a comparison of fatca and the common reporting...

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A comparison of FATCA and the Common Reporting Standard March 9, 2016

Michael J. Bruno and Sean Tevel

Agenda

© 2016 Baker & McKenzie LLP

‒ Foreign Account Tax Compliance Act (“FATCA”)

‒ Global Automatic Exchange of Information (“AEOI”) and the Common Reporting Standard (“CRS”)

‒ FATCA v. AEOI (Similiarities and Differences)

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FATCA in a Nutshell

Enacted as part of the HIRE Act in 2010 Effective as of July 1, 2014

Brief Background…

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Goals… Identifying unreported income of US persons Enlisting non-US financial institutions to report such US

persons FATCA not aimed at revenue raising


FATCA in a Nutshell

Targeted Structure…

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FATCA in a Nutshell

‒ Goal Information reporting of US persons investing through a foreign

financial institution (“FFI”) or a non-financial foreign entity (“NFFE”)

‒ Stick 30% withholding tax on certain US source payments to an FFI that

does not participate and NFFEs that do not comply Passthru Payment Withholding

‒ Action US withholding agents must collect documentation FFI: Enter into an agreement with the IRS NFFE: Provide documentation to avoid withholding Governments enter IGAs

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FATCA in a Nutshell The Basics…

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Payor FFI/NFFE 30% withholding tax on US source interest, dividends, rents,

salaries, wages, gain from sale of assets generating such income – e.g. stocks and bonds (“withholdable payment”)

Withholdable payment to FFI or NFFE US source FDAP income – July 1, 2014 Gross proceeds from sales (e.g., US stock and bond sales) – July 1,

2019 Foreign source passthru payments – July 1, 2019 (at earliest)

Exceptions: (1) Grandfathered Obligations; (2) Non-financial Payments; and (3) Short-Term Debt Proceeds.



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• Definition of FFI: • US Treas. Regs.: An FFI is broadly defined, with five (5) general

categories: (i) a depository institution; (ii) a custodial institution; (iii) an investment entity; (iv) a specified insurance company; or (v) a specified holding company or treasury center.

• IGA: Not as expansive, in that categories are defined to encompass only: (i) a custodial institution; (ii) depository institution; (iii) investment entity; and (iv) specified insurance company.



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• Who is the Withholding Agent? ANYONE (and everyone) who has custody of a withholdable

payment. US Co.

Interest payment

Paying Agent

Trustee

Bank Foreign Corp. Holder of Debt

Each step requires a FATCA compliance inquiry



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» Withholding agent is required to withhold on a withholdable payment if the payment is made to an FFI or NFFE, unless an exception applies… FFI exception: If an FFI enters into an agreement with the

IRS to report on US account holders or meets one of the exceptions, then withholding may not apply.

NFFE exception: If an NFFE provides the appropriate withholding certificate(s) and discloses substantial US owners, then withholding does not apply.



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» Withholding agent must determine: Who is the payee?

• Generally, person to whom payment is made; However, be careful… US entity classification rules control.

What is the payee’s FATCA status? • Can rely on withholding certificate, and IRS published list of

compliant FFIs. • Reliance on Withholding Certificates and Statements:

Must obtain prior to payment; Be able to reasonably determine how much of the payment relates to

the valid documentation; Must not know (or have reason to know) that any of the information,

certifications, or statements are unreliable or incorrect.



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WITHHOLDING CERTIFICATES Form W-8BEN: Beneficial owner withholding certificate

(individuals) Form W-8BEN-E: Beneficial owner withholding certificate

(entities) Form W-8IMY: Withholding certificate of an intermediary,

flow-through entity, or US branch Form W-8ECI: Certificate for effectively connected income Form W-8EXP: Certificate for exempt status


Reporting US Account Holders ‒ Model 1 IGAs vs. Model 2 IGAs ‒ Is there a withholdable payment in the structure or

transaction? ‒ Who must report? ‒ What is a “US Reportable Account”? ‒ What information gets reported? ‒ What due diligence can US people expect to be

required to US withholding agents?

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Reporting Non-US Account Holders ‒ Automatic Exchange/ TIEA ‒ What is a typical “Non-US Reportable Account”? ‒ What information is reported? ‒ What types of accounts are not reported? ‒ What information is not reported?

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Global AEOI Developments ‒ June 2013- summit of G8 leaders committed to AEOI. ‒ September 2013- G20 leaders endorsed the OECD's proposal for a global model of AEOI. ‒ February 13, 2014- OECD and G20 countries released a proposed global standard which

would enable jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis.

‒ July 21, 2014- OECD released the full version of the Standard for Automatic Exchange of Financial Information in Tax Matters (“The Standard”): including a model CAA, full CRS, and commentaries on both.

‒ October 29, 2014- 51 jurisdictions signed a multilateral Competent Authority Agreement (“CAA”) to automatically exchange information, more than 45 of them by September 2017.

‒ 2015 – More jurisidictions sign on / refinement of standards ‒ 2016 - Commencement of country reviews by Global Forum / Data collection by Financial

Institutions of 2017 committed jurisdictions ‒ 2017 – Beginning of first exchanges under CRS / Global Forum Peer Reviews

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Global AEOI Developments – (continued) ‒ Currently over 60 jurisdictions committed to implement The Standard,

including: Argentina, Australia, Belgium, Bulgaria, Canada, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Estonia, the Faroe Islands, Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Italy, Israel, Japan, Korea, Latvia, Liechtenstein, Lithuania, Malaysia, Malta, Mauritius, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Saudi Arabia, Seychelles, Singapore, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland and the United Kingdom; the UK's Crown Dependencies of Isle of Man, Guernsey and Jersey; and the UK's Overseas Territories of Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks & Caicos Islands; the United States.

‒ Early adopters: over 45 jurisdictions; the first automatic information exchanges ambitiously planned for September 2017.

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© 2016 Baker & McKenzie LLP 19

Global AEOI – CRS Overview

‒ What information gets reported? Investment income (e.g., interest and dividends; income from certain insurance contracts) Account balances Sales proceeds from financial assets

‒ Whose information is reported? Individuals Entities Trusts & Foundations Look-through rules apply to passive entities

‒ Who reports? Banks Custodians Brokers Certain collective investment vehicles Certain insurance companies


Global AEOI – the Standard (2014) ‒ The Standard (published by OECD) consists of four main parts: The Common Reporting Standard (CRS) contains the

reporting and due diligence rules for financial accounts The Model Competent Authority Agreement (CAA)

contains the rules on exchange of information Commentaries to the CRS and the CAA Annexes: including technical solutions, users guides, model

questionnaires, etc.

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Presenter

Presentation Notes

Commentaries are available online (www.oecd.org/tax/exchange-of-tax-information) and as part of the Standard.


FATCA Model of Information Exchange

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US IRS

US Bank

Non-US Customer

Model 1 Tax Authority

Non-US Bank

US Customer

1. Model 2 IGA and no IGA 2. Model 1 IGA

2

1


OECD AEOI Model of Information Exchange

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US

Bank

Non-resident Customer

Bank

Italy


Bank

Germany


Bank

France


Bank

Spain


Malaysia

Bank


Singapore

Bank


UK

Bank


Bank

Bank Bank

Bank Bank Bank

Bank

Bank

Bank Bank

Bank Bank Bank


FATCA v. OECD AEOI

FATCA AEOI Framework for exchange Unilateral or bilateral Multilateral

Compliance key Withholding tax on non-compliers or domestic enforcement for non-compliance in Model 1 jurisdictions

Domestic enforcement for non-compliance

Reportable persons US persons, including US citizens and US tax residents living overseas

Non-residents of the jurisdiction (residence address test)

Pre-Existing Account New Account

New Entity Accounts open as of 12/31/2014 (see Notice 2014-33) New Accounts opened from 1/1/2015

Accounts open as of 12/31/2015 New Accounts opened from 1/1/2016

Applicability of De Minimis Thresholds $50,000 for Individual and Depository Accounts $250,000 for Entity Accounts (not eligible if opened on or after 7/1/2014 and before 1/1/2015)

None (except $250,000 de minimis threshold for pre-existing entity accounts)

Availability of Sponsoring Entity Regime

Yes None (currently)

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a comparison of fatca and the common reporting...

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