Foreign Account Tax Compliance Act FATCA

Transcription

1 Foreign Account Tax Compliance Act FATCA Paul DePasquale Baker & McKenzie, Zurich Greg Lamont PwC, Bangkok

2 AGENDA I. FATCA Overview II. III. IV. What We Know Guidelines Issued So Far What are the Consequences of Not Complying with FATCA How to Avoid the FATCA Withholding V. Other Points VI. VII. VIII. IX. Exemptions from FATCA Time Line & Effective Dates Current Withholding & Tax Treaties Key Points X. What FFIs Should Do Now 2

3 I. FATCA OVERVIEW 3

4 FATCA OVERVIEW - BACKGROUND U.S. taxes it citizens and residents on worldwide income Perceived inadequacy of current regimes UBS affair Swiss (and other countries) bank secrecy laws U.S. Congress reacts with FATCA 4

5 WHAT FATCA IS ATTEMPTING TO DO Enlist Foreign Financial Institutions (FFIs) in the U.S. efforts to catch U.S. citizens and residents evading U.S. tax By getting FFI s to report to the U.S. IRS information about U.S. account holders U.S. cannot force FFIs to report to IRS So FATCA creates a voluntary reporting scheme for FFIs If a FFI fails to volunteer, the FFI will suffer a U.S. tax 5

6 FATCA OVERVIEW U.S. tax law that applies to non-u.s. Foreign Financial Institutions (FFIs) Subjects FFIs to U.S. tax information reporting requirements If FFI does not comply, it will suffer an additional 30% U.S. withholding tax on its U.S. income (and possibly some non-u.s. income) The information reporting requirements are burdensome and will require systems, process and control modifications Effective Jan 1, 2013 but delay announced on July 14 6

7 FFI WHAT IS IT? Any non-u.s.: Bank Securities Broker/ Dealer Asset manager Funds Mutual, Hedge, VC, Private Equity Some insurance companies Other? 7

8 COMMNLY USED TERMS FFI Foreign Financial Institution is any non- U.S. bank, broker, mutual fund or other financial institution PFFI Participating Foreign Financial Institution is any FFI which has entered into written agreement with the IRS to report and withhold under FATCA. A PFFI will not suffer FATCA withholding on its U.S. source withholdable payments NPFFI Non Participating Foreign Financial Institution is any FFI which has not entered into an FFI agreement with the IRS. NPFFI s will be subject to 30% withholding on their U.S. (and possibly some non U.S.) withholdable payments 8

9 II. WHAT WE KNOW GUIDELINES ISSUED SO FAR 9

10 GUIDANCE ISSUED Under FATCA, Congress has granted wide authority to the Treasury Department to issue regulations to implement and enforce FATCA Treasury Dept issued a 62 page Notice and Request for Comments Regarding Implementation in August (Notice ) Issued Notice (46 pages) in April 2011 with additional guidance Notice on July 14,2011 announcing delayed and phased-in implementation timeline Comprehensive proposed regulations expected by end of 2011 There is a lot we do not know and many unanswered questions But with the 3 Notices there is enough information for FFIs to begin evaluating their response to FATCA 10

11 III. WHAT ARE THE CONSEQUENCES OF NO T COMPLYING WITH FATCA? 11

12 WHAT IS THE U.S. WITHHOLDING TAX IMPOSED ON? If a FFI fails to comply, there is 30% withholding on the FFI s : Interest income from U.S. sources Dividend income from U.S. sources Gross proceeds (not the gain, if any) from the disposition of U.S. assets producing interest or dividends Certain other U.S. source income (Derivatives, Hedges, Swaps, etc.?) Certain non-u.s. source income may also be subject to withholding under Passthru Payment rules 12

13 IMPACT ON FFI IF NOT FATCA COMPLIANT: DIRECT US IMVESTMENT Interest Income of US$ 10M FFI Loss Realized on the Sale ; Gross Proceeds from the Sale of US$ 200M US Withholding Tax of US$ 3M US Treasuries* US Withholding Tax of US$ 60M FFI makes an investment in U.S. Treasuries that generates U.S. source interest income and eventually realizes loss on the sale of such U.S. Treasuries. If FFI does not enter into an FFI agreement with the IRS, 30% tax would be withheld on payments of interest income and sale or redemption proceeds. * Not limited to U.S. Treasury securities, same result if U.S. company bonds or stock 13

14 WITTHOLDING ON PASSTHRU PAYMENTS In addition to 30% withholding on direct payments of interest, dividends, and gross proceeds there can be withholding on indirect payments Passthru Payments Each PFFI must compute and publish its Passthru Payment Percentage ( PPP ) PPP is total U.S. assets / total worldwide assets A PFFI must withhold 30% tax on Passthru Payments it makes to NPFFIs based on its PPP 14

15 PASSTHRU PAYMENTS - EXAMPLE Bank A and Bank B are Malaysian Banks. Bank A is a PFFI and Bank B is a NPFFI. Bank B has Baht deposits with Bank A and earns interest of Ringgit 2000 Bank A has a PPP of 10% Malaysian Bank B (NPFFI) Deposit in Ringgit Interest in Ringgit Malaysian Bank A (PFFI) Bank A must withhold U.S. tax of 60 (Ringgit 2000 x 10% x 30%) if the payment from Bank A to Bank B is a Passthru Payment Same result if Bank A is any other country (non-u.s.) bank and same result no matter what currency 15

16 PASSTHRU PAYMENTS QUERY? Can Bank A legally withhold U.S. tax on the interest payment to Bank B? Will Bank A have to gross up the payment to cover the withholding thus essentially suffering the withholding cost itself? Will PFFIs lose business to NPFFIs as a result of the Passthru Payment rules? 16

17 IV. HOW TO AVOID FATCA WITHHOLDING 17

18 REQUIREMENTS TO AVOID FATCA WITHOLDING To avoid FATCA withholding on its U.S. investments and Passthru Payments, the FFI must enter into an FFI Agreement with the IRS. The FFI Agreement is a written contract Under the FFI Agreement, the FFI will need to agree to: Obtain information on U.S. account holders Comply with verification and due diligence procedures as specified by U.S. Treasury Dept. Deduct tax & withhold on payments to recalcitrant account holders and Passthru Payments File an annual information report with the IRS. 18

19 PFFI IS A WITHHOLDING AGENT UNDER A FFI AGREEMENT If the FFI chooses to comply and become a PFFI it will be required to withhold U.S. tax on: Direct U.S. source payments to NPFFIs Passthru Payments to NPFFIs Payments to recalcitrant account holders recalcitrant account holders are those who refuse to provide information to the PFFI such as U.S. TIN or other required information 19

20 ANNUAL INFORMATION REPORT Must contain : 1. The name, address, and U.S. Tax Identification Number ( TIN ) of each account holder that is a specified U.S. person; 2. The name, address, and TIN of each substantial U.S. owner of any account holder that is a U.S. owned foreign entity; 3. The account number; 4. The year end account balance or value; and 5. Gross interest, dividends, other income and gross proceeds paid or credited to the account Must be filed electronically in a format specified by U.S. Treasury 20

21 SPECIFIED U.S. PERSON and U.S. OWENED FOREIGN ENTITY If the FFI enters into an FFI Agreement it must track and report on accounts of Specified U.S. Persons and U.S. Owned Foreign Entities A Specified U.S. Person includes: Individuals Corporations, companies, partnerships, trusts and other entities A U.S. Owned Foreign Entity is any Malaysian (or other country) company, corporation, etc. with a Substantial U.S. Owner Substantial U.S. Owner is any Specified U.S. Person owning directly or indirectly more than 10% 21

22 IDENTIFICATION OF U.S. ACCOUNT HOLDERS Key requirement is that the PFFI must have policies and procedures in place to identify U.S. account holders Accounts are segregated into 4 categories: 1. Pre-existing Individual Accounts 2. New Individual Accounts 3. Pre-existing Entity (company) Accounts 4. New Entity (company) Accounts The procedures that a PFFI must follow for each of the 4 categories will vary. Detailed preliminary guidance has been issued only for category 1 22

23 PRE EXISTING* INDIVIDUAL ACCOUNTS A 6 step process must be followed to identify pre-existing individual accounts What is required is a search of the FFI s electronically searchable information for indications of U.S. ownership Indications of U.S. ownership to search for: Any identification as U.S. citizen or resident U.S. place of birth Standing instructions to transfer funds to the U.S. U.S. address An in care of or hold mail address Power of attorney or signature authority for person with U.S. address Special and additional procedures for: High value accounts ($500,000 or more) Private Banking Accounts * Pre-existing means an account opened prior to January 1,

24 NON INDIVIDUAL (COMPANY) ACCOUNTS The PFFI must have a process and procedure to identify company accounts with substantial (more than 10%) U.S. Owners Guidance not yet issued on how to do this 24

25 V. OTHER POINTS 25

26 LOCAL PRIVACY OR BANK SECRECY LAWS What if local country privacy laws (or other such laws) prohibit a FFI from disclosing information to a third party such as the U.S. IRS? The FFI must seek a waiver from the account holder If the account holder refuses to provide the waiver the FFI must treat the account as a recalcitrant account 26

27 AFFILIATED GROUP RULES For a FFI Agreement to be effective all members of an affiliated group must enter into a FFI Agreement Cannot Cherry Pick and house all U.S. investments in one compliant entity Affiliated group is more than 50% common direct or indirect ownership 27

28 ANNUAL CERTIFICATION BY CHIEF COMPLIANCE OFFICER The Chief Compliance Officer (or equivalent title) of every PFFI must annually personally certify (under penalty of perjury) that the FFI has adhered to all aspects of the FFI agreement 28

29 VI. EXEMPTIONS FROM FATCA 29

30 EXEMPT FROM FATCA REPORTING & WITHHOLDING Any foreign government, political subdivisions and wholly owned foreign government agencies Any Foreign Central Bank of Issue e.g. Bank Negara U.S. branches of a FFI 30

31 EXEMPTION FOR U.S. ACCOUNT HOLDERS - $50,000 A FFI need not report on U.S. account holders if the account is $50,000 or less $50,000 threshold is based on average monthly balances Must aggregate all of holder s accounts 31

32 DEEMED COMPLIANT CERTAIN LOCAL BANKS Local banks will be deemed compliant if all of the following conditions are met by the bank and every FFI in its affiliated group: 1. Each FFI is licensed as a bank in its country of organization and does not engage primarily in trading securities, commodities or financial products; 2. Each FFI is organized in the same country; 3. Each FFI does not maintain operations outside its country of organization 4. Each FFI does not solicit account holders outside its country of organization; and 5. Each FFI implements policies and procedures to ensure it does not open or maintain accounts that could contain U.S. holders 32

33 DEEMED COMPLIANT CERTAIN LOCAL BANKS If all tests are met then the deemed compliant local bank is exempt from withholding and reporting But must still register with IRS to obtain deemed compliant status 33

34 VII. TIME LINE & EFFECYIVES DATES 34

35 TIME LINE & EFFECTIVE DATES Original effective date for all aspects of FATCA was January 1, 2013 Notice issued July 14, 2011 provides a delay and a new timeline 35

36 KEY EFFECTIVE DATES IN NOTICE January 1, 2014 Withholding on interest, dividends and other income paid to NPFFIs January 1, 2015 Withholding on gross proceeds & Passthru Payments June 30, 2013 FFI Agreement must be filed to avoid withholding on January 1, 2014 Due diligence on new & certain existing accounts must still begin in 2013 Additional time for private banking and high value accounts 36

37 FATCA TIMELINE FOR FFIs As OF AUGUST 2011

38 VIII. CURRENT WITHHOLDING & TAX TREATIES 38

39 CURRENT WITHHOLDING UNDER EXISTING U.S. LAW U.S. payers must withhold 30% U.S. tax on Passive Income (interest, dividends, royalties, rents) 30% withholding may be reduced under a tax treaty There is no current withholding on Gross Proceeds or capital gains Interest most interest is exempt today from withholding under rule known as Portfolio Interest Exemption 39

40 U.S. INCOME TAX TREATY MONETARY NETWORK IN S.E. ASIA FFIs in the following countries will suffer the full FATCA 30% withholding which will be a final tax: Malaysia, Singapore, Hong Kong, Vietnam, Laos, Cambodia 40

41 U.S TREATIES WITH OTHER S.E. COUNTRIES NPFFI s will initially suffer the full 30% FATCA withholding NPFFIs in India, Indonesia, Philippines and Thailand will be able to seek partial refunds For example, Thai FFIs can seek refunds of 30% withholding down to treaty rate: Interest 10% Dividends 10% Proceeds 0% But must file U.S. tax return and refund process could be as long as 24 months and must maintain detailed records to claim refunds The Portfolio Interest Exemption is effectively repealed, the U.S. so the treaty withholding rate will be a new cost 41

42 IX. KEY POINTS 42

43 FATCA IS AN OPERATIONAL/COMPLIANCE ISSUE NOT JUST A TAX ISSUE FFIs that treat FATCA as a Tax Issue are making a mistake FATCA is an operational and compliance issue caused by U.S. tax law FATCA will impact multiple business and operational areas - Customer on boarding - Internal treasury & cash management - KYC & AML processes - Legal - Products & services offered - Compliance - Systems & controls - Operations - IT - Private Banking departments - Insurance affiliates - Trust company affiliates 43

44 FATCA IS NOT AIMED AT RAISING U.S. TAX REVENUE THROUGH WITHHOLDING TAX The U.S. Treasury has stated they hope there would be no withholding tax collected from FFIs The goal of FATCA is to identify unreported income by U.S. persons The U.S. simply wants FFIs to sign up and report their U.S. account holders 44

45 KEY POINTS Not having any U.S. account holders does NOT exempt the FFI from FACTA It is the FFI itself who suffers the withholding Only those FFIs with no U.S. source income that can possibly dismiss FATCA (but be careful of affiliated group and Passthru Payment rules) 45

46 X. WHAT FFIs SHOULD DO NOW 46

47 FFIs MUST DECIDE WHETHER TO COMPLY The U.S. cannot force compliance, but will withhold 30% on the FFI s U.S. income if it chooses not to comply Even FFIs with no U.S. account holders must enter into an FFI Agreement Decision factors: Compliance costs Amount of U.S. source income potentially subject to withholding Passthru Payments? 47

48 IF FFI CHOOSES TO COMPLY Will need to make systems and controls modifications to capture necessary information and to have the ability to verify The systems and controls need to be in place and operating before the various effective dates The original Jan. 1, 2013 effective date and announced additional delay was chosen knowing there would be a long lead time for FFIs to implement 48

49 SYSTEMS & PROCESSES NEEDED TO COMPLY A Partial list 1. Systems to search electronic records for existing U.S. accounts 2. Process for new accounts to identify U.S. persons and collect needed information (including substantial U.S. owners of entities with accounts) 3. System to track and identify counter party FFIs as participating or non-participating 4. System to withhold U.S. tax on Passthru Payments 5. System to capture information needed for annual electronic report to U.S. Treasury 49

50 SUGGESTED ACTIONS 1. Determine all touch points with U.S. that generate U.S. source income and proceeds across all business lines 2. Evaluate what information currently exists to possibly identify existing U.S. account holders 3. Consider implementing new identification procedures for new account holders 4. Prepare preliminary estimate of costs of compliance versus withholding costs 50

51 QUESTIONS?

52 CIRCULAR 230 DISCLOSURE 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.