FATCA FAQS FATCA AND THE MOVEMENT TO HARMONISE INTERNATIONAL TAX COMPLIANCE AND TRANSPARENCY

Transcription

1 FATCA FAQS FATCA AND THE MOVEMENT TO HARMONISE INTERNATIONAL TAX COMPLIANCE AND TRANSPARENCY

2 The last decade has seen an extraordinary number of tax information exchange agreements (TIEAs), which the Organisation for Economic Co-operation and Development (OECD) has championed. However, in recent years the focus has been on a US tax disclosure initiative, driven by their Foreign Account Tax Compliance Act (FATCA) which became effective on 1 July This initiative has led to a wider international move to an automatic exchange of information and a desire by many countries to harmonise international tax compliance and transparency. JTC Group continues to recognise the need to comply with such initiatives while seeking to ensure that we can maintain high standards of client data security and confidentiality within those requirements. This publication is designed to provide you with information on the various initiatives currently in place, or being proposed, that may impact on any Relevant Entity in which you have an interest that is administered by JTC Group, including: 1. What is FATCA? 2. UK FATCA 3. Guernsey and Jersey disclosure facilities 4. OECD and EU initiatives FATCA and the wider topic of the move to harmonise international tax compliance and transparency is a complex and evolving subject. If you have any questions that are not covered in this publication, then we would urge you to contact us. However, please note that JTC Group does not provide tax advice and we recommend that you also seek independent advice from a professional tax advisor about the possible impact of the following information on your personal tax position. 1. WHAT IS FATCA? FATCA stands for the Foreign Account Tax Compliance Act which was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act of The fundamental objective of FATCA is to identify those US persons who may be evading tax through the use of accounts held outside of the US. More information on FATCA can be found on the Internal Revenue Service (IRS) website at: The new rules require Relevant Entities which fall under the classification of Foreign Financial Institutions to provide the IRS with information on certain US persons investing in accounts outside of the US and for certain non-financial, non-us entities to provide information about any US owners to financial counterparties. Under a Model 1 intergovernmental agreement (IGA) such as the British Virgin Islands, Cayman Islands, Guernsey, Jersey, Luxembourg and the UK, reporting to the IRS is co-ordinated through the home country s tax authority. Under a Model 2 IGA such as Switzerland, reporting to the IRS is co-ordinated directly with the IRS. The reporting in all cases is broadly similar, but the methods and timing for information flow differ. The following set of frequently asked questions (FAQs) should help you understand the impact of FATCA on any entity in which you may have an interest and which is administered by JTC Group. A. WHO IS IMPACTED BY FATCA? Any Relevant Entity operating within the financial system will be impacted by FATCA, irrespective of whether it receives US source income or has any US beneficial owners, not only because many jurisdictions have implemented FATCA requirements into local law, but also as many third parties (such as banks) will require Relevant Entities to be FATCA compliant for practical business reasons. 2 of 10

3 FATCA especially impacts non-us entities receiving (directly or indirectly) most types of US source income, including gross proceeds from the sale or disposition of US property which can produce interest or dividends. B. WHAT IS THE EFFECT OF FATCA? Non-US financial institutions are designated Foreign Financial Institutions (FFIs). FFIs that agree to comply with FATCA, either because they are located in an IGA country or because they have entered into an agreement directly with the IRS, are known as Participating FFIs (PFFIs). PFFIs will be required directly or through a sponsor to identify and report on US accounts and payments to FFIs that are not FATCA compliant (i.e. non-participating FFIs or NPFFIs). Non-US, non-financial institutions are classified as non-financial Foreign Entities (NFFEs). NFFEs are not required to enter into an agreement with the IRS. NFFEs will either be treated as active (in which case no reporting is required) or passive. In the case of passive NFFEs, the paying FFI (such as a bank or the next financial intermediary in the payment chain) will be required to report on substantial US owners of the passive NFFE (broadly anything greater than 10% ownership or control). Countries worldwide have entered into an IGA with the US. Even China has now agreed to enter into a Model 1 IGA. Under a Model 1 IGA, FFIs (or their sponsors) will be required to collate and provide the information which falls to be disclosed to the tax authorities in the relevant IGA territory who will in turn provide the information to the IRS. Under a Model 2 IGA, FFIs (or their sponsors) will be required to collate and provide the information to the IRS. There is no withholding under an IGA as the information in relation to any relevant payments is collated and disclosed on an annual basis. In jurisdictions where an IGA is not concluded with the US, an FFI may elect to become a PFFI, and any reporting will be to the IRS directly. Where a financial institution in such a jurisdiction does not become FATCA compliant (i.e. is an NPFFI), then the default position is that it will suffer 30% withholding on withholdable payments, which are defined as certain income and gross proceeds from sources within the US. C. WHAT IS MEANT BY A US PERSON? FATCA applies to all US persons. Whilst many assume that this term simply refers to US citizens, the US tax net catches a considerably greater number of individuals. The following are all treated as US persons for tax purposes: US citizens. Individuals resident in the US based on number of days spent there. US green card holders (even if the green card has expired). US created corporations. US created partnerships. US estates and trusts. Virtually everyone born in the US. Those with dual nationality, even if such persons are registered taxpayers in the other, non-us country. Some individuals who were born outside the US but who have at least one US parent. 3 of 10

4 In practice, this means that banks and trust companies, including JTC Group, will have to carry out a review of the due diligence and information they hold on all their clients in order to identify whether any US indicia exist. D. WHAT IS MEANT BY US INDICIA? US indicia include the following information: US citizenship or lawful permanent resident (green card) status. A US birthplace. A US residence address or a US correspondence address (including a US PO box). A US telephone number. Standing instructions to transfer funds to an account maintained in the US, or directions regularly received from a US address. An in care of address or a hold mail address that is the sole address with respect to the client. A power of attorney or signatory authority granted to a person with a US address. Having one of these indicia does not mean that the account is owned by a US person, only that it must be given closer scrutiny and a written certification of tax status may be required before finalising the reporting requirements. E. WHEN DID FATCA COME INTO FORCE? FATCA came into effect on 1 July In terms of reporting deadlines for the exchange of information about relevant payments and as a general guide, data with respect to 2014 will be provided during the second quarter of 2015, and data with respect to 2015 will be provided during the second quarter of The position may vary slightly between jurisdictions. However, financial intermediaries such as JTC Group have a considerable amount of preparatory work to conclude before these dates. F. WHAT DOES THIS MEAN FOR THE RELEVANT ENTITIES? Relevant Entities will initially need to complete three separate workflows: (i) Classification of Relevant Entities as either FFIs or NFFEs. In the event that a Relevant Entity falls under the classification of reporting FFI, then online registration to complete the necessary agreement with the IRS will need to take place before 31 December 2014 (30 June 2014 for Model 2 jurisdictions and non-iga countries). The FFI will then be allocated a Global Intermediary Identification Number (GIIN). FFIs in Model 1 jurisdictions have deemed compliant status until 31 December In practice, many FFIs in IGA jurisdictions will be classified as non-reporting FFIs by virtue of having deemed compliant status and will not be required to register directly with the IRS. In some of these cases, a sponsor is appointed who will carry out FATCA compliance and reporting on behalf of the FFI. JTC Group s relevant in-house companies have been registered where required and JTC Group is able to act as sponsor for relevant non-reporting FFIs. 4 of 10

5 (ii) Once an entity has been classified as an FFI, it is necessary to identify the account holders of that FFI in order to determine the individuals/entities in respect of which it is necessary to perform the indicia searches. Broadly speaking these include: An account holder in respect of a company will be a shareholder. An account holder in respect of a trust will be a beneficiary. An account holder in respect of a partnership will be a partner. (iii) Review of due diligence of account holders to establish whether there is any US indicia. In the event that the US indicia indicate that an account holder is a US person, then reporting will be provided in relation to any relevant payments. JTC Group updated its client on-boarding procedures to ensure compliance with FATCA on 1 July G. WHAT RELEVANT ENTITY INFORMATION IS DISCLOSED AS PART OF THE REGISTRATION OF AN FFI (FORM 8957)? The Relevant Entity is required to provide the legal name, country of tax residence, FATCA classification and mailing address, details of any affiliated group members together with each member s FATCA classification. There are no details of beneficial ownership or control (US or otherwise) on the Form The US ownership information is only disclosed in relation to relevant payments (continue reading for further details). H. I HAVE NO US INDICIA AND THE RELEVANT ENTITIES HAVE NO US SITUS ASSETS AND RECEIVE NO RELEVANT PAYMENTS. COULD THE RELEVANT ENTITY OPT TO IGNORE FATCA? Non-compliance is not an option under an IGA, as domestic law has been introduced in IGA territories to implement the provisions of the IGA. However, there is no FATCA requirement to report on non-us accounts (except in the case of account holders who are NPFFIs). In these circumstances, reporting obligations cease on registration, although each Relevant Entity will be required to monitor any change in ownership and control. As financial institutions amend their procedures to comply with FATCA, it is more likely that banks and investment managers will not be willing to represent those entities that cannot demonstrate compliance with FATCA. I. I HAVE US INDICIA AND I RECEIVE RELEVANT PAYMENTS. WHAT REPORTING IS THE FFI (OR ITS SPONSOR) REQUIRED TO PROVIDE? Unless exempt, FFIs will need to report directly (reporting FFIs) or indirectly through sponsors (non-reporting FFIs) the following information on US accounts: The name, address and Taxpayer Identification Number (TIN) of each account holder which is a specified US person. And in the case of any account holder which is a US owned foreign entity, the name, address and TIN of each substantial US owner of such entity. The account number. The account balance or value at year end (to be confirmed by regulations). Gross dividends, interest and other income paid or credited to the account. 5 of 10

6 J. HOW WILL THE REPORTING BE PROVIDED TO THE IRS? Currently jurisdictions worldwide are each entering into IGAs with the US to simplify the FATCA registration and reporting process. All of the jurisdictions from which JTC Group conduct fiduciary services are in the process of entering into an IGA with the US (see section l for more details). Once these IGAs are concluded, JTC Group will be required to collate and provide the information which falls to be disclosed by the FFIs. In the case of Model 1 IGA, reporting will be to the tax authorities in the respective jurisdictions who will in turn provide the information to the IRS in accordance with the international timetable. In the case of Model 2 jurisdictions, reporting will be to the IRS directly. K. MY COUNTRY ALREADY HAS A TAX TREATY WITH THE US. DOES THAT MEAN I AM EXEMPTED FROM FATCA? IF NOT, HOW DO THESE REGIMES WORK TOGETHER? The fact that a country has entered into a double taxation relief treaty or an exchange of information treaty with the US government does not exempt individuals or entities located in that jurisdiction from having to comply with the FATCA provisions. Individuals or entities must be in compliance with the FATCA provisions for them or their clients to be entitled to treaty benefits. Exchange of information treaties are used when the governments are seeking information about specific taxpayers. L. TYPES OF IGAS (IN EACH CASE THE IGA IS SIGNED AND RELEASED) JURISDICTION British Virgin Islands Cayman Islands Guernsey Jersey Luxembourg TYPE OF IGA Model 1B (non-reciprocal) Model 1B (non-reciprocal) Model 1A (reciprocal) Model 1A (reciprocal) Model 1 (reciprocal) Switzerland Model 2 United Kingdom Model 1A (reciprocal) M. COSTS RELATING TO FATCA COMPLIANCE Costs associated with JTC Group dealing with FATCA compliance on behalf of Relevant Entities will not be covered under the scope of existing fee arrangements and will be invoiced to client entities separately. The cost will be dictated by factors such as the complexity of the client groups under consideration, whether or not separate professional advice has already been sought and provided to JTC Group and whether registration of client entities is required. JTC Group will invoice for the work undertaken in connection with entity classification and registration once this work has been completed. There may be additional work required in connection with reporting to be made in respect of any US Reportable Accounts and payments to NPFFIs where applicable and with certifying the FATCA status of a Relevant Entity to a financial counterparty. 6 of 10

7 2. UK FATCA FATCA has become the acronym for a series of similar agreements proposed between other territories and is now seen as the evolution of the TIEAs that the OECD has championed for the last 10 years. The UK took the lead in promoting FATCA as a possible international automatic exchange of information protocol and, as part of this process, the UK has entered into a FATCA style IGA with the Crown Dependencies (including Guernsey and Jersey) and the Overseas Territories. These memoranda of understanding (MoU) are generally referred to as UK FATCA. A. IS UK FATCA THE SAME AS US FATCA? The basic principles of UK FATCA are the same and it draws heavily from the US FATCA legislation and guidelines. The main differences are that UK FATCA only seeks to capture information about those persons who are tax resident in the UK (so excludes UK nationals who are not UK resident) and there is no requirement to register FFIs. B. HOW DOES UK FATCA IMPACT ON ME IF I AM DEEMED NON-UK DOMICILED? The Crown Dependencies engaged with the UK very early in the process to negotiate the IGA and have managed to obtain a carve out provision for non-uk domiciled individuals that means that the data shared with the UK through this process recognises and respects the different tax treatment. C. WHERE CAN I FIND MORE INFORMATION? Information on the Guernsey MoU can be found at: Information on the Jersey and UK MoU can be found at: 7 of 10

8 3. GUERNSEY AND JERSEY DISCLOSURE FACILITIES The UK issued MoUs with Guernsey and Jersey in March 2013, which make available a disclosure facility for each of the two islands that is similar to that negotiated with the Isle of Man. A. WHAT ARE THE DISCLOSURE FACILITIES? The disclosure facilities are linked to the UK FATCA IGA and run from 6 April 2013 to 30 September 2016, providing an opportunity for those with assets in Guernsey or Jersey to make a tax disclosure to HMRC if they are concerned that they may have undeclared tax liabilities. B. WHO DOES THIS APPLY TO? To use the facilities a person must hold relevant property in Guernsey or Jersey. The agreement also provides the impetus for those with complex tax affairs to check their advice is appropriate and effective. Both MoU include special terms and conditions that can be used to resolve tax compliance problems providing the individual, company or trust can qualify. Where a UK tax issue is identified, the disclosure facilities are available to individuals, companies, partnerships and trusts who: Were resident in the UK in the period starting 6 April 1999 and ending 31 December Had a beneficial interest in a bank account, annuity, company, trust or other entity at some point between 6 April 1999 and 31 December 2013 based in the respective island where they wish to use the disclosure facility. Are not the subjects of an enquiry or investigation by HMRC on 6 April If you are concerned about possible UK tax liabilities with respect to either your affairs with JTC Group or with any other service provider, we strongly recommend that you seek independent advice from a professional tax advisor about the possible opportunities presented by the Guernsey and Jersey disclosure facilities. C. WHY ARE YOU TELLING ME ABOUT THIS? Financial intermediaries in the Crown Dependencies were under an obligation to contact any customers who may have a UK tax exposure to make them aware of both disclosure facilities before 31 December They are required to follow this up with a further reminder in the six months before the facility ends. Since many of our clients lead an international lifestyle with sometimes complex financial arrangements developed for various reasons, JTC Group felt it would be best that we write to all our clients to make them aware of the disclosure facilities, not just those that are currently UK resident. However, while there is no requirement for a person to prove to their financial intermediary that they are tax compliant in the UK, we expect many people will want to check their UK tax status as a result of this agreement, even if only for peace of mind. D. WHERE CAN I FIND MORE INFORMATION? You could refer to your tax advisor and, in addition, HMRC have more information on the disclosure facilities at: 8 of 10

9 4. OECD AND EU INITIATIVES The OECD is looking to develop a FATCA standard that can be applied internationally. This is a move away from their focus on TIEAs in recognition of a growing desire from the G20 for a process that provides an automatic exchange of tax information from government to government. The standard for automatic exchange of financial account information, generally referred to as the Common Reporting Standard, has been adopted in principal by the following countries : JURISDICTIONS UNDERTAKING FIRST EXCHANGES BY 2017 Anguilla Dominica Italy Portugal Argentina Estonia Jersey Romania Barbados Faroe Islands Korea San Marino Belgium Finland Latvia Seychelles Bermuda France Liechtenstein Slovak Republic British Virgin Islands Germany Lithuania Slovenia Bulgaria Gibraltar Luxembourg South Africa Cayman Islands Greece Malta Spain Chile Greenland Mauritius Sweden Colombia Guernsey Mexico Trinidad and Tobago Croatia Curaçao Cyprus Czech Republic Hungary Iceland India Ireland Montserrat Netherlands Niue Norway Turks and Caicos Islands United Kingdom Uruguay Denmark Isle of Man Poland JURISDICTIONS UNDERTAKING FIRST EXCHANGES BY 2018 Albania Brunei Darussalam Marshall Islands Saint Lucia Andorra Antigua and Barbuda Aruba Australia Austria The Bahamas Belize Brazil Canada China Costa Rica Grenada Hong Kong (China) Indonesia Israel Japan Macao (China) Malaysia Monaco New Zealand Qatar Russia Saint Kitts and Nevis Samoa Saint Vincent and the Grenadines Saudi Arabia Singapore Sint Maarten Switzerland Turkey United Arab Emirates JURISDICTIONS THAT HAVE NOT INDICATED A TIMELINE OR THAT HAVE NOT YET COMMITTED Bahrain Cook Islands Nauru Panama Vanuatu 9 of 10

10 There is still much work to finalise the practical process and for it to be adopted into local legislation, but it is clear that all these countries wish to put in place a mechanism to share financial information in their battle against tax evasion. The development of EU FATCA would logically be an alternative to the existing EU Savings Directive (EUSD). The EUSD was agreed on 3 June 2003 with the aim to counter cross-border tax evasion by collecting and exchanging information about foreign resident individuals receiving savings income outside their resident state. The options at the time were either the automatic exchange of information with member states or the application of a withholding tax. All those jurisdictions within the EUSD are now moving to the automatic exchange of information rather than the application of withholding taxes. Therefore, for many with existing accounts within the EU the automatic exchange of information has been the norm for a number of years for various accounts, and the development of the various FATCA initiatives is an extension of that process. Source: OECD Global Forum on Transparency and Exchange of Information for Tax Purposes. AEOI: Status of commitments as at 6 November This publication is intended to provide an overview of the subject matter (errors and omissions excepted) and is not comprehensive in nature or to be construed as legal, tax or investment advice. We recommend that clients seek professional advice on any particular matter. Date content was published: May 2014 Date content was updated: December 2014 REGULATION AND TERMS OF BUSINESS The entities within JTC Group, carrying on the regulated business of JTC Group, are duly regulated as appropriate by the British Virgin Islands Financial Services Commission; the Cayman Islands Monetary Authority; the Guernsey Financial Services Commission; the Jersey Financial Services Commission; the Commission de Surveillance du Secteur Financier and the Ordre des Experts-Comptables in Luxembourg; the Malta Financial Services Authority; the Financial Services Commission in Mauritius; the South African Financial Services Board as an authorised financial services provider; as a member of l Association Romande des Intermédiaires Financiers in Switzerland; and is authorised and regulated by the Financial Conduct Authority in the UK. For more information about JTC Group, its offices and alliances please visit: For JTC Group s full terms of business, please visit: