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Tax Due Diligence - The first solution isn’t always the right solution

Governments and regulators reacted to the 2008 financial crisis by introducing a raft of regulation for financial services, acquainting professionals with a range of acronyms such as MiFID, PRIIPS, EMIR and FATCA. The aim of much of the regulation: to improve transparency through reporting information to regulators and government authorities to help them with detection and prevention of potential market failures, and to make better decisions about the supervision of the financial sector.

Tax has not been insulated from such new regulation.  Indeed, tax transparency has been a key theme for global regimes aiming to combat offshore tax evasion through a series of new reporting obligations. Most notable are the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS).

The introduction of tax regulations such as FATCA and CRS were initially problematic for financial institutions. Like other regulations introduced since 2008, the timeframe from regulations and guidance to go live was tight, and project teams were competing for budget against other impending regulations that required resourcing. In addition, many jurisdictions enforced their own interpretations of the regulations, which may have deviated away from the global standards; for example, CRS has seen many jurisdictions introduce their own subtle requirements. This created challenges for multinational financial institutions looking to develop a standardised operating model across jurisdictions and resulted in many financial institutions initially implementing a minimum level of compliance to get them over the line, using processes and solutions that would not be ideal in the medium to long term.

Fast forward to 2019, and financial institutions have gone through a few reporting cycles for FATCA and CRS. The influx of new regulations is easing as focus shifts to ongoing supervision and refinement. Technology is improving, and adopting technology to streamline tax operations is becoming an ever more compelling business case. Therefore, financial institutions now have the opportunity to review their tax operating models to seek out improvements – not just for managing compliance risk but reducing cost and improving client experience.

The adoption of technology for tax varies across sectors. For institutional businesses such as investment banking and asset servicing, where there are higher volumes of due diligences to a mainly institutional client base, there are many considerations:

  • Utilities can be employed to store, maintain and validate tax documents. This enables a one-time completion and upload of information for the investment manager, and a source of up to date tax documents for the financial institution to retrieve data from
  • Optical Character Recognition helps organisations digitise data on documents, which then can be fed through the rest of the process
  • Connectivity end to end, which may involve using application programme interfaces to ensure that data moves smoothly through a process, including introducing data from KYC to assist with validation for FATCA and CRS
For financial institutions with a more retail client base, having the capability to onboard a client smoothly is essential:
  • Digital client interfaces are becoming increasingly popular as part of digital onboarding initiatives, which help financial institutions collect the required information from the client and maximise the possibility of collecting the correct information at the first time of asking
  • Collecting digital data at the outset then enables the organisation to consume the data, process and monitor using automation and have the data in the ideal format for reporting from the outset

The time is now for organisations to review the due diligence processes implemented to initially comply with FATCA and CRS. Advances in technology enable organisations to think beyond compliance and evaluate not only their process but also how compliance affects client experience. As regulators shift toward ongoing supervision of regulation, it should create capacity at financial institutions to focus on reviewing the existing solution and building business cases for improvement. When organisations conduct this review, they should look not only at FATCA and CRS, but also for synergies with other regulations and at building flexibility for forthcoming regulations. Given the potentially broad scope for the EU’s DAC 6, organisations may have to rethink managing tax data and client onboarding. Therefore, the solutions that got them over the line for FATCA and CRS may not be the right ones going forward.

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Christopher Craddock

Christopher Craddock

Director for Tax Solutions

IHS Markit

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07 Jun

Location

London

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