KPMG TaxWatch Webcast: Final FATCA Regulations The Compliance Challenge Is On

KPMG TaxWatch Webcast: Final FATCA Regulations The Compliance Challenge Is On February 1, 2013 ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT 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 1

Speakers Laurie Hatten-Boyd, Global FATCA Tax Technical Lead Mark Naretti, FATCA Banking Tax Lead Erin Kragh, FATCA Subject Matter Professional John Sweeney, IRS Office of Associate Chief Counsel (International) Tara Ferris, IRS Office of Associate Chief Counsel (International) 3 Administrative CPE regulations require online participants take part in online questions You must respond to a minimum of four questions per 50 minutes in order to be eligible for CPE credit Polling questions will appear on your media player on top of the slides Results will be reviewed in aggregate and may be published as a pulse survey of the marketplace in the aggregate. Please note that no responses will be tracked back to any individual or organization To ask a question, use the Ask A Question icon on your media player or send an e-mail to us-taxwatch@kpmg.com t Help Desk:1-877-398-1471 or outside the United States at 1-954-969-3342 4 2

Agenda Brief history of FATCA Highlights relating to various sections of the final regulations Withholding Requirements Payee Identification Foreign Financial Institution (FFI) Agreement Section 1471 Definitions Exempt Beneficial Owners Section 1473 Definitions Withheld Tax and Reporting IRS Q&A 5 History Enacted in March 2010, the goal of FATCA is to obtain information relating to U.S. persons that have offshore accounts or investments. Generally, from a withholding agent perspective, FATCA applies to: U.S. withholding agents (USWAs) to the extent they make withholdable payments to foreign entities. Foreign entities to the extent that they meet the definition of a Foreign Financial Institution (FFI). Foreign entities that fail to comply are subject to a 30% withholding tax on certain payments. To avoid this 30% withholding, an FFI must either enter into an agreement with IRS to be a Participating FFI (PFFI) or meet the requirements of one of the many types of deemed compliant FFI (DCFFI). Certain nonfinancial foreign entities (NFFEs) also face potential withholding under FATCA if they fail to disclose their substantial U.S. owners. 6 3

Background Final FATCA regulations issued on January 17, 2013 These followed the statute, IRS Notices, proposed regulations, and model Intergovernmental Agreements (IGAs). IGAs are an alternative regime to the FATCA regulations and provide for alternative standards. While the evolution of FATCA continues, uncertainty remains For example: final withholding certificates, reporting forms, proliferation of IGAs, harmonizing regulation under chapters 3 and 61 That said, the final regulations provide impacted entities with some much needed answers. 7 Highlights Treas. Reg. 1.1471-2: Withholding Requirements on Withholdable Payments to Certain FFIs Modifications to Grandfathered Obligations Relief extended to obligations outstanding on January 1, 2014 Extension also applies to: Obligations where payments are captured under section 871(m) executed 6 months after the date the obligations will be subject to the rules; Obligations captured under the foreign passthru payment rules executed 6 months after the final regulations defining the term are published in the Federal Register; Payments related to collateral posted to secure a grandfathered obligation; and Life insurance contracts t payable upon death Withholding agent reliance on issuer statement Relief only applies to withholding 8 4

Highlights Treas. Reg. 1.1471-2: Withholding Requirements on Withholdable Payments to Certain FFIs Election to be Withheld Upon Election available to a PFFI or RDCFFI that is a: Nonqualified intermediary (NQI), nonwithholding foreign trust (NFT) or nonwithholding foreign partnership (NFP); or QI that has not assumed primary chapter 3 withholding responsibilities Election not available to: A withholding foreign partnership (WP) or trust (WT) or a QI that has assumed chapter 3 withholding responsibilities; or A QI branch of a U.S. financial institution (based on informal conversations with IRS, this is likely a drafting error) Elections on account by account basis 9 Highlights Treas. Reg. 1.1471-2: Withholding Requirements on Withholdable Payments to Certain FFIs Lack of Knowledge Final regulations clarify that a withholding agent is not required to withhold in circumstances where it does not have knowledge as to whether withholding is required. Not available to payments with respect to stock or other securities Where a withholding agent is unable to determine the source or character of any payment, it must be treated as a U.S. source withholdable payment. Can escrow for one year This should help eliminate unnecessary refund claims. Brokers (DVP payments) Regulations reserve on the provision for each broker that is a party to a transaction to withhold on payments of gross proceeds by reference to a payee s FATCA status No certainty whether this provision will be eliminated 10 5

Highlights Treas. Reg. 1.1471-3: Payee Identification Modifications to Documentation Requirements Numerous alternatives for documenting offshore obligations (e.g., written statements only if no U.S. source FDAP; written statements and documentary evidence if U.S. source FDAP) Caution: May have limited use for some industries given the restrictive language payment with respect to offshore obligation, which incorporates the Treas. Reg.1.6049-5(e) definition of payment outside the U.S. requirement (which excludes any payment that is processed inside the U.S. even where mailed to an address outside the U.S.) For certain Certified Deemed Compliant FFIs (CDFFIs), withholding agent is no longer required to obtain additional documents (e.g. financial statements, letters of counsel etc.) to corroborate a chapter 4 claim made 11 Highlights Treas. Reg. 1.1471-3: Payee Identification Partial reinstatement of eyeball test? In lieu of a Form W-9, withholding agents can rely on documentary evidence and the so-called eyeball test relating to certain exempt recipients to treat payee as a U.S. person other than a specified U.S. Person. Language is unclear because a privately held corporation is a specified U.S. persons. Likely insight into a new definition of corporate exempt recipients (publicly traded corporations only) Documentation Validity Significant relief provided in relation to the validity period of documentation Substitute Forms Required to include a certification that payee will notify withholding agent of change in circumstance within 30 days Likely insight into new certification on final forms? 12 6

Highlights Treas. Reg. 1.1471-3: Payee Identification Inconsequential Errors These will not invalidate documentation in circumstances where the withholding agent has other information on file that conclusively cures the error. The example cited (country abbreviation) appears contrary to the practical approach adopted by the IRS in recent years. Presumption Rules Withholding agents can rely on presumption rules in lieu of OBTAINING upon customer documentation. This language is inconsistent with other provisions (e.g., PFFI must obtain certain documentation, ti default for not reducing numbers of NPFFIs or recalcitrant account holders). ECI presumption reinstated for payments made to U.S. branches of FFIs where the withholding agent has the branch s EIN and the head office s GIIN. 13 Highlights Treas. Reg. 1.1471-3: Payee Identification Electronic Forms Preamble indicates that documentation may be obtained electronically (faxes, scanned documents transmitted via email). Regulations cross reference the 1441 regulations, which do not currently permit fax or scanned documents as these are not considered to contain the requisite electronic signature. Anticipated that 1441 regulations will be updated to permit these Due Diligence Partial relief Reason to know safe harbor included in the final regulations for U.S. indicia only Still required to review ALL account documents (including any credit reports or financial statements obtained during account opening) for inconsistencies with chapter 4 claim. Reason to know that a PFFI or DCFFI is limited FFI if address is outside country claimed to be operating or payment is made outside that country. This is true regardless of proper documentation AND verification of GIIN on IRS list. Appears to be a fatal flaw (no possible cures listed) 14 7

Highlights Treas. Reg. 1.1471-3: Payee Identification Multiple Accounts, Universal Accounts, Shared Accounts, Agents & Third-Party Data Providers In limited circumstances, the Regulations permit a withholding agent to rely upon: Documentation from other accounts, obtained from other members within an EAG, or a repository of documentation used by multiple withholding agents. Limitations: Among others, must treat the accounts sharing the same documentation as a single account for purposes of aggregation and due diligence (all withholding agents must communicate changes in circumstance to each other). Use of third-party data providers permitted subject to conditions. Subscriber remains liable for documentation failures but no requirement of subscribers to communicate inconsistencies back to the data provider as above. 15 Highlights of Treas. Reg. 1.1471-4: FFI Agreement FFI Agreement Effective Date New effective date is December 31, 2013 (all other benchmark dates remain unchanged) U.S. Branches of PFFIs Confirmation that the branch may elect to be treated as a U.S. person as long as home office is FATCA compliant (has GIIN) U.S. branch satisfies FATCA withholding responsibilities on accounts held by U.S. nonexempt recipients but satisfying its backup withholding responsibilities under section 3406(a) Given this, anticipated modification to definition of nonexempt recipient under those existing rules 16 8

Highlights of Treas. Reg. 1.1471-4: FFI Agreement Preexisting Accounts: Additional account Withholding agent can treat a new account opened by a preexisting account holder as a preexisting account if no additional AML requirements arise in relation to the new account. Must treat both accounts as one for purposes of aggregation and due diligence Bearer Shares Account identification and due diligence performed at the time the share is presented Must be treated as a new account 17 Highlights of Treas. Reg. 1.1471-4: FFI Agreement Limited FFIs Unlike IGAs, remains transition relief only (December 31, 2015) Problematic anti-abuse rule in relation to the ownership structure of expanded affiliated groups. Very limited options if not resolution at the end of 2015 Responsible Officer Certification Initial: Within 60 days after 2nd year: Certify PFFI has conducted due diligence procedures on preexisting accounts and that did not assist any account holders avoid chapter 4 Includes examples of such assistance (Is this inconsistent i t with the requirement to close the account?) Subsequent: Within six months after the end of each three-year review period. Compliance and effective internal controls (material failures and actions to remediate must be disclosed). 18 9

Highlights of Treas. Reg. 1.1471-4: FFI Agreement Collective Refunds Similar to the process allowed under the QI Agreement (direct account holders only; no U.S. persons) Welcomed distinction Unlike the QI provisions, the PFFI does not need to repay the account holder first (just represent it will repay). 19 Highlights Treas. Reg. 1.1471-5: Section 1471 Definitions Financial Institution More closely aligned to IGAs Third classification modified to Investment Entity : conducts as a business (or is managed by an entity that conducts as a business) trading, portfolio management, or investing, administering, or managing funds for or on behalf of a customer. Explicitly includes funds; though no reference to FATF Recommendations Managed PICs and family trusts appear to remain FFIs (ODFFI) Confusing example regarding activities of an investment advisor Also includes: Certain holding companies and treasury centers within an EAG that includes other financial institutions or that are formed in connection with investment vehicles. 20 10

Highlights Treas. Reg. 1.1471-5: Section 1471 Definitions Modifications to Registered DCFFI Category Local FFI definition expanded (not just limited to traditional bank). 98% resident threshold changed from account number to value Relief in relation to the regulation of Qualified Investment Vehicles Requirement to be regulated met if the manager is regulated with respect to the fund in all countries the fund is registered and operating Not disqualified if issued bearer shares in past if certain requirements are met (2017) Sponsored FFI (Investment Entity only and not QI, WP, or WT) Authorize Sponsoring FFI to enter into FFI Agreement and comply with its terms on behalf of the Sponsored FFI Sponsoring FFI registers as such with IRS Sponsored FFIs don t need to obtain GIIN until 2016 (transition time to provide IRS with all the requisite data). 21 Highlights Treas. Reg. 1.1471-5: Section 1471 Definitions Modifications to Certified DCFFI Category Limited Life Debt Investment Vehicle Must be beneficial owner Formed pursuant to trust indenture that offers interests to unrelated owners (trustee restricted from complying with FFI obligations) Formed prior to December 31, 2011 and have finite life Transitional: Only available before 2017 Qualified Credit Card Issuers FFI solely because it accepts deposits in form of overpayment and does not immediately return such overpayments Implements policies and procedures to prevent overpayments > $50,000 or to ensure any excess is returned within 60 days Sponsored Closed Held Investment Vehicle 22 11

Highlights Treas. Reg. 1.1461-6: Exempt Beneficial Owners International Organizations Expanded to include organizations comprised primarily of foreign governments and organizations recognized as intergovernmental or supranational organizations under certain foreign laws Retirement Funds Eliminated the requirement that the foreign fund be the beneficial owner. Also liberalized prior restrictions to: Permit alternative sources of contributions apart from employers and employee; Include funds that meet the requirements of section 401(a); and Include, in certain instances, plans that also provide disability or death benefits. 23 Highlights Treas. Reg. 1473-1: Section 1473 Definitions Withholdable Payments Clarified exclusion for nonfinancial payments: Excluded: fees for services, rents and lease payments, license fees or royalties,** transportation or freight charges, gambling winnings, awards, prizes, scholarships, and interest of accounts payments from the acquisition of goods and services Included: 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 **NOTE: While fees for the use of property (royalties) are explicitly excluded, there could be financial type transactions where a royalty payment would be considered financial in nature and, thus, included (e.g., motion picture financing transaction). Excludes offshore payments of U.S. source FDAP by non-intermediaries with respect to an offshore obligation until 2017 (e.g., deposit interest paid by foreign branch of U.S. bank) Controlling Persons v Substantial U.S. Owners 10% ownership threshold to identify U.S. substantial owners retained Inconsistent with the 25% threshold required by IGAs 24 12

Highlights Treas. Reg. 1.1474-1: Withheld Tax and Reporting Form 8966 Reporting: PFFI Accounts owned by specified U.S. persons: Name, address, TIN, account number, balance, and payments of income and proceeds Accounts owned by U.S. owned foreign entities Name, address, and TIN of entity, account number, account balance, payments of income and proceeds (and name, address, and TIN of each substantial U.S. owner) Accounts owned by ODFFIs Name, address, and TIN of entity, account number, account balance, payments of income and proceeds (and name, address, and TIN of each specified U.S. owner) 25 Highlights Treas. Reg. 1.1474-1: Withheld Tax and Reporting Form 1042-S Reporting: PFFI (Aggregate) Reporting of reportable amounts to: NPFFIs; and Recalcitrant Account Holders PFFIs and DCFFIs not making an election to be withheld upon must report Those making an election must provide sufficient information to upstream withholding agents to enable them to report. Reporting may be pooled or recipient specific. If pooled, but must be segregated by certain categories 26 13

Highlights Treas. Reg. 1.1474-1: Withheld Tax and Reporting Form 1042-S Reporting: Foreign Reportable Amount In 2015 and 2016, PFFIs must report foreign reportable amounts paid to each NPFFI. Regulations define this as a FDAP payment that would be U.S. sourced if paid by a U.S. person. Model 2 IGA defines this as a FDAP payment that would be a Withholdable Payment if it were from sources within the United States. Given cross reference to regulations and FFI Agreement, it is not clear which definition should apply to Model 2 FIs. 27 IRS Q&A 28 14

Polling Question Would you like a KPMG professional to contact you regarding the topics discussed today? a) Yes b) No 29 Q&A (continued) Today s KPMG Presenters Laurie Hatten-Boyd +1 (206) 913-4489 lhattenboyd@kpmg.com Mark Naretti +1 (212) 872-7896 marknaretti@kpmg.com Erin Kragh +1 (212) 954 8167 ekragh@kpmg.com Cut through FATCA complexity. Get the simple facts on FATCA. For the latest about FATCA from KPMG, visit FATCA Essentials at http://www.kpmginstitutes.com/insights/2012/fatca.aspx 30 15

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