FATCA Update: IGAs soften the blow…and some good news for insurers?:

Interviewers Opening Remarks

The US Foreign Account Tax Compliance Act, commonly referred to as FATCA, is designed to tackle offshore tax abuse by US taxpayers.

FATCA requires foreign financial institutions to identify and disclose the direct and indirect owners of accounts that are classified as US accounts. As we discussed in previous webcasts in this series, FATCA has caused consternation at the practical and legal implications of compliance.

Fortunately, the US authorities now seem to have recognized that initial criticisms of FATCA had some justification.

The model inter-governmental agreements between the US and specific countries initiated by discussions between the US and the UK, France, Germany, Italy and Spain, go some way to assuaging these concerns. There has also been some significant softening of the impact on insurers.

Just the other week, the IRS issued its long-awaited final regulations which make strides to converge the US requirements and the inter-governmental agreements.

Joining me to provide their insights on how FATCA will affect on the insurance industry are Craig Pichette from KPMG in the US, and Jeanette Cook from KPMG in the UK.


Before we get into the details of how insurers are impacted, can you give us a quick recap on the new FATCA requirements?

Craig Pichette

There are a number of things that have happened. Most significantly, the IRS has put out the final regulations of FATCA. The insurance industry, like a number of other industries, was waiting on these final regulations to be issued before actively pursuing their FATCA implementation programmes. Now that those rules have been issued, we’re seeing a tremendous amount of activity in the market as companies are beginning to implement their FATCA compliance programmes. The other significant thing is that the US and a number other jurisdictions have entered into inter-governmental agreements, IGAs, describing how each of the countries is going to implement their own FATCA regimes and coordinate with the US government on exchanging information.


This is a rapidly developing area. What have been the most significant developments since your article was published in December?


As everyone knows by now, FATCA rose out of the perceived abuse of Swiss banks selling tax-deferred accounts to US persons. The US response to that, of course, was enacting FATCA which has a very broad reporting obligation that are imposed on non-US persons. The hammer the US is using to enforce that is a 30% withholding on payments made by US entities to non-US entities. So, foreign financial institutions, banks, insurance companies, brokers, entities like that, are now required to review their customer base and report on US accounts to the US government.


And what are you seeing in the insurance industry? Are companies FATCA-ready?


The insurance industry was a little bit slower than some of the other industries in attacking FATCA. The banks, of course, this was primarily directed at were very early on in addressing FATCA and beginning their FATCA implementation programme. The insurance industry, for the most part, has been lagging behind but now that the final regulations are out we’ve seen a tremendous amount of activity as companies are now beginning their FATCA assessments and designing their FATCA implementation programmes.


The IGAs and the final IRS regulations go a long way toward resolving FATCA uncertainties for insurance companies, but some major uncertainties remain. What are some of the biggest challenges that lie ahead?

Jeanette Cook

Well, many groups will have operations in different countries and those countries will either have an IGA with the US or will just be under the normal FATCA regulations. So, you're going to have a significant challenge in developing an overarching compliance framework. For example, the Annex II’s in each IGA country are going to be different so designing the operational control framework is probably going to be the biggest headache for the Responsible Officer should the group need one for the IRS regulations.


And what should insurance companies be doing right now?


So, if they haven't done so already, you need to complete a Gap Analysis as to what your operations currently are and what your take on procedures currently are to what you’ll have to do under either the IGA or the IRS regulations. So, having determined whether you are a financial institution you then need to have a look your financial accounts because some products are going to be exempt. And then you will need to get management buy in, and this is properly one of the hardest things to do across a large group. So, one way to do it might be to identify who the Responsible Officer is, if you’ve got to comply with the IRS regulations, or who is going to be the contact with the local tax authority because those people will have a vested interest in driving the project forward and making sure that you do comply with the relevant regulations. And it's important to realise that although it's tax legislation, the actual operational changes that you have to make stretch right across from the investment manager, your customers and your on-boarding procedures, who you interact with, your creditors, the reinsurance and ultimately your bank might actually start giving you a hard time to know what your FATCA status is. So, you need to have a look and a think because not everything is going to be under your control so you might actually need to start renegotiating some of your third-party agreements, especially if they're doing the take-on procedures for you and are actually doing the KYC and the AML side because they will know who your customers are.


Thank you Craig and Jeanette for bringing clarity to these latest developments. Before we sign off, do you have any final thoughts for our listeners to take away?


As companies begin to implement their FATCA compliance programmes there’s a number of things they should probably be keeping in mind. First is that the effective date is January 1st 2014. That date had previously been moved back; you shouldn't expect any more slippage on that date so you should regard January 1st 2014 as a firm date that you need to have your compliance programme in place. You shouldn't underestimate the significance of FATCA to the business. If you're a domestic US insurance company, the effects may be fairly limited but if you’re a non-US insurance company, particularly a life insurance company, FATCA will impose a significant change on your compliance activities including reviews of all your accounts, additional reporting obligations and potentially, ultimately, withholding obligations. Because it affects your relationship with your customer, there’s a significant potential impact on your distribution and account management processes and you need to actively think about how you are going to manage those changes.


Thank you Craig and Jeanette.

Listeners can find more details on this topic in the December 2012 edition of KPMG’s frontiers in tax publication. Other podcasts in this series include the Alternative Investment Fund Managers Directive and the potential tax impacts.

Thank you and we look forward to you joining us again next time.


The US Foreign Account Tax Compliance Act (FATCA) – which aims to combat tax evasion by US persons with non-US accounts – has stimulated controversy and concern in the financial services industry ever since it was passed in 2010.1

FATCA requires ‘foreign financial institutions’ (FFIs) to report information on US account holders to the US Internal Revenue Service (IRS). FFIs are expected to identify the direct and sometimes indirect owners of their accounts to determine whether they are ‘US accounts’. To the extent they are, the FFI is required to disclose them to the IRS. FFIs that do not agree to do this would suffer a 30 percent withholding tax on all US withholdable payments. To avoid the withholding requirement, the FFI must enter into an agreement with the IRS to identify all US accounts held by it or its affiliates and report annually on each account.


Major concerns were raised by the insurance industry over the practical and administrative burden that FATCA would impose; and also in many jurisdictions on its apparent conflict with local privacy and data protection legislation which would prevent the release of such information. In many cases, too, companies argued that they simply did not possess the necessary information to comply with the law. Reflecting these concerns, the governments of the UK, France, Germany, Italy and Spain (the G5) approached the US, with the support of the European Commission, to explore ways to address the legal difficulties presented by FATCA.

The outcome was the development of an intergovernmental approach, in which financial institutions will report the necessary information to their own tax authorities, who will then exchange information with the US under existing double taxation and information exchange agreements. In July 2012, the US Treasury published two versions of a Model Intergovernmental Agreement to Improve Tax Compliance and to Implement FATCA as a basis for implementing this approach. The G5 governments are currently in the process of drafting Intergovernmental Agreements (IGAs); although the UK is furthest ahead, having signed the agreement and issued a consultation document on the intended implementation into UK law in September 2012. The other four governments are in detailed discussion with the US.

IGAs: G5 progress

France and Italy are in the process of negotiating annex II to their IGAs. In France, the IGA will have to be presented to the French parliament, which will have to enact implementing legislation. The situation is more complicated in Italy, where both the foreign ministry and the finance ministry must sign off on the IGA, which then must be ratified by the legislature.

Spanish officials have said that implementation of the IGA should not require too many changes to domestic law. The government is currently drafting non-compliance penalties and anti-avoidance measures, and is hoping that the IGA will be agreed by parliament using an expedited process, in time for January 2013.

Germany is currently negotiating Annex II with the United States. Ratification of the IGA is expected before the end of 2012, with domestic implementing legislation following. Officials expect the IGA to become effective before mid-2013.


In the UK, HMRC have said that the UK-US IGA sets out a framework within which:

  • legal barriers to compliance, such as those related to data protection, have been addressed
  • withholding tax will not be imposed on income received by UK financial institutions
  • UK financial institutions will not be required to withhold tax on payments they make
  • due diligence requirements are more closely aligned to the requirements under the existing anti-money laundering rules
  • a significant range of institutions and products are effectively exempt from the FATCA requirements.

Some relief for insurers

Although earlier hopes that insurers – at least non-life insurers – might be exempted entirely from FATCA have not been fulfilled, the IGA, including the exemptions in Annex II, does bring some significant relief:

  • ‘custodial accounts’ expressly do not include insurance or annuity contracts
  • ‘cash value insurance contracts’ are expressly defined to exclude indemnity reinsurance
  • reportable cash value insurance contracts are subject to a 50,000 US dollar (USD) de minimis threshold
  • all ‘Registered Pension Schemes’ are exempt financial accounts
  • tax-favored savings products such as Individual Savings Accounts (ISAs) and Child Trust Funds are exempt products
  • certain other pension arrangements may also be exempt financial accounts, although there are conditions that have to be met.

Uncertainty remains, however, regarding the exemption of products such as certain pension income paying contracts from the definition of a Financial Account, which could hinge on whether such contracts are ‘authorized payments’. The guidance is eagerly anticipated.

One of the major original concerns raised by insurers was the likely difficulty of collecting the required information from pre-existing accounts. The position has been eased significantly: back book due diligence should now only be required for ‘Financial Accounts’ held by individuals where balances exceed $250,000 on which no reporting is done to HMRC, for example under the qualifying policy or chargeable events regime. The effect of this is that due diligence on preexisting accounts should be focused on overseas life assurance business. For ‘Financial Accounts’ held by entities, reliance can be placed on the ‘know-your-customer’ and anti-money laundering procedures.

Annex II also exempts ‘local financial institutions’, that is, institutions located solely within the UK that serve a local customer base. A number of conditions need to be met to be able to take advantage of this exemption:

  • the institution must be located solely in the UK
  • be regulated in the UK
  • be required to report information or withhold tax on accounts held by UK residents
  • ninety-eight percent of accounts must be held by residents of the UK or another member state of the EU
  • accounts must not be provided to US persons (who are not UK residents) or any entity which has beneficial owners who are US persons (who are not UK residents), and all related entities must meet the same requirements.

To demonstrate compliance, local financial institutions need to implement procedures by 1 January 2014 to identify any new customers that breach these provisions and complete appropriate due diligence investigation of pre-existing accounts.


Despite these developments, which go a significant way towards resolving the FATCA issues raised by the industry and by insurers especially, major uncertainties still remain. In particular, Annex II of each IGA will be specific to the US government partner in question. Any institution with operations more extensive than that of a ‘local financial institution’ is likely to face inconsistent, and potentially conflicting requirements for information gathering and reporting in different jurisdictions. Many multinational groups will have operations in countries both with and without IGAs, creating major challenges in developing a compliance framework.

A further complication for multinational groups is that there are two models of IGA and one of those has two variations. Helpfully, a recent announcement by the IRS has almost wholly aligned the timelines for entities in IGA countries, non-IGA countries and the US. The opportunity for consistency in core definitions, however, will have to wait until the final regulations are released later this year.

For UK companies specifically, uncertainties remain over the interpretation of a number of technical and definitional details; although the consultation period for the current draft closes at the end of November, it is unlikely that all outstanding issues will be resolved by the January 2013 implementation date. Similar -- but different -- inconsistencies and uncertainties can be expected in each IGA negotiated by the US government.


Despite the uncertainties, time is short, notwithstanding the recent announcement. The priorities of affected institutions now should be to review and catalogue legal entity organization, insurance products, and all on-boarding procedures (including those of distributors) to prepare the organization to act as the rule become more settled. Notwithstanding the concessions made under the IGA approach, FATCA is still going to represent a significant burden.

For further information, please contact:

Craig Pichette

KPMG in the US

Tel: +1 312 665 5267

Jean Baxley

Senior Manager
KPMG in the US

Tel: +1 202 533 3008

Jennifer Sponzilli

KPMG in the UK

Tel: +44 20 7311 1878

Jeanette Cook

Senior Manager
KPMG in the UK

Tel: +44 11 7905 4277

1frontiers in tax, November 2011 and February 2012 editions,

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