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A Guide to FATCA

A Guide to FATCA. November 2012. A GUIDE TO THE U.S. FATCA RULES. Introduction to FATCA Background of Enforcement Foreign Financial Institutions The FFI Agreement Withholding – the “Hammer ” Timing of Implementation Intergovernmental Agreements

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A Guide to FATCA

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  1. A Guide to FATCA November 2012

  2. A GUIDE TO THE U.S. FATCA RULES • Introduction to FATCA • Background of Enforcement • Foreign Financial Institutions • The FFI Agreement • Withholding – the “Hammer” • Timing of Implementation • Intergovernmental Agreements • What’s Next for U.S. persons – Enforcement and Compliance

  3. Introduction to FATCA

  4. FATCA Generally • The Foreign Account Tax Compliance Act was enacted on March 18, 2010. • Adds new sections to Internal Revenue Code to induce Foreign Financial Institutions (“FFIs”) to provide information to the IRS (new “Chapter 4”). • Although FATCA uses withholding tax to incentive compliance by foreign financial institutions, the focus of FATCA is on compliance of U.S. beneficial owners of offshore income. • The Treasury and IRS issued proposed regulations February 2012. Final regulations and new draft “FFI Agreements” expected by the end of 2012 (should be coming soon because of impending January 1 effective dates). • Draft withholding forms W-8BEN and W-8BEN-E issued June 2012. • 24 categories of exemptions provided in W-8BEN-E. • Announcement 2012-42 released October 24, 2012, postponing critical dates in the FATCA implementation timeline by six months to one year.

  5. Intergovernmental Approaches: FATCA Joint Statements • The United States Treasury in February 2012 issued a Joint Statement from the U.S., France, Germany, Italy, Spain, and the United Kingdom (“EU-5”) and agreed to explore a common approach to FATCA. • In June 2012, Treasury entered into separate joint statements with Switzerland and Japan. • Model Intergovernmental Agreements (“IGAs”) issued July 26, 2012. • Agreement with the U.K. (“The First”) signed September 12, 2012. • Intended to provide an intergovernmental approach to overcome foreign legal restrictions on reporting or withholding. • U.S. Treasury and IRS are talking to numerous other governments regarding this types of agreement. • These are bilateral country-by-country arrangements and may at some point overtake the regulations – Global information reporting.

  6. How FATCA Operates • The primary goal of FATCA is to induce FFIs that directly or indirectly receive U.S.-source income to report “U.S. accounts”: • Accounts held by “Specified U.S. persons” or “U.S.-owned foreign entities” • How? FATCA requires U.S. withholding agents and “Participating FFIs” to withhold 30% from withholdable payments. • “Withholdable payment” includes U.S.-source interest, dividends, royalties -- and gross proceeds from the sale of security that could produce U.S.-source interest or dividends. Even if there is no gain, or there is a loss! • “Participating FFIs” are those which enter into an agreement with the IRS (“FFI Agreement”) or are “deemed compliant.” These are not subject to FATCAwithholding and have certain responsibilities to report to IRS. • Non-Participating FFIs and recalcitrant account holders may be subject to withholding on U.S.-source income received indirectly through a Participating FFI. These are called “Passthru Payments.”

  7. FATCA Phased Implementation Timeline Proposed Regs 2-8-12 Grandfathered Obligations 1-1-13 Deadline for FFI Agreements 6-30-13* Complete Due Diligence for Entity Accounts 12-31-2015 Withholding Begins on FDAPPayments; Complete Due Diligence on FFIs 1-1-14 Complete Due Diligence for High Value Accts. 12-31-2014 Gross Proceeds Withholding Commences 1-1-17 2012 2013 2015 2016 2017 2014 Report of FDAP and Other Payments to Non-Participating FFIs 3-31-16 First Reporting Date for Accounts Open on 12-31-14 is 3-31-15 Final Regs Est. End of 2012 FATCA Effective Date; FFI Applications Accepted 1-1-13 Account Opening Procedures Implemented; Transition Begins for Affiliates in Non-Consenting Jurisdictions 1-1-14

  8. Background of Enforcement

  9. Funding and Enforcement Goals

  10. IRS Funding and Enforcement • May have started with UBS, but has not stopped there. • Congressional budget process includes increased funding for IRS. • Sole Reason: Tax Gap.

  11. U.S. Tax Gap

  12. IRS Funding and Enforcement • Increased funding for enforcement • International focus • Identity theft • Preparer compliance

  13. IRS Funding and Enforcement • IRS Statistics • F/Y 2013 – request $12.8 Billion “To provide resources necessary to administer and enforce the tax code” • $403 Million in new money needed for enforcement • Enforcement receipts: $1.48 Billion • F/Y 2011 – collected $2.415 Trillion • 144.7 million individual returns • 110 million refunds for $345 Billion paid out

  14. IRS Funding and Enforcement • IRS-Criminal Investigation • March 2012 release ($700 Million budget) • Investigations: 2,502 • Recommended Prosecutions: 1,765 • Informations/Indictments: 1,567 • Convictions: 1,220 • Months: 44 avg. • Concern • Offshore Evasion • Structuring

  15. IRS Funding and Enforcement • DOJ-Tax Division • 639 Full time employees (377 lawyers) • Budget $113 Million • Handle 6,500 active civil cases • 700 appeals • 1200-1300 criminal referrals

  16. IRS Funding and Enforcement • DOJ-Tax Division • New AAG • Focus • Offshore Criminal Tax Evasion • Tax Shelter Products • Tax Shelter Promotion • National Tax Defier Initiative

  17. Summary of FATCA Application • Who? Foreign Financial Institutions • Non-Financial Foreign Entities • U.S. Withholding Agent • What?FFI Agreement • How? Information gathering and reporting and withholding • Why? 30% Withholding • When? Begins on January 1, 2012 • Many phased in dates • AND – all of above may be modified by IGAs.

  18. WHO? Foreign Financial Institutions

  19. Foreign Financial Institutions Definition • FATCA imposes rigorous reporting, withholding, and due diligence requirements on FFIs. • An FFI includes an entity that • Accepts deposits (e.g., banks), • Holds financial assets for others (e.g., trust companies, brokers), or • Is engaged primarily in the business of investing, re-investing or trading in securities, partnership interests, commodities, or any interests in securities, partnership interests or securities (e.g., funds). • Broad definition includes banks, brokers, insurance companies, trust companies, hedge funds, private equity funds, commodities traders.

  20. Foreign Financial InstitutionsProposed Exclusions • Proposed Regulations provide the following exclusions: • Foreign holding companies of groups primarily engaged in business other than that of a financial institution; • Foreign start-up company that is investing capital into assets with the intent to operate a business other than that of a financial institution; • Foreign entity in the process of liquidation or reorganization with intent to not operate as a financial institution; and • Foreign entities engaged in financing and hedging transactions with or for members of its group. • These are to be treated as Excepted NFFEs. • Additional exclusions have been requested but not (yet) granted for certain small trusts, U.S. controlled foreign corporations, and certain types of foreign entities that by their nature will not have U.S. beneficial owners.

  21. Foreign Financial InstitutionsDeemed Compliant Status • FFIs may be “deemed compliant” if they meet certain requirements, but the FFI must: • Comply with procedures to ensure it does not maintain U.S. accounts and meet certain other requirements prescribed by the IRS (such as ensuring direct holders are Participating FFIs); or • Be a member of a certain excluded classes of FFIs. • To be registered as deemed compliant, an FFI must: • Apply for deemed-compliant status; • Obtain an FFI identification number; and • Certify at least every three years that it meets deemed-compliant requirements. • To be certified as deemed compliant, FFI must certify to withholding agent on a Form W-8BEN-E that requirements are met.

  22. Foreign Financial Institutions: Registered Deemed Compliant Categories • Registered deemed compliant FFIs: • Local FFIs; • Non-reporting members of Participating FFIgroups; • Qualified Investment Vehicles; • Restricted funds; and • Under agreement between U.S. and foreign government – i.e., IGA.

  23. Registered Deemed Compliant: Local FFIs • To qualify as a deemed-compliant Local FFI, each FFI in the Group must: • Be licensed and regulated in country of organization, but not solely as fund; • Not have a fixed place of business outside country where organized; • Not solicit account holders outside local country; • Have 98% of its accounts owned by local residents; • Be subject to local reporting or withholding; • Have policies and procedures for not opening or maintaining U.S. accounts for local non-residents, non-Participating FFIs, and entities controlled or beneficially owned by specified U.S. persons; and • Perform certain due diligence.

  24. Registered Deemed Compliant: Non-Reporting Members of Participating FFI Groups • To qualify as a deemed-compliant non-reporting member of a Participating FFI group, each FFI in the Group: • Must be a member of the Group which includes at least one Participating FFI; • Must transfer any pre-existing account identified as U.S. account or held by non-Participating FFI to an affiliate that is a Participating FFI or a U.S. financial institution (so that full reporting is assured); and • Must implement policies to ensure that, within 90 days of opening such an account or change in circumstances of account holder, it transfers it as above or becomes a Participating FFI.

  25. Registered Deemed Compliant: Qualified Collective Investment Vehicles To qualify as a deemed-compliant qualified collective investment vehicle, the FFI: • Must be an FFI solely because it is a fund; • Must be regulated as a fund in the country in which organized; • Holders of record and account holders must be either: • Participating FFIs, • Registered deemed-compliant FFIs, • U.S. persons excepted from the definition of Specified U.S. Person, or • Exempt beneficial owners; and • All other FFIs in its Group must be either: • Participating FFIs, or • Registered deemed-compliant FFIs.

  26. Registered Deemed Compliant: Restricted Funds To qualify as a deemed-compliant restricted fund, the FFI: • Must be an FFI solely because it is a fund; • Must be regulated as a fund in the country in which organized; • Group members must be Participating FFIs or registered deemed compliant FFIs; • Must prohibit sales to U.S. persons, non-Participating FFIs, and NFFEs that are passive and have substantial U.S. owners; and • Each and every distributor must be either a: • Participating FFI, • Registered deemed compliant FFI, • Nonregistering local bank, or • Restricted distributor (required: local office, local solicitation, size restrictions, performs AML, > 29 customers).

  27. Foreign Financial Institutions: Certified Deemed Compliant Categories • Certified deemed compliant FFIs: • Non-registering local banks; • Retirement plans – two types; • Non-profit organizations; • FFIs with only low-value accounts; and • Certain owner-documented FFIs.

  28. Certified Deemed Compliant: Non-Registering Local Banks • Performs primarily basic banking services; • All members of Group must operate and be licensed solely in country of incorporation; • No fixed place of business outside that country; • Must not solicit account holders outside that country; • Reports or withholds taxes in that country; • Each Group member FFI’s balance sheet assets must not exceed $175 Million; • Entire Group must have no more than $500 Million of assets; and • Group must meet these requirements.

  29. Certified Deemed Compliant: Retirement Funds – Type A • Organized for retirement or pension benefits wherever it operates; • In general, contributions are only from employer, government or employees, and are limited by reference to earned income; • No single beneficiary has right to > 5% of assets; and • Generally, contributions must be deductible or excluded from locally taxed gross income; investment income must be locally exempt; or 50% of contributions are from the government and the employer.

  30. Certified Deemed Compliant: Retirement Funds – Type B • Fewer than 20 participants in FFI; • Sponsored by employer that is not fund or passive NFFE; • In general, contributions are limited by reference to earned income; • Participants who are not residents of country where FFI is organized are not entitled to > 20% of FFI’s assets; and • No non-resident participant is entitled to more than $250,000 of FFI’s assets.

  31. Certified Deemed Compliant: Non-Profit Organizations • Certain criteria must be met similar to those for U.S. tax-exempt organizations: • Established and maintained in country of residence exclusively for religious, charitable, scientific, artistic, cultural or educational purposes; • Exempt in country of residence; • No shareholders or members with proprietary or beneficial interest in income or assets; • Laws or formation documents do not permit income or assets to go to private person or noncharitable FFI, other than pursuant to FFI’s charitable activities, or at arm’s length; and • Laws or formation documents require that on liquidation or dissolution, all assets must be distributed to non-profit organization or EBOor escheat to the government of the FFI’s country of residence.

  32. Certified Deemed Compliant: Only Low-Value Accounts • Only accepts deposits in banking business or holds financial assets for the account of others (i.e., not a fund); • No Group member maintains an account with balance greater than $50,000; and • Group has no more than $50 Million of assets on its balance sheet.

  33. Certified Deemed Compliant: Owner Documented • No Group member accepts deposits in banking business or holds financial assets for the account of others or is insurance company; • Maintains no account for a non-Participating FFI and does not issue debt that is a financial account to any person in excess of $50,000; • Provides all required documentation on its owners to withholding agent and agent agrees to report same for any Specified U.S. Persons; and • FFI is deemed compliant only with respect to that withholding agent.

  34. WHAT? The FFI Agreement

  35. The FFI Agreement • This will not be the product of negotiation. • The IRS will have a standard agreement that will require the FFI to adhere to the rules set forth in FATCA. • Draft agreement expected before the end of 2012. • IRS will begin to accept agreements on January 1, 2013. • Verification of Participating FFI status – Website registration.

  36. HOW? Due Diligence, Reporting, Withholding

  37. The FFI Agreement General Requirements • The FFI Agreement will require the Participating FFI to: • Do due diligence: Obtain information regarding each account to determine if it is a U.S. account, including generally obtaining a Form W-9 for U.S. persons and appropriate W-8 for non-U.S. persons; • Comply with account verification procedures and any subsequent requests for additional information; • Annually report information to the IRS on U.S. accounts; • Attempt to get waivers of foreign law regarding account confidentiality or, if none given, close the account; • Withhold 30% from certain payments to recalcitrant account holders, non-Participating FFIs & FFIs that elect to be withheld upon; and • Certify specific compliance through responsible officer.

  38. The FFIAgreement: Due Diligence • Very detailed rules. • The FFI Agreement will require a review of existing accounts to determine whether there are “indicia” of U.S. status. Further documentation is required for these accounts. • Thresholds for exceptions from due diligence: • Individuals: Aggregate of accounts is $50,000 or less (or $250,000 if in cash annuity/insurance contract); and • Entities: Aggregate of accounts is $250,000 or less. • FFIs may use an alternative electronic due diligence procedure for individuals with accounts of greater than $50,000 and $1Million or less. • Enhanced due diligence is required for accounts of $1Million or more.

  39. The FFIAgreement: Due Diligence • Participating FFIs cannot merely rely on certification from an account holder that the account is not a U.S. account. The required verification will depend on the facts and circumstances, but there are detailed rules. • Participating FFIs must obtain information necessary from new account holders to determine if the accounts are U.S. accounts. In general, FATCAintake procedures from new accounts may follow those of AML/KYC rules.

  40. The FFI AgreementIndicia of U.S. Ownership • Indicia of U.S. ownership of account include: • U.S. address associated with account; • U.S. place of birth for account holder; • “In care of” or “hold mail” sole address or post office box; • Power of attorney or similar authority given to a person with a U.S. address; • Standing instructions to transfer funds to an account maintained in the U.S.; • U.S. telephone number; or • Identification as a U.S. citizen or resident.

  41. Participating FFI Reporting Requirements • Under the FFI Agreement, the FFI and any member of the Group must agree to provide, in general: • Name, address and tax identification number of each account holder that is a Specified U.S. Person; • Name, address and tax identification number of each substantial owner of any account holder that is a U.S.-owned foreign entity; • The account number; • The account balance or value; • Gross income paid to the account, by type (depends on account); • Gross proceeds from sales receipts; and • Gross withdrawals from the account.

  42. Participating FFI Reporting Requirements Alternative Form 1099 Reporting • A FFI can elect to be subject to the Form 1099 reporting rules as if it were a U.S. person. • This would be a significant change of focus, as the reporting must provide information about foreign-source income as well as U.S.-source income. Note: Generally, this is information that U.S. FFIs are presently required to report with respect to U.S. account holders.

  43. The FFI AgreementRecalcitrant Account Holders If an account holder refuses to: • give required information to allow a determination of whether the account holder is a specified U.S. person; or • fails on request to waive bank secrecy laws… then the person is a recalcitrant account holder. A Participating FFI must withhold 30% of the U.S.-source amounts paid directly or indirectly to the recalcitrant account holder, and close the account after a reasonable period of time.

  44. The FFI Agreement Passthru Payments • Passthru payments are certain payments paid by Participating FFIs to non-Participating FFIs or recalcitrant account holders. FFIscannot simply utilize a “blocker” Participating FFI to avoid FATCA. • A payment made by an FFI will be a passthru payment to the extent of: • The amount of the payment that is a withholdablepayment, plus • The amount of the payment that is not a withholdable payment but is attributable to a withholdable payment. • How this will work? Unclear. • FFIsmay be required to publish the applicable “passthru payment percentage” • New systems may need to properly identify, withhold, and report passthru payment percentages. • Full withholding on passthru payments is very controversial. It has been deferred until 2017 at earliest and may never occur. • Obligations that produce or could produce a foreign passthru payment and cannot produce a withholdable payment are grandfathered until 6 months after the date “foreign passthru payment” is defined in regulations.

  45. Example of Passthru Payments • Fund distributes the income to its investors, which include recalcitrant account holders and non-Participating FFIs. • How to trace incoming payments to the appropriate account holders? • Notice 2011-34 indicates that the participating fund would withhold based on a percentage of its U.S. assets. • The proposed regulations merely request comments given the complexity of calculating the withholdable portion of pass-thru payments. • Certain passthru payments currently grandfathered under Announcement 2012-42.

  46. WHY? Withholding – the “Hammer”

  47. Reporting and Withholding on Payments to Non-Financial Foreign Entities • U.S. withholding agents and Participating FFIs must withhold 30% from withholdable payments made to a non-exempt non-financial foreign entity (“NFFE”). • Unless, in general, the NFFE certifies that it has no substantial U.S. owners or provides identifying information for each substantial U.S. owner. • Excepted NFFEs include: • Publicly traded entities, • Foreign governments, international organizations, and agencies, • “Active” NFFEs: with income consisting of less than 50% passive income and assets consisting of less than 50% earning passive income, • Excluded FFIs, and • Exempt Beneficial Owners.

  48. NFFE: Substantial U.S. Owner • When does a NFFE have one or more “substantial U.S. owners” such that it is a “U.S.-owned foreign entity”? • Corporation: if any Specified U.S. Person owns, directly or indirectly, more than 10% of its stock, by vote or value.* • Partnership: if any Specified U.S. Person owns, directly or indirectly, more than 10% of its profits or capital interests. • Trust: if any Specified U.S. Person is an owner of any portion of the trust under the grantor trust rules. • Trust: if any Specified U.S. Person holds, directly or indirectly, more than 10% of the beneficial interest of the trust. * Note: The 10% thresholds above are reduced to zero for any owner that is engaged in investing or trading in securities, partnership interests or commodities (i.e., a fund).

  49. NFFE: Specified U.S. Persons • A “Specified U.S. Person” is any U.S. citizen, green card holder, U.S. resident, or any domestic partnership, domestic trust or domestic corporation…except that the following are not Specified U.S. Persons: • A publicly traded corporation; • A group company of a publicly traded corporation; • A tax-exempt organization or retirement plan; • The U.S. government or any wholly-owned agency; • A U.S. state, political division or wholly-owned agency; • A bank, Real Estate Investment Trust, Regulated Investment Company; and • Certain U.S. trusts.

  50. Exempt Beneficial Owner: A Good Category • The following beneficial owners of a payment are exempt from withholding on payments made to them or for their benefit (“EBO”): • Foreign governments, political subdivisions, and wholly- owned instrumentalities and agencies; • International organizations and wholly-owned instrumentalities and agencies; • Foreign central banks; • Governments of U.S. possessions; • Certain foreign retirement plans (see next slide); • Certain wholly-owned entities of the foregoing.

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