fatca and common reporting standard: preparing for new ...€¦ · and identify reportable accounts...

The Dbriefs Business Strategy & Tax series presents:

FATCA and Common Reporting Standard: Preparing for New Compliance Risks in 2015 Sam Lowenthal, Deloitte Tax LLP Denise Hintzke, Deloitte Tax LLP Jon Watts, Deloitte & Touche LLP Dan Dumezich, Deloitte Tax LLP Stuart Mann, Deloitte Tax LLP March 9, 2015

2 Copyright © 2015 Deloitte Development LLC. All rights reserved.

Agenda

• Overview of FATCA, IGAs, and CRS update

• An operational perspective of information reporting

• IRS enforcement and tax controversy

Overview of FATCA, IGAs, and CRS update


FATCA overview

Important considerations • Noncompliance may result in

– Exposure to 30% punitive withholding on U.S. source income, proceeds and foreign pass-thru payments

– Market risk – Reputational risk

• Classification and documentation of entities may be impacted by IGAs

• Must consider payments being received as well as payments being made

• The rules became effective on July 1, 2014 but the true withholding impact will be felt on January 1, 2015

• The IRS transitional relief which provides additional time to document new entity accounts and relief for FFIs that show a “good faith effort” towards compliance may not apply in all counties

• Compliance includes two key themes – Classifying entities under FATCA

guidelines and registering them when appropriate

– Documenting accountholders and counterparties to confirm tax status under the regulations and IGAs

• Participating Foreign Financial Institutions (“FFIs”) must document all accountholders/counterparties, withhold on non-compliant persons and have documented processes and procedures which can be verified

• Non-Financial Foreign Entities (“NFFEs”) are required to report substantial U.S. owners

• Information on reportable individuals and entities will be submitted annually

FATCA aims to identify U.S. persons trying to avoid U.S. tax obligations by holding assets in non-U.S. structures and products…

4


Evolving guidance

IRS

Technical Corrections

Final Regulations

Revenue Procedures

Forms and Instructions

FAQs Notices

The Growing Body of Guidance


State of the IGAs

112 countries have signed or agreed in substance

98 are Model 1

Agreements

Only 15 countries

have issued guidance

Open for renegotiation and can be terminated

May be modified by contracting authorities

Two different

models but several versions

US Treasury

6


Poll question #1

Will you be required to do FATCA reporting in 2015?

• Yes • Yes, but only NIL returns • No • Unsure / Not applicable


Reporting on the horizon

Model 1A (reciprocal)

Model 1B (non-reciprocal)

Model 2 (non-reciprocal)

No IGA

USFI Model 1 Reporting FFI

Information

Information

Model 1 Reporting FFI

Model 2 Reporting FFI

Participating FFI

8

Information Information

Information

Information

Information Information


The deadlines for reporting are imminent and the information to be reported is broad. Organizations need to plan now.

Reporting requirements

• The regulations require a mixture of client information and financial data. Reporting requirements will continue to increase after the first deadline

• Information on reportable individuals and entities will be submitted annually including name, address, TIN, account value and gross amounts paid or credited to the account

• The information to be reported by organizations is much broader than other current reporting requirements

• Reporting may be made via a local tax authority or direct to counterparty jurisdictions depending on the local legislation in force

• Local legislation and guidance will lead to variations in the date and format for reporting; generally, the timeline will be as follows:

March - June 2015 First annual reporting for U.S. FATCA on Tax Year 2014

May - June 2016 First annual reporting for UK FATCA on Tax Years 2014 and 2015

2017 First annual reporting for CRS


First US account reporting deadlines

March 31, 2015 May 1, 2015 May 31, 2015 June 30, 2015

Model 2 and non-IGA jurisdictions (90 day extension available)

Model 1 Spain

Cayman Islands Singapore

UK

July 31, 2015

Guernsey Ireland

Republic of South Africa

September 30, 2015 Model 1

(deadline for jurisdictions to report

to US) Bahamas Barbados

Brazil China

Colombia Curacao

Czech Republic France

Germany Gibraltar

India Indonesia

Italy Luxembourg

Malaysia Mexico

The Netherlands Poland Qatar

Saudi Arabia Sweden Thailand Turkey

Canada Australia Mauritius

South Korea


• Requirements continue to

rapidly evolve and managing changes across jurisdictions is difficult

• The rules impact a large volume of entities previously untouched by similar reporting

• Local requirements may vary widely based on guidance issued in the relevant jurisdiction

• Implementing a solution will require time in order to be in compliance with requirements for 2015

Key challenges There are a number of challenges to institutions that need to comply with the reporting requirements in a timely manner

11

Respecting data privacy

laws in relevant

jurisdictions

Tracking local

variations on reporting

rules globally

Formatting large

volumes of data from different systems

Interacting with a

number of different

competent authorities

Flagging reportable accounts effectively

Complying with complex

technical rules

Key challenges


The information exchange landscape The next three years will see increasing global transparency of account holder information

12

UK FATCA 2016 onward • Jersey, Guernsey, Isle of

Man and Gibraltar accounts in UK FIs reported to HMRC

• UK accounts in Crown Dependencies (CDs) and Overseas Territories (OTs) reported to local competent authority

U.S. FATCA

2015 onward • U.S. accounts in non-U.S.

Financial Institutions (“FIs”) reported to IRS

• To local authority under an Intergovernmental Agreement (“IGA”)

OECD CRS

2017 onward • Global initiative led by

OECD to increase tax transparency

• Global network of agreements between 93+ jurisdictions

• Accounts in counterparty jurisdictions report on an annual basis to local governments


UK Agreements with Crown Dependencies (“CDs”) and Overseas Territories (“OTs”)

The following key requirements apply:

• Following the introduction of US FATCA, the UK has implemented a number of similar automatic exchange of information agreements with its CDs and OTs

• UK FATCA impacts FIs located in the UK, CDs and OTs unlike US FATCA which impacts all FIs globally

13

CDs OTs Guernsey Isle of Man Jersey

Anguilla Bermuda British Virgin Islands Cayman Islands Gibraltar Turks and Caicos Islands

UK FIs Identify financial accounts held by Jersey, Guernsey, Isle of Man or Gibraltar specified persons and report where required

CD/OT FIs Identify financial accounts held by UK specified persons and report where required


• The CRS is the standard for automatic exchange of financial account information (“AEOI”) developed by the OECD

• The CRS is a broad reporting regime that draws extensively on the intergovernmental approach to implement FATCA

• Similar to FATCA, the CRS requires financial institutions resident in the participating jurisdictions to implement due diligence procedures, to document and identify reportable accounts under CRS as well as to establish reporting processes on the reportable accounts identified

• On July 21, 2014, the OECD released the first edition of the Standard for Automatic Exchange of Financial Account Information in tax matters which contained: − A Model Competent Authority Agreement (“Model CAA”) − The Common Reporting Standard (“CRS”) − Commentaries on the provisions of the Model CAA and the CRS User Guide

• By October 2014, over 90 jurisdictions had signed or committed to sign the CRS

The standard for OECD AEOI

CRS is a recommended standard – it contains minimum information to be exchanged

14


• On October 14, 2014, the European Council agreed on a Draft Directive to amend Directive 2011/16/EU on Administrative cooperation on direct taxation (“DAC”)

• The purpose of the amendment is to implement the global standard on AEOI within the EU countries

• This will provide the legal framework for the 28 Member States to apply the CRS among themselves by 2017*. In other words, by 2017 the Member States will automatically exchange information with each other based on the CRS standard

• The Draft Directive will be adopted at a forthcoming European Council without further discussion. Note that according to article 115 of the Treaty on the Functioning of the European Union, unanimity by the European Council after consulting with the EU Parliament is required for adoption

CRS – the European Union DAC

15

*With respect to Austria, it was agreed that the country would be given an additional year to apply the new rules


2015 2016 2017 2018

2017

ado

pter

s

New accounts

January 1, 2016 █

Review high value preexisting individual accounts December 31, 2016 █

First automatic exchange of information between jurisdictions September, 2017 █

Review preexisting low value individual accounts December 31, 2017 █

Review preexisting entity accounts December 31, 2017 █

2018

ado

pter

s

New accounts January 1, 2017 █

Review high value preexisting individual accounts December 31, 2017 █

First automatic exchange of information between jurisdictions September, 2018 █

Review preexisting low value individual accounts December 31, 2018 █

Review preexisting entity accounts December 31, 2018 █

CRS – timetable

16


• Last October the OECD released a draft document to key stakeholders with the purpose of re-launching the Tax Relief and Compliance Enhancement (“TRACE”) as the CRS and TRACE have large areas of synergy

• According to the OECD, combining CRS with TRACE can provide a withholding tax incentive for implementing CRS as TRACE eligibility is restricted to financial institutions based in jurisdictions that are committed to the CRS

• Under TRACE, financial institutions may adopt Authorized Intermediary (“AI”) status and benefit from streamlined procedures to claim reduced rates of withholding tax on behalf of their customers – the AI system is a standardized system for claiming withholding tax relief at source on portfolio investments

• AIs are allowed to claim exemptions or reduced rates by providing pooled withholding rate information to the upstream intermediaries from whom they are receiving the relevant interest or dividend payments

What’s next … TRACE

17


Poll question #2

Have you started looking at the impact of the Common Reporting Standard (CRS) on your organization?

• Yes, we have a project underway • Yes, we have been thinking about it • No, not yet as we are still focused on other issues • What is CRS? • Not applicable

An operational perspective of information reporting


The disconnect…

Fragmented systems, adhoc processes, and shortage of

resources are common problems as the industry works

to achieve compliance

The operating model for tax operations is under stress at many global institutions

• Lack of adequate senior leadership • Fragmented teams performing various tax

functions with no central ownership • Responsibilities overlap and role ambiguity

leading to confusion across teams • Inconsistent understanding of the role

Peop

le

• Lack of a central governance model to monitor current and future tax regulations

• Bespoke onboarding and reporting processes • Poor policy and procedure documentation and

operational adherence • Poor data quality and integrity reviews

Proc

ess

• Incomplete and inaccurate client and account data • Point-to-point, highly customized data feeds • Fragmented reporting systems across LOBs and

geographies • Lack of a strategic vision around system and data

architecture resulting in patchwork solutions Tech

nolo

gy

Process

Technology


Most institutions are leveraging the program infrastructure put in place for FATCA to respond to new regulations

The industry is moving towards a controlled and scalable tax operating model to meet various regulatory schemas

In order to comply with FATCA, CDOT, and CRS institutions are:

• Leveraging the existing people, process and technology to meet the immediate reporting milestones in 2015 as a near term tactical solution

• Assessing cross-border LOB centralized tax reporting utilities to create scale and quality efficiencies, as the long-term solution,

• Exploring buy vs build and shared service options

• Leveraging FATCA investment in onboarding, withholding and reporting systems and process to meet CDOT and CRS requirements

• Identifying synergies and create shared services platform for tax information reporting that is regulation agnostic

• Implementing a strong governance model to monitor ongoing performance

• Building scalable technology architecture to accommodate upcoming regulatory milestones


Poll question #3

Does your organization have the capacity to respond to new tax regulations beyond FATCA (i.e. UK FATCA, CRS, Chapter 3/61 remediation)?

• Yes – we’ve built institutional muscle in this space and are ready to respond

• Maybe – we’ve gotten better at tax regulations, but it is increasingly difficult to maintain organizational focus in terms of leadership, expertise, and budget

• No – we are tapped out; our experts are swamped and there is little left in the way of budget to take action

• Unsure / Not Applicable

IRS enforcement and tax controversy


Increase in IRS personnel

• Field agents • Data analysts

Historical emphasis on Financial Services

Simultaneous Chapter 3 and FATCA exams

IRS transition to FATCA tax compliance


Notice 2014-33 Relief on implementation of FATCA

• Development of written compliance procedures

• Internal controls that show procedures have actually been followed

• Collect documents that support the actions of the Withholding Agent

That any enforcement actions for the calendar years 2014 and 2015 under FATCA and the

temporary coordination regulations under

Chapter 3, Chapter 61, and Section 3406 will take into consideration the good faith efforts of

withholding agents


Form 5472 – Information Return of a 25% Foreign-Owned US Corporation or a Foreign Corporation Engaged in a US Trade or Business

Form 5471 – Information Return of US Persons with Respect to Certain Foreign Corporations

Form 1042-S – Foreign Person’s US Source Income Subject to Withholding

IRS return selection


IRM 4.10.21 IRS exam policy

Part 2 is general guidance for audits of US non-financial

entities

Review withholding systems

Review accounts payable file

Review vendor records


6721 – Failure to file correct information return

6722 – Failure to furnish correct payee statements

6723 – Failure to comply with other information reporting requirements

Penalties

6721(e) – Penalty in case of intentional disregard


Poll question #4

At the time FATCA was enacted the IRS had fewer than 20 people conducting enforcement activates. In 2015 the IRS will have how many people involved with enforcement?

• 20 - 49

• 50 to 99

• 100 to 200

• Over 200

• Unsure / Not applicable

Question and answer


Dan Dumezich +1.312.486.5167 [email protected] Denise Hintzke +1.212.436.4792 [email protected] Jon Watts +1.212.436.6561 [email protected] Sam Lowenthal +1.212.436.4286 [email protected] Stuart Mann +1.973.602.5843 [email protected]

Contact info


Acronyms used in presentation

• US Foreign Account Tax Compliance Act (FATCA)

• OECD's Common Reporting Standard (CRS)

• Intergovernmental Agreements (IGAs)

• Penalty in case of intentional disregard (§6721(e))

• Failure to file correct information return (§6721)

• Failure to furnish correct payee statements (§6722)

• Failure to comply with other information reporting requirements (§6723)


This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a detailed description of DTTL and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright © 2015 Deloitte Development LLC. All rights reserved. 36 USC 220506 Member of Deloitte Touche Tohmatsu Limited

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