leader KPMG to help financial firms make some of these results a reality, and here’s what you need to know.

Regulations Overview – What You’re Allowed to Do

FATCA states that a withholding agent may rely on documentation collected by a third-party data provider with respect to an entity. If it meets certain conditions, that third-party data can be used to classify offshore entity clients for certain entity types, such as Active Nonfinancial foreign entities (NFFEs) and International organizations.

FATCA regulations also state that preexisting accounts, which generally include accounts opened at a financial institution prior to July 1, 2014, and potentially entity accounts opened between July 1, 2014 and December 31, 2014, must be properly reviewed, documented and classified by June 30, 2016.

The CRS due diligence procedures also provide an exception to the requirement to obtain a self-certification where the financial institution can reasonably determine, based on information in its possession or that is publicly available, that the Account Holder is not a Reportable Person. By utilizing data, an FFI can determine that a client is not reportable and therefore does not have to solicit a CRS self-certification.

Data that can be utilized for a non-reportable entity includes:

  • Information published by an authorized government body of a jurisdiction. For example, the list of Foreign Financial Institutions published by the US tax administration;
  • Information in a publicly accessible register maintained or authorized by an authorized government body of a jurisdiction;
  • Information disclosed on an established securities market;
  • Information previously recorded in the files of the financial institution;
  • A publicly accessible classification based on a standardized industry coding system. This will include any coding system employed by the financial institution which is based on such a standardized industry coding system.

Where the financial institution relies on such information, it must retain a notation of the type of information reviewed and the date on which the review was carried out. For CRS 2017 adopters, the review of preexisting entity accounts is to be completed by December 31, 2017. 2018 adopters have until end of 2018 to review these accounts.

The Tools to Help

An FFI has can use technology tools that utilize third-party data to classify preexisting accounts for FATCA and CRS. These tools match and compare an FFI’s client account information to a third-party data source and, once compared, can catalog account records for certain FATCA and CRS classifications. This solution reduces the need to solicit and validate tax documentation, saving one costly step in the process.

Once linked, the accounts can be monitored for change in circumstance against a third-party data source, improving accuracy and providing confidence in the classifications. This procedure, along with technology, seamlessly provides the chance for an FFI to compare its client account information to a third-party source that can assist the quality assurance and improvement of the account data.

The Payoff

Two large global financial institutions recently received strong results by providing Dun & Bradstreet with a random sampling of their preexisting entity account data to determine what accounts could be classified for FATCA by utilizing D&B data.

First, the financial institutions’ data was uploaded into a tool that matched their data to ours. Based on the sampling of more 7,000 records, almost 40% of the accounts were classified for FATCA via the D&B data. For those accounts, FATCA status was clearly established, eliminating the need for the financial institution to reach out to its clients and request tax forms. Adding to the benefits, during the proof of concept, the FFIs were able to improve their customer account data by comparing it to the Dun & Bradstreet data files. For example, a number of records lacked data elements, like address or country, and the D&B data filled in many of the gaps.

By doing what is permissible under CRS and FATCA, an FFI can make a cumbersome documenting process simpler for customers, more efficient for the institute itself – and, on top of it all, improve overall data quality.

Note: This information does not constitute tax or legal advice and is provided for informational purposes only. Please consult your tax advisor for more information.