FATCA Intergovernmental Agreements

Transcription

1 FATCA Intergovernmental Agreements And Dispute Resolution Alternatives Tax Treaties: Advanced Topics and Strategic Planning Tax Executives Institute Houston Chapter May 7, 2013 Joshua D. Odintz (Washington) Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.

2 FATCA Overview 2

3 FACTA s Goals Identifying unreported income of US persons Enlisting non-us financial institutions to report such US persons FATCA is NOT aimed at raising revenue

4 FATCA - Perspective Goal Sticks Actions Information reporting of US persons investing through an FFI or an NFFE 30% withholding tax on certain US source payments to an FFI that does not participate and NFFEs that do not comply Passthru Payment Withholding US withholding agents must collect documentation FFI: Enter into an agreement with the IRS NFFE: Provide documentation to avoid withholding

5 Withholdable Payments & Passthru Payments Withholdable payments include: Certain types of US fixed, determinable, annual or periodic income (US FDAP) Gross proceeds from sale or other disposition of property that gives rise to US-source interest or dividends Passthru payments include any withholdable payment or other payment to the extent attributable to a withholdable payment Foreign passthru payments (undefined)

6 US FDAP US FDAP includes Interest Dividends Premiums Annuities Payments in connections with financial instruments and derivatives

7 Withholdable Payments: Exceptions Grandfathered obligations: Outstanding before 1/1/2014 and has a fixed term or expiration Examples: debt instruments and derivative contracts No withholding on payments from grandfathered obligations (but will have reporting) Lose grandfathered status if obligation is materially modified after 1/1/2014 (Treas. Reg ) Non-financial payments Short-term debt proceeds (e.g., commercial paper)

8 Withholdable Payments: Exceptions Excluded nonfinancial payments include: services (including wages and other forms of employee compensation (such as stock options)), the use of property, office and equipment leases, software licenses, transportation, freight, gambling winnings, awards, prizes, scholarships, and interest on outstanding accounts payable arising from the acquisition of goods or services.

9 Withholding Agents 9

10 Withholding Agents Withholding agents are required to withhold on withholdable payments if the payment is made to an FFI or NFFE FFI exception: If an FFI enters into an agreement with the IRS to report on U.S. account holders or meets one of the exceptions, then withholding may not apply NFFE exception: If an NFFE provides the appropriate withholding certificate(s) and discloses substantial U.S. owners, then withholding does not apply

11 Withholding Agents Withholding begins on 1/1/2014, except for grandfathered obligations Withholding agent must determine who is the payee. Generally, the person to whom a payment is made Withholding agent must determine FATCA status of the payee Can rely upon withholding certificate Can rely upon IRS published list of compliant FFIs

12 Foreign Financial Institutions 12

13 FFI Defined Depository Institution Custodial Institution Investment Entity Insurance company or holding company of insurance company Treasury center / holding company

14 Depository Institution Accepts deposits or other similar investments of funds; and Regularly engages in one or more of the following activities Makes personal, mortgage, industrial, or other loans or provides other extensions of credit; Purchases, sells, discounts or negotiations accounts receivable, installment obligations and other evidence of indebtedness; Issues letters of credit and negotiations drafts drawn thereunder; Provides trust or fiduciary services; Finances foreign currency transactions; or Enters into, purchases, or disposes of finance leases or leased assets

15 Depository Institution Accepting deposits alone is not sufficient to create a depository institution (activities adapted from sections 864 and 954(f)) Entity that completes money transfers by instructing agents to transmit funds is not a banking or similar business because it does not accept deposits for investment or similar temporary deposits of funds Exception for entity that solely accepts deposits from persons as collateral or security pursuant to a financing arrangement

16 Custodial Institution Holds as a substantial portion of its business financial assets for the benefit of one or more persons Derives 20% or more of its income from holding financial assets and related services, such as: Custody, account maintenance, and transfer fees Fees earned from executing and pricing securities transactions Fees from providing financial advice and for clearance and settlement services

17 Investment Entity: Three Types Type A: Entity primarily conducts as a business one more activities for or on behalf of a customer: Trading in financial instruments Individual or collective portfolio management Otherwise investing, administering or managing funds, money, or financial assets on behalf of other persons Type B: Entity s gross income is primarily attributable to investing, reinvesting or trading in financial assets and entity is managed by a depository institution, custodial institution or insurance company

18 Investment Entity: Three Types Type C: Entity functions or holds itself out as a collective investment vehicle, mutual fund, exchange traded fund, private equity fund, hedge fund, venture capital fund, leveraged buyout fund, or any similar investment vehicle established with an investment strategy of investing, reinvesting or trading in financial assets Financial assets broadly defined as a securities, partnership interests, notional principal contracts, insurance contracts, annuities, commodities, forward contracts, or any interest in such assets

19 Investment Entity Entity must derive 50% or more of its income from such activities

20 Holding Company & Treasury Center: FFI? A holding company is defined as an entity that primarily holds (directly or indirectly) the outstanding stock of one or more other members of the expanded affiliated group (EAG)

21 Holding Company & Treasury Center: FFI? A Treasury Center is an entity with the primary function of: Managing specified risks (i.e., interest rates, currency fluctuation) of a member of the EAG or the EAG; Managing the working capital of a member of the EAG or the EAG by investing or trading financial assets for the account and risk of such entity; or Acting as a financing vehicle for borrowing funds for use by a member of the EAG or the EAG

22 Holding Company & Treasury Center: FFI? A foreign entity is an FFI if it is a holding company or treasury center and: Is in an EAG with a depository institution, custodial institution, Type B or Type C investment entity, or insurance company; or Is formed in connection with or availed of by a collective investment vehicle such as a mutual fund or hedge fund

23 Exceptions from FFI Status The Final Regulations specifically except/exclude certain entities from FFI status These exceptions are generally for entities that may technically be FFIs but because of the nature of their business or activities, should not generally be subject to FATCA as other FFIs Examples: Holding companies, treasury centers, and captive insurance companies that are part of nonfinancial groups; section 501(c) corporations

24 Excepted FFI: Treasury Center EAG must not have more than 25% of its gross income from passive income No more than 5% of gross income of EAG is from FFIs Entity itself cannot be a depository or custodial institution for third parties Does not apply to entities formed with or availed of by private equity funds and similar arrangements

25 How Can an FFI Avoid Withholding? Withholding is automatic unless An exception applies (Final Regulations or in Annex 2 of an intergovernmental agreement) The FFI agrees to participate (PFFI) by registering and signing an agreement with the IRS, or is deemed to participate under an IGA

26 PFFI Obligations PFFI must register and enter into PFFI agreement to get a Global Intermediary Information Number (GIIN) Registration begins on July 15, 2013 through an IRS web portal Must register by October 25, 2013 to get a GIIN by year end GIIN list will be published monthly on IRS website All FFIs in an EAG must participate Unclear if registration process will apply to FFIs resident in a Model 1 IGA country

27 PFFI Obligations Must report on accounts of US persons Due diligence on accounts in existence prior to 1/1/2014 to ascertain accounts owned by US persons Individual accounts Balance over $1M: Greater due diligence, including interview with client relationship manager and paper documents for US indicia Under $1M but more than $50K: Electronic search for US indicia Responsible officer must certify under oath that accounts were reviewed

28 PFFI Obligations New account standards must be established for accounts open on or after 1/1/2014 or later (based on date of PFFI agreement) PFFIs must report on financial accounts with US owners Reporting phased in gradually from Model 1 IGA FFIs transmit information to the country of residence, who then transmits information to IRS Model 2 IGA FFIs and all other FFIs transmit information directly to the IRS

29 PFFI Obligations: Financial Accounts Depository accounts Examples: Checking, savings, time or thrift accounts Custodial accounts Accounts for the benefit of another person that holds any financial instrument or contract for investment Equity or debt interests in an FFI (unless interests are regularly traded on an established securities exchange) Cash value insurance contracts

30 PFFI Obligations Recalcitrant accounts Account holder refuses to provide information to determine whether the account is a US account PFFI agrees to withhold on recalcitrant accounts Eventually, PFFI must close recalcitrant accounts (note exceptions in intergovernmental agreements)

31 Intergovernmental Agreements 31

32 Origin of Intergovernmental Approach Joint Statement On 8 February 2012, the IRS issued proposed regulations regarding FATCA implementation G5 The original 5 FATCA cooperation jurisdictions are France, Germany, Italy, Spain and the UK Also on 8 February 2012, the IRS issued a joint statement with 5 European jurisdictions regarding an alternative intergovernmental approach to implementing FATCA Of the G5, as of 13 March 2013, only the UK has signed an IGA. Spain and Germany have initialled IGAs. 32

33 Origin of Intergovernmental Approach Joint Statement On 21 June 2012, the US Treasury issued joint statements with Switzerland and Japan that suggested an alternative IGA framework Model 2 Direct reporting by FFIs to the IRS, supplemented by information exchange upon request by the FATCA partner and the US FATCA partners may choose among two models Does not set up a new domestic reporting regime Japan and Switzerland 33

34 IGA Coverage IGA Signed, initialled, or in progress Exploring options

35 Status of IGA Negotiations IGA Status Country Signed Model 1 Signed Model 2 Committed to sign Finalizing IGA UK, Denmark, Mexico, Ireland, Norway Switzerland France, Germany (initialled), Italy (initialled), Spain (initialled), Japan (Model 2) Canada, Finland, Guernsey, Isle of Man, Jersey, Netherlands Negotiations in progress Argentina, Australia, Belgium, Cayman Islands, Chile, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, Slovak Republic, Singapore, Sweden, South Africa Exploring options Bermuda, Brazil, BVI, Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, Sint Maarten, Slovenia

36 General Framework FATCA partner agrees to: Pursue legislation to require FFIs in its jurisdiction to comply with FATCA Enable FFIs to apply FATCA due diligence, reporting, and withholding Transfer to the US the information reported by the FFIs The United States agrees to: Eliminate the obligation of each FFI to enter into an agreement directly with the IRS (Model 1) Allow FFIs to comply with reporting obligations by reporting to FATCA partner rather than reporting directly to the IRS (Model 1) Eliminate US FATCA withholding on payments to FFIs (both models) Identify specific categories of FFIs in FATCA partner jurisdiction that are exempt or deemed compliant (both models) Commit to reciprocity with respect to collecting and reporting information to FATCA partner from the US (optional and subject to safeguards) Both governments agree to: Develop a practical and effective alternative approach to achieve the policy objective of passthru payment withholding Commit to work with other FATCA partners and the OECD on adapting FATCA in the medium term to a common model for automatic exchange of information, including development of reporting and due diligence standards 36

37 Model 1 Framework Institutions report information to local authorities FATCA partner issues internal laws related to withholding on payments to non-cooperative entities, similar to FATCA Deemed-compliant FATCA partner financial institutions will not suffer withholding Reciprocal and non-reciprocal versions The authorities will send information to IRS 37

38 Structure of Model 1 IGA Preamble Article 1 Definitions Article 2 Obligations to Obtain and Exchange Information with Respect to US Reportable Accounts Article 3 Time and Manner of Exchange of Information Article 4 Application of FATCA to FATCA partner Financial Institutions Article 5 Collaboration on Compliance and Enforcement Article 6 Mutual Commitment (includes reciprocity article in reciprocal version) Article 7 Consistency in Application to FATCA partners Article 8 Consultations and Amendments Article 9 Annexes Article 10 Term of Agreement Annex I Due Diligence Obligations Annex II Non-Reporting Financial Institutions and Products 38

39 Main Components of Model 1 Article 2 FATCA partner obligations to obtain information from its financial institutions on US accounts Domestic implementing legislation to enable reporting Automatic information exchange with US Article 4 Simplification of FATCA responsibilities for FATCA partner financial institutions No withholding or termination of recalcitrant accounts Grants exemptions to low-risk financial institutions Relaxes expanded affiliated group rule Article 6 Commitment between US and FATCA partner to streamline FATCA rules and find alternative to passthru payment mechanism 39

40 Model 1 IGA - Reciprocity Reciprocal or nonreciprocal nature generally depends on whether local government has adequate safeguards and protections to ensure that information is only used for tax purposes 40

41 Model 2 Framework Laws of each country will be modified to allow the information to be exchanged without local law issues Exchange of information, upon request, between countries regarding recalcitrant account holders Deemed-compliant FATCA partner financial institutions will not suffer withholding Group exchange General FATCA rules apply to financial institutions in FATCA partner jurisdiction 41

42 Structure of Model 2 IGA Preamble Article 1 Definitions Article 2 Reporting and Exchange of Information Article 3 Application of FATCA to FATCA Partner Financial Institutions Article 4 Verification and Enforcement Article 5 Mutual Commitment Article 6 Consistency in Application to FATCA Partners Article 7 Reciprocal Information Exchange (reciprocal IGA only) Article 8 Consultations and Amendments Annex I Due Diligence Obligations Annex II Non-Reporting Financial Institutions and Products 42

43 Areas of Uncertainty Working together to develop a practical and effective alternative to foreign passthru payment withholding that minimized burden Local interpretations of IGA requirements and FATCA regulations remains unclear Complexity for multinational banks regarding numerous applicable regimes 43

44 Comparing Models Model 2, FATCA partner government confers authority to financial institutions and removes local legal hurdles Model 1 imposes a potentially larger information collection burden on governments 44

45 Comparing Models FFIs generally perceive Model 1 as less burdensome compared to Model 2 Model 2 designed for jurisdictions that are not interested in participating on a government-to-government basis Two different information exchange models Not two vastly different approaches to FATCA implementation Agreements are not significantly customized 45

46 Comparison of Framework Question Model 1 IGA Model 2 IGA Core FATCA Is the FFI required to sign an FFI Agreement? No Yes Yes, to avoid withholding EAG rule applies? No No Yes Is the FFI required to register with the IRS? Can resident FFIs remain nonparticipating? What entities can be deemed compliant? No, unless required under local implementing laws Yes Yes No No Yes* Annex II (by agreement) Annex II (by agreement) Treas. Reg

47 Comparison of Local Law Issues Question Model 1 Model 2 Core FATCA Is the FFI required to close recalcitrant accounts? Does the arrangement resolve local law restrictions on reporting? Does the arrangement resolve local law conflicts on withholding? No No Yes Yes Yes No Yes Yes No To whom does the FFI report? Local authority IRS IRS 47

48 Comparison of Withholding Issues Question Model 1 Model 2 Core FATCA Is the FFI subject to FATCA withholding on US source FDAP Is the FFI required to withhold on resident FFIs Is the FFI required to withhold on recalcitrant account holders? No No No (if FFI enters FFI Agreement) Yes (if FFI does not enter FFI Agreement) No No Yes, if resident FFI is a non-participating FFI No No Yes 48

49 Pros and Cons of Entering IGA Benefits Potential Negative Factors Potential carve-outs for specified financial institutions Removes many withholding obligations for FFIs in FATCA partner jurisdiction No required account closure for recalcitrant account holders if certain information is provided Resolves local law data protection and privacy issues Local tax authority takes on new reporting and audit responsibilities All FFIs in the partner country have to be PFFIs or exempt or deemed-compliant. (Query whether option to stay out of FATCA is really viable) Multiple versions of FATCA may apply to multinational financial institutions Model 1 removes requirement for financial institution to enter agreement with the US FFI in an IGA jurisdiction can continue to retain its good standing as a FATCA-compliant FFI even with an FFI that is not compliant, indefinitely Jurisdiction may be perceived internationally as a jurisdiction committed to mitigate tax evasion and to support greater tax transparency and international cooperation 49

50 IGA Observations Comparatively easier for FATCA partner financial institutions to comply with FATCA compared to FATCA regulations IGAs are particularly helpful for FATCA partners that have no or smaller global presence For global FFIs IGAs may pose more difficulty because of multiple applicable regimes (this may be offset by relief from expanded affiliated group rule) Definition of substantial US owner in regulations replaced by controlling person definition which is expected to be interpreted in accordance with FAT recommendations and better aligned to KYC 50

51 Dispute Resolution Alternatives 51

52 Dispute Resolution Alternatives Advance Pricing Agreements Competent Authority (MAP) Resolutions Pre-Filing Agreements

53 Advance Pricing Agreements 53

54 Advance Pricing & Mutual Agreement Program Commissioner IRS Commissioner LB&I Deputy Commissioner International Michael Danilack Chief Counsel IRS Chief Economist Transfer Pricing Operations Director Samuel Maruca International Business Compliance Director Advance Pricing & Mutual Transfer Pricing International International Agreement Program Specialist Field Services Territory Managers* Richard McAlonan *IE Managers, IEs, Economist Managers, Economists

55 Advance Pricing Agreements U.S. APMA Program 112 people 50% increase in total headcount Three teams for Canada; three for Japan; four for ROW Foreign APA Program resources vary Canada, Japan robust groups China: 5 people Effects on time to resolution

56 Advance Pricing Agreements US APA applications were down in 2011 APA completions were down in 2011 Only 42 APAs completed in new APAs in 2011 (15 renewals) 34 bilateral; 9 unilateral Two APAs cancelled; 9 applications revoked

57 Advance Pricing Agreements Average completion time 44 months (bilaterals) Average RNP 27 months APMP Program routinely adds additional years to the term to reduce renewal burden 305 open and active cases in 2011; up from 161 in 2008, 222 in 2009 and 243 in 2010 In 2011, 26 APAs involved a foreign parent and US sub; 16 involved a US parent and foreign sub

58 Advance Pricing Agreements Clearing the backlog is a stated priority but may take 18+ months RNPs Will be shorter (McAlonan) Will they be shared with taxpayer?

59 Advance Pricing Agreements Our observations Newly hired project leaders are eager, hardworking, practical (sometimes to a fault) and inexperienced Consider climate/staffing in other country There s no such thing as a quick renewal May still reduce compliance costs despite upfront investment Greater predictability for financial reporting

60 Advance Pricing Agreements Despite challenges, APAs still should be considered IRS has 856 international agents and 300 more will be hired Inventory of TP cases increased 10% from 2010 to 2011 (283 cases to 312 cases)

61 Eaton Corp. APA Eaton treated its PR subs as licensed manufacturers Following US TP adjustment, Eaton filed for an APA with a rollback to resolve US audit Achieved APA for but no rollback Achieved renewed APA for Data errors for found, disclosed and corrected by taxpayer IRS began audit of and asserted that it did not need to accept the results of the APAs

62 Eaton Corp. APA Pursuant to an IRS-taxpayer MOU, Eaton agreed to submit supplemental APA request for and an APA renewal request for ; IRS agreed to honor the existing APAs IRS then said it would not rely on the APAs and would treat PR ops as contract manufacturers Eaton withdrew its supplemental APA request for and APA renewal request IRS cancelled both and APAs

63 Eaton Corp. APA IRS cancelled both and APAs due to noncompliance IRS issued a deficiency notice for TP adjustments ($386 million) Eaton filed in Tax Court to enforce the APAs Motion for partial summary judgment asking Tax Court to rule that the APAs are binding contracts and that the IRS must prove it was entitled to cancel them

64 Competent Authority 64

65 Competent Authority (MAP) Resolutions Taxpayer right to invoke MAP Relief Obligation of Competent Authorities regarding taxation not in accordance with the provisions of the treaty Competent authorities shall endeavour to resolve issues regarding the application or interpretation of the treaty Absent mandatory, binding arbitration, no requirement that agreement actually be reached Timing Considerations Actions that result or will result in tax adjustment Time limits for filing Limited ability to apply MAP Agreements prospectively

66 Scope of Authority Authority to address taxation not in accordance with the provisions of applicable treaty Any issue arising under four corners of the treaty Authority (and obligation) whether or not actual double taxation arises Competent Authorities also have authority to: Address juridical or economic double taxation in cases not provided for by the Convention Conclude generally applicable agreements regarding the application or interpretation of the Convention

67 Scope of Authority Limitations on acceptance of MAP case Listed transactions and other abusive transactions may not be accepted Refusal by some Competent Authorities to engage Implementation of agreements generally not precluded by domestic law Deadlines for requesting MAP consideration differ Domestic time limits only waived if MAP resolution reached Limitations if issue resolve with IRS Appeals or in court Limited (or no) relief for penalties and interest

68 Coordination with Foreign Tax Credits Taxpayers may be able to obtain relief from double taxation through foreign tax credits under sections 901 and 902 To be creditable, a payment must be compulsory Determination based on taxpayer s reasonable interpretation and application of foreign tax law Taxpayer must exhaust all effective and practical remedies to reduce foreign tax, including invocation of competent authority procedures Under Rev. Proc taxpayer must consult with the U.S. Competent Authority to ensure relief

69 Practical Considerations Great majority of MAP cases resolved favorably in most bilateral relationships, with elimination of most or all double taxation But... Time to resolution uncertain No certainty that resolution will be reached Other considerations Current state of bilateral relationship Impact of arbitration Multilateral MAP cases

70 Pre-Filing Agreements 70

71 Pre-Filing Agreements Opportunity for early resolution of specific issues before filing a return May address up to four taxable years beyond the current taxable year Eligible Issues Appropriate only for issues involving application of well-settled principles of law Factual rather than legal focus Transfer pricing issues excluded Other international issues permitted (e.g., PE, Attribution of profits, ECI)

72 Pre-Filing Agreements Potential Benefits Certainty regarding position on tax return Permits timely access to the records and personnel that are relevant to the issues Facilitates joint development of methodology for addressing fact intensive questions Strategic Considerations: When does a PFA make sense? Coordination with MAP procedures Overlap with APA procedures (Implications of Rev. Proc )

73 Pursuant to requirements relating to practice before the Internal Revenue Service, any tax advice in this communication (including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing, or recommending to another person any tax-related matter.

74 Joshua D. Odintz (202) Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. 74