Key provisions of FATCA proposed regulations Anastasia Urias Senior Manager
1. Overview of keypoints 1 2
Significant highlights of FATCA FATCA was worked out by the United States of America in 2010. The effective date of the final regulations is 28 January 2013. FFIs that don t meet the requirements of FATCA will have certain negative financial and commercial consequences (FATCA imposes a 30 % withholding tax on payments to non-compliant entities and individuals) According to FATCA a FFI has to: Conclude an agreement with IRS (Registered Deemed Compliant status), or certify that the FFI meets the compliance program requirements (Certified Deemed Compliant status) or a partner jurisdiction has to sign an intergovernmental agreement with the United States of America. Conduct a due diligence for the existing accounts Change the new client acceptance procedures Provide the IRS with information about accounts maintained by U.S. account holders Withhold 30 percent of any withholdable payment to an FFI that doesn t meet the requirement of FATCA or recalcitrant account holders. IRS Agreement Pre-existing account analysis Changes of new client acceptance procedures Provide IRS with information about U.S. account holders Withholding of 30 % of any withholdable payment 3
Changes of Final regulations Prolonged period for FATCA implementation Withholding on gross proceeds was deferred until January 1, 2013; there s still no definition for pass-thru payment. New type of financial institution, some kinds of activities were excluded from the existing definitions. New requirements for internal control and new terms for confirmation of compliance. Final regulations give definitions for situations when a FFI fails to meet the requirements of FATCA or doesn t remedy the consequences of such situations. Final Regulations take into account the requirements of Intergovernmental Agreements The concept of FATCA hasn t changed 4
Key dates October 25, 2013 January 1, 2014 January 1, 2014 Last day to register on portal to be on first IRS list of FFI, published in December 2013 Start of new clients acceptance procedures Start of withholding tax from the U.S. income. 5
The other dates were extended for one year December 31, 2014 December 31, 2015 March 31, 2015 End of due diligence for accounts with aggregate balance in excess of 1 000 000 USD. End of due diligence for other accounts Date of report submission January 1, 2017 Start of withholding on gross proceeds and transitory payments 6
Financial Foreign Institution 2 7
What has changed? Proposed Regulations Final Regulations Changes 1 Depository institution Depository institution Exceptions from the definition: lessors and lenders solely accepting deposits as collateral companies servicing charge and credit cards 2 Custodial institution Custodial institution No significant changes 3 Insurance company Insurance company Clarifications of insurance companies concerning FATCA 4 Entities that invest/trade Investment entity New definition; expanded list of compaies that can be treated as FFI (for example, investment managers and some trusts) 5 - Holding companies and treasury center New type of FFI Changes of FFI definition mainly concern investment business and EAG (that include FFI) 8
Investment entities Definition Investment entity: Entity primarily conducts as a business one or more of the following activities or operations for or on behalf of a customer: (1)trading in certain financial products (2)individual or collective portfolio management (3)investing, administering or managing money or financial assets on behalf of others Entities that hold themselves out as collective investment vehicles, mutual funds, private equity funds, etc. Examples Investment entities include: Companies consulting on investments into financial assets. Investment funds Trusts and personal investment companies managed by professional trusts. Brokers Investment entities DON T include: Funds that invest in real estate Trusts and personal investment companies managed by individuals. 9
Holding companies and treasury centers Definition An entity that is a holding company or treasury center that: is part of an expanded affiliate group (EAG) that includes other financial institutions, or if formed in connection with investment vehicles such as private equity funds, mutual funds, hedge funds, etc. 10
New deemed-compliant FFIs New deemed-compliant FFIs Features Sponsored FFI FFI sponsored by another FFI Sponsoring FFI is authorized to manage FFI and enter into contact for FFI Sponsoring FFI registers with IRS as a sponsoring FFI Sponsoring FFI agrees to perform due diligence, reporting and withholding on behalf of a sponsored FFI If sponsoring FFI failed to meet the requirements of FATCA, the sponsored FFI has responsibilities in front of FATCA Qualified credit card issuers Company is FFI solely because it is an issuer of credit cards that accepts deposits only when a customer makes a payment in excess of a balance. Company implements policies and procedures to either prevent a customer deposit in excess of 50 000 USD or to ensure that any customer deposit in excess of 50 000 USD is refunded to the customer within 60 days. These FFI do not need to sign an FFI agreement 11
New exclusions excepted inter-affiliate FFIs Treated as excepted NFFE (not an FFI) Conditions: -entity is a member of a PFFI group -maintains no financial accounts outside EAG -does not hold an account with or receive payments from any withholding agent outside EAG -does not make withholdable payments to persons outside EAG May significantly reduce and ease registration requirements in certain situations. 12
Pre-existing account due diligence 3 13
What has changed? Extended terms for due diligence Cures for US indicia have been modified FFI can rely on client representation and confirmation of third parties (for example another FFI) 14
Individual accounts due diligence Individual accounts Account threshold Due diligence requirement Ongoing monitoring New rules for pre-existing accounts Deposit accounts held by documented US account holders with aggregate balance of $50k or less at calendar year end No review required account can be treated as an account other than a US account If account balance exceeds $50K at the end of any subsequent calendar year, the account must be treated as a US account Individual accounts all others Aggregate balance of $50k or less on effective date No review required account can be treated as a non-us account Review required If account balance exceeds $50K at the end of any subsequent calendar year, the account must be treated as a US account Accounts with aggregate balance on effective date of the FFI agreement is in excess of $50K but not in excess of $1M Only electronic search for US indicia required No additional review required until there is a change in circumstances Accounts with aggregate balance on effective date of the FFI agreement in excess of $1M Enhanced review requited No additional review required until there is a change in circumstances The choice of account threshold depends on FFI system 15
U.S. indicia Indicia Resident status of the U.S. or U.S. citizenship U.S. place of birth Cure for U.S. indicia W-9 and permission to pass information(if needed) W-9 and permission to pass information(if needed) or W-8BEN and non-u.s. identification card or another document signed by government body confirming the foreign status It is also needed to get PFFI to confirm a foreign status Copy of Certificate of Loss of Identity, or Form I-407, or Written explanation of the individual s renunciation of U.S. citizenship or the reason the individual didn t receive citizenship at birth U.S. address or U.S. mailing address U.S. telephone number W-9 and permission to pass information(if needed) or W-8BEN and non-u.s. identification card or another document signed by government body confirming the foreign status Standing instructions to pay amounts to an account in the U.S. W-9 and permission to pass information or W-8BEN and documentary evidence of U.S. status Power of attorney or signatory authority granted to a U.S. person W-9 and permission to pass information or W-8BEN and documentary evidence of U.S. status W 8 is not mandatory FFI can have its own form containing the similar information 16
Entity account due diligence Pre-existing accounts of entities Account threshold Due diligence requirement Ongoing monitoring Aggregate balance < 250 000 USD No review required account can be treated as a non-us account Review required If aggregate account balance exceeds $1M the account is treated as U.S. account Aggregate balance > 250 000 USD, but < 1 000 000 USD Enhanced review Can rely on client of a third-party confirmation Review required if aggregate account balance exceeds $1M at any subsequent calendar year end There are shorter terms for Prima Facie due diligence. Prima Facie FFIs (obvious FFIs) are entities identified as qualified intermediaries (QIs) or nonqualified intermediaries (NQIs), and for accounts maintained in the US, entities that have certain SIC/NAICS codes that indicate it s a financial institution. 17
Payments 4 18
What s new? The definition for withholdable payment hasn t changed Final regulations defer withholding on gross proceeds until 2017 Foreign pass thru payments were not defined A withholding agent must presume that a payment is a withholdable payment if the withholding agent does not know the character or source of the payment at the time it is paid 19
Withholding payments 30% withholding Income from the U.S. (interest, dividends, royalty, rent) (start date January 1,2014) Income from U.S. gross proceeds (starting from January 1, 2017.) «Pass-thru payment» (January 1,2017) When tax should be withheld Non-participating FFI Beneficial account holder Those who make payments must define a payee The payee who is an intermediary must confirm the status of the payee Payee Payments that are not withheld Payments that cannot reveal the source of payment or control to a financial institution Short term payments(up to 183 days) Payments related to commercial activities in the USA Income from sales of excluded property Sales of fractional shares Certain accrued interest Order of remittance of tax withheld Excessively withheld tax can be refunded There are penalties for FFI that failed to meet the requirements of FATCA 20
Relief for certain grandfathered obligations an extended cut-off date to January 1, 2014 withholding agents can rely on written statements by the issuer of the grandfathered obligation for: -grandfathered status -material modifications 21
Payee Identification of payee is required in addition to identification of FFI clients Payee receives the payment even though it might not be a beneficial owner W8 / W9 or other documents are needed to identify the payee status There are 40 types of a payee status Bank 1 Bank 2 Client Is the payment withholdable? YES Who is the payee? If bank 2 doesn t provide the following documents, it is considered to be a payee: W8 IMY certifying that Bank 2 is an intermediary Documents confirming the client status(w8-ben. W9) 22
Compliance and effective internal control 5 23
FFI registration portal registration of participating FFIs, registered deemed-compliant FFIs (including FFIs covered under an IGA) responsible officer certifications enables FFIs to interact with IRS Key dates No later than July 15, 2013 Registration portal will be available online October 25, 2013 Last day to register on portal to be on first IRS list of FFI December 2, 2013 IRS will post the first list of FFI and intend to update the list monthly 24
Compliance and effective internal controls requirements What s new? FFI has to: 1.appoint a responsible officer 2.establish policies, procedures and processes sufficient to satisfy agreement 3.periodically review and certify as follows: 25
Compliance and effective internal controls certification The responsible officer must certify that the FFI has completed the following activities: established a compliance program that is in effect reviewed the compliance program against the requirements of the FFI agreement With respect to material failures the responsible officer must certify: that there were no material failures, or if there were material failures, appropriate actions were taken to remediate and prevent reoccurrence 26
Material failures deliberate action by employee or agent to avoid requirements of FFI agreement error attributable to failure of FFI to implement sufficient internal controls certain criminal or civil penalties imposed on an FFI by regulators in connection with failure to properly identify account holders as part of its anti-money laundering (AML) procedures establishment of a tax reserve or provision related to lack of compliance with FFI agreement 27
Events of default Failure to perform one or more of the following are examples of events of default: obtain reporting waiver when required significantly reduce over time account holders and payees that are recalcitrant or nonparticipating FFIs maintain compliance program take timely corrective actions to remedy material failures make required certifications cooperate with IRS on requests for additional information 28
Approach to FATCA in the world 6 29
Countries participating in FATCA Canada Eastern Europe Russia USA Western Europe China Mexico Carribbean South Korea India YES Brasil Malaysia Probably YES No official data Chile Argentina SAR Singapore Australia New Zealand 30
Country Agreement type Date Comments GB Model 1 А 09.12.2012 Signed Dania Model 1 А 19.11.2012 Signed Mexico Model 1 А 19.11.2012 Signed Switzerland Model 2 14.02.2013 Signed Ireland Model 1 А 23.01.2013 Signed Canada Finland France Germany Guernsey Japan Jersey Man Holland Argentina Australia Belgium Cyprus Estonia Hungary Israel South Korea Lichtenstein Singapore Sweden Slovakia Caiman islands Italy Norway Spain 31
Models of IGA 1 IGA FFI Responsible body IRS U.S. Account information U.S. resident accounts data IGA Model 1 implies exchange of information on an automatic basis. FFI delivers the data to the responsible body, which in turn passes it to the IRS There are two types of IGA: 1. Mutual exchange of information 2. Delivery of information by a foreign country to IRS. Model 2 implies registration on IRS and delivery of the information directly. 2 FFI Responsible body IRS U.S. account information 32
Model 1. IGA G5 (1 out of 2) Model 1. FFI delivers the data to the responsible body, which in turn passes it to the IRS Model 1 implies the delivery of information to the responsible body which passes it to the IRS of the USA This approach will be adopted by Germany, GB, France, Italy and Spain IGA FFI RB IRS 33
Model 1. IGA G5 (2 out of 2) Model 1. FFI delivers the data to the responsible body, which in turn passes it to the IRS Advantages: Problems related to the direct access of IRS to the banking system of the country can be solved FFI RB IGA IRS Reliefs for countries that satisfy the requirements: Don t need to sign an agreement with IRS Don t need to withhold 30% of payment Mostly can rely on existing client acceptance procedures Accounts for recalcitrant holders can be maintained Enables to define the persons excepted from FATCA requirements According to the model, there must be changes imposed to the existing legislature (definition of beneficial owner key point) 34
Model 2. IGA (Japan and Switzerland) Model 2. Information is delivered to IRS directly Model 2 implies registration on IRS and delivery of the information directly. The foreign government imposes regulatory framework appropriate for FATCA This approach will be adopted by Japan and Switzerland FFI IGA RB U.S. account information IRS Advantages: Accounts of recalcitrant holders can be maintained Pass-thru payments are not withheld Registration on IRS instead of Agreement Disadvantages are related to the direct access of the IRS to the banking system of a country and uncontrollable cash flows. 35
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