A closer look at the final regulations and the path forward

Transcription

1 FATCA A closer look at the final regulations and the path forward 19 February 2013 Circular 230: This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding US Federal, state or local tax penalties that may be imposed on any taxpayer.

2 What we will be looking at FATCA recap Significant highlights of the final regulations Key differences between the proposed and final regulations Potential impact of inter-governmental agreements (IGAs) What Hong Kong and Chinese financial institutions should do now Q&A Panel Discussion the path to compliance 2

3 What is the Foreign Account Tax Compliance Act (FATCA)? 3

4 What is FATCA and why is it important? A US tax law that aims to enhance the US Internal Revenue Service s (IRS) ability to collect US tax imposed on income earned by US persons through non-us investments Requires most foreign financial institutions (FFIs) to employ enhanced due diligence procedures to identify US persons and to disclose specific information on their non-us investments to the IRS, or be subject to stringent financial penalties Non-compliance carries a severe penalty of a 30% withholding tax o Applied to certain US sourced payments received by an FFI starting January 2014, and even more payments received from 2017 o Even if the FFI believes it has no US customers Other financial institutions and counterparties may be more reluctant to conduct or continue business with non-compliant institutions 4

5 How does an FFI comply? - Sign an agreement with the IRS... Perform enhanced due diligence procedures to identify existing US account holders, and non-us accounts that have substantial US owners Collect more information when opening new accounts if US indicia are identified during on-boarding process for individual account holders, and meet FATCA requirements for new accounts opened by entities Report to the IRS identified US accounts and US-owned accounts, as well as, in the aggregate, on account holders who do not provide information or are FFIs not complying with FATCA Withhold US tax on certain payments and pay over to the US government on: o o Account holders who do not provide information FFIs that do not comply with FATCA 5

6 Significant highlights of the final regulations 6

7 What has changed in the final FATCA regulations? Most of the same fundamental FATCA responsibilities and requirements from the proposed regs were adopted in the final regs o Additional guidance tries to address stakeholder and industry comments o Provide many of the needed details and clarifications regarding customer on-boarding, due diligence, reporting and withholding FATCA timelines are generally the same as announced by the IRS in October 2012 Sign up with the IRS by 25 October 2012 to get on the IRS December FFI list FFIs will need to implement a compliance and certification programme Regulations now more closely coordinated with IGA models 7

8 FATCA Compliance Timeline under final FATCA regulations Key illustrative dates: 15 July 2013 IRS FATCA registration portal available 25 October 2013 Last day to register for inclusion on the 2 Dec 2013 IRS list of PFFIs and Registered DCFFIs 2 December 2013 First IRS list of PFFIs and Registered DCFFIs to be published 1 January 2014 New account identification procedures must be in place to establish the FATCA status of new individual and entity accounts. The earliest effective date of the FFI agreement would be 31 December January 2014 FATCA withholding commences on certain withholdable payments (i.e. US source interest, US dividends, etc.) 30 June 2014 Need to certify due diligence is complete on pre-existing prima facie FFI accounts 31 December 2014 Need to certify due diligence is complete on pre-existing high value accounts 15 March 2015 Begin FATCA reporting of US source FDAP income that was paid for calendar year

9 FATCA Compliance Timeline under final FATCA regulations (Continued) Key illustrative dates: 31 March 2015 Begin limited FATCA reporting for calendar years 2013 & 2014 for US accounts and aggregate FATCA reporting for recalcitrant accounts 31 December 2015 Need to certify due diligence is complete on all pre-existing accounts 29 February 2016 Responsible officer must be able to certify completion of identification and review for all preexisting individual and entity accounts 15 March 2016 Reporting of foreign reportable amounts to NPFFIs begins 1 January 2017 Begin FATCA withholding on gross proceeds on the sale of US stock and US securities. Earliest date that FATCA withholding may be required for "foreign passthru payments", which will be the subject of future US guidance.. 30 June 2017 First Certification of Compliance and Effective Controls required 9

10 Key differences between proposed and final regulations 1) Entities in scope 10

11 How has the concept of FFI changed under the final regs? Proposed regulations (4 types of institutions) Final regulations (5 types of institutions) Type of change 1. Depository institution 1. Depository institution Limited new exceptions 2. Custodial institution 2. Custodial institution Minor clarifications 3. Insurance company 3. Insurance company Clearer definition 4. Entities that invest/trade 4. Investment entities - entities that trade, invest or manage financial assets as a business on or behalf of customers Significant new concepts N/A 5. Certain holding companies and treasury centers New type of financial institution 11

12 Depository institutions Definition Accepts deposits in the ordinary course of a banking or similar business What s new? Limited new exceptions Key takeaways lessors and lenders solely accepting deposits as collateral are not considered to be in a banking or similar business charge and credit card services are not considered a banking or similar business 12

13 Insurance companies Definition is a company regulated as an insurance company in its country of operation, has gross income arising from insurance, reinsurance, and annuity contracts that exceeds 50% of gross income, or has assets associated with insurance, reinsurance, and annuity contracts that exceeds 50% of gross assets What s new? Clearer definition Key takeaways makes it easier to identify an insurance company single cash value contract cannot alone create an insurance company FFI requirement that insurer be regulated under local law provides clarity, as opposed to a determination under US criteria 13

14 Investment entities Definition Entity primarily conducts as a business one or more of the following activities or operations for or on behalf of a customer: (1) trading in certain financial assets (2) individual or collective portfolio management (3) investing, administering or managing money or financial assets on behalf of others Entities that hold themselves out as collective investment vehicles, mutual funds, private equity funds, etc. What s new? Significant new concepts and expanded definition Key takeaways fund managers become FFIs small non-professionally managed entities (e.g., family trusts, PICs, etc.) may get some relief 14

15 Holding companies and treasury centres Definition An entity that is a holding company or treasury centre that: 1. is part of an expanded affiliate group (EAG) that includes other financial institutions, or 2. if formed in connection with investment vehicles such as private equity funds, mutual funds, hedge funds, etc. What s new? Expanded definition Key takeaways Holding companies and treasury centers are FIs if: the EAG includes a depository institution, custodial institution, insurance company or an investment entity, or the entity is formed or availed of by any fund or similar investment vehicle 15

16 New FFI exclusion Excepted inter-affiliate FFIs Treated as excepted NFFE (not an FFI) Conditions: - entity is a member of a PFFI group - maintains no financial accounts outside EAG - does not hold an account with or receive payments from any withholding agent outside EAG - does not make withholdable payments to persons outside EAG Key takeaway May reduce registration requirements in some cases 16

17 Deemed-compliant FFIs Two categories of deemed-compliant categories do not need to sign an FFI agreement with the IRS, but still have some FATCA responsibilities: Registered deemed-compliant FFIs Must register with the IRS, agree to deemed-compliant criteria, and certify every 3 years to its compliance local FFI non-reporting member of Participating FFI (PFFI) group qualified collective investment vehicle restricted fund sponsored investment entities sponsored controlled foreign corporations (CFCs) Certified deemed-compliant FFIs Must certify to a withholding agent that it meets the requirements on a Form W-8 and provide any other required documentation non-registering local bank FFIs with only low value accounts limited life debt investment vehicle (pre-2017; for CLOs/CMOs) qualified credit card issuers sponsored closely held investment entity owner documented FFI Retirement funds and non-profit organizations are recategorized 17

18 Key differences between proposed and final regulations 2) Pre-existing accounts due diligence 18

19 Pre-existing account due diligence New accounts of a customer that has a preexisting account can be treated as a pre-existing account so long as they are treated as one obligation for purposes of: AML due diligence aggregating balances and applying some other parts of FATCA due diligence Some liberalization of documentation to be collected after US indicia show up, can apply in some cases 19

20 Pre-existing account due diligence Individual accounts Account threshold Accounts with aggregate balance on effective date of the FFI agreement of US$50K or less (US$250K for cash value insurance and annuity contracts) Accounts with aggregate balance on effective date of the FFI agreement is in excess of US$50K (US$250K for cash value insurance and annuity contracts) but not in excess of US $1M Accounts with aggregate balance on effective date of the FFI agreement in excess of US$1M Due diligence requirement No review required Only electronic search for US indicia required Review must be completed by 31 December 2015 Enhanced review required Review must be completed by 31 December 2014 Ongoing monitoring Review required if aggregate account balance exceeds US $1M at any subsequent calendar year end No additional review required until there is a change in circumstances No additional review required until there is a change in circumstances 20

21 PFFI Pre-existing account due diligence Entity accounts Account threshold Accounts with aggregate balance on the effective date of the FFI agreement of US$250K or less Accounts with aggregate balance on the effective date of the FFI agreement in excess of US$250K that are Prima Facie FFIs Accounts with aggregate balance on the effective date of the FFI agreement in excess of $250K other than Prima Facie FFIs Due diligence requirement No review required Review must be completed by 30 June 2014 Review must be completed by 31 December 2015 Ongoing monitoring Review required if aggregate account balance exceeds US $1M at any subsequent calendar year end No additional review required until there is a change in circumstances No additional review required until there is a change in circumstances Prima Facie FFIs (obvious FFIs) are entities identified as qualified intermediaries (QIs) or nonqualified intermediaries (NQIs), and entities that have certain industry codes on the FFI s systems that indicate they are financial institutions. 21

22 Key differences between proposed and final regulations 3) New accounts 22

23 Documentation Withholding certificates (Forms W-8, W-9) - electronic receipt - indefinite validity period Decreased supplementary documentation Documentary evidence - provides flexibility on documents retained Third-party credit agency information 23

24 Key differences between proposed and final regulations 4) Withholding 24

25 What is a withholdable payment? The definition of a withholdable payment is largely consistent with the proposed regs Withholding on gross proceeds on DVP/COD transactions Final regulations defer withholding on gross proceeds until 2017, so brokers need not be concerned with the status of the payee in such transactions at least until 2017 But excludes the following from being a withholdable payment: Offshore payments of US source fixed, determinable, annual, periodical (FDAP) income prior to 1 January 2017 with respect to an offshore obligation If the payor is not acting as an intermediary or a qualified securities lender 25

26 Relief for certain grandfathered obligations The final regulations provide: an extended cut-off date to 1 January 2014 an exemption for a payment with respect to collateral posted to secure a grandfather obligation obligations that give rise to withholdable payments under IRC section 871(m) (dividend equivalent payments) or foreign passthru payments will be grandfathered if outstanding by the date that is 6 months after a specified date to be determined by future regulations 26

27 Key differences between proposed and final regulations 5) Reporting 27

28 Form 8966 for FFIs For accounts owned by a specified US person name, address and TIN of each specified US person account number account balance or value payments of income and gross proceeds (if any) For accounts owned by US owned foreign entities name, address and TIN of the entity account number account balance or value payments of income and gross proceeds name, address, and TIN for: each substantial US owner of a US-owned foreign entity 28

29 Form 8966 for FFIs (cont d) Requirement to report payments is phased in first report due in 2015 with respect to 2013 and 2014 information income payments are not reportable until 2016 for 2015 gross proceeds are not reportable until 2017 for 2016 Rules for recalcitrant accounts need to provide the aggregate number and aggregate balance of recalcitrant accounts that: are held by passive NFFEs are held by US persons are dormant accounts have US indicia (other than passive NFFEs, US persons, and dormant accounts) have no US indicia (other than dormant accounts) 29

30 FATCA also changes existing Form 1042-S reporting PFFIs and deemed-compliant FFIs (DCFFIs) supplements Form 8966 reporting used to report chapter 4 reportable amounts paid to recalcitrant accounts and NPFFIs reporting can be on a pooled or payee specific basis the reporting obligation can be passed up to another withholding agent NPFFIs that act as intermediaries can issue Forms 1042-S to allocate the tax withheld to the underlying payees Chapter 4 reportable amounts US source FDAP income paid on or after 1 January 2014, that is reportable on Form 1042-S under chapter 3, or otherwise subject to withholding under chapter 4 gross proceeds and foreign passthru payments that are subject to withholding foreign reportable amounts paid to an NPFFI in calendar years 2015 and 2016 Withholding agents must file a 1042-S to report chapter 4 amounts paid to recipients 30

31 Key differences between proposed and final regulations 6) FFI compliance 31

32 FFI registration portal What is it used for? registration of participating FFIs, registered deemed-compliant FFIs (including FFIs covered under an IGA) responsible officer certifications enables FFIs to interact with IRS Key dates No later than July 15, 2013 October 25, 2013 December 2, 2013 Registration portal will be available online Last day to register on portal to be on first IRS list of FFIs IRS will post the first list of FFIs and intends to update the list monthly 32

33 FFI compliance program requirements The final regulations require an FFI to: 1. appoint a responsible officer 2. establish policies, procedures and processes sufficient to satisfy agreement 3. periodically review and certify as follows: Type of certification Compliance and effective internal controls Due diligence on preexisting accounts Not assisting account holders in avoidance of chapter 4 One time or ongoing? Ongoing, every 3 years One time One time When is certification required? 6 months after each 3- year review period 60 days after 2 nd anniversary 60 days after 2 nd anniversary 33

34 Compliance and effective internal controls certification The responsible officer must certify that the FFI has completed the following activities: established a FATCA compliance program that is in effect reviewed the compliance program against the requirements of the FFI agreement With respect to material failures the responsible officer must certify: that there were no material failures, or if there were material failures, appropriate actions were taken to remediate and prevent reoccurrence If the responsible officer is unable to make a certification, it can make a qualified certification. 34

35 Material failures deliberate action by employee or agent to avoid requirements of FFI agreement error attributable to failure of FFI to implement sufficient internal controls certain criminal or civil penalties imposed on an FFI by regulators in connection with failure to properly identify account holders as part of its anti-money laundering (AML) procedures establishment of a tax reserve or provision related to lack of compliance with FFI agreement A material failure will constitute an event of default if it occurs in more than limited circumstances or when the FFI has not substantially complied with its FFI agreement 35

36 Events of default Failure to perform one or more of the following are examples of events of default: obtain reporting waiver when required significantly reduce over time account holders and payees that are recalcitrant or nonparticipating FFIs maintain compliance program take timely corrective actions to remedy material failures make required certifications cooperate with IRS on requests for additional information 36

37 Certification about policies not assisting account holders in avoidance of chapter 4 to the best of responsible officer s knowledge after conducting a reasonable inquiry, that the PFFI did not have any formal or informal practices or procedures in place from August 6, 2011 through the date of certification to assist account holders in the avoidance of chapter 4. Reasonable inquiry written inquiry such as requests to relevant lines of business requires response from relevant customer onboarding and management personnel Bad practices suggesting account holders: split up accounts to avoid high-value close or transfer accounts to avoid reporting remove US indicia from records intentional failure to disclose US account manipulating account balances to avoid detection 37

38 Potential impact of intergovernmental agreements (IGAs) 38

39 Uncertainty remains where IGAs have not been established US government is working with governments around the world to establish a common approach to FATCA implementation (IGAs) Two approaches adopted so far Model 1 and Model 2 Model 1 generally relies on government-to-government exchange of information to address concerns that foreign laws prohibit many FFIs from reporting account holder information to IRS Model 2 provides an alternative solution to these restrictions, by providing another framework to allow reporting directly to the US under FATCA Both models provide applicable FFIs with some relief against certain aspects of the final regulations However the principles of FATCA remain and we do not anticipate that any IGAs could materially reduce the burden of FATCA compliance for Hong Kong or Chinese financial institutions 39

40 What Hong Kong and Chinese financial institutions should do now 40

41 What Chinese and Hong Kong financial institutions should do now Understand the impact of the final regs on the FFI s operations This will assist in determining changes that need to be implemented into their compliance policies, procedures, systems and operating models Time is of the essence with less than 11 months until the first compliance milestone Story is still unfolding especially with the level of cooperation and implementation details from foreign governments that are expected to implement IGAs. IGAs will impact the way that FFIs establish FATCA compliant operating models

42 No pressure, but with 11 months to go Chinese and Hong Kong financial institutions need to: Comprehend the final regulations and their impact Unfolding developments monitor them closely (i.e. IGAs) Review and determine what gaps they have in their existing processes Execute efficiently and effectively a FATCA compliance program

43 This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers Hong Kong its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers Hong Kong. All rights reserved. refers to the Hong Kong member firm, and may sometimes refer to the network. Each member firm is a separate legal entity. Please see for further details.