Step 3: Aggregate and report financial data
Before customer financial data, such as customer payments, incomes and balances, can be shared with customers and submitted to tax authorities, it should be aggregated according to a clearly defined and widely agreed set of rules.
This process of aggregation is necessary because organizations with multiple payment systems typically have multiple reporting processes, and many reporting entities. This can add complexity to the aggregation process and the ultimate filing submissions. While many organizations employ centralized submission services, the aggregation process is typically decentralized and linked to the payment systems or account balance system of record.
Ideally, each of these individual reporting processes will have strong processes and controls in place to ensure the correct data are aggregated in an accurate, timely and efficient manner. Failure to do so raises the risk of fines, sanctions and considerable reputational damage, at a time when regulators are pursuing ever-greater levels of tax transparency.
Accurate tax reporting relies on a series of closely integrated processes, including customer onboarding and AMC/KYC processing, tax documentation validation, reference data processing and monitoring, and client reporting classification. An organization’s central customer tax data strategy and processes should therefore aggregate all the specific tax reference data requirements needed to achieve reporting compliance.
Understanding the definition of a “financial account” is another key factor in tax information reporting compliance. Financial institutions should determine that each financial account is classified correctly, according to the tax documentation held by the carrying entity, and that the appropriate aggregation method is employed for each type of financial account, as defined by each tax jurisdiction.
Financial data required for both US and non-US withholding regulations are typically aggregated from the same payment systems used to ensure withholding is accurate. Ideally, these payment systems will access the same centralized system of record originally used to help ensure the proper withholding occurred. Financial data required for FATCA and CRS information reporting include both payment data and balance information. Payment and balance data aggregation must be done for each client’s financial account.
Documenting the source of all client data in each report submission – also known as reporting data lineage – is a recommended first step in ensuring clients are classified correctly and the appropriate financial data is aggregated and submitted for each jurisdiction.