XBRL's Fatca Benefits

The Foreign Account Tax Compliance Act (Fatca) was passed in 2010 in an effort by the Internal Revenue Service (IRS) to combat offshore tax evasion and recoup lost tax revenues from foreign financial companies doing business in the US.

As with any new regulation, there are challenges in Fatca’s implementation. Specifically, the volume of data required from multiple companies in multiple languages using multiple methods to define measurement can be complicated. However, adopting an eXtensible Business Reporting Language (XBRL) taxonomy for Fatca reporting can standardize the process to make its implementation easier and facilitate “zero error” validation through enhanced accuracy, consistency and completeness of the data for improved fraud detection.

We can look to Belgium, a multilingual country, as an example of how XBRL implementation can improve corporate tax filing and tax fraud detection, like Fatca. Since May 2011, 400,000 companies and non-profit organizations have reported, in XBRL, their income tax returns and all annexes to the Federal Public Service Finance (FPS Fin).

Because XBRL offers a standardized approach to create consistent, comparable data, tax filing information can be shared between all stakeholders (FPS Fin, companies and tax-filing software editors) in a single, electronic document, the XBRL taxonomy, which instantly reduces the burden for all stakeholders in the following ways:

• Reduction of administrative burden, by offering online or offline electronic solutions to generate automated validation before submission.
• Reduction of maintenance costs, thanks to the XBRL taxonomy, which includes all the corporate tax business rules for automated validation, without the need to maintain IT for changes in the corporate tax-filing rules.
• Automated fraud detection through the immediate cross-check between tax returns and annual accounts.

In several other European countries, including the UK, Germany, Italy and Spain, millions of corporations must report their annual financial statements in XBRL. Similar projects are in development in India, Malaysia and other Asia-Pacific countries. Using the existing XBRL-based systems in countries such as Belgium as a starting point, we can imagine the design of an XBRL Fatca taxonomy, including all Fatca rules, and the development of an XBRL-based Fatca reporting system available free to all corporations and foreign financial institutions (FFIs) worldwide.

Leveraging Reporting Benefits
Using new and existing applications, the data point modeling process, taxonomy-driven Web form design and XBRL Web portals can drastically reduce the end-to-end development cycle of the XBRL project. Thus, the XBRL Fatca reporting system will reduce the burden and cost for all stakeholders: corporations, FFIs and the IRS. The system also offers:

• Around-the-clock online and offline submission and validation in multiple languages from anywhere in the world.
• Automatic application of all Fatca rules included in the XBRL taxonomy to any Fatca submission.
• Real-time validation based on Fatca rules, including explicit instructions in the submitter’s language of choice, to facilitate any required corrections.
• A Fatca Web portal that can update non-confidential XBRL data in real time and store it automatically in an XBRL database, for international data analysis.

Fatca could also leverage the increasing number of XBRL reporting benefits, such as corporate actions and worldwide corporate financial statements. By incorporating Fatca business rules converted into XBRL and integrated into the corporate actions taxonomy, the full process can simplify the complexity of complying with Fatca rules. On financial statements, the IRS, like the FPS Fin of Belgium, can operate automated fraud detection through the immediate crosscheck between Fatca reports and corporation annual accounts, as both will be in XBRL.

By applying an automated system of XBRL data collection, validation and analysis, Fatca can create consistent, high-quality data that not only improves the detection of tax fraud, but streamlines the process through standardization and reduces the burden and cost placed on filers. Companies should look to Belgium’s example (and others) of XBRL implementation standards for tax filings, which can easily be adopted in the US to make Fatca compliance faster, cheaper and better.