Swiss « Financial Institutions », principally banks, are suddenly faced with the prospect of FATCA group requests as soon this year. Why now and what does this mean?

Ten years of uncertainty around the amendment of the tax treaty between Switzerland and the United States are coming to an end

In 2009 the Swiss and American government representatives signed a protocol to amend the tax treaty between Switzerland and the United States. Due to the byzantine internal workings of the US Senate, that was also the year that the US ceased ratifying tax treaties, and so the Swiss protocol (along with three other protocols and three treaties) stood in limbo until early June this year.

As many readers have now heard, the US Senate Foreign Relations Committee took the world by surprise when in early June it indicated that it would move to expeditiously approve the pending tax treaty protocols, a process which has now been completed with the Senate approval earlier this week.

The only outstanding steps for approval of the Swiss protocol is now President Trump’s signature and the purely formal exchange of notes between Washington, DC and Bern. On this basis the protocol will almost surely come into effect as of, latest, Q4 2019.

Group requests are coming, fast

At that point, the IRS will be able to send to the Swiss Federal Tax Authorities (SFTA) “group requests”, similar to those that have become de rigueur for our European neighbors, in relation to the FATCA aggregated reporting that many Swiss Foreign Financial Institutions (“FFIs”) have submitted these last few years, both:

  1. the aggregated reporting of non-participating foreign financial institutions (“NPFFIs”), a misnomer that englobes nearly all non-Swiss non-individual accounts that have not managed to correctly navigate the famous W-8BEN-E, and
  2. the aggregated reporting of non-consenting individuals, and certain owners of Passive NFFEs, that did not provide their bank with both the relevant information to report and a waiver of Swiss banking secrecy.

Swiss FFIs will face a very short deadline to respond a group request

The sting in the tail is that once a Swiss FFI is notified by the SFTA of such a group request, it has only 10 days to respond with the relevant information. A timeline that, given the technical nature of the submission format and the lack of robust documentation of the 2015, 2016 and 2017 reporting at many FFIs, is quite simply impossible to meet without substantial preparation. Whilst discussions are underway about mitigating this deadline, Swiss FFIs cannot afford to count on any relief.

Specifically, based on our experience helping clients with advance preparation of their response files:

  • this exercise can amount to virtually re-doing the due diligence on these accounts, especially if the Bank’s data quality is lacking or if it did not keep detailed records for each aggregated account. The creation of the procedures needed to generate an appropriate audit trail to protect the bank from charges of both under- and over-zealousness, as well as the training of ad hoc resources if required, can be a disproportionately lengthy undertaking.
  • the technical burden is often underestimated. Although technical complexity per se is moderate, the amount of data preprocessing work due to insufficient data quality can be very significant, and if the financial institution does not already have a dedicated file review workflow in place, the design of a robust process requires the setup and configuration of ad hoc infrastructure and tools.

Even for very small volumes preparation is essential!

Interested parties can contact their usual EY contact or can also consult some of the relevant documentation available on the SFTA page.