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Financial Translations of Foreign Tax Documents

We’ve blogged about the importance of certified financial translation services in the context of FATCA. Now that with the Foreign Account Tax Compliance Act (FATCA) in full force, 2013 is a busy year for tax lawyers and tax filers. Although FATCA was passed in 2010, 2013 (for the 2012 tax year) is really the time it will be in full effect. This is primarily because the US government continues to reach compliance agreements with various foreign jurisdictions. In fact, early this year banking secrecy stronghold Switzerland bowed to FATCA, signing a bilateral agreement with the US government to ‘improve tax compliance, combat international tax evasion and implement FATCA’. Currently the US is working with over 50 countries to curtail offshore tax evasion, including Norway, the UK, Mexico, Denmark, Ireland and Spain. Of course this means that foreign language translations of tax and accounting forms are now a regular part of tax compliance law.

At the heart of the Act is the information reporting and withholding requirement, which requires foreign financial institutions (FFIs) to report account numbers, balances, names, addresses and US taxpayer identification numbers to the US tax authorities.

Likewise, US-owned foreign entities must also report the name, address and US tax identification number of each substantial US owner. More so, after identifying relevant account holders, the institutions must impose a 30 percent tax on payments or transfers to anyone who refuses to comply and FFIs must file IRS reports (no later than September 30, 2014).

Finally, the regulations include several step-by-step processes that the FFI can use to comply with FATCA. Under one type of agreement, FFIs can report FATCA data to their own governments, who then exchange the information with the IRS. Under the second option, the FFI must register with the IRS (in English, so certified translations from a foreign language into English would be required) and report FATCA data directly.

Although the practice implications for the tax lawyer are clear, there are also many concurrent legal effects of FATCA, such as the need for best practices and due diligence for those whose practice focuses on financial services and banking. For example, as already explained, non-US firms will have to provide US tax authorities a look into the financial details of all its US-based investors and limited partners (LPs). For “fund of funds” (FOF) this law means not only implementing new best practice policies and controls, ensuring its own investors are FATCA compliant, but confirming that any non-US funds within the portfolio are also compliant and apply best practices. Likewise General Partners (GPs) taking on a fund of funds as an investor, risk a 30 percent tax penalty when exiting certain US assets, should a fund of funds skirt the new tax-avoidance rules.

As a consequence, for funds of funds, compliance and best practice costs hit from both ends, as an investor and as a fund manager. Still the only true safe way for the fund of funds and direct fund to ensure FATCA compliance is to demand the other party guarantees maintaining its tax sharing information agreement with US authorities. Many GPs are expected to balk at this commitment, especially if it means exposing itself to liabilities for the actions of its LPs.

While much depends on the US Treasury Department’s specific regulations for the applications of FATCA, some fund managers find compliance and best practice costs too prohibitive and decide to stop making US investments or taking commitments from US-based investors. FATCA poses regulatory challenges to the funds of funds industry. The various regulations on the horizon will mean a great deal of time, energy and money on the part of managers, and perhaps even some changes to certain funds’ investment strategies. To assist, practitioners should keep in mind the following ‘best practices’:

Don’t underestimate the burden of FATCA: It is much more than a new reporting requirement. Instead, it will impact the entire value chain and will require new organizational structures, processes and systems. In essence, FATCA is a data-driven initiative and must be treated as such.

FATCA is a multi-year regulation that has continuously evolving requirements: It is imperative to have a long term compliance and architecture strategy to minimize unnecessary project and compliance costs.  Determine who will own the compliance initiative: Institutions should begin by appointing a leader, whether the chief compliance officer or equivalent-level officer, to guide and sign-off on the FATCA compliance plan, as required under the legislation.

Communicate the initiative, its importance and objectives, and what will be required of individuals and groups across the enterprise, preparing them for requests and changes: Keep internal stakeholders and affected teams apprised of progress.

Keep clients in the loop, apprising them of the new regulations and the impending deadlines, and what they mean.

Determine the legal issues: For example, are there restrictions on sending account holder information outside the country without the client’s permission? If so, plan to address in customer communication.

Prepare and maintain an inventory of affected business lines, products and services, including the number of accounts within each legal entity that will be affected.

Identify the types of customer information currently being collected across affected lines, as well as in non-affected lines. Then, identify where gaps exist.

Review onboarding and data gathering processes and update as needed, setting up a structure to manage this information from a central location.

Understand the importance of keeping historical data to prove compliance to the regulation.

Contact legal translation company All Language Alliance, Inc. with your certified foreign language translation needs.

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