Does FATCA affect me?

Transcription

1 Issue 7/2014 FATCA now in force: How the rules affect you FATCA now in force: How the rules affect you Does FATCA affect me? The US Foreign Account Tax Compliance Act (FATCA) rules came into effect on 1 July While the rules principally place obligations on banks, fund managers and other financial institutions (FIs), there are important implications for all customers of FIs. FATCA has particular importance for trusts, which are commonly used for investment in New Zealand. Anyone who is a trustee of a trust needs to understand their FATCA obligations, which surprisingly, can include having to register for FATCA with the US Internal Revenue Service (IRS) even if the trust has no US assets or beneficiaries. What is FATCA? FATCA aims to reduce the opportunity for US citizens to evade US tax by investing money with foreign financial institutions (FIs) and not reporting income for US tax purposes. In the aftermath of the Global Financial Crisis it was evident some foreign FIs actively facilitated US persons to hide money outside the US resulting in significant amounts of non-taxed income. It can be difficult for the IRS to know when a US person shelters money offshore unless detailed enquiries are made with respect to a specific person. The FATCA rules reverse this position by placing a positive global obligation on global FIs to identify and report to the IRS on US customers. This gives the IRS the ability to follow up with those customers on whether the correct US tax has been returned. Of course, the US Government cannot directly impose such requirements on FIs outside the US. Therefore, to ensure compliance with the requirements the rules prima facie impose a 30% deduction from payments of interest or dividends or sale Page 1 PwC Tax Tips July 2014

2 proceeds from shares or debt instruments from a person in the US to a foreign FI if that institution has not met its FATCA reporting obligations. To implement FATCA in New Zealand, the Government has entered into an intergovernmental agreement (IGA) with the US and has enacted domestic legislation. Impact on individuals Mark Russell PwC Partner Banks and other FIs will be reviewing customer information for specified indicators of a US person such as a US address or phone number. They will also be asking new customers specifically if they are a US person. For customers who have a US indicator on their file, the FI will request the customer to complete a declaration of whether they are a US person. If the customer certifies they are not a US person, no further action is required. If the customer certifies they are a US person, the FI is required to report certain details of the customer each year to the IRS via Inland Revenue (IR). Initially, they need to report: Henry Risk PwC Director Isla Harling PwC Senior Manager customer name, address and account number US tax information number (US TIN), and account balance at the end of the period or prior to closure (if closed during the year). More information regarding transactions will need to be reported over the next few years. If a customer does not respond to a request for certification from the FI, the FI will also report on that customer. Impact on trusts New Zealanders often hold investments via trusts and it is important for all trustees to consider the impact of FATCA. FIs will require trusts to complete self-certification documents informing the FI of the FATCA status of the trust. A key point is that a large number of trusts (including family trusts ) will themselves be treated as FIs for FATCA purposes. A trust that is an FI must register for FATCA with the IRS, undertake due diligence on the beneficiaries of the trust to identify any US persons and report on such persons to the IRS via Inland Revenue. According to Inland Revenue, a trust is an FI if: (a) it has a business of dealing in investments; or (b) the trustee is a statutory trustee company, a lawyer or accountant s nominee company or other professional trustee company ; or (c) the trust has given a discretionary mandate to an investment manager to make and execute investment decisions on its behalf. Trustees of trusts that appear to fall into one of these categories should seek advice on their obligations. Trusts that are not FIs A trust that is not an FI should not have any direct due diligence or reporting requirements. However, the trust will be required to provide information to other FIs (e.g. banks and fund managers) regarding its status. Effectively, the bank or other FI Page 2 PwC Tax Tips July 2014

3 will perform due diligence and reporting for the trust if US persons are settlors, trustees or beneficiaries of the trust. Impact on other entities Other types of entities, such as ordinary (non-financial) trading companies, are known as non-financial foreign entities. They do not have any registration, due diligence or reporting requirements. However, they are likely to be asked by FIs (e.g. their bank, fund manager, custodians) to provide information on any US persons that are substantial shareholders (interest of 10% or more) or certify that there are none. They will also be asked whether the majority of the entity s income is from passive investments (as opposed to an active business) or if the majority of the entity s assets are for the production of passive income (e.g. interest, dividends and royalties). For entities with a majority of passive income, FIs will need to report on substantial US owners. There are no reporting requirements for active businesses even if there are substantial US owners. Financial institutions (FIs) FATCA requires FIs to undertake due diligence to identify customers that are US persons and report on those persons to Inland Revenue. The main categories of FIs are entities that are: Depository institutions: an entity that accepts deposits in the ordinary course of a banking or similar business Custodial institutions: an entity holding financial assets for the account of others as a substantial portion of its business Investment entities: a catch-all category applying to a wide range of entities that invest in, trade, manage or provide other administrative and management type services in relation to financial investments. Obvious examples of FIs include banks, co-operative banking institutions, credit unions, managed funds, fund managers, custodians, private equity funds and venture capital funds, broker dealers and life insurance companies. However, as the FI definition is wide, other entities can also be caught. These include private investment vehicles, family trusts, property funds, investment advisors who hold assets on behalf of their customers, nominee companies of lawyers and accountants and holding companies to name a few. Entities that fall within the above categories will all need to consider whether FATCA applies to them. On-boarding and customer due diligence FIs must implement new on-boarding processes and undertake due diligence procedures on new accounts opened from 1 July Due diligence on existing accounts is also required but will be phased in over time. The due diligence requirements are relatively straightforward for individuals. The customer can self-certify their status using forms prepared by the FI or US withholding certificates (W8 / W9 forms). Determining FATCA status for entities is more complex. In broad terms, FIs must identify and report on entities that are US entities, FIs not participating in FATCA, and entities not carrying on an active business that have US persons with a Page 3 PwC Tax Tips July 2014

4 controlling interest. FIs will generally rely on certification by the customer as to whether they fall into any of these categories. Documentation requirements In addition to reporting requirements, all FIs, individuals and other entities need to ensure they have provided sufficient information and documentation to all other FIs they deal with. This will help those FIs to correctly classify their customers and ensure they have no obligation to withhold on payments to their customers. This will be particularly important when dealing with FIs established in a country that has not entered into an IGA or when dealing with US FIs. Excluded entities The New Zealand Government has negotiated the exclusion of some entities from the ambit of the FATCA registration, due diligence and reporting requirements. The exclusions are for entities perceived to have a low risk of tax avoidance and tax evasion by US persons. These include KiwiSaver and other superannuation schemes, the New Zealand Government, Maori Authorities, registered charities, tax pooling accounts as well as certain employee stock option and share purchase plans. Listed shares and debt New Zealand listed shares and debt held via another FI (e.g. a custodian) will be reportable by that other FI (i.e. the custodian). This exemption is designed to stop the double reporting of listed shares and debt interests in FIs where those interests are held by a custodian and not by the clearing or settlement provider. Listed entities like exchange traded funds are likely to be FIs and need to comply with FATCA registration, due diligence and reporting requirements (unless all the interests are held via a custodian). However, a concession until 1 January 2016 gives such exchange traded funds more time to implement processes for complying. Group treasury centres / finance companies Where an entity is a finance company or treasury company for a non-financial services group and obtains external funding (i.e. issues third party debt), it is prima facie considered an FI for FATCA purposes. However, exclusions apply for legitimate group finance and treasury companies subject to specific criteria. Other due diligence and reporting concessions The IGA includes several concessions that remove either reporting or both reporting and registration requirements. The following entities will be treated as non-reporting FIs and deemed compliant: Financial institutions with a local client base: Such entities must meet several requirements including being licensed or regulated in New Zealand, not having operations outside New Zealand, not soliciting customers from outside New Zealand, having greater than 98% by value of its customer accounts held by New Zealand or Australian residents, and having systems in place to ensure they meet the above requirements and do not on-board non New Zealand or Australian account holders. Non-registering local banks: This exemption can apply to entities such as credit unions and non-bank deposit takers with less than $175 million in assets. Page 4 PwC Tax Tips July 2014

5 Financial institutions with only low-value accounts: The entity must have no accounts with balances over $50,000 and must have less than $50 million in assets to qualify. Qualified credit card issuers: Credit card issuers that only accept deposits as an overpayment from a customer will not be a financial institution provided they implement policies and procedures before 1 July 2014 to ensure account balances do not exceed $50,000 or to ensure amounts over $50,000 are refunded within 60 days. Collective investment vehicle: Certain collective investment vehicles whose only investors are other participating FIs or exempt beneficial owners. The concession for financial institutions with a local client base has the widest potential application. However, in our experience, the detailed requirements to enable an entity to fall within this category can be as onerous as registering and complying with FATCA in full. The IGA and Inland Revenue guidance also clarify that fringe financial services companies such as leasing companies that solely accept deposits as collateral or security pursuant to a lease, loan or similar financing agreement will not, due to those deposits, constitute an FI. Some key dates Date Action 1 July 14 NZ financial institutions are required to have implemented new account opening procedures to enable classification of customers/account holders 31 Dec 14 Deadline for NZ financial institutions to register with the IRS and obtain a GIIN (global intermediary identification number) 30 Jun 15 Deadline for NZ financial institutions to report "US reportable accounts" to Inland Revenue in relation to 2014 (assuming reporting is for the year to 31 March 2015) 30 Sept 15 Deadline for Inland Revenue to exchange FATCA data with the IRS for 2014 *currently expected for the period to 31 March Further information and assistance Visit our website for more background and information about FATCA or contact our experts Mark Russell, Henry Risk or Isla Harling for assistance. Page 5 PwC Tax Tips July 2014

6 Contributors: Mark Russell Partner T: E: mark.r.russell@nz.pwc.com Henry Risk Director T: E: henry.c.risk@nz.pwc.com Isla Harling Senior Manager T: E: isla.c.harling@nz.pwc.com Sladjana Freakley Senior Associate T: E: sladjana.x.freakley@nz.pwc.com Connect with us Join our group on LinkedIn Search for TaxNetWork under Group Follow us on Visit us online at pwc.co.nz Tax Technical Knowledge Centre tax@nz.pwc.com 2014 PricewaterhouseCoopers New Zealand. All rights reserved. PwC refers to the New Zealand member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details. Disclaimer: Tax Tips is intended as comment only and should not be relied upon or used as a substitute for professional advice. No liability is accepted for loss or damage incurred by persons who rely on this commentary. Professional advice should be sought in relation to any particular situation or circumstance.