FATCA and CRS Related to Shares and Employee Share Plans

Transcription

1 FATCA and CRS Related to Shares and Employee Share Plans Panayiota Burquier, Gibson Dunn & Crutcher LLP June Davenport, Solium John D. Heaton, Equiniti Jeffrey M. Trinklein, Gibson Dunn & Crutcher LLP

2 Topics Origins of the Problem US Response UK Response International Response Effects on Participants, Issuers, Service Providers and Advisors Hope for the future?

3 Origins of the Problem Extraterritorial reach of the Taxman Many jurisdictions tax long-term residents on worldwide income The United States even taxes nonresident citizens on worldwide income No longer One for you, Nineteen for me but rates are still high enough Perception of widespread tax evasion Sales of confidential bank information to tax authorities in Europe Stories of private bankers shuttling money and even diamonds in toothpaste tubes between Switzerland and the United States Conflict between the old and new way of doing things Bank secrecy was sacrosanct in Switzerland and elsewhere In a digital age, diminished expectations of privacy and massive information transfers

4 US Response Foreign Account Tax Compliance Act Law enacted in 2010 Either foreign financial institutions collect information for the IRS on US accountholders, or else FFIs must suffer 30% withholding tax on dividends, interest and capital gains generated by US stocks and bonds Mechanics of FATCA Under the law, FFIs must register with the IRS Inter-Governmental Agreements are based on one of two models Model I: FFIs do not need to report to the IRS, but rather report to the tax authorities in their own jurisdictions Model II: FFIs report to the IRS but with certain modifications The key to compliance: understanding who is and is not an FFI

5 US Response For US employers with US employee benefit arrangements benefiting only US employees, FATCA is not an issue and the only compliance burden relates to collecting Forms W-9 and withholding the right amount of tax Are non-us retirement plans FFIs? Look for exemption: broad participation retirement fund narrow participation retirement fund treaty-qualified retirement fund fund similar to a U.S. qualified plan investment vehicle for these funds Does the IGA change the result?

6 Sample of IGA Provisions: Canada FATCA Canada IGA exempts tax deferred arrangements from reporting RRSPs, pension programs, Tax Free Savings Plans General share purchase plans /corporate nominee like accounts subject to reporting Canadian banks lobbying to get share plans removed from reporting obligations Privacy is of significant concern (cannot ask for nationality to identify US persons) FBAR/FATCA reporting confusing for individuals many cross border employees impacted by reporting

7 Sample of IGA Provisions: Australia FATCA Australia IGA much broader for reporting exemptions Any account which qualifies as an employee share scheme or an employee share trust is not reportable Corporate nominee arrangements/vested Share Accounts still reportable if not covered as part of the share scheme

8 Sample of IGA Provisions: UK FATCA UK Excluded products Pension schemes Investment trusts Share registers CSNs Dissenter registers Depositary Instruments In scope Investment Account Global nominee (nominees not falling into CSN category)

9 Sample of IGA Provisions: UK FATCA UK Excluded products EBTs Share Incentive Plans (Schedule 2 SIP) Save As You Earn (Schedule 3 SAYE Option Scheme) Company Share Option Plan (Schedule 4 CSOP) Profit Sharing Schemes (Approved by HMRC under the Income and Corporation Taxes Act 1988) In scope - non-tax advantaged SIPs and other trusts (where trust identifies beneficiary) Not in scope - if EBT holds unallocated shares, an unallocated right does not constitute a Financial Account - when shares become allocated and the trustee is directed as soon as reasonably possible to transfer the assets, the Trust will not be treated as maintaining a Financial Account for the duration of time it takes to complete the transfer

10 UK Response UK Intergovernmental Agreements ( Son of FATCA ) 2012 UK Autumn Statement announced that UK would enter into intergovernmental agreements (IGA) with Crown Dependencies and Overseas Territories Each of the Crown Dependencies IGAs are reciprocal. Only one of the Overseas Territories IGA is reciprocal - that with Gibraltar All of the UK IGAs except one follow the US Model 1. Bermuda IGA follows the US Model 2 General framework similar to US FATCA Key difference is that UK IGAs do not form part of a withholding tax regime UK s political power over overseas possessions enough to encourage them to sign up to the IGAs

11 International Response In April 2013, the G20 Finance Ministers endorsed the idea of automatic exchange of information. From that moment, the Common reporting standard (or CRS ) was born The proposed OECD CRS is based on the Model 1 IGA Many similarities to FATCA Also many false cognates 52 jurisdictions have agree to begin exchanging information in either September 2017 or September 2018, depending on the country. Absent from the list: the United States

12 International Response Why is the US reluctant to participate? The US has unique views on tax residency, taxing all citizens and US corporations The OECD CRS model looks to tax residency or place of effective management in the relevant jurisdiction, which is more or less the standard in the rest of the world As a result, unlikely that the US will ever commit to the CRS Unlike FATCA, CRS has no de minimis threshold, which means that all accounts are currently eligible for CRS reporting regardless of the account balance A common reporting schema is being developed. However, authorities in individual countries are likely to amend CRS to accommodate their local needs

13 International Response FATCA vs OECD CRS: Entities Required to Report Financial Institutions FATCA * Custodial Institution Depository Institution Investment Entity Specified Insurance Company OECD CRS Custodial Institution Depository Institution Investment Entity Specified Insurance Company Exempt/Non- Reporting Financial Institutions Government Entities International Organizations Central Banks Certain Pension and Retirement Funds Qualified Credit Card Issuers Certain Collective Investment Vehicles Government Entities International Organizations Central Banks Certain Pension and Retirement Funds Qualified Credit Card Issuers Certain Collective Investment Vehicles Low-Risk Non-Reporting Financial Institutions * Based on Model 1 IGA provisions

14 International Response FATCA vs OECD CRS: Persons Subject to Reporting Information Exchange Model Persons Subject to Reporting Basis for Specified US Person/Reportable Jurisdiction Person Status ** FATCA * Bilateral (reporting required with respect to US persons) Specified US Persons and Non-US Entities with one or more Controlling Persons that is a Specified US Person US citizen or resident individual Partnership or corporation organized in the United States or under the laws of the United States or any State thereof A trust if (i) a court within the United States would have authority under applicable law to render order or judgments concerning substantially all issues regarding administration of the trust and (ii) one or more US persons have authority to control all substantial decisions of the trust An estate of a decedent that is a citizen or resident of the United States OECD CRS Multilateral (reporting required with respect to all partner jurisdiction persons) Reportable Jurisdiction Person and Passive NFEs with one or more Controlling Persons that is a Reportable Jurisdiction Person An individual or Entity that is resident in a Reportable Jurisdiction under the laws of such jurisdiction, or an estate of a decedent that was a resident of a Reportable Jurisdiction. For this purpose, an Entity such as a partnership or similar legal arrangement that has no residence for tax purposes shall be treated as resident in the jurisdiction in which its place of effect management is situated * Based on Model 1 IGA provisions ** Persons described in this row may be exempt from reporting under one of the exemptions to Specified US Person status under FATCA IGAs or Reportable Person status under the OECD CRS

15 International Response FATCA vs OECD CRS: Persons Exempt from Reporting Exemptions from Specified US Persons/Responsible Person Status FATCA * Corporations the stock of which is regularly traded on one or more established securities markets ( Publicly Traded Corporations ) Any corporation that is a member of the same expanded affiliated group (as defined under US law) as a Publicly Traded Corporation The United States or any wholly owned agency or instrumentality thereof Any State of the United States, any US Territory, any political subdivision of any of the foregoing, or any wholly owned agency or instrumentality of any one or more of the foregoing Certain tax exempt organizations, retirement plans, and trusts Banks REITs and Regulated Investment Companies Certain trust funds Registered dealers in securities, commodities or derivative financial institutions Brokers OECD CRS Publicly Traded Corporation Any corporation that is a Related Entity with respect to a Publicly Traded Corporation Governmental Entities International Organizations Financial Institutions * Based on Model 1 IGA provisions

16 International Response FATCA vs. OECD How different are the CRS definitions? Limits for reporting? Other differences?

17 Effects on the Participants Participants may see reduced value of equity plans Complexity of personal filing obligations Fines for non compliance at individual level can be severe (penalty could exceed plan benefit) US participants who sign on foreign accounts also have FBAR reporting Compliance is an individual burden and is mixed in with participant s personal assets Unlike FATCA, penalties for willful failure to comply can be enormous 50% of the highest amount of the account balance each year Many companies just eliminate US citizens from signature authority

18 Effects on the Issuers Significant complexity for global share plans Where are the assets? Whose IGA or CRS scheme applies?

19 Choices for the Issuer Paternalistic approach or do it yourself What support should the issuer provide to plan participants, if any? Issuer plans create reporting requirements Potential obligation to provide employees with information to assist with personal tax filing requirements Who do you need support from? Liability Guidance versus advice Specificity e.g. including a country missing another

20 Effects on Service Provider/Advisor Registration as FFI Database scanning Questionnaires How do you identify the individuals to report on Same employee may have reportable and non reportable plans Data privacy legislation considerations in certain jurisdictions Global plans & mobility can add complexity Asset value calculations broader than plan assets Non standardised filing formats under different IGAs Legislation evolving unlikely to see more exemptions for share plans under CRS

21 Sample Questions Name Address Date of birth Place of birth Country of birth Nationality Dual nationality Country of tax residency Taxpayer reference number Additional country of tax residency Taxpayer reference number Third country of tax residency Taxpayer reference number Do you hold US residency or citizenship or a Green Card

22 Is there Hope for the Future? Early protoypes for a USB drive?

23 Is there Hope for the Future? Blame it on the computer If the data can be collected, it will It is too easily for digital information to get around state imposed confidentiality restrictions Going back to the Stone Age is not generally seen as a desirable outcome What can we do? Make the systems work together as closely as possible Keep the government administrators in the loop Manage participant expectations

24 Thank You Panayiota Burquier Gibson Dunn & Crutcher LLP June Davenport Solium John D. Heaton Equiniti Jeffrey M. Trinklein Gibson Dunn & Crutcher LLP