Fiduciary and Investment Risk Management Association 28 th National Risk Management Training Conference

Transcription

1 Fiduciary and Investment Risk Management Association 28 th National Risk Management Training Conference Foreign Account Tax Compliance Act: Considerations for Trusts April 30, 2014 Michael Shepard Principal Deloitte Transactions and Business Analytics LLP Andrea Garcia Castelao Manager Deloitte Tax LLP

2 DISCLAIMER This document contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this document. 1

3 Foreign Account Tax Compliance Act Overview

4 Foreign Account Tax Compliance Act Overview What is FATCA? The Foreign Account Tax Compliance Act (FATCA) was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act on March 18, FATCA creates a new information reporting and withholding regime for payments made to individuals and entities that do not provide certain documentation that evidences their FATCA status. The FATCA rules generally become effective with respect to certain payments made on or after July 1, U.S. withholding agents (USWAs) and participating Foreign Financial Institutions (FFIs) are required to document account holders and withhold and/or report on non-compliant accounts. 3

5 Foreign Account Tax Compliance Act Overview What is the Intent of FATCA? FATCA is intended to increase transparency for the Internal Revenue Service (IRS) with respect to U.S. persons that may be investing and earning income through non-u.s. institutions. While the primary goal of FATCA is to gain information about U.S. persons, FATCA imposes tax withholding where the applicable documentation and reporting requirements are not met. FATCA aims to identify U.S. persons trying to avoid U.S. tax obligations by holding assets in non-u.s. structures and products 4

6 Foreign Account Tax Compliance Act Overview Who does FATCA Impact? While FATCA affects U.S. withholding agents and U.S. multinational companies, its greatest impact will likely be to Foreign Financial Institutions (FFIs) 5 Main FATCA impact US US Financial Institutions Due diligence processes according to Chapter 4 (FATCA) New documentation requirements for payees New Standards of Knowledge s rules New presumption rules Withholding 30% on withholdable payments to NPFFIs New reporting obligations US Non Financial Entities Classify entities within the group Identify withholdable payments Withholding 30% on withholdable payments to NPFFIs New reporting obligations

7 Foreign Account Tax Compliance Act Overview Who does FATCA Impact? (cont.) While FATCA affects U.S. withholding agents and U.S. multinational companies, its greatest impact will likely be to Foreign Financial Institutions (FFIs) 6 Main FATCA impact - Foreign Foreign Financial Institutions Sign an Agreement with the IRS Due diligence processes according to Chapter 4 (FATCA) - New documentation requirements for payees Withholding 30% on withholdable payments to NPFFIs/ Recalcitrant account holders Closing accounts New reporting obligations Compliance program - Responsible Officer Registration with the IRS Non Financial Foreign Entities Non-Financial Foreign Entities (NFFEs) are required to report substantial U.S. owners or certify no U.S. ownership Classify entities within the group They may opt to register with the IRS as Direct Reporting NFFEs

8 Foreign Account Tax Compliance Act Overview What are the Withholding Requirements? In general, a withholding agent is required to withhold 30% on a withholdable payment made to a FFI or to a Non-Financial Foreign Entity (NFFE), unless the FFI or NFFE meets certain requirements. In addition, an FFI must withhold 30% on any pass through payment it makes to a recalcitrant account holder, as well as to payments it makes to another FFI unless that FFI meets certain requirements 7

9 Foreign Account Tax Compliance Act Overview Who Needs to Comply? U.S. Withholding Agents U.S. entity that has control, receipt, custody, disposal or makes a payment of any withholdable payment FFIs potential relevant categories Accepts deposits in the ordinary course of a banking or similar business (depository institution) Holds financial assets for the account of others as a substantial part of its business (custodial institution) Engages primarily in the business of investing or trading securities, commodities, partnerships or any interests in such positions, individual or collective portfolio management or otherwise invests, administers, or manages funds, money, or financial assets on behalf of other persons (investment entity) Primarily holds the shares of other related entities (holding company) 8

10 Foreign Account Tax Compliance Act Overview Who Needs to Comply? (Cont.) Specified U.S. persons U.S. citizens, U.S. residents (i.e., Green card holder), non-u.s. persons who meet the substantial presence test, U.S. partnerships, U.S. trusts, U.S. estates and U.S. corporations that are not publicly traded 9

11 Foreign Account Tax Compliance Act Overview Implications of Non-Compliance Financial, commercial and reputational risks May be forced to comply even where no U.S. source payments as many third parties will require FATCA compliance Uncertain degree of foreign government regulatory enforcement under the bilateral intergovernmental agreements (IGA) with IRS Non-Compliance is Not an Option Although FATCA is technically voluntary, institutions who ignore it may find themselves frozen out of the global financial market 10

12 Foreign Account Tax Compliance Act Overview The Cost of Getting Caught as a Taxpayer Filing Requirement Any taxpayer with an aggregate total of at least $50,000 in foreign assets has to follow this tax reporting measure. Failure to complete Form 8938 by the reporting deadline leads to a minimum $10,000 penalty, which may go as high as $50,000 over time. Further, all assets must be reported or a 40 percent understatement penalty will be issued In addition to civil penalties, there could be criminal penalties for willful violations as much as $250,000 for individuals and $500,000 for corporations FBAR Penalties Failure to file a FBAR comes with its own penalties in addition to those associated with Form Civil penalties can be up to $10,000 per non-willful violation. Willful violation penalties can exceed $100,000 or be equal to 50 percent of the account amount for each violation 11

13 Foreign Account Tax Compliance Act Overview What is an Intergovernmental Agreement ( IGA )? Under the Model IGA, FFIs in partner jurisdictions will report information on U.S. account holders to their national tax authorities, which in turn will provide this information into the U.S. under an automatic exchange of information IGAs provide reduced compliance burdens for FFIs in the partner country jurisdiction in exchange for instituting the FATCA requirements into local law or relaxing local laws that would preclude FATCA compliance IGAs are still a moving target! Many new agreements are already in negotiation and will be signed IGAs open for renegotiation in the future and may be terminated IGAs may be modified by the contracting authorities (Favored Nation Clause) 12

14 Foreign Account Tax Compliance Act Overview 26 Intergovernmental Agreements signed (as of April 17, 2014) Model 1 United Kingdom Denmark Ireland Spain Germany Norway France Guernsey Isle of Man Jersey Netherlands Malta Italy Hungary Finland Luxembourg Model 2 Switzerland Model 1 No IGA currently in place Model 2 Japan Model 1 Mexico Costa Rica Cayman Islands (Model 1B) Canada Honduras Model 2 Bermuda Chile Model 1 No IGA currently in place Model 2 No IGA currently in place Model 1 Republic of Mauritius Model 2 No IGA currently in place 13 IGAs status - 4/21/2014

15 Foreign Account Tax Compliance Act Overview 24 Jurisdictions that have reached agreements in substance and have consented to being included on IRS list (Announcement , April 2, 2014) Model 1 Australia ( ) Belgium ( ) Brazil ( ) British Virgin Islands ( ) Croatia ( ) Czech Republic ( ) Estonia ( ) Gibraltar ( ) India ( ) Jamaica ( ) Kosovo ( ) Latvia ( ) Liechtenstein ( ) Lithuania ( ) New Zealand ( ) Poland ( ) Portugal ( ) Qatar ( ) Slovak Republic ( ) Slovenia ( ) South Africa ( ) South Korea ( ) Romania ( ) Model 2 Austria ( ) There are more than 100 IGAs being negotiated today 14 IGAs status - 4/21/2014

16 Foreign Account Tax Compliance Act Overview Characteristics of the Model I IGA Model I FIs will be required to register with the IRS but will not be required to enter into an FFI Agreement Further, Model I FIs will not report directly to the IRS pursuant to the standard FATCA regulations, but rather to the domestic tax authority, which will then pass on the information on an automatic basis to the IRS Model I FIs are relieved of the requirement to close accounts belonging to recalcitrant account holders. However, Model I FIs will report to the domestic tax authority the names of recalcitrant account holders and nonparticipating FFIs and the amounts of all payments made to them No payments to Model I FIs are subject to withholding. Exception: substantial non-compliance clause. Model I FIs are relieved of the responsibility to withhold 30% of certain U.S.- sourced payments to recalcitrant account holders. However, if the withholding implicates a nonparticipating FFI located outside an IGA partner country, the Model I FI must report the amount to an upstream withholding agent who will withhold on the payment (or assume withholding responsibility) 15

17 Foreign Account Tax Compliance Act Overview Characteristics of the Model II IGA Under Model 2 IGA, Reporting Financial Institutions (RFIs) enter into an FFI Agreement and report directly to the IRS pursuant to the standard FATCA regulations RFIs are relieved of the requirement to close accounts belonging to recalcitrant account holders. However, for account holders (with U.S. indicia) and nonparticipating FFIs (NPFFIs) which do not consent to have their account information reported to the IRS (non-consenting accounts), the detailed account information must be transmitted to the local tax authority, while aggregated information will be reported to the IRS, which may result in a group administrative request. Upon its receipt, the domestic tax authority is allotted eight months to exchange this information with IRS 16

18 Foreign Account Tax Compliance Act Overview Characteristics of the Model II IGA (Cont.) No payments to RFIs are subject to withholding. Exception: substantial non-compliance clause. In general, RFIs are relieved of the responsibility to withhold 30% of certain U.S.-sourced payments to non-consenting U.S. account holders. However, the withholding requirement still remains for certain non-consenting accounts and payments made to Nonparticipating FFIs Note: Should the suspension of the duty to withhold be revoked because the domestic tax authority does not comply with the U.S. request within eight months, the cost of the withholding falls on the customer, not the financial institution However, amounts paid to NPFFIs not located in a country with an IGA will be subject to withholding 17

19 Foreign Account Tax Compliance Act Impacts to the Trust Industry

20 How Does FATCA Impact the Trust Industry? How will you ensure the FATCA compliance of this structure? 19

21 How Does FATCA Impact the Trust Industry? Trust Company s Legal Entities Location of entity determines set of governing rules Depending on governing rules and classification type, entity may need to register and possibly sign an FFI Agreement by 25 April 2014 FATCA requires classification of all legal entities, including trust companies, corporate directors and nominee shareholders Generally operations of trust companies and typical related entities qualify as FFIs 20

22 How Does FATCA Impact the Trust Industry? Clients: Trust or Fiduciary Structures Including Underlying Companies FATCA treats all trusts and other structures as entities regardless of legal form, and therefore requires all to be classified FATCA does not oblige trust companies to comply on behalf of the fiduciary structures they administer, but it is very likely part of the fiduciary duty Typically, structures holding financial assets will qualify as FFIs 21

23 How Does FATCA Impact the Trust Industry? Beneficiaries U.S. tax rules dictate the owner of the trust or other structure As part of the diligence obligations, the trust or other structure will identify its owner and U.S. persons will generally be reported 22

24 Foreign Account Tax Compliance Act Considerations

25 Considerations for use of AML/KYC Information Optional Considerations Example Identify substantial U.S. owners of certain Passive NFFEs Requires: Integrated systems between AML and Onboarding Consistent data quality Tracking of account balance information Mandatory Requirements Example Reason To Know: Determine if inconsistencies exist between KYC and Tax certification Requires: Closely linked processes and controls between onboarding, Tax and AML Documented Policies and Procedures Compliance monitoring Both optional and mandatory considerations should be addressed throughout your FATCA implementation 24

26 Asset Management Compliance Model Determine impact of KYC/FATCA mandatory and optional considerations through gap assessment between current capabilities under chapter 3 and the new chapter 4 requirements Map current AML/KYC fields that would need to be cross referenced for U.S. Indicia such as: Phone Number, Address, Place of Birth Tax forms and documentation on file providing residency and citizenship information Align solutions with impact, consider current and future state Govern centrally with common standards and guidelines and execute locally 25

27 Mandatory AML/KYC compliance considerations Ongoing FATCA Compliance 1 Communication Plan Website updates, internal educations and awareness, investor communications, and counterparty verifications Onboarding and Remediation Responsible Officer Framework Registration Strategy Service Provider Management Withholding & Reporting 7 Update fund documents (subscription, prospectus, and offering) Enhance KYC/AML procedures and systems (onboarding) Implement controls for incomplete and expired information Begin due diligence of pre-existing accounts Develop an oversight and responsible officer strategy that fits the segregated business lines and geographic regions, while inclusive of IGA requirements Engage resources to govern the compliance sub structure Implement solutions` Build data management solution Develop registration strategy and identify resources Document policies and process for classifying and implementing new entities or funds Supply registration information to counterparties to prevent withholding Modify Existing Operating Environment Outline support model and finalize zone of responsibility Discuss and finalize any impacts to commercial terms Manage service provider process and system changes Develop ongoing governance and service level metrics Assign scope of responsibilities, adopt common practices, and enhance capability to manage performance across regions/businesses, investment strategies and portfolio companies Define global withholding model and reporting framework once regulations are finalized (adaptable for IGAs) Draft business requirements for systematic and process updates Implement solutions 26

28 Illustrative FATCA Governance Roles 27

29 Illustrative FATCA Timeline Key Activities`` Role Description 1 Legal Considerations Support the assessment of legal considerations impacting compliance with FATCA. Frame and develop analysis, impact and go forward approach across legal considerations such as: Intergovernmental Approach Data Protection/storage and reuse of AML/KYC data 2 Tax SME Provide Tax Subject Matter support to provide refresh to the tools and education materials in alignment with the release of the final FATCA regulations. Provide guidance on Withholding and Reporting approach and planning considerations. Take part in enterprise solutioning providing support on FATCA remediation and implementation considerations. Develop tracking dashboard for key milestones. 3 Compliance Support approach and framework development to support monitoring of Blackstone compliance initiatives. Development of a FATCA control framework AML/KYC considerations Remediation strategy support 4 Entity Classification/FFI Framework Support entity classification initiatives including special purpose entities. Develop FFI Agreement framework to build off requirements support. 5 Initiative Support Provide overall management and coordination of activities of resources while supporting each stream with subject matter knowledge of FATCA and coordinating additional support from areas where needed. 6 Business Unit Liaison Liaise with Business Unit s to cross pollinate issue discovery and resolution and share best practices across Business Unit and to PMO. Work with the Business Unit Lead to identify specific enterprise FATCA compliance issues and coordinate resolution Track and report progress by Business Unit; provide recommendations for escalation 28

30 Foreign Account Tax Compliance Act Reporting

31 Foreign Account Tax Compliance Act Reporting Reporting will be phased in gradually between 2015 and Foreign Financial Institutions (FFIs) are required to report name, address, TIN, account number and account balance on U.S. accounts (U.S. Account Reporting), in line with IGA requirements The effective date of the FFI Agreement is June 30,201 for all those entities that have obtained a Global Intermediary Identification Number (GIIN) before July 1 st, The agreement requires reporting U.S. accounts identified during 2014 under the FFI Agreement due diligence requirements. An FFI can elect Form 1099 reporting Reporting is required to be filed electronically on March 31,

32 Foreign Account Tax Compliance Act Reporting Reporting will be phased in gradually between 2015 and FFIs are required to add income payments made in the prior year to its U.S. Account Reporting, again in line with IGA requirements FFI is required to complete Forms 1042-S allocating the income and withholding paid to its recalcitrant account holder pools. New 1042-S form has been released. Reporting is required regardless of whether the FFI made a payment of a chapter 4 reportable amount to each such account holder FFI must aggregate report on NPFFI accounts opened in 2015, as under IGA approach 31

33 Foreign Account Tax Compliance Act Reporting Reporting will be phased in gradually between 2015 and FFI are required to add gross proceed payments made in the prior year to its U.S. Account Reporting, aligning with IGA approach FFI is required to complete Forms 1042-S allocating the income and withholding paid to its recalcitrant account holder pools FFI must aggregate report on NPFFI payments made in 2016, as under IGA approach 32

34 Foreign Account Tax Compliance Act Reporting Highlights The FFI that maintains the account is generally responsible for reporting the account The final regulations add a rule to determine when the FFI is treated as maintaining an account FFIs will be issued a GIIN that will be used for FATCA reporting purposes The GIIN is provided by the IRS. The entities need to be registered with the IRS to obtain the GIIN (generally, before May 5 th, 2014). The IRS will release a list of participating FFIs by June 2 nd, Reporting does not need to be performed in U.S. currency The character of payments may be determined under the same principles that the FFI uses to report information to the tax authorities in their own country The amount and character of items of income need not be determined in accordance with U.S. federal income tax principles In the UK, a consistent and verifiable approach must be adopted to valuation 33

35 Foreign Account Tax Compliance Act Reporting Form 8966 The IRS has released a new version of draft Form 8966 on March 2014, FATCA Report, that will be used by FFIs (including Qualified Intermediaries (QI), Withholding Foreign Partnerships (WP), and Withholding Foreign Trusts (WT)) and withholding agents to comply with their chapter 4 reporting obligations This new Form 8966 will set forth all the information that must be reported with respect to financial accounts Will be used to report Certain information regarding U.S. accounts Substantial U.S. owners of passive NFFEs and owner documented FFIs Aggregate recalcitrant account information Form 8966 will be filed electronically with the IRS on or before March 31 of each year reporting prior year information 34

36 Foreign Account Tax Compliance Act What is Coming Next?

37 Final FATCA Regulations Timeline AG2 36 Highlights *Form 8966 **Form 1042-S

38 Slide 37 AG2 I have updated this table Garcia Castelao, Andrea, 4/17/2014

39 Foreign Account Tax Compliance Act More Coming On February 20, 2014, the Treasury and the IRS released temporary regulations that revise and clarify the final FATCA regulations Temporary Regulations On the same date, the government also released temporary regulations coordinating the final regulations under Chapters 3 and 61 of the Internal Revenue Code with the final FATCA (Chapter 4) regulations Coordination Regulations The new rules do not provide any further extensions to the effective date of FATCA FFI Agreement: on December 27, 2013, the IRS published Revenue Procedure containing the final FFI Agreement Forms W-8 s: W-8BEN, W-8BEN-E forms have been released. However, new form W-8IMY as well as Instructions to W-8BEN-E are still pending Draft 1042 instructions have been released. However, by now only final form 1042-S has been released Final form 8966 Additional IGAs 37

40 Foreign Account Tax Compliance Act Registration Process All FFIs will go through a paperless registration process using a secure online web system from anywhere in the world FFIs will need to respond to 15 questions Form 8957 will be used in rare cases where FFI must register manually Upon registration participating and deemed compliant FFIs will be issued a GIIN that will identify them as Participating FFIs or Model 1 Reporting FFIs. Registered FFIs designated as leads of an expanded affiliated group will use the System to manage the registration status of group members The registration system is used by Financial Institutions in IGA jurisdictions to obtain a GIIN reporting purposes Sponsoring entities will need to be registered by May 5 th, However, an extension is granted to Sponsored entities. This scheme is applicable to Investment entities meeting certain requirements. Registering entities will also use the System to manage their information, and, as appropriate, agree to the terms of or make the representations required for their status and communicate with the IRS Due by May 5 th, 2014 (some exceptions in IGA countries may apply) 38

41 Questions & Answers

42 Michael Shepard Principal Deloitte Transactions and Business Analytics LLP (215) About Deloitte As used in this document, Deloitte means Deloitte Transactions and Business Analytics LLP, an affiliate of Deloitte Financial Advisory Services LLP. Deloitte Transactions and Business Analytics LLP is not a certified public accounting firm. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.