Data Management Providers Address Uncertain Tax Withholding Plans

Global financial services firms with concerns about how to manage data needed for compliance with the reported deal between the UK and Swiss governments on taxation of Swiss bank accounts, could look to efforts already underway to ensure compliance with the Foreign Account Tax Compliance Act (Fatca) in the US.

The act, scheduled to take effect in 2013, is similar to the agreement between the UK and Switzerland in that it address tax avoidance issues. Fatca, however, represents an effort by the US to “flex its muscles” on foreign institutions from more than one specific country, says Mike Roberts, managing director of corporate tax and accounting at Thomson Reuters.

Fatca sets qualifications administered by the US Internal Revenue Service (IRS) for foreign financial institutions to receive income from US sources without tax deducted, explains Roberts. “Fatca requires someone paying interest or dividends out to the US from a foreign financial institution to withhold tax on that at the full withholding rate in the US, unless the IRS grants that foreign institution a status based on the institution identifying all US taxpayers it will pay out money to,” he says.

The UK-Swiss agreement is the result of the UK pursuing tax on undeclared Swiss bank accounts held by UK citizens. In return for collecting tax on the accounts, the anonymity of account holders will be protected. The agreement could net as much as £5 billion ($8.2 billion) for the British government. It includes an initial, one-time-only tax between 19 percent and 34 percent for all Swiss accounts of UK citizens, based on the size of the account and amount of time it has been held, to be followed by taxes on future income from the accounts to be collected at a 48 percent rate.

Although it is still early to determine the complete operational impact of the UK-Swiss agreement, the Swiss banking community is more likely to shoulder more of the responsibility and work involved in collecting relevant information, according to Roberts. “Swiss banks will have to collect more information about their customers than they do at the moment,” he says. “Some other requirements, such as whether someone has a UK passport, are clearly items banks will have to track, but do not track now. Banks will have to ask their customers if they are residents of the UK, for tax purposes.” UK customers may only be exempt if they have declared the income domestically, according to details of the agreement that are available, says Roberts.

“Banks will have to change their systems to capture the level of information at the granularity they need, or alternatively take a third-party system or software that will deal with the requirements for them,” he adds. “When you start getting to the question of whether an individual has the hallmarks of being a resident of a third country, for tax purposes, from the banks’ perspective that becomes very difficult for operations, as to what data they need. Often the information needed to determine if someone is a tax resident is detailed, and can be subjective.”

The details of Fatca and the UK-Swiss agreement have not yet been completely disclosed by their authors, and the Swiss agreement is still subject to parliamentary approval. Still, the likely provisions are not completely a mystery to service providers, according to Roberts. “Fatca itself is actually like the next generation of some rules that already exist in the UK,” he says.

Thomson Reuters provides tax reporting capabilities as part of its OneSource service suite. “We collect information from the ultimate taxpayer,” says Roberts. “If the UK-Swiss treaty changed so that more information was required every time a customer of the bank logs on the system, or creates a new account, that opens a window that collects the information under this legislation.”

His company’s services maintain and update tax information, and seek necessary IRS approvals of data capture and archiving—making sure these are done in a manner meeting requirements of US law.

Other providers have also addressed tax withholding data issues that have arisen worldwide. SIX Telekurs CEO Thomas Gross said in April that Swiss tax regulation changes have created a growth opportunity.