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by Michael Scholl

The latest developments regarding a U.S. law aimed at combating tax evasion were a major source of discussion during DTCC’s 13th Annual Global Tax Forum, held in New York on April 27.

More than 120 tax professionals and other interested parties attended the half-day forum, which DTCC organized to give its clients the chance to talk about complex tax issues with DTCC executives and one another. Attendees included officials from BNY Mellon, Barclays Capital, Brown Brothers Harriman, Citigroup, Credit Suisse, Deutsche Bank, Ernst & Young, Goldman Sachs, HSBC, KPMG, Morgan Stanley and Pershing.

“The Global Tax Forum provides a great opportunity for our clients and DTCC representatives to discuss pressing issues in international tax law. And this year – with its concentration on FATCA and its impending requirements – the forum proved especially valuable in helping our clients plan and prepare for the steps they will need to take in the year ahead,” said Susan Cosgrove, DTCC Managing Director and General Manager, Settlement and Asset Services. FATCA is short for the Foreign Account Tax Compliance Act.

Focus on FATCA

FATCA is a U.S. statute enacted in 2010 that imposes new due-diligence, reporting and withholding requirements on many financial institutions. The requirements are intended to identify U.S. taxpayers who hold assets in non-U.S. financial institutions so that they can be held accountable for their U.S. tax obligations.

Chapter 4 of FATCA will require Foreign Financial Institutions (FFIs) to sign agreements with the U.S. Internal Revenue Service (IRS) in which they will pledge to report certain information about financial accounts held by U.S. taxpayers.

FFIs that fail to comply with Chapter 4 will be subject to a 30% punitive withholding tax on all of their U.S.-source income payments.

The compliance challenge

Many experts on FATCA believe firms that will be impacted by Chapter 4’s requirements may struggle to implement the many technical changes that need to be made to comply with the law.

On February 8, the IRS and U.S. Treasury released hundreds of pages of proposed regulations regarding the implementation of Chapter 4. The voluminous document provides some relief to financial institutions in that it calls for the chapter to be implemented on a phased schedule, in the view of tax analysts. However, this schedule, if it remains intact when the final IRS/Treasury regulations are issued later this year, still might not provide sufficient lead time for financial institutions to make the necessary system changes to comply with the regulations.

Joint statement

Another new development regarding FATCA took place on February 8 when the U.S. issued a joint statement with Germany, France, Italy, Spain and the U.K. that said they were working on an agreement that would allow countries to become “FATCA Partners” with the U.S. According to the statement, FFIs operating within a FATCA Partner would be required by local law to report certain account information to their country’s tax authorities, but would be relieved of the obligation to supply FATCA information to the IRS. This arrangement would presumably be less burden-some on FFIs than if they had to report to the IRS.

Prioritizing FATCA

FATCA issues were the subject of a presentation given at the forum by Nicole Tanguy, Director and Tax Counsel at Citigroup. They were further discussed by a subsequent panel that included Justin O’Brien, Partner, Ernst & Young; Karan Mosley, Director, Barclays; Ted Jahn, Director, Deutsche Bank, and Nardeo Ganesh, DTCC Director, Settlement and Asset Services Product Management. The consensus among the panelists was that, despite the phased schedule called for by the proposed regulations, it was imperative for firms covered by Chapter 4 to do the preparatory work needed to be ready to comply with the law.

DTCC is currently analyzing the proposed regulations and considering whether it makes sense to build the massive system enhancements that it would need to manage FATCA withholdings on behalf of its clients.

On to Canada

A panel on Canadian tax regulations included Mary Ann McNulty, Senior Programs Officer, Canada Revenue Agency (CRA); Janet Schermann, Non-Resident Policy Advisor, CRA; Elaine Marino, Managing Director, KPMG, and Ian DeSacia, DTCC Director, Settlement and Asset Services Product Management. This panel’s conversation focused on the new declaration forms the CRA is requiring of non-Canadian residents who want to reduce Canadian withholding on their Canadian-source income. One panelist acknowledged that many firms were upset about having to process this additional paperwork, but said the forms were necessary for the CRA to accurately establish the eligibility of those seeking withholding reductions.

DeSacia added that DTCC’s TaxInfoSM service would continue to provide updates about any revisions the CRA may make to its requirements. “DTCC will continue to work with the CRA to get out as much information as possible,” he said.

CBRS and depositary reporting updates

The forum included the latest news on DTCC’s efforts to enhance its Cost Basis Reporting Service (CBRS) to help firms comply with the U.S. mandate for financial institutions to pass cost basis information whenever they transfer customer assets.

During her presentation, Lydia Midwood, DTCC Director, Equities Clearance Product Management, said CBRS is on track to handle the third and final phase of the mandate’s implementation, which covers debt and options. The effective date of this phase was recently postponed from the original date of January 1, 2013, to January 1, 2014, due to industry concerns made to the IRS. DTCC is on schedule to implement its newest set of CBRS enhancements in November 2012, Midwood said.

The forum concluded with a presentation from Brett Lewis, Director, Globe Tax Services, who provided a depositary receipt market update.

Feedback on forum

In a follow-up survey, 98% of the attendees responding said they found the forum’s content to be informative and valuable, and 95% said they planned to attend next year. @