With the entrance of Covid-19 onto the world stage, a lot of things have changed. From the top levels of government right down to individual lives, nothing looks the same as it did 2 months ago. For financial institutions the challenges are massive – from adopting new technologies to allowing staff to work from home, managing an influx of new processes, products and procedures, and trying to keep up with their own compliance requirements, many are expressing frustration at the added strain.
One of the ways governmental bodies have responded is to issue a deferral notice for FATCA and CRS reporting. On the 25th of March the IRS updated it’s FATCA FAQ website, stating that they will provide an extension of time from March 31sst 2020 to July 15th 2020 for Foreign Financial Institutions (as defined under FATCA) to file their FATCA reports to the IRS, disclosing information on their US account holders. They also clarified that no institution needs to formally file for an extension – it will be automatically applied. But after this announcement we’ve had a lot of clients ask us whether they should be taking advantage of this deferral, or if they should aim to report as normal, or how this deferral might impact them.
The answer depends on whether you also receive payments of US sourced income. All firms are affected by FATCA, but some also receive income. For these firms there is an added complexity of potential FATCA withholding and reporting under IRC Chapter 4 on forms 1042-S and 1042. The problem many organisations will come across in this context is that each reporting firm doesn’t exist in a vacuum. Instead, you are part of a daisy chain of payments, with each firm needing to report what they’ve paid to their customers. And just like a chain, if the upstream firm reports late, it will trickle down and impact your ability to report. So no matter where you are in the chain, reporting on time means the whole process runs properly, and this means it doesn’t always make sense for a firm to automatically delay their reporting just because an extension has been granted.
The Payment Daisy Chain
To get a better understanding of why deferring your reporting deadline might not be a good idea, let’s look at that chain in more detail. For firms that do receive US sourced income, the firms at the very bottom of the payment chain are almost always NQIs in IRC chapter 3, irrespective of what they are in chapter 4 – which unfortunately means they often have a limited idea of how the whole process works, or what they need to do within the process. This isn’t their fault – often they have only just found out that they have any reporting obligation at all, and they may have been missed the deadline already. In fact we are currently working with 2 firms who have already missed their reporting deadline, but are still keen to meet their compliance obligations because they know that a bad reporting history might impact any application they make to convert to QI status later on.
When we move further up the chain, we find slightly bigger firms, potentially already QI’s themselves, who have a reporting process already established and in place. These firms are the ones who are pressing for 1042-S reporting deadlines to be extended, or deferred until lockdown has been lifted in their countries. Their reasoning for this is simple – to meet their reporting obligations they would normally deploy human resources staff, fairly late in the day, to get the reconciliation of numbers fixed and ensure their reports are accurate. And with Covid-19 impacting the workforce, this just isn’t working. So while their normal reporting processes are well established and would easily be able to handle the 1042-S reporting, if their staff are furloughed, self-isolating at home, or worse in hospital, then they might fail to report on time, and receive a penalty notice as a result.
A Breakdown in Communication?
So the question really is, what deadlines have been deferred, and does it make sense for firms to be taking advantage of them? While the 1042-S deadline has stayed firmly in place, both the FATCA and CRS deadlines have been given an extension. I would say how long the extension is, but this is where we start to see a breakdown in the system. Since there is no coordination between countries around the deadline, we’re seeing a very fragmented approach to the whole thing. Some countries are issuing notices that CRS and/or FATCA reporting deadlines are being put back (and by how long), but others aren’t saying anything, and so those firms believe nothing has changed. There is also now a third category, which includes the UK HMRC, that are not changing their deadlines, but are announcing that they will accept COVID-19 as a valid excuse for not meeting the deadline. This leaves those larger firms with an international presence in multiple countries attempting to handle multiple reporting deadlines for each region, which is a huge operational challenge and for some could feel impossible. Personally, I think it would be helpful for the OECD to coordinate information, so that there is one place where the status of the country’s deadlines could be seen by all. This would significantly help larger firms, while smaller firms would remain unaffected (as they only have to meet the deadline of their own country).
Should Financial Institutions be Taking Advantage of Deferred Deadlines?
The question now playing on many firm’s minds is ‘Should I be taking advantage of the deferred deadline, and not report now?’ And while the decision is ultimately subjective, we believe it would be unwise to delay your reporting unless you have absolutely no choice. After all, the FATCA and CRS deadlines are well-known and publicly available, so if you knew you had an obligation to report your firm should have been prepared for this point well in advance. If you weren’t, then you should be questioning your reporting processes and how you can improve them. Even if you feel delaying your reporting would be advantageous, the daisy chain we talked about earlier means you could not only cause issues for your own firm when creating next years reports, but it will also have a knock-on effect, trickling down and impacting your own ability to report.
The response to the current crisis by the IRS and OECD has been admirable, and creating a little space and flexibility when it comes to reporting will be a relief for some. But unless they have no other option, most firms would be better served reporting as usual, in line with the original reporting deadlines, rather than taking advantage of the extension. By doing this you can ensure your firm doesn’t risk penalties, or having a black mark against you if you ever want to apply for QI status.
If you have any thoughts on the content of this article, or want to discuss your reporting requirements in more detail, we would love to hear from you. Just get in touch today to arrange your complimentary consultation with one of our subject matter experts.