Webinar: Foreign Account Tax Compliance Act

P R I N C I P L E S T H A T E N D U R E Staying Ahead of Regulatory Changes Service Expertise Integrity Webinar: Foreign Account Tax Compliance Act August 9, 2011 Kathleen Dugan Senior Vice President Product Manager Northern Trust Lorraine White Senior Vice President Tax Specialist Northern Trust 2011 Northern Trust Corporation northerntrust.com

N O R T H E R N T R U S T Foreign Account Tax Compliance Act : Application to Investment Funds Kathleen Dugan Senior Vice President, Product Manager, Northern Trust Kathy is a Product Manager in the Global Product and Strategy Group, with responsibility for FATCA as it applies to Corporate and Institutional Clients. She works with a cross-disciplinary team of FATCA experts, Operations and Technology to understand FATCA requirements and develop services to assist clients to comply. Kathy brings over 18 years of asset servicing product management experience. Prior to her current role, she was APAC Regional Product Manager, led the teams that pioneered cross-border pension pooling and opened Northern Trust s Beijing and Melbourne offices. 2011 Northern Trust Corporation northerntrust.com

N O R T H E R N T R U S T Foreign Account Tax Compliance Act: Application to Investment Funds Lorraine White Senior Vice President, Tax Specialist, Northern Trust Lorraine is a member of Northern Trust s international tax services group, responsible for the research and development of banks international tax product offering. Her primary responsibilities include providing technical support to Northern Trust s asset servicing groups and the banks clients in Europe, Asia and North America, ensuring consistent tax servicing policy and practice and the integration of tax risk into the banks wider business agenda. Lorraine has worked in the asset servicing industry for 25 years and been with Northern Trust for the last 11 years. 2011 Northern Trust Corporation northerntrust.com

FATCA legislation aims to enable U.S. tax authorities to collect information on U.S. individuals who hold financial assets overseas Objective: The IRS wants to reduce U.S. tax evasion by U.S. individuals who hold financial assets outside the U.S. To do so, the IRS needs foreign financial institutions to report on U.S. persons and institutions with U.S. owners that hold such assets. Incentive: The IRS will require U.S. financial institutions to withhold 30% on any U.S.-sourced payment paid to a foreign financial institution that does not comply. How will FATCA impact Northern Trust clients? Northern Trust will have substantial new withholding and reporting requirements. We will be required to impose withholding on U.S.-sourced payments to non-compliant clients. Northern Trust will need to collect additional information from each of our clients. FATCA will impose reporting and withholding responsibilities on foreign institutions, many of whom are Northern Trust clients. Fund manager clients in particular will suddenly have withholding and reporting responsibilities and will look to Northern Trust to assist them in meeting these responsibilities. 4 Foreign Account Tax Compliance Act

Under FATCA, all U.S. financial institutions will have new U.S. withholding responsibilities U.S. Withholding Agents Include: U.S. Financial Institutions Examples: Banks Brokers Custodians Insurance Companies Investment Companies Fund Distributors Investment Funds Foreign branches of USFIs Other U.S. Payors 2 1 Apply NRA Withholding Tax (may be reduced by treaty) Apply 30% tax on withholdable payments Withholdable Payments Under FATCA: FATCA Compliant Foreign Entity Non-Compliant Foreign Entities Gross Proceeds from the sale or other distribution of any property of a type which can produce interest and dividends from sources within the U.S. Any payment of interest, dividends, rents salaries, wages, premiums, annuities, compensations, remunerations, profits, and income from sources within the U.S. Interest paid by foreign branch of USFI treated as U.S. source for FATCA Non-participating Foreign Financial Institutions Noncompliant Non- Financial Foreign Entities 5 Foreign Account Tax Compliance Act

Both U.S. and Foreign Financial Institutions must determine FATCA compliance of all foreign institutional account holders U.S. or Foreign-Domiciled Fund Proof of Compliance with FATCA Foreign Financial Institution (FFI) Banks Brokers Custodians Investment Funds Insurance Companies Fund Distributors Participating FFI EIN Deemed Compliant FFI 1) Proof that not an FFI 2) Details of U.S. ownership, or proof of exempted NFFE status Non-Financial Foreign Entity (NFFE) Includes all foreign entities that are not FFIs Exempted NFFEs Corporation regularly traded stock; and affiliates Entity organized in US Possession Proof of exemption from FATCA Exempt Foreign Institution Government organizations International organizations (e.g., UN) Central Banks Insurance companies that do not issue cash value insurance or annuities Retirement Plans (definition unclear) Status of charities is not clear Certain Holding Companies If no evidence of compliance, 30% FATCA withholding applies to U.S. source income 6 Foreign Account Tax Compliance Act

To comply with FATCA, a Foreign Financial Institution (FFI) must: Enter into an agreement with the IRS. Identify and classify all account holders Report to U.S. individuals and to US institutions on a 1099 light with a copy to the IRS Apply 30% FATCA withholding to passthru payments made to noncompliant account holders 7 Foreign Account Tax Compliance Act FFI Collect proof of compliance (i.e., IRSissued EIN) NFFE Collect proof that not an FFI and details of U.S. ownership, if any Exempt Foreign Institution Collect proof of exemption Foreign individual No reporting requirement U.S. institution Report to the IRS U.S. individual Report to the IRS FATCA requires documentation for all account holders, not solely U.S. individuals or U.S. institutions, and is likely beyond current AML / KYC requirements. Name, address, taxpayer ID, account number Year-end account balance Gross income paid or credited to the account Redemptions paid to the account holder For accounts closed or transferred, report value redeemed or transferred, plus income paid or credited Reporting is required on all accounts, not just those generating US-sourced income Obtain waivers from account holders where required by local and/or privacy laws or close accounts Withhold 30% on passthru payments and remit this withholding to the IRS Close any persistently noncompliant account Note: Some funds may decide to exclude U.S. investors (individuals and institutions) to avoid reporting obligations, but the responsibility to register with the IRS, evaluate compliance of FFI account holders and withhold from non-compliant FFI account holders remains.

FATCA implementation will be phased (Notice 2011-53, 14 July 2011) IRS to begin accepting online applications from participating FFIs 1 January 2013 Sign Up FFIs must sign participating FFI Agreement with IRS by 6/30/2013 to avoid withholding as of 1 January 2014 (1) Withholding FATCA withholding begins for U.S. source payments (other than gross proceeds) (4) 1 January 2014 Due Diligence FFIs must complete review and documentation of pre-existing private banking accounts over $500,000 (individual and entity) 30 June 2014 Withholding FATCA withholding begins for U.S. source gross proceeds, and for passthru payments (5) 1 January 2015 1 st Qtr. 2013 2 nd Qtr. 2013 3 rd Qtr. 2013 4 th Qtr 2013 1 st Qtr. 2014 2 nd Qtr. 2014 3 rd Qtr. 2014 4 th Qtr. 2014 Due Diligence pffis (3) must follow FATCA documentation procedures for new accounts opened on or after 1 July 2013 Withholding pffis begin publishing Passthru Payment Percentages 1st Qtr 2014 Reporting pffis must report to IRS 12/31/2013 balance of all U.S. accounts and substantial U.S. owners of NFFE accounts for which W-9 is received by June 30, 2014 Treasury expects to issue final regulations & form of FFI agreement Summer 2012 Reporting Due 30 September 2014 Reporting pffis must complete full FATCA reporting for account activity in calendar year 2014 (due in 2015) (1) This timeline assumes the foreign financial institution entered into an FFI agreement by June 30, 2013 with a July 1, 2013 effective date. Those who sign on later may be subject to withholding 1/1/2014. (2) Pre-existing accounts are accounts that have been opened prior to the FFI agreement effective date. (3) A participating FFI (pffi) is an FFI that has entered into an FFI Agreement with the IRS. 8 Foreign Account Tax Compliance Act (4) This means U.S.-sourced payments to a non-compliant foreign fund will be subject to FATCA withholding, but payments out of a foreign fund (i.e., passthru payments) will not. (5) This means a foreign fund will need to begin applying withholding to payments to account holders who are not FATCA-compliant. Due Diligence pffis must complete review and documentation for all pre-existing accounts by 30 June 2015

Foreign fund and service provider responsibilities under FATCA FFI Fund Account Holders Responsibility FATCA reporting/withholding legal obligations as FFI Hires Custodian, Fund Administrator & Transfer Agent Legally responsible for AML/KYC Responsibility FFIs must enter into an agreement with the IRS Account holders must supply FATCA-required data Failure to comply incurs a 30% withholding penalty on passthru payments Access to information Usually has no visibility to the underlying account holder information US Subcustodian (USFI) Fund Custodian (FFI) Fund Administrator Transfer Agent (not FFI) Responsibility Responsibility Responsibility Responsibility Holds U.S. securities in custody Collects payments of U.S. sourced income to the fund. (Note payments will pass through a US or FFI global custodian) Withhold 30% FATCA on U.S. source income at the custody level if Fund is non-compliant Makes no payments to fund unitholders Access to information Sees only next payee in the chain of custody Provides global custody services Collects payments from all sources for its fund client Withhold 30% FATCA on passthru payments collected for a non-compliant fund Makes no payments to fund unitholders Access to information Sees all asset holdings and transactions within the fund No access to unitholder information Calculates the NAV May need to calculate passthru payment percentage Makes no payments, so no withholding responsibilities Access to Information Sees all holdings and transactions within the fund No access to account holder information No legal responsibility to withhold or report to the IRS unless: Contractual obligation to fund as agent U.S. Payor (obligations outside of FATCA) Processes unitholder subscriptions May review KYC/AML data Makes payments of distributions and redemption proceeds Access to Information Usually only the transfer agent has access to the fund s account holder information 9 Northern Trust FATCA Workshop

Both custodians and transfer agents must be prepared to report on account holders and to withhold from recalcitrant account holders The custodian applies FATCA withholding only if the Fund is not compliant. The withholding reduces the NAV, negatively impacting all investors. The Transfer Agent applies FATCA withholding selectively only to those account holders who are not FATCA-compliant. Compliant account holders are not affected. Withhold 30% of all US sourced income & payments U.S. Custodian or Subcustodian Apply NRA Non-Compliant Non-U.S. Account Holder Compliant Account Holder (Investment Fund) Apply FATCA withholding No withholding Non-Compliant Unit Holder Compliant Unit Holder 1. Account holders with custody accounts hold securities directly 2. The custodian applies withholding to each U.S.-sourced payment before it is paid into the custody account 3. The custodian maintains account holder records for AML/KYC and tax purposes 1. Account holders with transfer agency accounts hold units in a fund 2. FATCA requires the fund to apply withholding to distributions and redemptions from the fund.the fund can contract with the TA to do this. 3. The transfer agent normally maintains account holder records for AML/KYC purposes, but currently does not withhold tax. 10 Northern Trust FATCA Workshop

U.S.-domiciled funds and non-u.s. domiciled funds have slightly different obligations under FATCA USFI (U.S. domiciled fund) FFI (foreign domiciled fund) Not required to enter into an agreement with the IRS Evaluate FATCA compliance only on foreign institutional investors in the fund FATCA withholding applies only to noncompliant foreign entities Enter into agreement with the IRS Evaluate FATCA compliance by foreign institutions, US institutions and US individuals. FATCA withholding will apply to all non-compliant investors For a U.S.-domiciled look-at fund all distributions and redemptions will be U.S.- sourced payments 1. Determine if account holder is FATCA compliant 2. Withhold 30% on all distributions and redemptions paid to non-compliant account holders Collect information on US-ownership of NFFEs and report to the IRS No FATCA responsibility to report to IRS on US institutions or individuals (already have Form 1099 reporting responsibilities) Apply 30% FATCA withholding only to passthru payments (that portion of the payment considered to be attributable to US-sourced income) 1. Determine if account holder is compliant 2. Find the passthru payment % (PPP) 3. Withhold 30% times PPP on all distributions and withdrawals Collect information on U.S.-ownership of NFFEs and report to the IRS Prepare a Form 1099 light for U.S. institutions and U.S. individuals and report to the IRS 11 Northern Trust FATCA Workshop

Each Foreign Financial Institution must calculate and publish a Passthru Payment Percent (PPP) For funds investing in securities: Quarterly, 1. Calculate total U.S. assets 2. Calculate total assets For funds of funds: Q1+Q2+Q3+Q4 US Assets Q1+Q2+Q3+Q4 Total Assets = Passthru Payment Percent Find the PPP for each underlying fund: 1. Find the fund s PPP 2. If no PPP is calculated: 1. Is the fund a participating or deemed compliant FFI? Then apply a PPP of 100% For each fund: PPP x Assets in Fund equals Total U.S. Assets attributable to that fund F1+F2+F3+F4 US Assets F1+F2+F3+F4 Total Assets = Passthru Payment Percent 2. Is the fund not a participating or deemed compliant FFI? Then apply a PPP of 0% 12 Northern Trust FATCA Workshop

A non-u.s. fund applies a uniform FATCA withholding rate to all noncompliant accounts, based on the fund s Passthru Payment Percent No FATCA withholding Compliant Account Holder Compliant Non-U.S. Fund (Participating FFI) PPP = 65% Apply 19.5% (30% x 65%) withholding to all distributions and redemptions Apply 19.5% withholding. Passthru payment withholding appears to apply to all payments made to non-compliant FFIs, not just payments made by a fund to its non-compliant investors Non-Compliant Account Holder Non-Compliant FFI (not an account holder) Caution: Recent preliminary guidance on passthru payments has caused much debate and concern in the industry. It is unclear how passthru payments will work in practice under final regulations yet to be issued. 13 Northern Trust FATCA Workshop

Under current FATCA guidance, a non-compliant fund may still suffer FATCA withholding even if it has no U.S. investments Assets held by Bank A as custodian Non-compliant non- US fund (FFI) Issuer 1 U.S. Corp PPP = 100% Withhold 30% FATCA on payment Issuer 2 Compliant FFI Published PPP = 50% Issuer 3 Compliant FFI No published PPP Default = 100% Issuer 4 Non-Compliant FFI PPP = 0% Non-U.S. Bank As Custodian (Participating FFI) Custodian s PPP is irrelevant Withhold 15% (50% x 30%) FATCA on payment Withhold 30% FATCA on payment Not subject to FATCA withholding Note: If the custodian is a USFI, FATCA withholding applies only with respect to Issuer 1 (since the passthru payment concept applies only to payments made by Compliant FFIs) 14 Northern Trust FATCA Workshop

FATCA requires certification by a Chief Compliance Officer The Chief Compliance Officer (CCO) must certify to the IRS: The FFI s compliance with documentation requirements for existing individual accounts Between April 8, 2011 and the effective date of the Agreement, the FFI did not engage in any activities or have any formal or informal procedures in place to assist account holders to avoid the account identification requirements Policies and procedures are in place prohibiting employees from advising account holders how to circumvent the identification requirements. Caution: These requirements, contained in recent preliminary guidance (IRS Notice 2011-34), have caused much debate and concern in the industry. It is unclear how this will work in practice under final regulations yet to be issued. 15 Northern Trust FATCA Workshop

An Investment Fund may wish to consider the impact of FATCA Do you understand the Fund s legal obligations under FATCA? Contact your tax or legal advisor to understand how FATCA applies to your particular circumstances. Will any of your investors fail to comply, forcing you to withhold? You may wish to discuss FATCA with investors (particularly FFIs such as nominee companies and distributors) to find out if they are preparing for FATCA. You may wish to alert all investors that they may need to provide additional information to assist the Fund in determining FATCA compliance status. Will you choose to become a Participating Foreign Financial Institution (FFI)? Some funds may qualify as a deemed compliant FFI. Some funds with limited U.S. investments and limited investments in securities issued by FFIs may decide to accept the FATCA withholding risk and not become a participating FFI. Do you invest in other foreign-domiciled funds? If these funds invest in the U.S. and fail to comply with FATCA, fund performance will suffer as a result of FATCA withholding the fund must pay. You may wish to ask whether they are preparing to comply with FATCA. Will you choose to change your agreements with distributors? Restrictions in distribution agreements may help the fund obtain deemed compliant status. Will you outsource some FATCA compliance functions to vendors? Some funds will choose to outsource some FATCA functions to the fund accountant or transfer agent. Are your vendors preparing for FATCA? Will you want to establish an FFI Group to coordinate and simplify the FFI application process? The IRS and Treasury are considering providing a centralized compliance option for funds associated with a common asset manager or other agent. Do privacy laws prevent you from reporting to the IRS on U.S. investors in the fund? FATCA requires the fund to obtain a waiver of privacy rights from U.S. investors. 16 Northern Trust FATCA Workshop

Many open questions require further guidance, including: How will a foreign financial institution enter into an agreement with the IRS and obtain a participating FFI EIN? How will account holders be distinguished compliant FFIs, exempt FFIs, non-compliant FFIs, NFFEs, exempt NFFEs? How will passthru payment percentages be published? How will deemed compliance be achieved in practice? How will FATCA impact retirement plans? What reporting formats will be used to report on U.S. account holders and on the U.S. owners of NFFEs? What kind of verification procedures will the IRS require? How can FATCA withholding be refunded if an error was made? How will FATCA withholding work for flow-through entities (e.g., partnerships?) How will FATCA work for insurance companies? How will conflicts between U.S. law and the laws of the country of fund domicile be resolved? 17 Northern Trust FATCA Workshop

Northern Trust is preparing for FATCA Cross-disciplinary, cross- business line FATCA Working Group is: Identifying Northern Trust s legal responsibilities under FATCA Exploring how we can help our clients meet their FATCA obligations Assessing required changes to Northern Trust systems and operations Respond to IRS and Treasury requests for comments on proposed FATCA implementation guidance Participate with industry groups to submit comments Submit comments from Northern Trust Meet with the IRS and Treasury along with other global financial institutions to advance concerns and make recommendations Inform clients about FATCA compliance requirements 18 Northern Trust FATCA Workshop

N O R T H E R N T R U S T Kathleen Dugan Senior Vice President, Product Manager Northern Trust KD18@ntrs.com 312-630-0625 Questions Lorraine White Senior Vice President, Tax Specialist Northern Trust LW42@ntrs.com +44 207-982-2949 www.northerntrust.com 2011 Northern Trust Corporation northerntrust.com

Disclosures Northern Trust Corporation, Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A, incorporated with limited liability in the U.S. The Northern Trust Company, London Branch (reg. no. BR001960), Northern Trust Global Investments Limited (reg. no. 03929218) and Northern Trust Global Services Limited (reg. no. 04795756) are authorised and regulated by the Financial Services Authority. The material within and any linked material accessed via this communication is directed to eligible counterparties and professional clients only and should not be distributed to or relied upon by retail investors. For Asia Pacific markets, it is directed to institutional investors, expert investors and professional investors only and should not be relied upon by retail investors. Northern Trust (Guernsey) Limited, Northern Trust Fiduciary Services (Guernsey) Limited, Northern Trust Fiduciary Company (Guernsey) Limited and Northern Trust International Fund Administration Services (Guernsey) Limited are licensed by the Guernsey Financial Services Commission. Northern Trust International Fund Administrators (Jersey) Limited and Northern Trust Fiduciary Services (Jersey) Limited are regulated by the Jersey Financial Services Commission. Northern Trust International Fund Administration Services (Ireland) Limited and Northern Trust Fiduciary Services (Ireland) Limited are regulated by the Financial Regulator. Northern Trust Global Services Limited has a Netherlands Branch which is authorised and regulated in the Netherlands by De Nederlandsche Bank. Northern Trust Global Services Limited has a Luxembourg Branch which is authorised and regulated by the Commission de Surveillance du Secteur Financier (CSSF). Northern Trust Luxembourg Management Company S.A. is regulated by the Commission de Surveillance du Secteur Financier (CSSF). Northern Trust Global Services Limited operates in Abu Dhabi as a Representative Office, Licence number 13/238/2008 which is authorised and regulated by the Central Bank of the United Arab Emirates. The Northern Trust Company operates in Canada as The Northern Trust Company, Canada Branch which is an authorized foreign bank branch under the Bank Act (Canada). Trustee related services in Canada are provided by the wholly owned subsidiary The Northern Trust Company, Canada, an authorized trust company under the Trust & Loans Companies Act (Canada). Deposits with The Northern Trust Company and its affiliates and subsidiaries are not insured by the Canada Deposit Insurance Corporation. The Northern Trust Company operates in Australia as a foreign authorised deposit-taking institution (foreign ADI) and is regulated by the Australian Prudential Regulation Authority. The Northern Trust Company of Hong Kong Limited is a securities company regulated by the Securities and Futures Commission. The Northern Trust Company has a Singapore Branch which is a foreign wholesale bank regulated by the Monetary Authority of Singapore. The Northern Trust Company operates in China as a Representative Office and is regulated by the China Banking Regulatory Commission. Northern Trust Global Investments Japan, K.K. is regulated by the Japan Financial Services Agency. Northern Trust Global Services Ltd (UK) Sweden Filial is authorised by the Financial Services Authority and subject to regulation by the Finansinspektionen. IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. For more information about this notice, see http://www.northerntrust.com/circular230. 20 Foreign Account Tax Compliance Act