FROM PRINCIPLES TO PLANNING FATCA What You Need to Know FROM PRINCIPLES TO PLANNING Introduction SOURCE OF LAW? FATCA: Foreign Account Tax Compliance Act enacted in 2010 Purpose: Curb tax evasion Proposed Regulations: February 2012 Final Regulations: January 2013 Worldwide scope of implementation with or without the signature of an International Governmental Agreement (IGA) WHO IS CONCERNED? Foreign Financial Institutions (FFIs) and Non Foreign Financial Entities (NFFEs) with more than 50% of passive income Multinational Corporations (MNCs) U.S. Withholding Agents (USWAs) WHAT OBLIGATION? Reporting to the IRS of U.S. Account holders (for FFI) and of U.S. holders of a substantial ownership interest (for NFFE) Potential for 30% FATCA withholding for non-compliance Introduction WHEN? Starting January 1, 2014 for ordinary income (FDAP, dividends, interests, wages, annuities, rents, royalties) and January 1, 2017 for gross proceeds, foreign pass thru payments and grandfathered obligations WHERE? Registration through the FATCA Portal in place on July 15, 2013 or filing the New Form 8957 to obtain a Global Intermediary Identification Number (GIIN) as a Participating FFI (PFFI) to be identified as FATCA compliant HOW? Reporting to the IRS through the New Forms 1042 and 1042-S (to encompass both Chapter 3- NRA and Chapter 4-FATCA) Reporting to the IRS using the new Form 8966 for reporting specified U.S. persons, U.S. owned foreign entities, owner-documented FFIs with an owner that is a specified U.S. person and aggregate reporting for recalcitrant account holders Document the account holder for tax purposes through Forms W-8series & Form W-9 WHY? Reputational concerns Avoid negative client impact and potential for liquidity issues To avoid the punitive 30% FATCA withholding 321 Agenda DD & Verif. Proced.Forms W-8seriesFATCA Overview Purpose Definitions Prevention of 30% Withholding Exclusions Intergovernmental Agreements (IGAs) IRS Registration Responsible Officer DD obligations Timeline Implementation Strategies Chapter 3 Withholding Rules Chapter 4 - FATCA W-8BEN W-8IMY FATCA Overview Purpose Definitions Prevention of 30% Withholding Exclusions Intergovernmental Agreements (IGAs) What is the Purpose of FATCA? What Is FATCA? FATCA is U.S. legislation enacted in 2010 which aims to prevent U.S. persons from using foreign accounts and foreign entities to evade taxes. It requires withholding agents, including Foreign Financial Institutions (FFIs) and certain Non-Financial Foreign Entities (NFFEs) to withhold a 30% U.S. tax with respect to any withholdable payment or foreign pass thru payment made to another foreign entity or a recalcitrant account holder unless the foreign entity (i) complies with the FATCA due diligence and reporting requirements or (ii) qualifies for an exemption from these provisions and/or (iii) unless the account becomes documented. Withholding under FATCA is separate and distinct and is in addition to the current withholding regime under the Code (Chapter 3 NRA withholding). Although FATCA seeks to find U.S. persons hiding behind foreign accounts and entities, the presumption is negative, so that unless the FFI complies with FATCA or unless the NFFE provides satisfactory information, the entity is presumed to be owned by U.S. persons and the 30% withholding is triggered. FATCA Terminology Accepts deposits in the ordinary course of business FATCA Terminology (contd) WeiserMazars conclusion: Financial groups with NPFFI or limited FFI will not be able to use holding companies to shelter payments from FATCA withholding. SPVs and other holding companies that are part of EAG of certain investment entities will fall under the FFI definition. However, holding companies that are part of a nonfinancial group or are not part of other FFIs will likely be exempt from FFI status Although, these entities can be considered Passive NFFEs. Holding Companies and/or Treasury Centers as FFI Part of an expanded affiliated group (EAG) that includes a (i) depository institution (ii) custodial institution (iii) certain insurance companies (iv) an investment entity Is formed in connection with or availed of by a collective investment fund, mutual fund, exchange traded fund, hedge fund, private equity fund, etc. -OR- FATCA Terminology (contd) FFI NFFE Dividends, Interest, Rents, Annuities, any other FDAP (Fixed, Determinable, Annual or Periodical income) + Gross Proceeds (not merely gains) from the sale of property that produces interest and dividends Is there an exclusion for certain withholdable payments? Important Exclusions Withholdable Payments An Expanded Scope of U.S. Source Income Dividends, Interest, Rents, Annuities, any other FDAP (Fixed, Determinable, Annual or Periodical income) + Gross Proceeds (not merely gains) from the sale of property that produces interest and dividends ECI Income Effectively Connected with U.S. Trade or Business (unless income is exempt under the tax treaty). Excluded nonfinancial payments for non financial goods or services and the use of property. Short term obligations. Grandfathered obligations, generally debt instruments, certain other legal documents with fixed terms, instruments that can produce dividend equivalent amounts and certain collateralized agreements that are issued or executed before Jan. 1, BEWARE IF THE CHARACTER OR SOURCE IS UNKNOWN IT IS PRESUMED TO BE A WITHHOLDABLE PAYMENT FROM U.S. SOURCES WITHHOLDING AGENT CAN EITHER START WITHHOLDING OR DEPOSIT IN ESCROW ACCOUNT FOR ONE YEAR UNTIL THE DUST SETTLES. FATCA Terminology (contd) Financial Account Pursuant to Final Regulations Custodial and depository accounts of an entity that is engaged in banking or similar activity WeiserMazars conclusion: Depository account is clarified to include accounts that are maintained by financial institutions that are engaged in banking or a similar activity. Financial accounts are clarified to include interests in certain investment entities. The final regulations clarify when such interests are considered a financial account, e.g., in case of interest in holding companies of FFI groups. Debt and equity interest in a holding company or a treasury center provided certain requirements are met Debt and equity interest in certain investment entities Debt and equity interest in a custodial and/or depository institution or insurance company provided that certain requirements are met Financial account needs to be held by a specified U.S. Person or U.S. Owned Foreign Entity. Prevention of 30% WH for an FFI FFI would have to become participating to avoid 30% withholding: An entity classified as an FFI, such as broker/dealers, foreign banks and credit unions will be required to enter into an agreement with the IRS under which it would have to: Obtain information from investors to determine which are U.S. accounts, e.g., accounts held by U.S. citizens, green-card holders, or entities substantially owned by U.S. persons. Substantially owned applies a more than 10% threshold, however, for investment entities a 0% threshold is applied. Comply with specified verification and due diligence procedures relating to its investors. Report annually certain information with respect to U.S. accounts that it maintains. Deduct and withhold a 30% tax on any passthru payment made to a recalcitrant account holder or another Non-Participating FFI; Comply with requests for additional information on accounts ; and Attempt to obtain a waiver if foreign law prevents reporting and if a waiver is not obtained, to close the accounts. If the FFI is in a country that is party to an Intergovernmental Agreement, then the FFI is considered deemed compliant but would have to significantly comply with the terms of the agreement. Significant noncompliance may result in the classification of the non-compliant FFI as non- participating. Prevention of 30% WH for an NFFE NFFE would have to provide information or certify to the withholding agent its exempted status: To provide information on U.S. substantial ownership or to certify eligibility for an exemption or lack of U.S. substantial ownership. A 30% withholding will not be required if: The NFFE certifies to the withholding agent that it has no substantial U.S. owners (a more than 10% threshold both directly or indirectly); IMPORTANT: The Final Regulations do NOT adopt the IGA controlling person approach (typical KYC 25%) so there is more pressure to enter into an IGA to receive more favorable terms. The NFFE provides the withholding agent the information with respect to U.S. owners; The NFFE belongs to a class of NFFE that are considered Excepted NFFE; OR The NFFE belongs to class of entities that are excluded FFI and NFFE. Excepted NFFE Include: Publicly traded entities and expanded affiliate group members; Certain entities listed in a U.S. possession or wholly owned by residents in a U.S. possession; Certain excepted nonfinancial entities (such as certain holding companies, treasury centers, start up companies and certain entities that emerge from liquidation or reorganizing); Active NFFE. Active NFFE - Important Exception Active NFFE: