Foreign banks and other financial institutions are facing a number of deadlines this year for complying with the Foreign Account Tax Compliance Act, or FATCA, which is forcing many of them to wake up belatedly to the complex demands thrust upon them by the new reporting regime.

“It’s a crazy cluster of international law mayhem, which is as complicated as complicated can be,” said Mary Kopczynski, chief executive of 8of9 Consulting, a firm that assists banks with FATCA compliance.

April 25 is the last date to register with the Internal Revenue Service through its portal to ensure inclusion on its list of foreign financial institutions. “You definitely want to be on the FFI list, and then they’re going to publish the results of it on June 2, 2014,” said Kopczynski.

FATCA was included as part of the HIRE Act of 2010 and requires foreign financial institutions to report on the accounts of U.S. account holders to the IRS or else face stiff penalties in the form of a withholding tax of 30 percent. The law has provoked controversy abroad among foreign banks and governments, in addition to U.S. expatriates and dual citizens, who have complained that the law violates privacy and banking secrecy laws in other countries. Many U.S. citizens have seen their bank accounts closed abroad because of the compliance hurdles anticipated by foreign banks, and the law has reportedly led to a record number of U.S. citizenship renunciations last year.

In response, the Treasury Department and the IRS have delayed a number of the requirements and softened some of the regulations, while also negotiating intergovernmental agreements, or IGAs, with tax authorities in other countries that would require U.S. banks to share information on nonresidents with their home countries. Banks in many cases are scrambling to meet the deadlines, according to Kopczynski.

“Everybody is just now waking up and saying, ‘What? FATCA? What is FATCA?’ Even though you try to warn everybody in advance and let them know, all of the sleeping giants are putting 2 and 2 together, and are saying, ‘Oh, I never thought FATCA applied to me because I’m a Russian entity, and we only do business in China. Why would I care about FATCA?’ Then you have to explain.”

Kopczynski expects to see a flurry of activity over the coming weeks. “The big pressure is the April deadline for registration with the IRS, so you’ll be hearing a lot about it,” she said. “Then the next big hump is going to be in June. That’s when the IRS is going to publicly release the numbers of all the people who registered. Then there is going to be a flurry of everyone in the world calling each other and saying, ‘What’s your number? What’s your number?"

Kopczynski expects to see a great deal of outreach among entities once the IRS publishes its first FFI list on June 2 as businesses ask for each other's W-8 forms, global intermediary identification numbers and classifications.

July 1 is the deadline for the requirement to implement new account onboading procedures for U.S. withholding agents. participating FFIs and so-called "registered deemed-compliant FFIs," but Kopczynski doesn't anticipate as much activity around that date as it is only for new accounts.

“Then the next hump to get over is going to be in July when withholding starts for new clients,” Kopczynski added. “I don’t think that’s going to be as stressful. It will be annoying for certain for some, but I think the real intense hump is going to be December 31 when everybody needs to be withheld upon. If I’ve been doing business with you for years, we’re not going to be impacted until December 31, or January 1. Then if you’ve been asleep at the wheel, you’re going to notice you got 30 percent less and you’re going to pick up the phone and say, ‘What’s going on? Why did I get withheld upon?’ And I’m going to say, ‘I’m going to need your number and your W8 and all this stuff.’ The deadline in July is just for new relationships.”

Dec. 31, 2014 is the date by which U.S. withholding agents, participating FFIs and registered deemed-compliant FFIs must document their pre-existing entity accounts, identified as prima facie FFIs. If the FFI signed an agreement after July 1, 2014, the deadline is six months from the effective date of the FFI agreement.

Wide-ranging Impact
Banks not only need to deal with the new U.S. requirements, but the United Kingdom is imposing its own version of the law to deal with local tax havens such as the Isle of Man.

“There is an entire regime tracking your United Kingdom source income that you need to start reporting to the United Kingdom,” said Kopczynski. “It’s ridiculous keeping track of everything. In fact, the IGA situation is problematic because we have situations where we need to go ahead and register with the IRS, but then you have entire countries that haven’t yet agreed to an IGA. The question is how do I register with the IRS if simultaneously my government doesn’t let me register with foreign countries?”

Saudi Arabia is among the many countries that have not yet signed an IGA with the U.S., leaving many of their banks effectively in a holding pattern. “The CMA [Capital Market Authority] of Saudi Arabia needs FATCA furiously, but they don’t want to agree to one and it’s delaying, so any Saudi Arabian entity is in limbo-land right now,” said Kopczynski.

Not only banks, but also hedge funds, international lenders, investors and trusts may be affected by the law. Trustees who are responsible for taking care of any tax issues of the trust may need to examine the FATCA implications if there are any foreign entities or investments involved.

Final Regulations
Last month, the Treasury and the IRS issued final regulations for FATCA, with some amendments intended to make the language more consistent and clarify a number of points (see Treasury and IRS Amend Final FATCA Regulations). Among the changes were some clarifications on bank branches.

“The treatment of branches was helpful because we weren’t quite clear if they were supposed to be treated as completely separate entities, but it sounds like the branches are going to have the GIIN, or global intermediary identification number, as the parent,” said Kopczynski. “They came out with some clarity on another acronym, LLDIE, or limited liability debt investment entities. That’s useful because it gives a specific carve-out for what most people refer to as special purpose entities, SPEs, basically the shell corporations that led to Sarbanes-Oxley. However it doesn’t save you from having to do the analysis, which is super annoying. You don’t have to register so long as you confirm no one else will, but you still have to do all this scrambling to confirm that somebody else is going to do it.”

Foreign financial institutions are going to need to trace not only their accounts, but also their subaccounts, to comply with FATCA, which may be particularly challenging.

“If you are a large asset manager and you’re trading on behalf of subaccounts, it’s going to be a huge data exercise,” said Kopczynski.

For example, if withholding causes numbers not to seem as they should, banks will need to find out why, for example, a button that should be clicked to show that some W-8 form is on file has not been clicked. “Those data exercises are going to be very painful,” Kopczynski predicted.

Role of Accountants
For accountants, Kopczynski advises they help any counterparties who are located abroad register with the IRS on the FATCA portal by the April 25 deadline if they do any financial work. “Once you’ve done that, identify who and what your clients are and make sure they’re ready for you,” she said. “Make sure your client has everything they need from you to make sure you’re not withheld upon.”

U.S.-based companies and their accountants generally will not need to worry, but they could be pulled into the reporting regime if they have a branch in another country or if they are sending money abroad.

“A U.S. company is paying taxes already so they don’t need to worry about it,” said Kopczynski. “But if a U.S. company has a branch overseas or if they are sending money to a foreign financial institution, make sure that foreign financial institution has what they need in terms of the U.S.-related data so that they can accurately withhold or report.”

In certain countries, there may be client consent required for the reporting side, Kopczynski cautioned. “You may want to double check that your clients are all OK with the fact that if their money is running around the world, that client needs to know they’re going to be paying taxes on that money in the end,” she said. “You’re going to be paying regular taxes, or they’re going to be withheld upon, and tax evasion just isn’t an option.”