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FATCA Issues for Derivatives and Capital Markets, US
Withholding Agents and US Branches of FFIs
Tom Prevost, Credit Suisse
Paul Epstein, Deloitte Tax LLP
Susan Grbic, WeiserMazars LLP
Mark Leeds, Greenberg Traurig
IIB’s Annual Tax Seminar
CUNY Graduate Center
June 20, 2012
November 2005 Presentation to Pegasus Corp. 2 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
FATCA Issues for Derivatives and
Capital Markets, US Withholding
Agents & US Branches of FFIs
June 20, 2012
9:00 to 10:00am
365 Fifth Avenue
Mark Leeds
Greenberg Traurig
(212) 801-6947
leedsm@gtlaw.com
Mark Leeds (leedsm@gtlaw.com; 212-801-
6947) is a shareholder with the law firm of
Greenberg Traurig. At Greenberg, Mark is a
member of the Tax and Capital Markets
practice groups. Mark’s professional practice
focuses on the tax consequences of a variety
of capital markets products and strategies,
including over-the-counter derivative
transactions, swaps, tax-exempt derivatives
and strategies for efficient utilization of tax
attributes, such as net operating losses. Mark
is also the editor-in-chief of Derivatives:
Financial Products Report, a Thomson/RIA
monthly publication. Prior to joining
Greenberg, Mark served as a Managing
Director at Deutsche Bank, general counsel of
a credit derivative company and, prior to that,
Mark was a partner at Deloitte & Touche where
he led the Capital Markets Tax Practice.
Mark Leeds
November 2005 Presentation to Pegasus Corp. 4 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
Topics to Be Addressed:
ISDA Master Agreements (Bilateral Trading &
Over-the-Counter (OTC) Transactions)
Payments made on collateral arrangements
supporting OTC Transactions
November 2005 Presentation to Pegasus Corp. 5 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
When will payments made on bilateral OTC derivatives be considered to
be US source?
1. Equity swaps referencing US stocks, to the extent treated as US-
source under Code § 871(m).
2. Other swaps should be sourced to the residence of the payee. Same
rule should apply to forward contracts and OTC options.
3. Securities lending transactions – Treasury Regulation § 1.861-3(a)(6)
treats substitute dividend payments, and Treasury Regulation § 1.861-
2(a)(7) treats substitute interest payments, as US-source if the loaned
security is a US stock or debt instrument.
November 2005 Presentation to Pegasus Corp. 6 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
ISDA (International Swap and Derivatives Association) Master Agreements
are frameworks that contain all generic provisions for two parties to
contract, but contain no provisions as to the actual transactions
themselves.
The actual transactions are documented on short form addendums to the
ISDA Master Agreements referred to as “Confirmations.” The
Confirmations incorporate the terms of the Master Agreement and
transaction-specific definitions (Equity derivatives, credit derivatives,
etc.)
The 2 versions of the ISDA Master Agreements both contain
“Indemnifiable tax” provisions. If a tax withheld meets this
definition, the payer must gross-up the payment so that the net after-
tax amount received is equal to what it would have been if the tax
had not been imposed.
November 2005 Presentation to Pegasus Corp. 7 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
ISDA has issued a preliminary response to the new FATCA rules: In the
view of ISDA, payers should not be required to gross-up payments for
FATCA taxes withheld:
“Withholding Tax imposed on payments to non-US counterparties under the
United States Foreign Account Tax Compliance Act. (a) For purposes of any
Payer Tax Representation, the words "any Tax from any payment" shall not
include any tax, however imposed, pursuant to Sections 1471 and 1472 of the
Internal Revenue Code of 1986, as amended (or the United States Treasury
regulations or other guidance issued or any agreements entered into
thereunder) ("FATCA Withholding Tax"); (b) for the avoidance of doubt the
parties agree that for purposes of Section 2(d) of this Agreement the
deduction or withholding of FATCA Withholding Tax is required by applicable
law; and (c) the definition of "Indemnifiable Tax" shall not include any FATCA
Withholding Tax.”
November 2005 Presentation to Pegasus Corp. 8 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
ISDA Protocol:
Unknown how widely it will be adopted
Not suitable when transacting with a rated vehicle that cannot
take tax risk
Bilateral renegotiation of ISDA Master Agreement (recommend
completing prior to January 1, 2013)
Cease entering into new trades after 12/31/2012 absent FATCA
protection
Insert FATCA language into trade confirms
November 2005 Presentation to Pegasus Corp. 9 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
The ISDA protocol does not address banks that are
resident in countries in which the United States has
entered into an “Intergovernmental Agreement.”
FFIs that are resident in countries that have entered into
an Intergovernmental Agreement likely will be withholding
pursuant to the laws of their country and not pursuant to
the US FATCA rules.
The current ISDA language does not carve-out local
withholding undertaken pursuant to the laws of a country
other than the US.
November 2005 Presentation to Pegasus Corp. 10 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
Collateral arrangements pose questions as to whether income earned is
subject to FATCA withholding:
If the collateral is cash, then look to the residence of the Payer
- If the collateral are securities, then in the absence of
rehypothecation, look at the source of income for the collateral
itself
- For rehypothecated securities, the answer is unclear
Delay FATCA withholding tax on collateral for three years by exchanging
USD and US assets posted as collateral for assets that do not generate US
source payments
November 2005 Presentation to Pegasus Corp. 11 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
When will parties not have to worry about withholding on collateral:
Grandfather relief? (No withholding is required on fixed term obligations
outstanding on Jan 1, 2013.) Does collateral have a fixed term? When CSAs
support multiple transactions, is the answer that it does not? Should one
look thru collateral arrangements to the underlying assets? Is grandfather
relief affected if the pledgee rehypothecates the assets?
Pre-existing obligation relief? Pre-2015 relief for payees that are not prima
facie FFIs. Obligation must have been outstanding on Jan 1, 2013. CSAs
could qualify as pre-existing obligations, but Master Agreements are unlikely
to qualify.
Short-term OID instruments are not subject to FATCA withholding.
Substitute non-US assets for US assets posted as collateral.
No exceptions for bank or portfolio interest.
November 2005 Presentation to Pegasus Corp. 12 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
Commentators have recommended a variety of solutions, including:
• Exclude accounts that hold collateral from the definition of “financial accounts”
(RBM CM)
• Move the grandfathering date to 7/1/2014 or later, particularly with regard to
passthru payments IIB/EBF)
• Grandfather ISDA transactions under pre-2013 Master Agreements that do not
extend past 2016 (SIFMA)
• Redefine “material modification” (BBA)
• Adjust rules for pre-existing obligations to enable this relief to be available for all
collateral (not just payments to non prima facie FFIs) (RBC CM)
• Issue guidance indicating there will be symmetry in the rules applicable to PFFIs
and USFIs with regard to the application of FATCA to derivatives payments (RBC
CM, IIAC)
November 2005 Presentation to Pegasus Corp. 13 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
Securitization and Fund
Documentation
November 2005 Presentation to Pegasus Corp. 14 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
• Generally, these entities will satisfy the definition of FFI and financial U.S. entity and
therefore be withholding agents for FATCA purposes
• Absent relief, these entities would be required to document account holders and
perform withholding and reporting
• Rated securitization vehicles typically cannot take tax risk for regulatory reasons
• Securitization vehicles typically lack the infrastructure to perform the necessary
withholding and reporting and existing vehicles will lack the ability and authority in
most instances to demand documentation; the cost of creating such infrastructure
would potentially render these vehicles unattractive from a pricing perspective
• A number of comment letters have recommended creating a ‘deemed compliant’
category for securitization vehicles, with particular latitude recommended for existing
securitization vehicles (LSTA, RBC, SIFMA, IIB/EBF)
• What is the IRS’ current thinking on FATCA and these entities?
November 2005 Presentation to Pegasus Corp. 15 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
• Like securitization vehicles, funds typically lack the infrastructure and
a pricing model that would enable them to function as FATCA
withholding agents
• Funds should be able to agree to modify tax indemnity language
• Certain funds may qualify for an exemption from PFFI status:
• Registered Deemed Compliant—restricted funds
• Certified Deemed Compliant – retirement funds (2 types), non-
profit, low value accounts
• Exempt Beneficial Owner—fund wholly-owned by EBOs
• Is the IRS considering further exclusions for funds?
November 2005 Presentation to Pegasus Corp. 16 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM
To ensure compliance with requirements
imposed by the IRS under Circular 230, we
inform you that any U.S. federal tax advice
contained in this presentation (including
any attachments) is not intended or written
to be used, and cannot be used, for the
purpose of (1) avoiding penalties under the
Internal Revenue Code or (2) promoting,
marketing or recommending to another
party any matters addressed herein.
Tax Advice Disclosure
FATCA Issues for Derivatives and Capital Markets, US Withholding Agents and US Branches of FFIs
Institute of International Bankers Seminar on U.S. Taxation of International
Banks - June 20, 2012
Paul Epstein – Director, WNT
Phone: 202-758-1390
Email: pepstein@deloitte.com
FATCA Compliance Timeline: Prop. Regulations
FATCA issues: Source & Characterization
• Withholdable Payment Treatment on U.S. Source Payments
• Foreign-to-Foreign Transactions may be U.S. Source
“withholdable” payments
− Stock Loans and Sale Repos of U.S. bonds and stocks
§§1.861-2, 1.861-3, 1.871-7(a)(6), 1.881-2(b)(2)
− Specified NPCs – Prop. & Temp. §1.871-16
− Equity Linked Instruments – Prop. Reg. §1.871-15
• Characterization of instruments can alter the source and cause
payments to become “withholdable” under FATCA
• Allocations of interest within a single enterprise to ECI
− Principal protected structured notes
Scope of Section 871(m): Dividend Equivalent Payments
• Applies only to U.S. Source Non-ECI Dividend Equivalent Payments
• Coordinates and applies to the following –
− Section 1058 Securities Loans
− Sale Repurchase Transactions
− Payments Identified as “Substantially Similar”
− Temporary Regulations continue application of 1997 final regulations
• Derivatives: Specified Notional Principal Contracts
− Newly defined by 871(m)
− Expanded and modified by Proposed Regulations
− Substantial Similar Payments – Equity Linked Instruments (Proposed Regulations)
Copyright © 2011 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited
Qualified securities non-ECI lender exemptions
Cayman
fund
UK Corp 3
QSL
UK Corp 2
QSL
U. S.
broker
dealer
1058 1058 1058
Form
W-9
W8-
IMY
W8
IMY
Short Sale
Proceeds
No W/H
Substitute payment:
• 1441: 0% Direct W/H
• 1441: 0% Credit
• FATCA-Withholdable Pmt
UK Corp 3: §881results
• QSL Exemption if
Offsetting Pmt made
Substitute payment:
• 1441: 0% Direct W/H
• 1441: 0% Credit
• FATCA-Withholdable Pmt
UK Corp 2 results
• QSL Exemption
If Offsetting Pmt
Substitute payment:
• 1441: 0% Direct
W/H
• 1441: 0% Credit
UK1 §881 results
• §881 Tax is self-
Assessed if no
offsetting Payment
is made Final Regs: 15% §881 Tax 15% §881 Tax No W/H Tax
Notice 2010-46: QSL exempt QSL exempt No W/H Tax
FATCA (cascading) 30%-noncompliant 30%-noncompliant None
Non-qualified securities lender in stock loan series
Cayman
fund
UK Corp 3
Non-QSL
UK Corp 2
QSL
Foreign Fund
Treaty Rate
15%
1058 1058 1058
W8-
IMY
W8-
IMY
W8-
BEN
Short sale
proceeds
No W/H
Substitute payment:
• 1441: 15% Direct W/H
• 1441: 0% Credit
UK Corp 3: §881results
• §881 Tax Satisfied by
Cayman Fund w/h
• W/H may not be credited
To anyone but UK Corp1
Substitute payment:
• 1441: 0% Direct W/H
• 1441:15% Credit
UK Corp 2 results
• QSL Exemption
If Offsetting Pmt
Substitute payment:
• 1441: 0% Direct W/H
• 1441: 15% Credit
U.S. broker dealer
• W/H on non-QSL may
Require indemnity/
gross up
Final Regs: 15% §881 Tax 15% §881 Tax 15% §881 Tax
Notice 2010-46: 15% §881non-QSL QSL exempt Foreign Fund
Cayman w/h Agent 15% credit forward 15% credit forward
FATCA 30% if noncompliant 30% if noncompliant 30% if noncompliant
15% additional w/h? No credit forward No credit forward
Specified NPC Treatment: Code v New Reg Comparison §871(m)(3)(A) – pre 1/1/13 new Temp
Reg. 1.871-16T(b)
Long Party Transfers security to short party in
connection with entering in NPC (“Cross-in”)
Short Party Transfers security to Long Party
in connection with terminating NPC (“Cross-
out”)
Underlying referenced security is not readily
tradable on established securities market
(quotable)
Underlying security is posted as collateral
with Long Counterparty
1.871-16(c) – post 12/31/12 payments
on specified NPCs
Long Party Transfers security “in the market” – (i.e. on day of NPC acquisition)
Long Party acquires security “in the market” on day of termination of NPC contract
Underlying referenced security is not regularly traded on established securities market (objective vol.)
Underlying security is posted as collateral (with 10% de minimis amount permitted – relaxes statute)
NPC term is less than 90 days
Long party controls short party hedge contractually or by conduct
NPC notional amount is significant percentage of float or trading vol.
Special dividend is announced before NPC is entered into
Retroactive SNPC Status-Withholdable Payments
§1.871-16(d): Specified Status
Arising During Contract Term
• Specified NPC status may arise
after periodic payments have been
made
• Retroactive dividend equivalent
status is imposed on all payments,
including prior payments
• Short party is a withholding agent
whether or not cash is available
• Long party is joint and severally
liable for the retroactive tax
• Retroactive disqualification may
occur solely due to specified status
on termination payment
Specified NPC status may arise
on any of
• Crossing-out of the market on
termination (§1.871-16(c)(1));
• Underlying security is more than
10% of the FMV of collateral
posted at any time during the
contract (§1.871-16(c)(3))
• The long party enters into a long
position at anytime within 90 days
of the contract (§1.871-16(c)(4))
• The long party controls the short
party’s hedge (§1.871-16(c)(5))
• NPC notional amount represents
5% of the public float of the
reference shares (§1.871-
16(c)(6)(i))
Specified NPC: FATCA Considerations
Component of NPC Income
Non-ECI Long Party – 15% Rate
Short Counterparty
Pmt #2: Long Counterparty
Pmt#2: Short Counterparty
Dividends on Referenced Equity
$100 ($100) $100 ($100)
Appreciation on Referenced Equity
$0 $0
LIBOR-based Financing Charge
$(50) $50 ($60) $60
Depreciation on Referenced Equity
$ (30) $30 ($50) $50
Totals
$ 20 Payment Received from
Short Party
($20) Payment Owed to Short Party
($10) Payment Owed to Short
Party
$10 Payment received from
Long Party
§871(m) SNPC Status on 2nd Pmt
Foreign Source non-ECI at Pmt
For. Source- No w/h at Pmt
Date
$30 Gross Basis Tax on 2nd Pmt
$30 w/h on 2nd Pmt Date
FATCA: Chapter 4
Foreign Source-Not Withholdable
No Chapter 4 Withholding
$60 Chapter 4 Tax until Refund
$60 Chapter 4 Withholding
FATCA Issues for Interest Allocation and Branch Interest
Foreign corp
(Bank or broker dealer)
U.S. trade or
business
Treasury
book
ECI Global
Dealing
Book
Cost of Carry
Interdesk
$60
U.S. broker
dealer
• Maintains Segregated Dealer Book of ECI and Matched
Funding all from foreign offices of FFIs
• Some 3rd Party Funding on book treated as U.S.
booked liabilities in §1.882-5 Allocation Formula
• Books Income, Gains and Losses in Foreign
Location/H.O.
• Performs Back-Office Functions
• Branch Performs Mktg/Trader Functions U.S. broker
dealer • Or, Broker/Dealer Contracts as Agent
with Discretionary Authority
Interest
Cost of Carry
3rd Party
Total
FATCA
Book Amt
$ 60
$ 90
$150
Scaledown
Disregard
$60 US
$60
§1.884-
4(b)(6) select
Excess Int
Disregard
$90 US
$90
$90 Pmt
Withholdable
Treaty-AOA
Not Interest
TP Attrib
TP Allocation
3rd Party Amt
in TP Alloc?
Global dealing equity swap profit split allocation
Foreign corp
(Bank or broker dealer)
U.S. trade or
business
Treasury
book
Global
dealer
book
Cost of
carry
$60
• Sales
• Marketing
• Pricing
• Brokering
• Risk Management
U.S. broker
dealer
• Acts as Principal Short Counterparty with Unrelated and
Related Long Parties
• Owns Stock Hedges
• Books Income, Gains and Losses in Foreign
Location/H.O.
• Performs Marketing/Trader Functions and Risk
Management Functions
• Performs Marketing/Trader Functions
• Acts as Agent w/Contractual Auth.
Character of
income
Gross amount-
total TPM % allocation
U.S. allocation
amount
Authority for
income source
Derivative MTM
income $150 50% $75
U.S. Source -
§863/865(j)(2)
Prop. Regs
Derivative FDAP
income $ 20 50%
$10
U.S. Source —
§863/865(j)(2)
Prop. Regs.
Bond/stock
hedges $ (30) 50% $(15)
U.S. Source-
§863/865(j)(2)
Prop. Regs
Hedges (FDAP
interest and
dividends)
$ 70 50% $ 35 Source by Statute:
§861/862
Totals $ 210 50% $105 Item Based
Sourcing
cost of carry $ (60) 50% $ (30) Treaty Only
Mgm’t profit $ 150 50% $ 75 Net Profit Pre-
Adjustment
Global dealing source of income in single enterprise — Profit split
Global dealing — Source of allocated income
Character of Allocable Income is determined under Host PE country principles
− OECD Attribution Report on Global Trading authorizes pro-rata treatment when profit
splits are used — See Part III, paragraph 263 (2008 Final Report)
Global Dealing Regs (1998) (Prop Regs §1.864-4(c)(2)(iv); §1.864-4(c)(3)(ii); §1.864-
4(c)(5)(vi); and
U.S. Asset Split-ECI Treatment in 1996 Prop Regs §1.884-1(d)(2)(vii)) and §1.884-
1(d)(2)(xi) Example 8.
− Source of income is not changed by the allocation unless U.S. statutory rule adopts trade
or business based sourcing
Total TPM% U.S. portion Source
Derivatives MTM 150 50% 75 U.S.— §863/865 Prop.
Derivatives FDAP 20 50% 10 U.S.— §863/988 Regs/871(m) Statute
Hedges MTM ( 30) 50% (15) U.S. — §863/865/
Hedges FDAP 70 50% 35 U.S. — §861/862 /871(m)— Statute
Gross profit
before funding 210 50% 105 §871(m): 2 U.S. source dividends
$35 Div. and SNPC of $10 tax net , $35 taxed at 15% and $35 SNPC FDAP Taxed at 15%-Article 10
FATCA: Two cascading div. equivalent payments: Prop. Reg. §1.871-16 (i.e. FATCA withholdable )
Other Potential U.S. Source Payments: Characterization Uncertain
• Fails Charges on non-U.S. Government Securities
− Residence/QBU based sourcing in §1.863-10 final regulations limited to U.S. Treasuries, FNMAs, Freddie Macs and FHLB issuances
− Issue: Source by analogy to these instruments or by analogy to interest?
• Certain Credit Default Swaps
− Prop. 1.446-3 regulations purport to provide NPC characterization and coordinate residence based sourcing
− But, compare preamble with “tie-breaker” for guarantees
− Are CDSs issued on originated single loans or loan basket originations financial guarantees?
• Exchange Traded Notes
− Rev. Rul. 2008-1: Debt Treatment for Currency Denominated Notes
− Non-Currency ETNs
− Equity Linked ETNs: Prop. Reg. §1.871-15 depending on whether Dividends are announced or agreed to before issuance date or dividends are estimated
Instrument provides or is per se treated as adjusting for the dividend value
• Credit Default Swaps - Compare Regulation Statements Preamble Section 2. Credit default swaps
In Notice 2004-52 (2004-2 CB 168), the Treasury Department and the IRS
described four possible characterizations of a credit default swap. See
§601.601(d)(2)(ii)(b). These proposed regulations resolve this uncertainty by
adding credit default swaps to the list of swaps categorized as notional principal
contracts governed by the rules of §1.446-3.
1.446-3(c)(1)(iii) Included contracts. Notional principal contracts governed by this
section include contracts commonly referred to as interest rate swaps, currency
swaps, basis swaps, interest rate caps, interest rate floors, commodity swaps,
equity swaps, equity index swaps, credit default swaps, weather-related swaps,
and similar agreements that satisfy the requirements of paragraph (c)(1)(i)…Notwithstanding
the rule under paragraph (c)(3) of this section—
(A) Special rule for credit default swaps. A credit default swap contract
that permits or requires the delivery of specified debt instruments in satisfaction
of one leg of the contract is a notional principal contract if it otherwise satisfies
the requirements of paragraph (c)(1)(i) of this section.
Proposed NPC Regulations - §1.446-3
Credit Default Swaps - Compare Regulation Statements
− 1.446-3(c)(1)(iv) Excluded contracts. A forward contract, an
option, and a guarantee are not notional principal contracts.
An instrument or contract that constitutes indebtedness
under general Federal income tax law is not a notional
principal contract. An option or forward contract that entitles
or obligates a person to enter into a notional principal
contract is not a notional principal contract, but payments
made under such an option or forward contract may be
governed by paragraph (g)(3) of this section.
Proposed NPC Regulations - §1.446-3
Credit Default Swaps - Compare Regulation Statements (2) Specified index. A specified index may be either a specified financial
index or a specified non-financial index.
(i) Specified financial index. A specified financial index is—
(A) A fixed rate, price, or amount;
(B) A fixed rate, price, or amount applicable in one or more specified
periods followed by one or more different fixed rates, prices, or amounts
applicable in other periods;
(C) An index that is based on objective financial information (as defined in
paragraph (c)(4)(ii) of this section); and
(D) An interest rate index that is regularly used in normal lending
transactions between a party to the contract and unrelated persons.
(ii) Specified non-financial index. A specified non-financial index is any
objectively determinable information that—
(A) Is not within the control of any of the parties to the contract and is not
unique to one of the parties’ circumstances;
(B) Is not financial information; and
(C) Cannot be reasonably expected to front-load or back-load payments
accruing under the contract.
Proposed NPC Regulations - §1.446-3
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Member of Deloitte Touche Tohmatsu Limited
Practical Issues
Handling Changes in Documentation due to
FATCA
Tom Prevost, Credit Suisse
Practical Issues – Handling Changes in Documentation
due to FATCA
FATCA is unlike many taxes in that the withholding is
generally triggered only by a “voluntary” decision of the Payee
to comply or not comply.
Although FATCA provides grandfathering for most financial
arrangements executed prior to 2013, it does not focus on
legal agreements that allow for new transactions to be
executed under existing documentation.
On the following slides is an approach on how to conduct a
proper review of legal agreements and potential mitigation
approaches.
Practical Issues – Handling Changes in Documentation
due to FATCA
Step 1: Determine Scope
− What is the population of legal agreements outstanding
where a party could execute a new transaction in 2013
without signing a new agreement?
Examples:
– ISDA Masters
– Master Repo Agreements
– Securities Lending Masters
Practical Issues – Handling Changes in Documentation
due to FATCA
Step 2: Review of Agreements
− Once the population is identified there are a number of key questions
that must be answered and documented:
What are the tax provisions in each of these agreements?
Do the agreements require a Payor to gross-up the Payee for taxes?
Are there termination rights in the agreement? – If yes, is it applicable
and at what cost?
Is there a Change in Law provision? If so, is it applicable?
After completing the exercise above, you now understand which
agreements need to be amended for FATCA, and what is the level of risk
of not amending each agreement, assuming the counterparties chooses to
be an NPFFI. However, now you must act on the information and likely
amend large amounts of documents.
Practical Issues – Handling Changes in Documentation
due to FATCA
Step 3: Amendments of Agreements
− So how do you amend all the affected agreements?
Protocols – helpful for mass amendments, but still require bilateral consent
Bilateral negotiated amendments
− What is the right language for the amendment?
Narrow vs more open language
Cover IGAs or defer IGA discussion until more clarity?
− How do you manage the amendment process?
Dedicated FATCA team or normal negotiators for documents.
− How does FATCA affect your document templates going forward?
Standard FATCA provisions?
− Starting Jan 1, 2013, what procedures should you put in place to handle amendments of old grandfathered transactions that would subject them to FATCA?
Practical Issues – Client/Customer Data: Due Dilligence
FATCA is ultimately about client/customer information
Customer information is key in the due diligence, reporting and
withholding portions of FATCA
FFIs have many responsibilities with respect to customer
information in the due diligence process:
− Collect information from various internal and external sources
− Review and validate the information, including resolving any
conflicting information that may have been obtained in order to
validate the proper FATCA classification
− Document the steps taken in the review and store all the
underlying information for future audits and review
Practical Issues – Client/Customer Data: Due Diligence
Who are my clients?
− Do I have a client master database or is my information scattered?
− Is my information current/accurate?
Do I need to perform a data remediation project to even be ready to start due diligence?
− How do I reconcile multiple data sources to make sure that I don’t have a party double counted because the name is slightly different in 2 databases (i.e., ABC Corp. instead of ABC Corporation)
− As silly as it may sound, even if you have a client master database are you sure you have the proper clients in the database?
Client master databases were built to accommodate front office and AML requirements. No one ever classified clients through a US tax lens, which is what FATCA requires.
– Example: Your client master shows your client at “Blackrock” or “PIMCO”, but those are managers and not specific legal entities. How many funds are under that relationship? Is Blackrock acting as an agent with an undisclosed principal? One party in a system may mean hundreds of tax entities, each of which requires its own FATCA classification.
Practical Issues – Client/Customer Data: Due Diligence
How do I actually get to final FATCA classifications?
− Very few categories where you can get to final FATCA classification without an
additional document from the client:
Individuals without US indicia
Active NFFEs
− For everyone else you need something else
How do you put together the request to the client?
– New vs. Existing Clients
Who contacts the client?
Who validates the information?
– Some information is “technical tax”: W-8s
– Other information: incorporation documents, passport copies, charity
documents, lawyer letters, etc…
Practical Issues – Client/Customer Data: Reporting &
Withholding
How do I get information about US persons to the IRS?
− Transaction data and client data in different systems
− Pulling the proper data from the systems and aggregating by
legal entity for reporting
Front office systems not always legal entity focused
How do I withhold on NPFFIs and Recalcitrant Accounts?
− Do I build a withholding system or do withholding manually?
− Is waiting until withholding due too late in the process? Should I
try to stop transactions subject to withholding before they
happen?
Potential credit issues if withholding not subtracted from client
accounts.
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