How Thai Financial Institutions are Preparing for FATCA s 31 Dec Deadline

How Thai Financial Institutions are Preparing for FATCA s 31 Dec Deadline

AMCHAM: FATCA Overview 25 th June 2013 1

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTENBYKPMGTOBEUSED,ANDCANNOTBEUSED,BYACLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 2

Agenda FATCA What it means How FATCA Works Intergovernmental Agreement 3

FATCA What it Means 4

Current US Tax System The current US tax system taxes US citizens and residents on their worldwide income, with a limited credit for foreign taxes paid US individuals and entities complete and submit annual accounting of their tax position on prescribed forms and within prescribed timelines Compliance is confirmed, in part, through matching tax returns with information reporting returns 5

U.S. Resident vs. Non-Resident Taxation Resident individuals and domestic corporations are subject to U.S. tax on all income, both from U.S. and non-u.s. sources. Non-resident individuals and foreign corporations are subject to U.S. taxation on U.S. source income. U.S. source fixed or determinable annual or periodical gains, profits, and income, with exceptions for investment and bank deposit interest, subject to a 30% gross-basis withholding tax Income connected with conduct of a U.S. trade or business is subject to the same net-basis taxation that applies to U.S. persons. 6

How Does U.S. Tax Reporting Work? Reports payments made to individuals Submits tax return (self assessment) Payor IRS Payee IRS matches the documents against each other 7

Documentation & Reporting Example: U.S. Source Income Paid to Individual On U.S. tax return, USP reports & self assesses tax owed Form W-9 U.S. Person (USP) Form W-8BEN Non-U.S. person Tax Paid by USP $100 $70 Gross Payment Net Payment 30% Tax Treasury $30 Tax for Non-US $0 Tax for USP U.S. Source Dividend Form 1042-S for Non-US Form 1099 for USP IRS Reporting 8

Documentation & Reporting Example: U.S. Source Income Paid to Non-U.S. Corporation US Person Non-US Person Know Your Customer Info Non-U.S. Corporation Bank Secrecy W-8BEN Qualified Intermediary (Non-U.S. Bank) Bank Secrecy W-8BEN U.S. Equities U.S. Bonds Non-U.S. Securities 9

Documentation & Reporting Example: Non-U.S. Source Income Paid by Non-U.S. Payor Outside the U.S. Self Assessment US Person Non-US Person 100 100 IRS Global Custodian Dividend paid by Non- U.S. Corp. 10

The Intended Solution: FATCA The Foreign Account Tax Compliance Act was enacted on March 18, 2010. FATCA introduces a new reporting regime aimed at the disclosure of U.S. persons with offshore accounts and investments. This disclosure is accomplished by a new withholding regime (Chapter 4), that works in tandem with the current withholding regime (Chapter 3). Chapter 4 imposes a penal withholding tax on withholdable payments made to foreign financial institutions and other foreign entities that fail to comply with the disclosure requirements. 11

FATCA law, notices and regulations HIRE Act signed into law by U.S. President Obama on March 18, 2010 Guidance notices Notice 2010-60: preliminary guidance issued August 27, 2010 Notice 2011-34: additional guidance issued April 8, 2011 Notice 2011-53: more guidance issued July 14, 2011 Proposed Regulations: Issued February 8, 2012 Final Regulations: Issued January 17, 2013 12

FATCA Time Line for Foreign Financial Institutions A February 8, 2012 D Q1 2013 I December 31, 2014 J Q1 2015 M December 31, 2016 N January 1, 2017 IRS published draft FATCA regulations. B Q3 2012 July 26, 2012 Draft Model I IGA released Summer 2012 Draft IRS forms released FFI agreements to be released Updated versions of IRS forms for FATCA to be released January 17, 2013 Final FATCA regulations released E July 15, 2013 IRS portal opens H Deadline for FFIs to complete remediation on preexisting high-value accounts* June 30, 2014 Deadline for FFIs to complete remediation on preexisting entity accounts held by prima facie FFIs (begin withholding)* March 15, 2015 Tax return reporting begins (Form 1042) Information return reporting begins (Forms 1042-S) March 31, 2015 Form 8966 reporting for 2013 and 2014 on substantial U.S. owners and ODFFI accounts identified by December 31, 2014 Final day of transitional rule treating U.S. source FDAP payment paid by nonintermediaries on offshore obligations as excluded from definition of withholdable payment FATCA withholding begins on certain gross proceeds payments to noncompliant accounts FATCA withholding begins on foreign passthru payment (or six months after publication of regulations defining term, whichever is later) For qualified collective investment vehicles, date by which policies aim to redeem or immobilize bearer interests 2012 2013 2014 2015 2016 2017 C Q4 2012 F Q4 2013 G January 1, 2014 K December 31, 2015 L Q1 2016 O October 24, 2012 IRS Announcement 2012-42 released, providing some FATCA implementation deadline relief November 14, 2012 Model II IGA released, available to countries with TIEAs with the United States Model I IGAs revised October 15, 2013 GIINs assigned October 25, 2013 Last date to register with IRS to ensure inclusion on FFI list (safe harbor) December 2, 2013 FFI list published by IRS List December 31, 2013 FFI agreement becomes effective New account due diligence/identification begins Grandfathered Obligations: Payments on certain obligations outstanding on January 1, 2014 are exempt from FATCA withholding** FATCA withholding begins on U.S. source FDAP payments to new account holders identified as NPFFIs, Recalcitrants, and Passive NFFEs with undisclosed Substantial U.S. Owners Deadline for FFIs to complete remediation on preexisting accounts, other than prima facie FFIs and high-value accounts (begin withholding)* Final date for FFIs to qualify for limited branch and limited FFI status February 29, 2016 Due date for responsible officer due diligence certifications (unless previously submitted)* March 15, 2016 Annual tax return reporting (Form 1042) Annual information reporting (Forms 1042-S) Reporting of foreign reportable amounts to NPFFIs begins March 31, 2016 Annual Form 8966 reporting * These dates assume that the PFFI s FFI agreement is approved by the IRS and effective on December 31, 2013. ** Payments treated as dividend equivalents, under section 871(m), may be treated as Grandfathered up to six months after the publication of regulation implementing 871(m). Payments treated as foreign passthru payments may be treated as Grandfathered up to 6 months after the publication of implementing regulations. Q1 2017 March 15, 2017 Annual tax return reporting (Form 1042) Annual information reporting (Forms 1042-S) Reporting of foreign reportable amounts to NPFFIs ends March 31, 2017 Annual Form 8966 reporting P June 2017 Deadline for responsible officer to file certification for first certification period 13

FATCA highlights The goals of FATCA are to identify U.S. persons and have their investment information provided to the Internal Revenue Service (IRS) Under FATCA, payments to Foreign Financial Institutions (FFIs) are potentially subject to punitive 30% withholding rate on the withholdable payments An FFI can avoid the punitive 30% withholding by entering into an FFI agreement with the IRS and becoming a Participating Foreign Financial Institution s (PFFI) The FFI Agreement will require the FFI to identify U.S. accounts and report them to the IRS on an annual basis If 30% FATCA withholding is not required, then regular non-u.s. person withholding rules (Chapter 3) continue to apply FATCA also requires punitive 30% withholding on withholdable payments to certain Non- Financial Foreign Entities (NFFEs) that fail to either: disclose substantial U.S. owners or certify that none exist 14

How FATCA Works 15

Withholdable Payment Any payment of interest, dividends, premiums, annuities, and other fixed or determinable annual or periodical gains, profits, and income (FDAP income), if such payment is from sources within the U.S. Certain nonfinancial payments specifically included: Payments in connection with lending transactions, forwards, futures, options, swaps, insurance premiums, cash value insurance or annuity payments, dividends, interest, investment advisory fees, custodial fees, and bank or brokerage fees AND Any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States 16

Withholdable Payment Exclusions Payment of interest or OID on short-term obligations (Less than 183 days) Effectively connected income Nonfinancial payments (ordinary course of business payments) specifically excluded: Payments for services (including wages and other forms of employee compensation (such as stock options), payments for the use of property, office and equipment leases, software licenses, transportation and freight, gambling winnings, awards, prizes, scholarships, interest on outstanding accounts payable arising from the acquisition of goods or services Gross proceeds from sales of excluded property Fractional shares Offshore payments of U.S. source FDAP income prior to 2017 (unless acting as an intermediary) 17

Financial Institution (FI) A financial institution is defined as any entity that meets at least one of the following: Accepts deposits in the ordinary course of business Holds financial assets for the benefit of others as a substantial portion of its business An investment entity An entity that primarily conducts certain portfolio activities (trading in securities, portfolio managements, or otherwise investing or managing assets) for or on behalf of a customer or is managed by an entity that conducts one or more such activities for or on behalf of a customer. An entity s gross income is primarily attributable (more than 50%) to investing or reinvesting securities and the entity is managed by an FFI. Entity functions or holds itself out as a collective investment vehicle A specified insurance company An insurance company, or a holding company that is a member of an expanded affiliated group (EAG) that includes an insurance company and the insurance company or holding company issues, or is obligated to make payments with respect to, cash value insurance or annuity contracts. An entity that is a holding company or treasury center that is part of an EAG that includes a depository institution, custodial institution, insurance company, or investment entity or is formed in connection with or availed of by a collective investment vehicle, mutual fund, exchange traded fund, private equity fund, hedge fund, venture capital fund, leveraged buyout fund, or any similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets 18

FFI, USFI, WA FFI: foreign financial institution that meets the definition of FI and: Is not U.S. Is not resident in an IGA country USFI: U.S. financial institution A financial institution that is classified as a U.S. person, including a U.S. branch WA: withholding agent Any person, U.S. or foreign, in whatever capacity acting, that has the control, receipt, custody, disposal, or payment of a withholdable payment or foreign passthru payment 19

Classifications of FFI PFFI: participating foreign financial institution An FFI that agrees to enter into an FFI Agreement with the IRS and comply with the requirements of the FFI Agreement; includes an FI in a Model II IGA country DCFFI: deemed-compliant foreign financial institution An FFI that is treated as one that meets the requirements of this classification and is not required to enter into an FFI Agreement NPFFI: nonparticipating foreign financial institution An FFI that does not agree to enter into an FFI Agreement with the IRS and is not a DCFFI or exempt beneficial owner 20

Non-Financial Foreign Entity (NFFE) A non-u.s. entity that does not meet the definition of financial institution Two broad categories: Excepted NFFE Passive NFFE 21

Exempt Beneficial Owners Any foreign government, any political subdivision of a foreign government, or any wholly owned agency or instrumentality (only the integral parts, controlled entities, and political subdivisions of a foreign sovereign) Any international organization or any wholly owned agency or instrumentality thereof Foreign central bank of issue Governments of U.S. territories Certain retirement funds: Treaty-qualified Broad participation requirements Narrow participation conditions Fund formed pursuant to a plan similar to a section 401(a) pension plan Investment vehicles exclusively for retirement funds Pension fund of an exempt beneficial owner Entities wholly owned by exempt beneficial owners 22

Definition FFI and NFFE Foreign Financial Institution Non-Financial Foreign Entity Investment Entities Conducts investment activities for a customer (or managed by the same) Accepts deposits Foreign Financial Institutions (FFI) Banks Funds Insurance Companies Holds financial assets for others An NFFE is any foreign entity that is not an FFI. Once the determination between FFI and NFFE is made, an entity should be further identified as a: 1. Participating FFI 2. Non-Participating FFI 3. Deemed Compliant FFI 4. Exempt Beneficial Owner 5. Passive NFFE or 6. Excepted NFFE 23

Financial Account Any depository account maintained by a FI Any custodial account maintained by a FI Any equity or debt interest in: An investment entity A holding company or treasury center An entity that is a depository institution, custodial institution, investment entity or certain interests in an insurance company An insurance contract issued or maintained by an insurance company, a holding company of an insurance company, or a financial institution if the contract is a cash value insurance contract or an annuity contract 24

Excluded from Definition of Financial Account Certain savings accounts (including both retirement and pension accounts) that meet certain requirements with respect to tax treatment and the type and amount of contributions Nonretirement savings accounts that satisfy conditions: including: regulated savings vehicle, taxfavored, withdrawals have conditions or penalties, and contributions are limited to $50,000 annually Certain term life insurance contracts Accounts held by an estate Certain escrow accounts Certain annuity contracts Accounts or products excluded under an IGA Insurance contracts that provide pure insurance protection (such as term life, disability, health, property and casualty insurance contracts) Account held by an exempt beneficial owner Any account held solely by one or more exempt beneficial owners or by NPFFIs that hold the account as intermediaries solely on behalf of one or more such owners Any account owned by a company with debt or equity that is regularly traded on an established securities market 25

U.S. Account Any financial account maintained by an FFI that is held by one or more specified U.S. persons or U.S. owned foreign entities 26

Identifying US Status What does a US account mean for FATCA? A FATCA account is held by a specified US person or US owned foreign entity. A US individual is one who is: A citizen A green card holder A tax resident A specified US person is any US person excluding : US listed corporations and their affiliates US tax exempt entities US banks US Real Estate Investment Trusts US Regulated Investment Companies Among others US owned foreign entity is one with substantial US owners Corporation or partnership or certain trusts where specified US person owns 10 percent, directly or indirectly Owner Documented FFIs 27

Specified U.S. Person Any U.S. person other than: A corporation the stock of which is regularly traded on one or more established securities markets Any corporation that is a member of the same EAG as a publicly traded corporation Any organization exempt from taxation under section 501(a) or an individual retirement plan The United States or any wholly owned agency or instrumentality thereof Any State, the District of Columbia, any U.S. territory, any political subdivision of any of the foregoing, or any wholly owned agency or instrumentality of any one or more of the foregoing Any bank as defined in section 581 Any real estate investment trust as defined in section 856 Any regulated investment company as defined in section 851 or any entity registered with the Securities Exchange Commission under the Investment Company Act of 1940 Any common trust fund as defined in section 584(a) Any trust that is exempt from tax under section 664(c) or is described in section 4947(a)(1) A dealer in securities, commodities, or derivative financial instruments (including notional principal contracts, futures, forwards, and options) that is registered as such under the laws of the United States or any State A broker Any tax exempt trust under a section 403(b) plan or section 457(g) plan 28

U.S. Owned Foreign Entity & Substantial U.S. Owner U.S. Owned Foreign Entity Any foreign entity that has one or more substantial U.S. owners Substantial U.S. Owner Non-U.S. corporation: any specified U.S. person that owns, directly or indirectly, more than 10% of the stock of the corporation (by vote or value) Non-U.S. partnership: any specified U.S. person that owns, directly or indirectly, more than 10% of the profits interests or capital interests in such partnership Trust: Any specified U.S. person treated as an owner of any portion of the trust under sections 671 through 679; and any specified U.S. person that holds, directly or indirectly, more than 10 percent of the beneficial interests of the trust 29

Recalcitrant Account Holder An account maintained by a PFFI that: Fails to comply with the PFFI s request for documentation or information to establish whether the account is a U.S. account Fails to provide a valid Form W-9 upon PFFI s request Fails to provide a correct name and TIN upon request after the PFFI receives notice from the IRS indicating a name/tin mismatch Fails to provide a valid and effective waiver of foreign law if foreign law prevents reporting with respect to the account holder by the PFFI Fails to provide owner information of a passive NFFE Exceptions: FFI Account meets exception for U.S. accounts with deposit accounts with a balance of $50,000 or less Qualifies for documentation exceptions for preexisting accounts 30

Documentation required on-boarding individual account holders outside the US Withholding certificate OR Other Appropriate Documentary Evidence W8 - BEN W9 + waiver? 31

Passthru payments Any withholdable payment and any foreign passthru payment The final regulations reserve to define a foreign passthru payment to a future time. 32

Expanded Affiliated Group An expanded affiliated group means an affiliated group as defined in section 1504(a) of the Internal Revenue Code, determined by substituting more than 50 percent for at least 80 percent each place it appears; and without regard to paragraphs (2) and (3) of section 1504(b); and without application of section 1504(a)(3) and 1.1504-4(b)(2)(i)(A). Partnerships and other entities shall be treated as a member of an expanded affiliated group if such entity is controlled (within the meaning of section 954(d)(3) by members of such group (including any entity treated as a member of such group by reason of this sentence). 33

Intergovernmental Agreements 34

Alternative Regime to FATCA: Intergovernmental approach IGA Governments support FATCA goals but legal impediments prevent compliance Alternative approach to FATCA created where countries (FATCA partners) would enter into Intergovernmental Agreement (IGA) Alternative regime based on automatic exchange authorized in existing bilateral tax treaties This does not eliminate due diligence or reporting requirements. 35

Thanks 36