FATCA: More than a Five Letter Word NACUBO Tax Forum 2014

Transcription

1 FATCA: More than a Five Letter Word NACUBO Tax Forum 2014 Presented by: Nicole Bencik, Partner, Crowe Horwath LLP John Kelleher, Partner Crowe Horwath LLP Joel Levenson, Associate Director: Tax Compliance, University of Central Florida

2 This information provided herein is educational in nature and is based on authorities that are subject to change.

3 Foreign Account Tax Compliance Act (FATCA) A Brief History of FATCA Impact of FATCA Definitions Foreign Financial Institutions (FFIs) Intergovernmental Agreements (IGAs) Non-Financial Foreign Entities (NFFEs) Withholding Agent Responsibilities Summary

4 A Brief History of FATCA March 18, 2010 FATCA was introduced as part of the Hiring Incentive to Restore Employment Act of 2010 (H.R. 2847). Primary objectives of the legislation are to: Combat tax evasion by U.S. persons holding investments in offshore accounts Expand the information reporting requirements imposed on foreign financial institutions with respect to certain U.S. accounts Impose withholding, documentation, and reporting requirements with respect to certain payments made to certain foreign entities February 8, 2012 Treasury and the IRS issued proposed regulations Provided clarification on the prior notices released since March 2010

5 A Brief History of FATCA Final Regulations were issued January 18, 2013 Provided that obligations in place prior to January 1, 2014 are grandfathered accounts and not subject to withholding These accounts can not be materially modified Must be of a fixed term (i.e. bonds or credit agreements); does not apply to equity securities Notice was issued July 12, 2013 Generally deferred the effective date of FATCA by 6 months (to July 1, 2014) Indicated modified final regulations were to be issued Did not delay the reporting requirements for 2014 accounts (Note: see final regs.) Notice released October 29, 2013 Provides guidance to FFI s on registering through the portal & Model 2 IGA guidance

6 A Brief History of FATCA Revised Final and Temporary Regulations issued March 6, 2014 Made approximately 50 changes to the regulations Several conforming requirements to Chapter 3 and Chapter 61 withholding Adopted many changes from Notices and Eliminated payment reporting requirements for 2014, though account information reporting remains required for Participating FFIs for 2014 Full reporting required for 2015 calendar year Announcement released April 2, 2014 guidance on IGAs in process Covered in more detail later in the presentation Notice issued May 2, 2014, provides for a two-year grace period from enforcement for calendar years 2014 and 2015 for those making a good faith effort to comply and extends the period for pre-existing obligations to 12/31/14. May 28, 2014 IRS Chief Counsel International announces that current versions of the Form W-8 series may be used through 2014

7 Definitions Definition of Withholdable Payments Payments of U.S. sourced interest, dividends, rents, premiums and other Fixed or Determinable Annual or Periodic gains, profits and income (FDAP income) Gross Proceeds from the sale or other disposition of any property of a type that can produce interest or dividends from sources within the U.S. Excluded from the definition of withholdable payments Original Issue Discount from certain short-term obligations Income effectively-connected with the conduct of a trade or business in the U.S. Certain payments in the ordinary course of the withholding agent s business Gross payments from the sale of property that can produce income that is excluded from the definition of withholdable payments Certain broker transactions that involve the sale of fractional shares Grandfathered payments

8 Definitions Foreign Financial Institution (FFI) FFI s include banks, brokerages, securities and commodities dealers and asset-backed securities dealers who act on behalf of their customers Insurance companies issuing cash value insurance or annuities P&C insurance companies should be excluded Certain holding companies and treasury centers if: They are part of a group that includes a depository or custodial institution, or insurance company They are formed or availed of by a mutual fund, collective fund or private equity fund or similar entity with the purpose of investing or trading financial assets. Intergovernmental agreements (IGA) will determine those entities that are FFI s, for a given IGA jurisdiction In summary, FFI s are broadly defined Non Financial Foreign Entities (NFFE s) Any foreign entity that is not an FFI

9 FATCA Requirements for Participating FFI s Foreign Financial Institutions must obtain information regarding each holder of each account that is considered a U.S. account Name, address, TIN, account number, account balance or value, gross receipts and gross withdrawals or payments from the account Must implement due diligence procedures on existing and new accounts Withhold at a rate of 30% on withholdable payments (unless treaty benefits apply) Supply additional information upon request Can elect to be subject to same reporting as U.S. financial institutions Must register with the IRS and obtain a Global Intermediary Identification number (GIIN) Foreign Financial Institution search tool is currently available for use on the IRS website.

10 FATCA Requirements for Participating FFI s In general, FATCA status is determined and documented on an entity by entity basis Non-compliant status of one group member can taint the entire group Multinational groups should review each of their entities to understand what type they are and if they might potentially be FFI s If so, need to undertake a due diligence process to become Participating FFI s NFFE s should be prepared to receive requests to complete new forms W-8BEN-E, which were recently issued in final form and now in use U.S. subsidiaries may request foreign parents or brother/sister entities to certify FATCA status

11 Impact of FATCA FATCA potentially touches every Foreign Financial Institution FATCA provisions impose a 30% withholding tax on withholdable payments made to a foreign financial institution, unless the Foreign Financial Institution agrees to enter into an agreement with the IRS FATCA will also apply to NFFE s Document which customers meet an exception Withhold on customers that do not meet an exception Annually report on U.S. persons that are not exempt or are Recalcitrant Withholding under FATCA will be deemed to meet Chapter 3 withholding requirement Reg. Sec provides refund procedures where documentation is submitted for those eligible for treaty benefits (similar to existing Chapter 3 rules)

12 Intergovernmental Agreements (IGAs) Intergovernmental Agreements The U.S. quickly realized that the privacy laws of many countries would prevent FFI s from providing the kind of information FATCA was intended to capture This left many FFI s with a choice of being subject to 30% withholding or violating local laws As a solution Treasury has been negotiating IGA s with FATCA partners. There are currently two types of Agreements: Model 1 Agreement Model 2 Agreement Both agreements assume that the foreign jurisdiction will enact enabling legislation that will require FFI s within their jurisdiction to identify and report information regarding U.S. accounts.

13 Intergovernmental Agreements (IGAs) Intergovernmental Agreements - Model 1 Agreements Under a Model 1 Agreement, FATCA partner FI s are required to report information regarding U.S. accounts to the local tax authority The local tax authority will then provide the information to the IRS, under exchange of information agreements between US and foreign jurisdiction FATCA partner FI s are not required to enter into an agreement with the IRS under Model 1 jurisdictions. Two options under Model 1 agreements reciprocal and non-reciprocal Reporting FI s are required to do the following: Identify U.S. accounts Report for 2015 and 2016 to the Competent Authority the name of each nonparticipating FFI to which payments were made. Impose FATCA withholding in cases where they have agreed to undertake withholding under Chapter 3 (such as Qualified Intermediaries). Provide required information to withholding agent Notice removed the requirement to report 2013 accounts

14 Intergovernmental Agreements (IGAs) Model 1 IGAs which are fully in effect as of August 22, 2014 are as follows: Australia Belgium British Virgin Islands Canada Cayman Islands Costa Rica Czech Republic Denmark Estonia Finland France Germany Gibraltar Guernsey Hungary Honduras Ireland Isle of Man Israel Italy Jamaica Jersey Latvia Liechtenstein Luxembourg Malta Mauritius Mexico Netherlands New Zealand Norway South Africa Spain Slovenia Sweden United Kingdom

15 Intergovernmental Agreements (IGAs) Intergovernmental Agreements - Model 2 Agreements: Require the FATCA partner to cause FI s to register with the IRS Require FATCA partner FI s to report directly to the IRS FFI must enter into agreements with the IRS These agreements are non-reciprocal, only Comply with the due diligence procedures related to pre-existing accounts as determined under the IGA Model 2 IGAs in effect as of August 22, 2014 are: Austria Bermuda Chile Japan Switzerland

16 Intergovernmental Agreements (IGAs) Substantial Effect On April 2, 2014, IRS Announcement , the Treasury Department and IRS give substantive effect to IGAs with a number of countries which are currently under negotiation Such effect is temporarily provided through December 31, 2014, under the assumption that these agreements will be concluded before year-end The countries covered by IRS Announcement are (Model 1, except as noted): Algeria Colombia Indonesia Anguilla Croatia Kosovo Antigua and Barbuda Curacao Kuwait Azerbaijan Cyprus Malaysia Bahamas Dominica Montenegro Bahrain Dominican Republic Lithuania Barbados Georgia Panama Belarus Greenland Peru Brazil Grenada Poland Bulgaria Guyana Portugal Cabo Verde Haiti Qatar China India Romania

17 Intergovernmental Agreements (IGAs) Substantial Effect St. Kitts and Nevis St. Lucia St. Vincent and the Grenadines Saudi Arabia Serbia Seychelles Singapore Slovak Republic South Korea Thailand Turkey Turkmenistan Turks and Caicos Islands Ukraine United Arab Emirates Uzbekistan Model 2 IGAs Armenia Hong Kong Iraq Nicaragua Moldova Paraguay San Marino Taiwan

18 Non-Financial Foreign Entities NFFE s are also potentially subject to FATCA Non-Financial Foreign Entity (NFFE) includes any foreign entity that is not an FFI or one of the following specifically excluded entities: An entity whose stock is traded on an established securities exchange An entity that is part of the same expanded affiliated group of as a publiclytraded corporation An entity organized under the laws of a possession of the U.S. Any foreign government Any international organization or agency or instrumentality of such A foreign central bank of issue Any other class of persons identified by the Secretary as posing a low risk of tax evasion

19 Non-Financial Foreign Entities 30% withholding on payments of FDAP income are required with respect to withholdable payments made after June 30, 2014, unless: NFFE is the beneficial owner of the payment and, Certification is provided that there are no substantial U.S. owners, or none exist Substantial U.S. owner is a U.S. person owning more than 10% Provide name, address, and tax identification number of each substantial U.S. owner NFFE s may also register with the IRS and obtain a GIIN There is an exception for payments made before July 1, 2016 on a pre-existing obligation to a payee that is not a Prima Facie FFI Withholding agent must not have documentation indicating the payee s status is a passive NFFE with substantial U.S. owners for exception to apply Withholding on payments to undocumented Prima Facie FFI s begins January 1, 2015

20 Non-Financial Foreign Entities Definitions: Prima Facie FFI A Foreign entity where the withholding agent has determined by using searchable data under Chapter 3 withholding / information reporting and recorded a recorded a SIC or NAICS code that identifies the payee s industry as that of a financial institution. Pre-existing Obligation An account, instrument, contract, debt, or equity interest that is issued or in existence on December 31, 2014 Active NFFE Less than 50% of income from passive sources and less than 50% of the assets generate passive income Passive NFFE A foreign entity that is not an excepted NFFE (i.e. active NFFE) Has greater than 50% passive assets, or more than 50% of income is from passive sources Exempt Beneficial Owner A foreign payee that is a foreign government or agency; an international organization; a foreign central bank of issue; certain retirement funds; government of a U.S territory; entities owned by one or more exempt beneficial owners

21 Non-Financial Foreign Entities Applying exceptions for otherwise withholdable payments Payments made in the ordinary course of business, such as: Payments for non-financial services Office and equipment leases Licenses of software Interest payments on open accounts payable from buying nonfinancial goods or services Payments of interest and OID on short term obligations Payments that are effectively-connected with a U.S. trade or business Certain Grandfathered payments Although the above are not withholdable payments, they are still reportable under FATCA

22 Who is a Withholding Agent? Per IRC 1473 all persons, in whatever capacity, having the control, receipt, custody, disposal, or payment of any withholdable payment Anyone can be a withholding agent U.S. persons Foreign persons Every person within the payment chain is a potential withholding agent FATCA applies to related-party transactions FATCA incorporates the Qualified Intermediary ( QI ) regime QI s must agree to participate to maintain QI status QI s will be treated as the beneficial owner for purposes of FATCA

23 Responsibilities of a Withholding Agent Obtain Documentation In order to determine if withholding applies, payees that are beneficial owners will be required to provide Forms W-9, W-8 BEN-E, or W-8BEN Form W-8IMY for Intermediaries; Form W-8EXP for Tax Exempts (new drafts issued) Information should be collected before a payment is made Unrelated parties Related parties Withhold and Remit Where withholding is appropriate, withholding agents must withhold 30% of any withholdable payment Only one withholding is required if Chapter 4 applies; Chapter 3 will then not apply Withheld taxes must be remitted to the IRS based upon the amount collected If more than $2,000 within 3 days of the quarter monthly period Report Withholding agents will be required to report payments on Form 1042/1042-S Forms recently revised to account for FATCA reporting

24 Responsibilities of a Withholding Agent Obtain Documentation of Chapter 4 Status Pre FATCA W-8 s May be used for foreign individual, foreign government or international organization (W-8BEN or W-8EXP) Pre FATCA W-8BEN May be used for other types of payees if additional information is obtained, as defined in regulations: Organization documents Financial statements Letters from a foreign government Opinions from certain professionals such as Attorneys Documentation as to substantial U.S. owners The above documentation is valid until January 1, 2017, subject to the normal expiration policies for W-8 s W-8BEN s expiring on December 31, 2013 are considered valid until Jan. 1, Form W-8BEN-E was recently released in final form, along with revised instructions W-8BEN may be used by entities for six months after the issuance of new forms Going forward, W-8BEN will essentially be limited to use by individuals only Best practice is to request completed Forms W-8BEN-E to be received by 12/31/14

25 Responsibilities of a Withholding Agent Reporting of Payments Revised Forms 1042/1042-S have been issued, along with revised instructions Entity, payment and withholding codes will differ from Chapter 3 codes Payments that are not subject to withholding may still be subject to reporting Excluded payments: Non-FDAP payments i.e. the purchase of inventory; non-us source services, etc. Payments made on Pre-existing obligations to Active NFFE s

26 Changes under Revised Regulations U.S. Withholding agents may rely on faxed or PDF copies of withholding statements after July 1, 2014 In the absence of documentation, a withholding agent must treat a payee as foreign for obligations not considered pre-existing This is significant as a U.S. withholding agent will effectively need a W-9 for all U.S. payees of FDAP income after June 30, 2104 W-8 s received must be completed in full to be considered as valid It cannot be valid for Chapter 3 and invalid for Chapter 4 Withholding certificates received more than 30 days after payment must be accompanied by an affidavit representing the facts were accurate as of the time of payment

27 Changes under Revised Regulations A U.S. TIN or a foreign TIN may be provided to claim a reduced rate of withholding under a treaty for nonresident aliens Provides for direct reporting for NFFE s who would rather not provide substantial U.S. investor data to payors NFFE s may also contract with a sponsoring entity to perform the required due diligence under FATCA Narrowed the definition of an FFI in certain cases Custodial institutions who do not hold accounts are no longer FFI s Certain investment managers will be deemed compliant under FATCA Entities in existence for more that six months prior to acquisition by an investment vehicle, that conducted ordinary business activities are not considered formed or availed of and will be considered part of a non-financial group and not an FFI

28 Implementation of FATCA U.S. Withholding Agents Employ a cross-functional team to address FATCA implementation requirements Determine weaknesses in current Chapter 3 information collection procedures Identify all payment streams that might be made to a foreign payee Interest, dividends, insurance, bank or brokerage fees, FX contracts, swaps, etc. There is no exception for related-party payments Identify all foreign payees This should be done entity-by-entity, even within the same affiliated group Determine if FFI or NFFE rules govern New account opening policies were to be in place by June 30, 2014, classifying all payees; may qualify for transitional relief if still ongoing and meet good-faith standard Amend contracts or agreements to allow for data collection, and withholding Identify Grandfathered and pre-existing accounts U.S. payees (Entities) Identify FATCA status of all members within the group Provide completed Forms W-8BEN-E (New form is 8 pages long)

29 Summary Registration for FFI s Portal is Open Registration began January 1, 2014 If not yet complete, efforts should be underway in order to qualify for transitional relief Withholding General rule - withholding on withholdable (FDAP) payments begins Jan 1, 2015 For FFIs which are undocumented, withholding begins July 1, 2015 Withholding for payments on pre-existing obligations of NFFE s begins July 1, 2016 Withholding on gross proceeds begins January 1, 2017 Prior Form W-8 series remains in effect until January 1, 2015 Reporting of U.S. Accounts by a Participating FFI March 15, 2015 reporting date for calendar year 2014 Account opening procedures Should have been in place by July 1, Transitional relief may be available upon showing of good-faith effort.

30 FATCA Documentation Is the payee an Is the payee an FFI? exempt beneficial A B owner? C Does available info show entity to be excepted NFFE? No No No Does entity have a GIIN? No Yes Yes Yes Yes Request W-8BEN-E Can rely on current W-8 EXP No FATCA withholding Can rely on current W-8BEN with support. No FATCA withholding Rely on current W-8BEN + GIIN Request W- 8BEN-E or withhold 1/1/15 Assumptions Payments are deemed to be withholdable payments Obligation is not pre-existing obligation Assumes obligation is not a Grandfathered obligation Assumes current chapter 3 Documentation exists A B C Potentially Available Information to required: Based on NAICS/SIC Codes Foreign Gov t, Foreign Central Bank, Int l Organization Articles of Org., Credit reports, Financial statement to support entity is: Publicly-traded/affiliate; Territory Entity; Active NFFE; Start up, etc.

31 FATCA Pre-Existing Obligations A Is the payee a Prima Facie FFI? No B Does available evidence show entity to be a non participating FFI? No Does documentation indicate the entity is an FFI? No Withholding is not required on payments made before Jul. 1, 2016 Yes Yes Yes C Request W-8BEN-E or withhold beginning Jan 1, 2015 C Request W-8BEN-E or withhold 30% on payments beginning Jan 1, 2015 C Rely on W-8BEN, request GIIN for payments prior to Jan 1, 2017 Assumptions Payments are deemed to be withholdable payments Obligation is not modified after Dec 31, 2014 Payment is not a Grandfathered Obligation A B C Potentially Available Information to required: Based on NAICS/SIC Codes and not a QI or NQI Available internal documentation Information reporting is still required

32 Questions?