SELECTED FATCA ISSUES

Transcription

1 SELECTED FATCA ISSUES JOHN STAPLES BURT, STAPLES & MANER STEP CONFERENCE MIAMI: November 4, 2011

2 Agenda 2 I. A Brief Overview of FATCA II. III. IV. Prospects for FATCA Industry Reaction FATCA and Trusts V. Deemed Compliant FFIs VI. Selected Documentation Issues

3 FATCA As a Reporting Regime 3 FATCA stands for the Foreign Account Tax Compliance Act which was incorporated into the HIRE Act that became law on March 18, The goal of FATCA is to require foreign financial institutions ( FFIs ) and non-financial foreign entities ( NFFEs ) to provide information to the IRS identifying U.S. persons invested in non-u.s. bank and securities accounts. The policy of FATCA is to reduce U.S. tax evasion by improving the information available to the IRS about the offshore accounts of U.S. persons. Treasury/IRS accordingly describe FATCA as a reporting regime.

4 FATCA s Teeth = Withholding 4 FATCA s lever to achieve this goal is a NEW 30% withholding tax levied on withholdable payments made to nonparticipating FFIs and NFFEs. Withholdable payments include all U.S. source income ( FDAP ) and gross proceeds from the sale or disposition of any property of a type that can produce interest or dividends from U.S. sources. Withholding may also apply to non-u.s. source payments because of the passthru payment concept.

5 FFIs 5 Broad definition that includes any non-u.s. entity that: Accepts deposits; Holds financial assets for the account of others; Engages primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such securities. FFI Examples: non-u.s. banks, securities brokers and dealers, hedge funds, collective and family investment vehicles. A Miami bank custodies the U.S. assets for a non-u.s. bank with solely non-u.s. customers the non-u.s. bank is an FFI. A Miami bank s customer is a Panamanian personal investment corporation ( PIC ) holding solely passive assets the PIC is an FFI.

6 Good FFIs 6 How to be a good FFI not subject to 30% FATCA withholding? Belong to a class of institutions that Treasury/IRS designate as per se good and not subject to FATCA withholding. Enter into an FFI Agreement with the IRS with the attendant obligations ( participating FFI ). Comply with procedures to establish that the institution does not maintain U.S. Accounts. Be exempted because another withholding agent has agreed to take on expanded documentation and due diligence requirements for underlying owners.

7 The FFI Agreement Route 7 A participating FFI must enter into an agreement with the IRS to do all of the following: Identify its U.S. Accounts including all its worldwide affiliates; Comply with due diligence criteria to ensure that it has really identified its U.S. Accounts; Provide the IRS with an annual report with details about the U.S. Accounts that it has found; Deduct and withhold 30% on withholdable payments made to recalcitrant account holders or non-participating (or bad ) FFIs; Provide any follow-up information requested by the IRS with respect to the U.S. Accounts; and Request a waiver from any U.S. account holder if disclosure would otherwise be prohibited on the basis of non-u.s. law (e.g., privacy or bank secrecy laws), and close the account if the account holder refuses to cooperate. The IRS can terminate the agreement if any of the above is not done.

8 NFFEs 8 Non-financial Foreign Entities ( NFFEs ) are non-u.s. entities that are not FFIs. The goal of section 1472 is to find substantial U.S. owners of these entities. Substantial means >10% U.S. owners of non-u.s. corporations or partnerships and >10% beneficiaries of non-u.s. trusts. A U.S. grantor of a grantor trust is always considered a substantial U.S. owner. Examples: non-u.s. corporations, partnerships. A Miami bank s customer is a closely-held Argentine manufacturing company the company is an NFFE.

9 Good NFFEs 9 How to be a good NFFE not subject to 30% FATCA withholding: Belong to a class of NFFEs that Treasury/IRS designate as per se good and not subject to FATCA withholding (or good under the statute, e.g., publicly traded corporations); Engage in an active business; Certify to the withholding agent that the NFFE has no substantial U.S. owners; or Provide the names, addresses, and U.S. taxpayer identification numbers ( TINs ) of substantial U.S. owners to the withholding agent to then be reported to the IRS.

10 The FATCA Notices 10 Notice Issued August 27, Overall FATCA system architecture. Grandfathering of certain obligations from FATCA withholding. Documentation of accounts by FFIs, including transition relief. Notice Issued April 8, Modified rules for documenting preexisting individual accounts. Passthru payments. Deemed compliant FFIs. FFI annual reporting. Expanded affiliated FFI group rules. QI coordination.

11 Notice Issued July 14, Primarily modifies original FATCA effective date of January 1, FFI elections must be made in 2013 by June 30 to ensure that they are effective for that year. New account opening procedures must be in place by July 1, 2013 (or effective date of FFI agreement if later). Withholding on FDAP begins January 1, Reporting of certain known U.S. persons begins Sept Withholding on gross proceeds from the sale of securities giving rise to U.S. source interest and dividends begins January 1, Passthru payment withholding may also begin January 1, 2015.

12 The Prospects For FATCA 12 Is FATCA likely to be repealed? U.S. domestic political considerations: Anti-tax evasion as political calculus. Concerns with effects on U.S. capital markets. Concerns with proposed bank deposit interest rule. Non-U.S. political considerations: Concerns raised by non-u.s. governments. Potential for retaliatory measures. FATCA as a model.

13 What is the Industry Doing? 13 The Challenge of FATCA to the Industry: Statute gives great discretion to Treasury/IRS to implement. 3 Notices issued to date but notices are not rules. Notice extends various FATCA deadlines from those starting in 2013 to 2015 and potentially beyond. Spectrum of Reponses: Early adopters. Extreme denial. Balanced approach.

14 What Are Trusts For FATCA Purposes? FFIs or NFFEs? 14 Notice strongly suggests that non-u.s. trusts should be treated as FFIs under section 1471(d)(5)(C) ( engaged primarily in the business of investing, reinvesting or trading securities, etc.). This may make sense for business trusts that are classified as corporations under section However, many commentators have noted that fiduciary trusts, whether inter vivos or testamentary, are not engaged in business but simply preserve assets. The approach also appears at odds with the substantial U.S. owner provisions that contemplate specific U.S. ownership thresholds for trusts as NFFEs. May depend on the type of assets in trust. Securities may trigger FFI status, but (for example) real estate and artwork would not.

15 Why Does It Matter Whether Trusts are FFIs or NFFEs? 15 If trusts are NFFEs, then the trust must identify to a withholding agent ANY U.S. grantor AND any person who holds more than a 10% beneficial interest in the trust. That is, the trust/nffe would represent these facts to the withholding agent. If trusts are FFIs, they must identify ANY U.S. grantor and any U.S. beneficiary, regardless of the size of the beneficial interest. They do this by entering into an agreement with the IRS to perform FATCA reporting.

16 Exception From Treating Trusts As FFIs The Small FFI Exception 16 General Description: Notice states that certain FFIs may be relieved of having to function as an FFI IF either a larger FFI or a U.S. withholding agent agrees to: Specifically identify each individual, specified U.S. person, or excepted NFFE that has an interest in such entity, either directly or indirectly; Collect documentation from such persons; and Report to the IRS any specified U.S. person identified as a direct or indirect interest holder in the entity (no % threshold). For example, a Miami bank agrees to identify the underlying beneficial owners and grantors of its foreign trust customers and reports any U.S. owners to the IRS the trusts are relieved of FFI status.

17 The Small FFI Carve-Out (Cont d) 17 Ambiguity in Notice : The Notice describes the proposed carve-out from FFI treatment as being for entities with certain identified owners but then repeatedly talks about the carve-out applying to small entities (e.g., small family trusts) and those with small numbers of direct or indirect account holders. Treasury and IRS officials have stated publicly that this concept is not meant to apply only to small FFIs. Instead, they have stated that the reporting FFI/USWA itself would determine entities for which it is willing to do more extensive due diligence checks. The government apparently believes that a reporting FFI/USWA would only agree to additional due diligence for smaller FFI-type customers thus leading to a natural cut-off.

18 The Small FFI Carve-Out (Cont d) 18 Treasury/IRS request comments on whether such entities simply should be treated as NFFEs. Industry Concerns/Open Issues No ownership threshold to identify U.S. investors (but >10% for NFFE). Would process to identify customers be too burdensome? That is, will withholding agents want to collect, validate, process and monitor documentation from the underlying owners of trust clients? Would a reporting FFI/USWA be willing to take on this risk in order to help their small FFI customer base?

19 Other FATCA Trust Issues 19 How should mixed trust/company structures be treated? For example, a Miami bank has a customer that is a company wholly owned by a non-u.s. trust. Both entities would be treated as FFIs if the company is set up to hold passive trust assets. If company has active business, it would be an exempted NFFE under Notice regardless of who owns it. How should non-u.s. private foundations be characterized for FATCA? No clear answer in either Notice or the statue but the trust as FFI analogy is troubling unless Treasury/IRS rethink position and treat trusts as NFFEs.

20 Other FATCA Trust Issues 20 (Cont d) How should trust companies be treated for FATCA? Notice states that trust companies are FFIs because they hold financial assets for the accounts of others. To date, guidance does not distinguish between trust companies that retain custody of trust assets and those that provide just trustee and not custodial services substantial differences in operational systems.

21 Other FATCA Trust Issues 21 (Cont d) How are beneficial interests in a trust to be determined? No clear guidance but strong likelihood that trustee would be assigned this task (some beneficiaries may not even be aware of their status). Likewise, there is a good case for distinguishing between different forms of complex/discretionary trusts and grantor/simple trusts as to how beneficial interests should be determined. Finally, it is difficult to see how one could determine interests that are not fixed (e.g., contingent, conditional, etc.).

22 FFI Carve-Out - No U.S. 22 Accounts The FATCA statute deems certain FFIs to meet the FFI requirements if they can comply with procedures to prove that they do not have and will not have U.S. accounts. Neither Notice provides guidance on this key exception. Treasury/IRS have stated that they intend to do so shortly given its great importance to the financial industry. Many institutions assessing commercial effect of keeping U.S. accounts. Government belief that the small FFI carve-out will obviate need for FFIs to eliminate U.S. accounts. Industry Concerns/Open Issues What are the criteria for proving no U.S. accounts? What are the potential risks if an FFI misses some U.S. accounts (particularly U.S.-owned entities)? What will be the audit/verification requirements?

23 Same Country Local Banks Deemed Compliant 23 Notice adds a new FFI carve out. Each FFI in an expanded affiliated group will be deemed compliant if all the FFIs: Are licensed and regulated as banks; Are in same country and have no operations outside that country; Do not solicit accounts outside that country; and Implement policies and procedures to prohibit accounts to non-residents (e.g., no U.S. people), non-participating FFIs, and NFFEs (unless excepted NFFEs).

24 Documentation Rules: Overview 24 First two Notices address how FFIs and USFIs must document their account holders. The Notices distinguish between and provide specific rules for: Existing accounts versus new accounts; and Entity accounts versus individual accounts. The Notices provide a series of transition rules and effective dates to perform various tasks (and each of these dates will need to be monitored and met). While rules are provisional and subject to change, Treasury/IRS officials have expressed apparent belief that FFIs can get started on identifying U.S. accounts based on the guidance in the Notices. Deadlines in the Notices are measured from the date the FFI s agreement with the IRS becomes effective ( Effective Date ).

25 Documentation of Existing Individual Accounts 25 Notice proposes rules for documenting existing individual accounts that replace those suggested in Notice Key change is the introduction of more rigorous requirements for private banks and less rigorous search and follow-up standards than those in the first Notice for other types of accounts. Private banking is defined broadly to include any type of private banking or wealth management service offered for high net worth individuals.

26 Documentation of Private 26 Banking Accounts Step 3 : Special Search Of Any Private Banking Accounts: Step 3A: Relationship Manager Search: Determine if private banking relationship managers have actual knowledge that customer is U.S. and obtain Form W-9 if necessary. Step 3B: U.S. Indicia Search: Search electronic AND paper files for following U.S. indicia U.S. citizenship or permanent residence; U.S. birthplace; U.S. address; standing instructions to transfer to U.S. account or directions regularly received from U.S. address; in care of or hold mail as sole address (whether or not associated with U.S.); POA or signature authority granted to person with U.S. address. NOTE: Non-U.S. post office box addresses no longer indicia of U.S. status.

27 Documentation of Private Banking Accounts (Cont d) 27 Step 3B (cont d): Determine whether customer is actually U.S. or not including whether U.S. citizenship has been renounced if U.S. birthplace indicated. Obtain Form W-9 and waiver if necessary. Timing: Steps 3A and 3B must be performed within 1 year of FFI Agreement and any document requests and responses kept for 10 years. Continuing due diligence required.

28 Private Banking Documentation: Open Issues 28 Can the definition of private banking be scaled back to better identify true private banking practices? Could there be an alternative to a search of non-electronic files given the great expense of doing so? Is U.S. birthplace an appropriate search criteria for existing accounts, particularly if an electronic option is adopted?

29 Documentation of Existing Individual Accounts: Open Issues 29 What is meant by the proposed U.S. indicia directions received from a U.S. address? Is this meant to be the same as the standard in Treas. Reg (e)(2) ( transmitted instructions... from inside the United States )? Note: The analogous section 6049 rule is largely inadministrable given the difficulty in knowing if telephonic or internet instructions came from inside the United States. Why are hold mail instructions inherently indicative of U.S. indicia? Example: Argentine customer with hold mail instructions at Singapore branch and investments only outside U.S.

30 Documentation of New Entity Accounts: Industry 30 Concerns/Open Issues Likely requires totally new account opening procedures. Can bespoke certifications be used rather than IRS forms to solicit FATCA entity type and any information on owners? Can FFI rely on these certifications with the exception of FFIs that do not provide an FFI EIN? Need to integrate tax systems with other regulatory systems worldwide (e.g., AML/KYC systems)? Is it intentional that there is no requirement to re-document account if FFI knows or has reason to know that the circumstances affecting the correctness of an entity account holder s classification have changed?

31 Other Issues 31 Administrative Issues: What will the FFI agreement process look like? How will audit/verification for compliance with requirements be accomplished? How will FFIs report U.S. account information to the IRS? The future of passthru payments.

32 Contact Details 32 John M. Staples Please visit our websites for up-to-date information on FATCA: or