Ninth Annual Domestic Tax Conference. 24 April 2014 New York City

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1 Ninth Annual Domestic Tax Conference 24 April 2014 New York City

2 Information reporting and withholding Impact of FATCA on USWA

3 IRS Circular 230 disclosure Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 3

4 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited located in the US. This presentation is 2014 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP. Page 4

5 Today s presenters John McMahon, moderator Hindy Stern Todd Larsen Justin O'Brien Page 5

6 Agenda FATCA introduction and fundamentals Requirements of a US withholding agent (USWA) as payor Global legal entity classification Recent changes to guidance What companies should focus on now Page 6

7 What is FATCA? The Foreign Account Tax Compliance Act (FATCA), enacted in March 2010 Generally effective on 1 July 2014, but with phased-in effective dates Aimed at seeing that US persons with financial assets outside the US are paying US tax on their worldwide income Requires foreign financial institutions (FFIs) to disclose the identities of US persons holding accounts with such institutions Requires non-financial foreign entities (NFFE) to disclose the identities of their substantial US owners Requires a 30% withholding tax on any withholdable payment made to an FFI or NFFE only if the requirements related to the identification and reporting of US accounts or owners are not met Page 7 7

8 FATCA s impact FATCA impact Details Financial risks 30% withholding is imposed on all non-compliant organizations and account holders. Non-compliance creates difficulty in doing business with compliant institutions. Modifying systems and processes is costly. Operational challenges FATCA impacts different business lines and geographic areas in different ways, affecting each legal entity as both payor and payee. FATCA will impact business operating models such as vendor, customer and counterparty onboarding, operations, and compliance. Global compliance Compliance with FATCA s due diligence, verification and annual reporting may result in conflicts with local privacy laws. Anti-money laundering/know-your-customer documentation must be reviewed. Technology investments Existing systems and processes are likely to have issues with the additional data elements, withholding calculations and reporting changes required under FATCA. Implementation of new systems and processes may be required to continuously track documentation for payees that are FFIs and others. Page 8

9 FATCA vs other US tax information reporting regimes: chapters 3, 4 and 61 Chapter 3 ( section 1441 ) It requires withholding (generally at 30%) and reporting on certain USsource income paid to foreign persons (i.e., section 1441). It also addresses effectively connected income of foreign partners and gains from real property. Purpose: collect tax on US-source income of foreign persons. Chapter 4 ( FATCA ) FATCA (effective 1 July 2014) calls for the collection, validation and reporting of certain information and documentation to identify offshore investments of US persons. Purpose: make sure US persons pay tax on income received through offshore investment. Chapter 61 ( Form 1099 ) Reporting on US and foreign-source income is paid to US persons (i.e., Form 1099 reporting). Backup withholding is applicable only where TIN/documentation requirements are not met. Purpose: enable IRS to match income paid with tax filings of US recipients. Page 9 9

10 Requirements of a USWA as payor Page 10

11 Process flow for USWAs taking into account chapters 3, 4 and 61 Step 1: Determine whether an amount to be paid is fixed, determinable, annual, periodical (FDAP) income or gross proceeds from the sale of US securities If it is not, no documentation, withholding or reporting is required Step 2: If the income is FDAP (or gross proceeds from the sale of US securities), collect either a valid Form W-8 (or Form 8233) or valid Form W-9 from the payee If the payee furnishes a Form W-9 and is not an exempt recipient, report payment on a Form 1099 Step 3: If the payee furnishes a Form W-8 (or Form 8233), determine and document source of income If the income is foreign source income, no withholding or reporting is required Page 11

12 Process flow for USWAs taking into account chapters 3, 4 and 61 Step 4: If the income is US source, determine whether the payment is a withholdable payment for chapter 4 purposes If the income is not a withholdable payment for chapter 4 purposes, apply chapter 3 Impose 30% withholding (or reduced withholding rate if the payee furnishes a valid treaty claim or 0% if the payee certifies that the income is effectively connected with their conduct of a trade or business in the US) Report the income and any tax withheld on a Form 1042-S Note: insurance premiums and gross proceeds on US securities are subject to chapter 4 withholding, but not chapter 3 (gross proceeds become subject to chapter 4 withholding in 2017). Page 12

13 Process flow for USWAs taking into account chapters 3, 4 and 61 Step 5: If the payment is a withholdable payment for chapter 4 purposes, determine whether the payee furnished valid chapter 4 certifications If the payee has furnished valid chapter 4 certifications, apply chapter 3 (see step 4) Step 6: If the payee has not furnished valid chapter 4 certifications, withhold 30% under FATCA and report the income and tax withheld on a Form 1042-S Note: FATCA withholdable payments and related withholding that are allocable to certain US owners of certain NFFEs and owner documented FFIs must be reported on Forms 8966 along with relevant information about such US persons. Page 13

14 FATCA withholdable payments and exclusions The following are FDAP types included or excluded from FATCA (Chapter 4). Note: All FDAP is subject to Chapter 3 and 61 unless specifically excluded by related guidance. Included Excluded Bank and brokerage fees Investment advisory fees Custodial fees (e.g., fund manager fees) Payments in connection with lending transactions Forward, futures, option or notional principal contracts Insurance premiums and annuities Dividends on US securities Interest (with certain exceptions) OID (excluding short term) Certain dividend equivalent payments Financing leases Payments for tangible goods Fees paid for non-financial services (e.g., fees paid to an engineering consultant) Software licenses Rent for office space Use of other property (e.g., royalty or intellectual property) Freight/transportation expenses Interest on outstanding bills arising from services Interest on deferred purchases (e.g., goods purchase on credit) Lease payments on equipment Page 14

15 Global legal entity classification Page 15

16 Global legal entity classification A multinational organization must classify its entities into three general categories, as follows: US entities/us withholding agents FFIs NFFEs A US entity must generally provide a Form W-9 to payors to document itself as a US person. In the absence of a Form W-9, complex presumption rules must be applied to determine US vs. non-us status. In general, presumption rules cannot reduce withholding. An FFI must generally provide a Form W-8BEN-E with a US Global Intermediary Identification Number (GIIN). An NFFE must generally provide a Form W-8BEN-E and a certification with respect to substantial US owners. Page 16

17 Global legal entity classification FFIs A financial institution for FATCA purposes is broadly defined and generally includes the following: An entity that accepts deposits in the ordinary course of a banking or similar business An entity that holds, as a substantial portion of its business, financial assets for the benefit of one or more other persons (custodial institution), Or An investment entity, which is generally defined as: An entity that primarily conducts the business of trading in various financial instruments, managing individual or collective portfolios or otherwise investing, administering or managing funds (defined broadly), money or financial assets on behalf of other persons An entity that functions as a fund (defined broadly) or for which gross income is primarily attributable to investing, reinvesting or trading in financial assets Certain insurance companies, holding companies or treasury centers that are members of an expanded affiliated group having specified attributes Page 17

18 Global legal entity classification Exclusions from FFI status Certain entities that may otherwise have to register as an FFI under FATCA may be excluded from the relevant requirements if the entity is: A retirement fund located in an intergovernmental agreement (IGA) country that is listed in Annex II and qualifies as an exempt beneficial owner (i.e., a IGA FFI) A pension or retirement fund that falls into one of six categories under FATCA regulations, treated as exempt beneficial owners: Treaty qualified retirement fund Broad participation retirement fund Narrow participation retirement fund Fund formed pursuant to a plan similar to a US 401(a) plan Investment vehicles exclusively for retirement funds Pension fund of an exempted beneficial owner In general, an excepted non-financial group entity that is not otherwise an FFI, does not hold itself out as an investment vehicle and is a: Non-financial holding company Treasury center Captive finance company Page 18

19 Global legal entity classification NFFEs An NFFE is defined as a non-us entity that is not a financial institution. A withholding agent is required to withhold 30% of any withholdable payment made to a payee that is an NFFE unless: The USWA has appropriate certifications regarding substantial US owners of the NFFE, and the USWA reports to the IRS required information about any substantial US owners. Or The NFFE is an excepted NFFE (certification generally required). For example: A publicly traded entity (per FATCA definition) and its affiliates An active NFFE Page 19

20 Global legal entity classification Effect of IGAs To effectively administer FATCA around the world, the US Treasury is entering into IGAs with various countries to enable local country administration and certain changes to FATCA requirements that the US government deems appropriate based on local country considerations. These can alter FATCA entity classifications within a local jurisdiction. For example: The regulations provide that for entities resident in IGA countries, the IGA definitions of FFI and NFFE control, and that the statutory and regulatory definitions apply to entities that are resident in jurisdictions that do not enter into IGAs. IGAs of certain countries have their own list of excepted and deemed compliant entity types based on the risk profiles of those entity types within the relevant country. IGAs also have specific guidance regarding documentation an FFI can collect to determine the classification of a payee. Page 20

21 IGAs (as of 3 April 2014) Many countries are in different stages of the IGA process. It is expected that 50+ countries will sign IGAs with the US. Actually or presumed effective on July 1, 2014 Under consideration Bermuda (Mod. 2)* Canada Cayman Islands* Chile (Mod. 2)* Costa Rica Denmark Finland France Germany Guernsey Honduras Hungary Italy Ireland Isle of Man Japan (Mod. 2)* Jersey Luxembourg Malta Mauritius Mexico Netherlands Norway Spain Switzerland (Mod. 2)* United Kingdom Agreed in substance Austria (Mod. 2)* Australia Belgium Brazil British Virgin Islands Croatia Czech Republic Estonia Gibraltar Jamaica Kosovo Latvia Argentina Bahamas Barbados China Colombia Cyprus Hong Kong India Israel Lebanon Malaysia Organization of Eastern Caribbean States* Panama Philippines Russia Saint Maarten Seychelles Singapore Slovak Republic Sweden Taiwan (Mod. 2)* United Arab Emirates Liechtenstein Lithuania New Zealand Poland Portugal Qatar Romania Slovenia South Africa South Korea **Non-Reciprocal Model IGA **The member States of the Organization of Eastern Caribbean States (OECS) are Antigua and Barbuda, Dominica, Grenada Montserrat, St. Kitts and Nevis, Saint Lucia, and St. Vincent and the Grenadines. Page 21

22 Recent changes to guidance Page 22

23 Recent FATCA changes and considerations Direct reporting NFFEs (or their sponsors) Need a GIIN Investment advisors and investment managers Certified deemed-compliant FFIs GIIN validation and awaiting GIIN Validate within 90 days of claim of status No catch up withholding if GIIN doesn t validate But Chapter 3 withholding possibly still applicable New definition of an expanded affiliated group Partnership: can lead a group if an election is made Page 23

24 Presumption rules in the conforming regulations The Payee is presumed US or foreign in the absence of documentation. Undocumented individuals are presumed to be US persons. Exempt recipients: the Bad 8 are presumed foreign payees (thus, nonparticipating FFIs subject to FATCA withholding). This includes corporations, foreign governments, international organizations, foreign central banks of issue, financial institutions, nominees/custodians, brokers and swap dealers. This does not apply if the payor classified the payee as an exempt recipient prior to 1 July All other exempt recipients: the Good 9 are subject to indicia test. Foreign telephone numbers were added as a type of foreign indicia (for accounts opened on or after 1 July 2014). All other entities are presumed to be US non-exempt recipients. There is no apparent transition rule or pre-existing account treatment for purposes of the conforming regulations. Page 24

25 Documentation Faxed or ed Forms W-8s Effective 1 July 2014, USWAs may rely on fax or pdf versions of valid withholding certificates (Forms W-8/W-9). This applies unless the USWA knows the sender transmitted the document without the authority of the person who signed the form. This is not applicable to FATCA, but a correction is expected. Evergreen Forms W-8 Valid Forms W-8 furnished after 30 June 2014 may be treated as evergreen if: There is no US indicia (individuals only). The Form W-8 is completed in full, and no changes in circumstance have occurred. Documentary evidence is furnished with the Form W-8. Treaty claims cannot be evergreen. Page 25

26 Documentation When collecting new forms, temporary regulations require collection of revised versions of Forms W-8 and 8233 six months after their issuance, unless the IRS provides otherwise Does not apply to Form W-9 Form W-9 (rev. August 2013) Exemption from FATCA reporting code (if any) applicable only to offshore accounts Additional jurat The FATCA (codes) entered on this form (if any) indicating that I am exempt from FATCA reporting is correct Or on a substitute form, The payee is exempt from FATCA reporting Page 26

27 US indicia If a withholding agent documented the foreign status of a pre-existing account holder prior to 1 July 2014, it may continue to rely on such documentation New indicia of US status US phone numbers nonresident aliens with only a US phone number on file (i.e., no foreign phone number(s)) US place of birth For new accounts, if documentation indicates a person was born in the US, proof that they renounced their citizenship is required For accounts opened prior to 1 July 2014, no requirement to look for place of birth in records, but if reviewing documentation on file and US place of birth is identified, proof of renounced citizenship is required Page 27

28 Curing US indicia Written explanation supporting an individual s claim of foreign status may now be provided by a checklist furnished to the nonresident alien (NRA) by the withholding agent Specifics of written explanation in the regulations include: Specific visa status (e.g., student, teacher or diplomatic status) Detailed information demonstrating that the individual does not meet the substantial presence test, for example, the number of days present in the US during the three-year period of the test Certification of status under a US tax treaty Certification of a closer connection to another country Simple explanations regarding delayed mail or security concerns are no longer sufficient Page 28

29 Documentation to do reminder Forms W-8 remediation required (at a minimum) in 2014 for: Forms signed in 2010 Expiration date previously extended from 30 June 2014, now moved to 31 December 2014 Forms signed in 2011 Expire 31 December 2014 Prima facie FFIs Presumed foreign persons Classify eyeball exempt recipients as such where proper documentation is on file or the eyeball test applies Page 29

30 What companies should focus on now Page 30

31 What non-financial companies should focus on now Corporate footprint Define and review organizational footprint Review entities within the corporate footprint and identify each legal entity s FATCA classification (e.g., USWA, FFI, NFFE) For each entity, identify documentation to be provided to a payor Payment streams Identify business units making and processing payments and review FATCA implications Accounts payable, treasury, shareholder relations and any other function involved in payment processing and determination of income (e.g., procurement, legal and business units) Review impact on intercompany transactions as well as third-party payments Current IRW (information reporting and withholding) compliance capabilities Review current information reporting and withholding compliance Identify process and procedure gaps that may delay or derail FATCA compliance efforts Page 31

32 What financial companies should focus on now Focus on near-term 7/1 deliverables for onboarding new clients and for applying those new Chapter 3 and 61 rules Don't forget the other stuff Establish buckets of pre-existing account holders to establish new withholding dates Perform your own internal data mining to determine how and where to look for US indicia and changes in circumstances Establish strong governance around FATCA business decisions Determine whether you have a testing plan in place Establish contingency plans Know procedures for W-8 validation Page 32

33 Questions? Page 33

34 Thank you! Page 34

35 Ninth Annual Domestic Tax Conference 24 April 2014 New York City