Introduction to FATCA. Introduction to FATCA

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1 Presented by: Joe Perera Strasburger & Price, LLP July 1, 2014 Agenda Legislative Purpose and Approach To Whom and To What Payments Does FATCA Apply? Rules Regarding Foreign Financial Institutions (FFIs) FFI Due Diligence Requirements FFI Reporting Requirements Non-Financial Foreign Entities (NFFEs) FATCA Forms 2 1

2 Legislative Purpose and Approach The stated purpose of the Foreign Account Tax Compliance Act ( FATCA ) is to clamp down on tax evasion and improve taxpayer compliance by giving the IRS new administrative tools to detect, deter, and discourage offshore tax abuses Target: U.S. persons who hide investment assets in foreign entities Approach is similar to U.S. backup withholding rules: Primary requirement is information reporting: FATCA requires reporting of information on financial accounts held by U.S. persons at foreign financial institutions and held by U.S. persons through non-financial foreign entities Withholding as a backup requirement. If the reporting requirements are not satisfied, FATCA imposes a 30% withholding tax on non-exempt payments to non-exempt foreign entities of U.S. source passive-type investment income 3 Agenda Legislative Purpose and Approach To Whom and To What Payments Does FATCA Apply? Rules Regarding Foreign Financial Institutions (FFIs) FFI Due Diligence Requirements FFI Reporting Requirements Non-Financial Foreign Entities (NFFEs) FATCA Forms 4 2

3 Who is Subject to FATCA? Any payor of withholdable payments to any foreign entity All foreign entities that have U.S. source income or hold U.S. stock or securities (even if the foreign entity does not have any U.S. owners) Two types of foreign entities Foreign Financial Institutions ( FFIs ) Non-Financial Foreign Entities ( NFFEs ) Direct payments to individuals are not subject to FATCA 5 A Foreign Financial Institution (FFI) is any entity that Accepts deposits in the ordinary course of a banking or similar business (e.g. retail banks); Is engaged in the business of holding financial assets for the account of others such as investment banks; or Is engaged primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities, or derivatives in the above, such as mutual funds, hedge funds, private equity funds, and securitization vehicles A Non-Financial Foreign Entity (NFFE) is any entity that is not a foreign financial institution 6 3

4 What is a Withholdable Payment? Any payment of U.S. source interest, dividends, rents, compensation, premiums, annuities, and other fixed or determinable annual or periodical income (FDAP income) Withholding on these payments starts on July 1, 2014 FDAP income payments are generally subject to withholding under the regular withholding rules in 1442; any FATCA withholding reduces the required withholding under the regular withholding rules Any gross proceeds from the sale of any property that could produce U.S. source interest or dividends Withholding on these payments begins on January 1, 2017 FATCA does not apply to income effectively connected with the conduct of a trade or business within the U.S. 7 Exclusions from Withholdable Payments Short Term Obligations (including interest or original issue discount on short term obligations and the gross proceeds from sale or disposition of the obligation) Defined as any debt obligation which is payable in 183 days or less from date or original issue (e.g. 30 day U.S. T-Bills and commercial paper) Grandfathered Obligations Obligations (debt instruments, extensions of credit for fixed terms, life insurance contracts and annuity contracts) that are outstanding as of July 1, 2014 and not materially modified after July 1, 2014 Obligation is not a legal agreement or instrument that Is treated as equity Lacks a stated expiration or term Is an agreement to hold financial assets for the account of others and to make and receive payments with respect to those assets 8 4

5 Exclusions from Withholdable Payments (con t) Withholdable Payments Made to FFIs With Respect to Preexisting Obligations Payment is made before July 1, 2016 The FFI is not a prima facie FFI (a foreign entity that is classified as a financial institution under NAICS or SIC codes) A preexisting obligation is any account, instrument, contract, debt or equity interest maintained, executed or issued by the withholding agent that is held by an individual and outstanding on June 30, 2014, or held by an entity and issued, opened or executed on or after July 1, 2014 and before January 1, U.S. Withholding Agent Is this a Withholdable Payment? Should I withhold tax? If withholding agent fails to withhold and deposit FATCA tax, the agent is liable for the tax (officers and employees could be held personally liable for trust fund recovery penalty) IRS can also assess failure to deposit penalties Additionally, the withholding agent could face criminal penalties of up to $10,000 in fines, the costs of prosecution, and up to 5 years of imprisonment Need to obtain an updated Form W-8 (many different W-8 Forms) This form will have a new FATCA global intermediary information number ( GIIN ) Then have to verify GIIN s accuracy on the IRS database 10 5

6 Foreign Recipients Am I a FFI? NFFE? If so, how do I eliminate FATCA withholding tax 11 Agenda Legislative Purpose and Approach To Whom and To What Payments Does FATCA Apply? Rules Regarding Foreign Financial Institutions (FFIs) FFI Due Diligence Requirements FFI Reporting Requirements Non-Financial Foreign Entities (NFFEs) FATCA Forms 12 6

7 FATCA applies to FFIs unless FFI becomes a participating FFI by signing an agreement with the IRS The FFI is a resident of a country that signs an Intergovernmental Agreement with the IRS (IGA) FFI falls within an applicable exemption under the FATCA regulations 13 Participating FFI Obtain information for each account holder to determine which (if any) accounts are U.S. accounts, accounts held by a recalcitrant account holder, or accounts held by nonparticipating FFIs Recalcitrant account holder: an account holder that fails to comply with reasonable request to provide information to determine account status or fails to provide any necessary waiver from foreign disclosure law Adopt a compliance program and periodically certify compliance to IRS Annually report on Form 8966, FATCA Report, information on U.S. account holders and recalcitrant account holders and file Form 1042-S for payments to recalcitrant account holders; alternatively, issue Form 1099 to U.S. persons 14 7

8 Participating FFI (con t) Beginning on January 1, 2017, must withhold on passthru payments to recalcitrant holders and nonparticipating FFIs Passthru payment is any withholdable payment or other payment to the extent attributable to a withholdable payment (regulations haven t clearly defined) Must comply with IRS requests for additional information on any U.S. account Must attempt to obtain a valid and effective waive for any U.S. account that it maintains whenever any foreign law (but for the waiver) would prevent the FFI from disclosing information to the IRS, or close or transfer the account if the FFI does not receive the waiver within a reasonable period of time 15 Intergovernmental Agreements Provides a framework to enable FATCA compliance by entities within with these countries FFIs in the other country Do not need to enter into FFI Agreements Do not need to withhold on payments to FFIs in the other country Would not be required to terminate accounts of recalcitrant account holders or withhold on passthru payments 16 8

9 Intergovernmental Agreements (con t) Model 1 IGAs FFIs in the foreign jurisdiction identify U.S. accounts using due diligence rules of foreign country FFI reports information about U.S. accounts to foreign jurisdiction and foreign jurisdiction reports such information to U.S. FFI not subject to FATCA withholding List of countries with Model I IGA include popular offshore destinations including (many more on their way) Cayman Islands; Guernsey; Isle of Man; Lichtenstein; Luxembourg Model 2 IGAs Foreign jurisdiction agrees to direct and enable all FFIs in that jurisdiction to register with IRS and report U.S. account information directly to IRS consistent with FATCA rules 17 Exceptions for FFIs Registered Deemed Compliant FFIs Small, local FFIs Members of a group that transfer U.S. accounts or accounts of recalcitrant account holders to a participating FFI, Model 1 FFI, or U.S. financial institution, or closes such accounts, within six months of opening the account or conducting required due diligence Qualified collective investment vehicles Restricted funds Qualified credit card issuers Sponsored investment entities and controlled foreign corporations 18 9

10 Exceptions for FFIs (con t) Certified Deemed Compliant FFIs Non-registering local bank FFI with only low value accounts (accounts less than $50,000 and no more than $50 million in assets) Sponsored, closely held investment vehicles Limited life debt investment entities Investment advisors and investment managers Owner Documented FFIs An investment entity that provides designated withholding agent all the necessary documentation (concerning any U.S. owners) and the withholding agent agrees to report to IRS or relevant foreign jurisdiction, the information concerning U.S. owners 19 Agenda Legislative Purpose and Approach To Whom and To What Payments Does FATCA Apply? Rules Regarding Foreign Financial Institutions (FFIs) FFI Due Diligence Requirements FFI Reporting Requirements Non-Financial Foreign Entities (NFFEs) FATCA Forms 20 10

11 FFI Due Diligence Requirements FFI must Identify each account that is a U.S. account or account held by recalcitrant account holder or nonparticipating FFI and report that information U.S. Account: account owned by U.S. persons or U.S. owned foreign entities having more than 10% U.S. ownership Retain a record of the documentation collected or otherwise maintained when making certain payments to an account holder or payee to determine whether withholding applies 21 FFI Due Diligence Requirements (con t) No due diligence for preexisting entity accounts of $250,000 or less (opened before January 1, 2015) if no account holder has previously been documented as a U.S. person or for accounts held by a natural person and under $50,000; diligence required when account reaches $1 million or more If preexisting account and less than $1 million, then FFI conducts electronic review and contacts customer only if U.S. indicia is found; if more than $1 million, FFI conducts electronic and paper review and must talk to the account manager This due diligence must be complete within six months of effective date of FFI agreement for prima facie FFIs (foreign entities that have a NAICS or SIC code indicating that it is a financial institution); and Within 2 years for all other entities 22 11

12 FFI Due Diligence Requirements (con t) For new accounts, must obtain documentation by earlier of Date a withholdable payment is made, or Within 90 days of date the account is open Documentation includes W-9 or W-8 series forms (W-8BEN, W-8BEN-E, W-8IMY) U.S. indicia include Account holder listed as U.S. citizen or resident alien U.S. place of birth U.S. address U.S. telephone number Wiring instructions to U.S. Account U.S. power or attorney Care of address or hold address in the U.S. 23 FFI Due Diligence Requirements (con t) If U.S. person listed as account holder, then FFI most report but must obtain Form W-9 and disclosure waiver If U.S. place of birth, FFI must obtain either documentary evidence of foreign citizenship (e.g. passport) and copy of individual s Certificate of Loss of Nationality of the United States (DS- 4083) or a Form W-8BEN, evidence of foreign citizenship and a reasonable written explanation If any other U.S. indicia, FFI must get Form W-8 or evidence that the person is not a U.S. person 24 12

13 Agenda Legislative Purpose and Approach To Whom and To What Payments Does FATCA Apply? Rules Regarding Foreign Financial Institutions (FFIs) FFI Due Diligence Requirements FFI Reporting Requirements Non-Financial Foreign Entities (NFFEs) FATCA Forms 25 FFI Reporting Requirements Reporting requirements begin for withholdable payments made in 2014; FFIs will file reports by March 31,2015 Must report information on U.S. accounts Account values and balances and amounts and character of payments Reports on Form 8966 Name, address, and taxpayer identification of each specified U.S. person Account number Account balance Payments made If the account owner is NFFE, information concerning substantial U.S. owners Can alternatively issue Forms 1099 to U.S. account holders Aggregate number and value of accounts held by recalcitrant account holders 26 13

14 Agenda Legislative Purpose and Approach To Whom and To What Payments Does FATCA Apply? Rules Regarding Foreign Financial Institutions (FFIs) FFI Due Diligence Requirements FFI Reporting Requirements Non-Financial Foreign Entities (NFFEs) FATCA Forms 27 Non-Financial Foreign Entities (NFFEs) Exempt NFFEs Publicly traded corporations Active NFFEs: Less than 50% of entity s gross income is passive income and less than 50% of entity s assets are held to produce passive income NFFEs organized under U.S. law NFFEs can be exempt from FATCA withholding if The NFFE provides the withholding agent with a certification that the NFFE does not have any substantial U.S. owners or provides the name, address and TIN of each substantial U.S. owner The withholding agent does not know or have reason to know that that information is wrong And the withholding agent reports the NFFE s information to the IRS on Form

15 Substantial U.S. Owner A U.S. person owns, directly or indirectly, more than 10% of the voting power or value of a corporation s stock A U.S. person owns, directly or indirectly, more than 10% of the profits or capital interest of a partnership 29 Agenda Legislative Purpose and Approach To Whom and To What Payments Does FATCA Apply? Rules Regarding Foreign Financial Institutions (FFIs) FFI Due Diligence Requirements FFI Reporting Requirements Non-Financial Foreign Entities (NFFEs) FATCA Forms 30 15

16 Forms to certify FATCA status Form W-9 Used to certify status as U.S. person Form W-8BEN Used by foreign individuals (not entities) to certify foreign status and claim any applicable treaty benefits Form W-8BEN-E Used by foreign entities to certify foreign status, certify FATCA status, claim any applicable treaty benefits (regular withholding only), and provide other information relevant to FATCA withholding Form W-8IMY Used by foreign intermediaries or flow through entities 31 Disclaimers This document is not intended to provide advice on any specific legal matter or factual situation, and should not be relied upon without consultation with qualified professional advisors. Any tax advice contained in this document and any attachments was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under applicable tax laws, or (ii) promoting, marketing, or recommending to another party any transaction or tax-related matter