IMAS 7 December FATCA New definitions New classifications New rules New ideas

Transcription

1 IMAS 7 December 2012 FATCA New definitions New classifications New rules New ideas

2 Contents 1 FATCA - the principles 2 Model IGAs 3 Ernst & Young Benchmarking survey - approaches to interpreting and delivering FATCA 1

3 1. FATCA the principles

4 FATCA at a glance - The principles remain the same, for now US FI = 30% withholding tax Recalcitrant account holder Foreign financial institution (FFI) An FFI is any foreign entity that: Non Participating FFI Participating FFI Participating FFI Non Participating FFI 3 Compliant account holder accepts deposits in the ordinary course of a banking or similar business (e.g. bank); as a substantial portion of its business, holds financial assets for the account of others (e.g. custodian) is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading securities, partnership interests, commodities or any interest (including a future or forward contract or option) in such securities, partnership interests or commodities (e.g. broker) Participating FFI (PFFI) An FFI that has entered into an agreement with the IRS. No witholding is required. 2. Non Participating FFI (NPFFI) An FFI that has not entered into an agreement with the IRS. An FFI must retain 30% of each "withholdable payment made to a NPFFI. Withholdable payment is US sourced income such as dividends, interest, rents and royalties and the gross sale proceeds on the sale of assets producing US source dividends and interest. 3. Compliant account holder An account holder of a PFFI who is not a US person or a US person who agrees to the PFFI reporting on their investment income to the IRS. 4. Recalcitrant account holder A recalcitrant account holder is either someone who fails to provide information regarding their US tax status or refuses to all a PFFI to report their investment income to the IRS. All PFFIs must retain 30% of each withholdable payment attributable to a recalcitrant account holder. Note: If a participating FFI fails to withhold tax, the FFI remains responsible for its payment. Details of the payment process to the IRS are still to be defined by the IRS. 3

5 Revised implementation timelines the critical deadlines that need to be achieved Onboarding new accounts and due diligence on pre-existing accounts USWA FFI Account onboarding operational for new accounts 1/1/2014 1/1/2014 Begin account due diligence for all pre-existing accounts 1/1/2014 1/1/2014 Complete due diligence for prima facie FFIs 30/6/ /6/2014 Complete due diligence for high-value individual accounts N/A 31/12/2014 Complete due diligence for all remaining accounts 31/12/ /12/2015 Withholding for USWAs and FFIs Withholding begins on U.S. gross proceeds 1/1/2017 1/1/2017 Reporting for FFIs FFIs report year end 2013 and year end 2014 acct balances & identifying information on specified US accounts Grandfathered obligations Obligations that produce or could produce a foreign pass-thru payment (that cannot produce a withholdable payment) Obligations that give rise to a dividend equivalent (pursuant to 871(m)) Obligations to make a payment with respect to, or to repay, collateral posted to secure obligations under a NPC that is a grandfathered obligation N/A 31/3/2015 Effective date Final regulations defining the term foreign pass-thru payment plus six months. The date the obligation is first subject to withholding as a dividend equivalent plus six months (i.e. 1/7/2014) Obligations outstanding on 1/1/2013 4

6 2. Model IGAs

7 Model IGAs Summary The IRS and 5 European countries issued the first model for an Intergovernmental Agreement (IGA) on 26 July 2012, following negotiations between the US and France, Germany, Italy, Spain and the United Kingdom (partner jurisdictions). The primary rationale behind the IGA is to address the conflicts between the requirements of FATCA and local laws regarding data privacy and withholding, as well as reducing the regulatory burden. The Model IGA consists of three sections:- Base agreement: The base agreement sets out general definitions, the obligations of the US and the FATCA partner jurisdiction to obtain and exchange information, the application of FATCA to financial institutions in the FATCA partner jurisdiction, and the procedures for collaborating on compliance and enforcement. Annex I: Annex I describes the due diligence requirements for identifying and reporting on specific types of accounts under FATCA. Annex II: Annex II will set forth a list of financial institutions and financial products (such as pension and retirement plans or tax-favoured savings plans) that will be treated as exempt or deemed compliant for the purposes of FATCA. Annex II will be tailored on a country-specific basis and therefore the model IGA includes only the framework for Annex II. 6

8 Model IGAs Summary cont.. Model 1 IGA Under the Model 1 IGA, FFIs will report information directly to their national tax authorities, who in turn will provide this to the US. In addition the US will provide information to the tax authorities of the FATCA partner jurisdiction on a reciprocal basis, if required This Model 1 IGA has been released under the joint statement between the US and these five EU members. However, this reflects an approach that can be applied by other jurisdictions and the US are already entering discussions with other jurisdictions that are interested in entering into such agreements. Model 2 IGA Further, the second direct reporting model agreement, Model 2 reflects the separate joint statements issued by the US with Japan and Switzerland on 21 June This second model differs from the Model 1 IGA, in that: Financial Institutions will provide information directly to the IRS, with National tax authorities agreeing to provide information upon request to the IRS UK/US IGA On 14 September 2012, HM Treasury signed the first bilateral agreement with the United States to implement the information reporting and withholding tax provisions of the Foreign Account Tax Compliance Act (FATCA). Annex II to the Agreement contains an extensive list of exempt beneficial owners, deemed compliant FFIs and exempt products. 7

9 Model IGAs Summary cont.. Government Model 1 IRS Model 1 Model 2 FFI 8

10 Intergovernmental agreements Model 1 Joint statement of the US, France, Germany, Italy, Spain and the United Kingdom Intergovernmental agreement between the US and partner countries Implementation of FATCA in national law * Deemed-compliant status for all FFIs in the partner countries No withholding for recalcitrant account holders and non-pffis Relief for passthru payments FATCA as blueprint for the automatic exchange of information For UK, HM Treasury has signed agreement with the signed a bilateral agreement with the United States to implement the information reporting and withholding tax provisions of the Foreign Account Tax Compliance Act (FATCA) Model 2 Joint statements between the US and Japan and Switzerland Alternative intergovernmental agreement between the US and partner countries Main difference is that financial institutions will report direct to the IRS. Implementation of FATCA in national law * * This means that the jurisdiction becomes responsible for compliance, not the IRS. 9

11 IGAs are changing FATCA s global landscape We anticipate the landscape of IGA partner and non partner countries evolving significantly over the coming months. To the US Key to FATCA obligations: - Model IGA: reciprocal & non reciprocal agreement in place Model IGA: direct reporting Subject to full proposed Regulations Not in scope ( ie US) Information flows Page 10 10

12 IGAs Ernst & Young s insight Simplification of diligence requirements for existing accounts: The model IGA includes and option to treat existing accounts with US indicia as US accounts, which would eliminate the need to request additional information from account holders that show indicia. Simplification of diligence requirements for new accounts: The model IGA introduces a self-certification approach with the ability to rely on information such as that collected for AML/KYC purposes. Reduction in requirements with respect to withholding: The model IGA reduces the instances of FATCA withholding on or by FFIs operating in FATCA partner jurisdictions. Greater clarity with respect to application to insurers: The model IGA includes clearer definitions with respect to pension annuities and more favorable de minimis rules applicable to new insurance contracts. Greater clarity through country-specific provisions: The inclusion of Annex II in the model IGA will ease compliance burdens under FATCA by providing a country-specific list of financial institutions, products and accounts that will be considered exempt or deemed compliant under FATCA. Introduction of investment entity within the definition of financial institution: This new definition refers to any entity that conducts as a business (or is managed by an entity that conducts as a business) one or more specified activities, including individual and collective portfolio management. At first sight, this definition seems to be broader than the proposed FATCA regulations and any resulting implications need to be assessed further. 11

13 IGAs Countries in process of signing Countries Treasury hopes to conclude negotiations by year end include: Jurisdictions with which Treasury is actively engaged in a dialogue towards concluding an intergovernmental agreement include: The jurisdictions with which Treasury is working to explore options for intergovernmental engagement include: France Germany Italy Spain Japan Switzerland Canada Denmark Finland Guernsey Ireland Isle of Man, Jersey, Mexico the Netherlands Norway Argentina Australia Belgium the Cayman Islands Cyprus Estonia Hungary Israel Korea Liechtenstein Malaysia Malta New Zealand the Slovak Republic Singapore and Sweden Bermuda Brazil the British Virgin Islands Chile the Czech Republic Gibraltar India Lebanon Luxembourg Romania Russia Seychelles Saint Maarten Slovenia South Africa 12

14 3. Ernst & Young Benchmarking survey - FATCA readiness

15 Peers surveyed We sent questionnaires asking a broad set of questions on FATCA approach and implementation relating to a cross-section of your peers across insurance, asset management and banking We are in the process of expanding this to US HQ clients Ernst & Young engagement teams from 20+ FATCA engagements actively involved in supporting the design and delivery of these programmes were able to respond based on their insight and knowledge of how this was being approached by their respective clients Global Regional National Banks Insurers Asset Managers 0 Banks Insurers Asset Managers Global Regional National The majority of respondents we surveyed 11 out of 21 were global financial institutions many of whom had Asian operations A small proportion were regional and national financial services providers Regional and National Insurers will be covered in a separate initiative currently underway The preponderance of banks in the survey is, in our experience, a reflection of the fact that banks have been quicker to respond to the requirement to deliver FATCA than those of their FS peers in other industries 14

16 1. Appointment of Responsible Officer Financial institutions must appoint a FATCA Responsible Officer (RO), this is expected to fit with the responsibilities of the Chief Compliance Officer. The high level responsibilities are outlined in the proposed regulations with further definition pending The RO will sign off with the IRS that the firm complies with the requirements to become a participating financial institution. The survey sought to identify how many institutions had made the appointment. The findings are outlined below. Has a Responsible officer Been Appointed? 85% 15% Yes No In Which Department Does the RO Sit? 25% 25% 50% Complianc e CFO Has a Responsible officer Been Appointed? By Business Scale Global Yes 3.8% No 38.5% National Yes 11.5% No 15.4% Regional Yes 0.0% No 30.8% The level of RO appointment is low at 15%, with regional financial institutions having made no decision on this Early advice was to have appointed an RO by the end of 2011 Many institutions are defining the RO s role and approval process needs currently. Many FI s note that they intend to appoint an FFI in the next quarter (July Sept 2012) In line with expectations the majority of appointments are within the Compliance area The additional areas, CFO and Tax/Legal are normally closely aligned to Compliance within financial institutions, presenting a positive trend in terms of appointments National-scale financial institutions have made the most appointees comprising 12% of total respondents Global scale financial institutions comprise 42% of respondents, but only 4% of appointments There have been no appointments among the regional-scale institutions who are a third of the respondents 15

17 2. Current stage of programme lifecycle There is now 12 months remaining to become compliant in FATCA for on-boarding and FFI agreements. Benchmarks indicate that Global FI s require on average 18 months to design and deploy this scale of solution. Implementation Stage Requirements Gathering Solution Design Solution Build Implementation Planning Solution Test Pilot Roll-out All respondents have a detailed impact assessment Two thirds have detailed plans for delivery Two thirds of the sample have embarked upon their solution design Only a handful have progressed beyond solution build and those that have are global banks By geographical scale Requirements Solution Design Solution Build Implementation Solution Test Pilot Roll-out By sector Requirements Gathering Solution Design Solution Build Implementation Planning Solution Test Pilot Roll-out Global National Regional Banks Insurers Asset Mgrs 16

18 3. De minimis limit The de minimis limit is the threshold, above which relevant accounts come under the scope of the FATCA regime. Current limits are $50,000 for individuals and $250,000 for corporates. There are still uncertainties as how this will be applied. Will a de minimis limit be applied? 14% 10% 76% What approach has been agreed? 14% 33% 53% Yes Variable Application No decision Full Application No Decision Variable Application Most respondents have agreed to apply a de minimis limit in all cases. Some institutions are only applying the limit to new customers, or will apply the individual limit only One issue in application will be whether static or dynamic exchange rates are applied, or if a degree of tolerance is applied to account levels to reduce the complexity. Some institutions will apply higher limits - 1m in one case - while others are making a distinction between retail and corporate customers Where account volumes are low some institutions will not apply a limit 17

19 4. Documentary evidence As essential element of opening an account is providing the relevant documentation to verify a customer or client s identity and address. Under the FATCA guidelines evidence is required to prove identity and status for the purposes of FATCA. Financial institutions need to collect and verify the documentation. An approach is required for both new and existing customers. Documentary approach agreed for new customers? 43% 57% Yes TBC Over half have defined an approach to capturing the Indicia A cross-sector view is of respondents is that they are developing solutions for new customers before creating solutions for existing customers Documentary approach agreed for existing customers 67% 33% Yes Less respondents were certain about an approach for existing customers TBC Many are focusing on the early deadlines and waiting for final regulations In a number of cases different approaches will be developed by region Notice lists six indicia of US status: U.S. Citizenship or lawful permanent resident (green card) status; A U.S. Birthplace; A U.S. Residence address or a U.S. Correspondence address (incl. a U.S. P.O. Box); Standing instructions to transfer funds to an account maintained in the United States, or direction regularly received from a U.S. Address; An in care of address or a hold mail address that is the sole address with respect to the client; or A power of attorney or signatory authority to a person with a U.S. Address Having one of these indicia does not mean that the account is owned by a U.S. Person, only that it must be given closer scrutiny. 18

20 5. Non-participating FFI s (N-PFFIs) Financial institutions need an approach for dealing with financial institutions that have elected not to participate or are non compliant as N- PFFIs are still subject to the FATCA withholding at 30% on certain direct and indirect US sourced income paid to it by other PFFIs. Has an approach for Nonparticipating FFIs (N-PFFIs) been agreed? 33% 10% 57% 5% Approach to N-PFFIs 5% 14% 19% 57% No approach TBC Avoid NPFFIs Awaiting further IRS guidance At account opening Yes No TBC The effective date for FFI agreements entered before July 1, 2013 will be July 1, 2013 and any FFI agreement entered after June 30,2013 will be the date the FFI enters the FFI Agreement An FFI dealing with an N-PFFI has the following implications - Capture that the entity is an N-PFFI - Report on aggregate basis number and value of N-PFFIs - Withhold on certain US assets A couple of points to note 1. It is the withholding that causes an issue with -NPFFIs but if this is only on a passthru basis then it is not required until 2017 many organisations are taking a wait and see strategy (note earlier deadline of 2014 for withholding on interest, dividends etc.) 2. Any non financial entities which cannot be documented must be recorded as undocumented payee and treated as an NPFFI 10% of respondents have agreed their approach to PFFIs 57% have not agreed an approach Currently this is not on the priority list for many FFIs. 90% are yet to decide. 5% will identify FFI status at account opening A further 5% will put procedures in place to avoid N-PFFIs In conversations, many FI s are developing an approach where they will avoid business conduct with N-PFFIs This is considered to be more difficult in Asia and LATAM where there are a high number of national banks providing local financial services. 19

21 6. Implementation approach The Implementation approach will differ dependant on how global the FI and the local solutions in place. It is necessary for all local BU s to be compliant for the Group/Parent company to apply for FFI status. This requires global oversight of all implementations. Is an implementation approach agreed? 90% 10% Yes No Reasons behind lack of implementation approach 42% 5% 27% 26% Schedule pressure before go-live Clarity needed on transiton to national law Evaluating options Require clarity of regulations 90% of respondents are yet to agree an approach on implementation, yet two thirds have commenced Solution Design The chart shows that 42% are waiting for greater clarity around the regulations In terms of implementation before the go-live date, some respondents did not see there being sufficient time to implement early and are aiming for a July 2013 implementation. Some respondents were waiting to see what implications the regulations would have on national law before implementing The lack of implementation planning with just over a year to places great pressure on delivery, but after the regulations are finalised it should accelerate delivery. 20

22 7. Enhanced File Reviews The enhanced file review is designed to ensure the correct processes and outcomes are evident. There are range of options in terms of administering the review. They can be manual or electronic and they can be administered by the Relationship Manager or by a central team. The approach taken will be shaped by the size of the organisation and number of customers. Has an approach to file reviews been agreed? 57% 43% What is the preferred approach 29% 62% 9% Who will administer the file reviews? Central 38% 24% team Hybrid (RM/Cent 24% ral team) RM 14% Yes No Manual Electronic TBC TBC The majority of respondents have agreed on an approach to file reviews. As noted before there is a strong tendency to design what needs to be done but not develop how until the account opening processes are in place Almost two thirds are currently agreeing on how they will implement the procedures they have defined. They expect them to be mostly manual with IT supporting the findings. 29% are committed to a manual approach partly driven by small customer volumes. A number of large institutions did note that they will is build a specific case management tool The majority, 38%,are yet to agree on who should administer the review. Others have adopted hybrid approach, where the review is completed by the Relationship Manager with central oversight coming from either, Tax or Compliance 21

23 Disclaimers Circular 230 disclaimer 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.

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