Under FATCA rules, every foreign financial institution (FFI) must identify and classify all its clients with US indicia, but also do the same for all parties to financial transactions, including other FFIs and non-financial foreign entities (NFFEs). The challenge here lies in the complexity of the classification that needs to be carried out to ensure that they are classified correctly and that the NFFEs are, in fact, legitimate companies.

There are a couple of issues that this throws up.

In an effort to identify and classify participating FFIs and NFFEs, FFIs need to have a clear understanding of who the beneficial owner is. For this, they may need to build a more holistic record of corporate clients by searching publicly available information such as company records from the companies’ registration office or from third party company data providers. There are two immediate challenges that this presents to FFIs. The first is how to ingest this information into existing software systems given that most information will be available in PDF format? Some sort of utility will be needed to extract data from un-editable formats such as PDFs. And secondly, with forms containing different types of information, how do you consolidate all of this into a single format to aid reasoned and structured decisions? Now when I say structured decisions, what I’m really talking about is the ability to make consistent decisions from a standard set of information from different data sources, as well as the ability to justify and backup classifications derived at times of review by any governing body (financial regulator or tax authority).

To get around these issues, FFIs really need to consider the types of technologies they are putting in place to solve for FATCA (and other classification-based regulations). There are a number of things you should consider for your FATCA software:

1. The solution should be capable of ingesting publicly available information, standardise this information and undertake the initial classification of the 21 types listed by the IRS. For example, an NFFE can be classified as having no withholding tax liability if the payment is beneficially owned by any corporation whose stock is regularly traded on an established securities market.
2. Each classification type will have its own specific workflow depending, of course, on the information that the particular classification determines needs to be collected. With the proper supporting technologies, most FFIs should be able to automate as much of the manual tasks involved in the FATCA compliance outreach process as possible, including the capability to generate standard letters, track and manage responses, provide self-service certification portals for online completion of W-8 and W-9 forms. 
3. If an FFI chooses to implement the de minimis rules based on thresholds, it may conduct an initial classification for some of the FFIs or NFFEs to reduce the work involved.

Once you have identified and classified all relevant participating FFIs or NFFEs and have reached out to them to certify this information, the responding FFI or NFE has up to 12 months to respond under the final FATCA regulations. So if you haven’t started this process yet, you really should begin it soon. If you can demonstrate that you have diligently conducted identification and classification of the entities in question but have not yet had a response back yet, then you’re still entitled to submit those reports to the IRS (for IGA Model II) or to the relevant tax authority (for IGA Model I). On the flipside of this, if you cannot prove that you’ve started the identification, classification or self-certification process, then organisations really run the risk of being classified as either recalcitrant or non-compliant and, as such, would be subject to a 30% withholding tax.