Financial Institutions in Asia-Pacific behind the curve in global tax reporting
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  • Financial Institutions in Asia-Pacific behind the curve in global tax reporting

    By Wouter Delbaere, Asia-Pacific Market Manager – Regulatory Reporting, Wolters Kluwer Financial Services  

    (Published January 14, 2016)

    As tax-related compliance obligations evolve, how will financial institutions (FIs) in Asia-Pacific respond and cope? This question has become more pressing amid clear signals the regulatory burden is poised to increase in 2016 and beyond. Just as the industry struggles to digest the US Foreign Account Tax Compliance Act (FATCA), which requires foreign financial institutions to provide reports on US clients to the Internal Revenue Service (IRS), the sequel to FATCA – the Automatic Exchange of Information (informally referred to as GATCA) – is already taking shape, and is set to drive additional data requirements, cross-border coordination and client information reporting.

    However, despite the signs that compliance will only increase in complexity, research conducted by Wolters Kluwer shows that financial institutions in the region are not prepared for the changes to come.

    FATCA compliance

    In December 2015 Wolters Kluwer, with the GRC Institute, conducted a survey of more than 40 financial institutions across eight Asia-Pacific markets. The results show that nearly 90% of FIs are taking a “tactical” approach to FATCA reporting, of which the large majority are tackling FATCA reporting manually.

     

    FATCA Reporting Pie Chart

     

    Although on the surface it may seem understandable for FIs with limited reportable accounts to manually produce FATCA reports, this approach is inherently risky. Not only is it error-prone and time-consuming there are also shortcomings in user and version control. Manual spreadsheets enable business users to easily visualize and organize data, however, this flexibility comes at a price. Freely making changes to the data, formulae and formatting opens the door to errors, inaccuracies and inconsistencies, without any corresponding audit trail.

    Further, in order to classify and report accounts and monitor regulatory changes as FATCA evolves, institutions must have in-house expertise; people with the right knowledge are scarce in today’s market, and heavy reliance on a limited number of individuals exposes the institution to key person risk. Additionally, a manual approach typically lacks scalability and extensibility. As the scope of the spreadsheet is extended beyond FATCA (e.g. for GATCA reporting), the increase in data and complexity of logic will quickly become impractical to manage manually.

    Taking a tactical approach for FATCA reporting – be it completely manual or semi-automated – significantly increases the risk of being caught out by tax, and with the financial institutions’ reputation at stake, any form of regulatory compliance should not be taken lightly.

    While some institutions may be able to use a tactical solution for FATCA in the short-term because of the limited number of reportable accounts, GATCA will be an entirely different ballgame. FATCA regulation encompasses accounts for only one country– the United States – while GATCA covers over a hundred, and is commonly dubbed “FATCA on steroids”. This implies that a financial institution in a specific jurisdiction will need to classify, monitor and report for over 100 other jurisdictions, each with their own variation of GATCA in terms or reporting and exemptions. Complicating matters further, the US has indicated that FATCA is here to stay, which in essence leaves financial institutions in the awkward position of having to comply with two similar, yet divergent standards.

    According to our survey, more than 90% of financial institutions have not started implementing GATCA, have no strategy and no dedicated teams. Close to 60% have not even started discussing their strategy internally yet.

    One of the most common reasons implementations fail is because they don’t start on time. The majority of the jurisdictions in Asia-Pacific have committed to exchanging GATCA information with participating jurisdictions within 2018 (India and South Korea have committed to start one year earlier). Given the high level of complexity of data requirements, the window of opportunity to adequately prepare for a successful GATCA implementation is swiftly closing, and institutions that have not yet decided on their strategic approach may find themselves in a tricky position.

    Despite the differences between FATCA and GATCA, the frameworks have enough in common that a united approach, particularly in terms of technology, is essential. Consolidating FATCA and GATCA into a single automated tax compliance solution can generate significant benefits, including cost savings; faster implementation; consistent data sets; a consistent control framework across tax regimes; and the ability to apply best practices from FATCA to GATCA implementation. The lack of coordination within financial institutions as they bolster their compliance regimes thus represents a missed opportunity.

    GATCA as a competitive advantage

    The best-positioned financial institutions will be those that upgrade their existing technology infrastructure to collect and report the additional information required by regulators under GATCA, while simultaneously consolidating and centralizing this information with data used for other purposes. This single data repository can be a powerful business asset forms the basis for meeting all regulatory requirements, including FATCA and GATCA, and also provides a single window into business activity. A consolidated view can enable institutions to spot and even anticipate trends, flag and address problem areas, and broadly inform planning and strategy throughout the organization.

     

    GATCA Reporting Pie Chart

     

    Working with a solutions provider with recognized expertise in regulatory compliance allows the institution to focus their efforts on their core businesses and clients, rather than building a complex framework from scratch -- or worse, contending with the tedious and risky task of generating the reports required by regulators manually. In the emerging regulatory landscape GATCA is helping to create automation and agility that will be the key watchwords for financial institutions striving to avoid sanctions and distance themselves from the competition.



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