FATCA to CRS: How Tax Reporting became Big Data

Data Management and Regulatory Reporting for Investment Firms7 July 2016 - London

BREXITKeep calm and carry on..."Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect," the statement from the FCA.

Agenda Tax Regulation: Past and Present What was FATCA and What is CRS Impact on Investment Firms Industry Response – Our Findings What next

Supervisory Action Managing Financial and Reputation Risk Governance and Controls

Tax Regulation: Past & Present

OptimisationTechniques Money on the Table Operational Excellence

Tax Regulation: Past & Present HMRC’s Connect program went live in 2010 Designed by the defence contractor BAE Systems

Pressure to fix UK’s estimated £40bn per year “tax gap” HMRC headcount cuts, meant technology needed to be deployed for

investigative work Connect came with an initial price tag of £45m Connect had delivered £1.4bn of additional revenues by 2011 Won major industry awards, including: ‘IT outsourcing project of the

year’; the British Computer Society ‘Big Data project of the year’; and the ‘Civil Service Science and Technology Award’

Tax Regulation: Past & Present Connect is based on Social Network Analysis (SNA) SNA is a mathematical technique used to investigate social structures employing network and graph theories. SNA’s theoretical roots lie in the work of early sociologists such as Georg Simmel and Émile Durkheim, who highlighted the importance of studying patterns of relationships that connect social actors. With Connect, a trained HMRC investigator has on-screen access to see the interconnecting lines and relationships a taxpayer has across business, employment, property interests and bank accounts.

Tax Regulation: Past & Present Connect contains more than a billion records, including taxpayer records as well as information from third parties and the internet Connect detects links and identifies anomalies between a taxpayer’s declared resources and those shown by other sources of information Using Connect, HMRC interrogates Land Registry data, information from Companies House, bank account details, credit card statements, voting and council tax registers, and data from tax authorities in other countries. Information from diverse sources is then compared with the self-assessment returns to identify taxpayers data anomalies.

Tax Regulation: Past & Present

FATCA FATCA is a US measure which imposes an international standard for the Automatic Exchange of Information (AEOI) FATCA regulations require IGA tax authorities to obtain detailed account information for US taxpayers on an annual basis and then forward this to the IRS For non-IGA jurisdictions, FATCA imposes punitive withholding tax where the financial institution has not ‘voluntarily’ agreed to participate in the FATCA regime

FATCA obligations Registration and entity classification Due-diligence of account-holders

Pre-existing New upgraded on-boarding procedures

Classification of account-holders Indicia checks and change of status monitoring Reporting Governance/Policies & Procedures

FATCA experience Unrealistic deadlines (moved many times) Level of compliance mixed Localised businesses excluded Tactical solutions….MS Excel UK took the lead and pushed for UK FATCA (also known as ‘CDOT’)

CRS vs FATCA Broadly similar methodology….but SCALE Over 100 jurisdictions Static (citizenship) vs Dynamic (tax residency) De minimis levels removed Less generous exemptions includes charities, local institutions

Impact on FIs Tactical solutions will not work given the scale and complexity Unrealistic deadlines Lack of guidance by tax authorities Legal hurdles Problem of outsourcing Cyber security…sitting ducks

Our findings“Legacy systems are inadequate in meeting the demands of the modern day data hungry systems”

- Ali Kazimi

Our Findings – not data driven Data extraction and uploads

excessive manual interventions data contamination and absence of integrity controls

Processing capability income records (155,000 stock lines) take 48 hours to extract (not process!)

Audit trail must be able to substantiate the work undertaken compliance records must be ready for external audit scrutiny

Unified view of compliance Visualisation/analytical techniques to have a single view of compliance across

business/product lines and geographies Tax and Regulatory compliance need to be consistent

What next Customers, Regulator and Tax Authorities Must avoid tax authority audits – cost, complexity and frequency of audits Documentation and building of audit trails Mock audits – testing and highlighting the systematic deficiencies Remediation of records Ramping off projects to BAU Governance frameworks, delineation of responsibility, service level agreements

Take away points World of big data has hit Tax Big gap between tax authority and tax payer capabilities Tax authority investment is yielding results and is about to take off FATCA must not give you false sense of security CRS is enormous and will test the best of players Must be ready for tax authority audit….

ContactAli KazimiHansuke ConsultingUnited House, North Road, London N7 9DP

alikazimi@hansukeconsulting.co.ukuk.linkedin.com/in/securitiestax+44 7818 522 779