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Implications of Foreign Account Tax Compliance p g pAct (FATCA) for Credit Unions

December 4, 2012

Dan Lundenberg, PartnerGrant Thornton LLPT +1 416 360 4988E [email protected]

Meg Hogan, Senior ManagerGrant Thornton LLPT +1 202 521 1519E [email protected]

Chris Anderson, PartnerGrant Thornton LLPT +1 416 360 4977E [email protected]

© Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd

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Implications of Foreign Account TaxImplications of Foreign Account Tax Compliance Act (FATCA) for Credit UnionsCredit Unions

With an introduction fromWith an introduction fromWith an introduction from With an introduction from Andy Andy PoprawaPoprawa, , CEO of DICOCEO of DICO

Webinar Agenda

• What is FATCA?• Why is FATCA important to Credit Unions?• Why is FATCA important to Credit Unions?• What is FFI Registration?• What is the FATCA Reporting Regime?• What is the FATCA Reporting Regime?• What do FFIs need to do to become FATCA

compliant?compliant?• When does FATCA become effective?

© Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd© Grant Thornton LLP. A Canadian Member of Grant Thornton International Ltd

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Cautionary Notes

• FATCA is evolving on a daily basis– The IRS is late issuing final rules and has delayed

some effective dates– Intergovernmental Agreements with certain

countries that seek to simplify reportingcountries that seek to simplify reporting– US and Canada announced negotiations over an

Intergovernmental AgreementIntergovernmental Agreement• We must simplify certain technical aspects for

presentation purposes


p p p• We apologize for any lapses into US tax jargon

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What is FATCA?

• The US Congress passed FATCA in 2010 to combat offshore tax evasion by US personsy p

• US requires all citizens regardless of residency to file and pay US taxp y

• Many Canadian citizens and residents are dual citizens of the US

• Offshore Voluntary Disclosure Programs – allow non-filers to start filing and avoid certain penalties


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Why is FATCA important to Credit Unions?

• FATCA will require foreign financial institutions (FFIs) to:( )─ Register with the US Internal Revenue Service─ Identify their customers who are AmericansIdentify their customers who are Americans,

and─ Report these American customers to the IRSepo t t ese e ca custo e s to t e S

• Non-participating FFIs will suffer:– 30% US withholding tax on its and its


30% US withholding tax on its and its customers' US source income

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Credit Unions are FFIs

1. Enter into an FFI Agreement with the IRS and become a participating FFIp p g

2. Qualify as "deemed compliant"3 Ch t b " li t"3. Choose to be "non-compliant"

Many Canadian Credit Unions could be deemed compliant


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Registered Deemed Compliant FFIs – "Local FFIs"

• Licensed or regulated under the laws of its country of organization (which must be "FATF-compliant") as a bank or similar organizationM t h fi d l f b i t id it t f i ti• Must have no fixed place of business outside its country of organization and must not solicit account holders outside its country of organization

• At least 98 percent of the accounts maintained by the FFI must be held b id t f th FFI’ t f i tiby residents of the FFI’s country of organization

• The FFI must be subject to information reporting or tax withholding requirements in its country of organization with respect to resident acco nt holdersaccount holders

• Must establish policies and procedures to ensure that it does not open or maintain any accounts for specified U.S. persons that are a resident


• Register with the IRS and re-certify compliance every three years; notify IRS if later becomes non-compliant

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Certified Deemed Compliant FFIs - Non-Registering L l B kLocal Bank

• Not required to register with IRS• Provide certification to US withholding agent• Provide certification to US withholding agent

– Licensed and regulated as a bankNo foreign offices or solicitation of foreign– No foreign offices or solicitation of foreign accounts

– No more than $175 million in assets– No more than $175 million in assets– Local country requires information reporting or

tax withholding


tax withholding

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Certified Deemed Compliant FFIs - FFIs with Low Value AccountsValue Accounts

• Not required to register with IRS• Provide certification to US withholding agent• Provide certification to US withholding agent• Applies to local bank or local custodian with low

value accountsvalue accounts– No account can exceed $50,000– No more than $50 million in assets for most– No more than $50 million in assets for most

recent accounting year


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FFI Agreement

In a FFI Agreement, a FFI will be required to:1. Obtain information and documentation regarding each account holder to

determine whether an account is held by US individuals and certaindetermine whether an account is held by US individuals and certain entities;

2. Comply with IRS due diligence and verification procedures with respect to the identification of United States accounts;

3. Report annually certain information on United States and recalcitrant accounts that it maintains;

4. Deduct, withhold and pay over 30 percent of certain pass-thru payments that the FFI makes to recalcitrant account holders (and others); and

5. Attempt to obtain a waiver of applicable bank secrecy or other local information disclosure limitations or close the United States account if the waiver is not obtained within a reasonable period of time


waiver is not obtained within a reasonable period of time.

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FFI Registration

• Online registration and account management• Application process to commence early 2013• Application process to commence early 2013• IRS model FFI Agreement is expected

i i tlimminently


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What is an Intergovernmental Agreement?

• Effort to simplify FFI reporting and address local country impedimentsy p

• Reciprocal Model: – Allows FFIs to report FATCA information to local tax

authorities instead of the IRS– Local tax authorities provide info to the IRS

• Non-Reciprocal Model:– FFI reporting directly to the IRS


– Generally does not require FFI Agreement

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Due Diligence for Preexisting Individual Accounts

• Exempt: depository accounts that do not exceed $50,000

• Accounts that exceed $50,000 but do not exceed $1,000,000 are subject only to review of "electronically searchable information" for "indicia of U.S. status."review of electronically searchable information for indicia of U.S. status.

1. Identification of an account holder as a U.S. resident or citizen; 2. a U.S. place of birth; 3 a U S address or mailing address (including a U S P O box);3. a U.S. address or mailing address (including a U.S. P.O. box); 4. a U.S. telephone number; 5. standing instructions to transfer funds to an account maintained in the

United States;United States; 6. a power of attorney or signatory authority granted to a person with a U.S.

address; or 7. a U.S. “in-care-of” or “hold mail” address that is the sole address the FFI


a U S ca e o o o d a add ess a s e so e add ess ehas identified for the account holder.

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More on Procedures for Preexisting Individual AccountsAccounts

• No further search of records or contact with the account holder is required unless U.S. indicia are found through the electronic search.

• Electronically searchable information - information an FFI maintains in its tax reporting files customer master files or similar files stored in electronic form that can be accessedfiles, customer master files or similar files stored in electronic form that can be accessed through standard programming queries.

• For "high value" accounts with a balance or value that exceed $1 million, a paper file review for U.S. indicia must be performed, including an inquiry of the actual knowledge of any relationship manager associated with the account. The paper file review is limited to the “customer master file” and other documents.

• Deadline for completing due diligence of preexisting individual account procedures -

• High value accounts – Due diligence must be performed by the later of December 31, 2014 or date that is one year from effective date of FFI Agreement

• Other individual accounts (other than high value accounts) – Due diligence must


Other individual accounts (other than high value accounts) Due diligence must be performed and documentation obtained by the later of December 31, 2015 or two years after the effective date of FFI Agreement.

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Preexisting Entity Accounts

• Exempt Accounts - preexisting entity accounts with a value or balance of $250,000 or less are exempt from due diligence until the balance or value exceeds $1 million.

• Entity accounts exceeding $1 million must be reviewed to determine the reporting status of the entity based on FATCA entity classifications and a review of existing accountof the entity based on FATCA entity classifications and a review of existing account information. If the entity account holder is then found to be a "passive investment entity," it must be determined whether that entity has substantial U.S. owners. If the account value exceeds $1 million, then information regarding all of the entity's substantial U.S. owners must be obtained or a certification (on W 8) that the entity does not have anyowners must be obtained or a certification (on W-8) that the entity does not have any substantial U.S. owners must be obtained.

• Deadline for completing due diligence for preexisting entity accounts -

for "prima facie" FFI accounts due diligence must be performed and documentation– for "prima facie" FFI accounts, due diligence must be performed and documentation obtained by the later of June 30, 2014 or 6 months after the effective date of the FFI Agreement

– all other preexisting entity accounts, due diligence must be performed by the later of D b 31 2015 t ft th ff ti d t f th FFI A t


December 31, 2015 or two years after the effective date of the FFI Agreement.

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New Accounts

• New Individual accounts (accounts opened after the effective date of an FFI's agreement) - review the information provided at the opening of the account, including identification and any documentation collected under AML/KYC rules. If U S indicia are identified as part of that review the FFI must obtain additionalIf U.S. indicia are identified as part of that review, the FFI must obtain additional documentation or treat the account as held by a recalcitrant account holder.

• New Entity Accounts - certification as to whether an entity account holder has any substantial U S owners is required However certain entities are exemptany substantial U.S. owners is required. However, certain entities are exempt from documenting substantial U.S. owners and this exempt status can be verified on a W-8.

• Deadline for implementing new individual and entity account openingDeadline for implementing new individual and entity account opening procedures – new account opening procedures must be implemented by the later of January 1, 2014 or the effective date of the FFI Agreement.


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So what does a CU do?

What• Confirm FATCA entity categorization

How – a project!

A i ty g• Include FATCA-related information for

identification of any US account holders• Calculate and deduct "withholdable

• Assess impact

• Design solution• Calculate and deduct withholdable

payments" where necessary• Report on accounts in scope annually

D t t FATCA li t IRS

• Implement plan

• Demonstrate FATCA compliance to IRS • Manage controls


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The timeline

Recent developments• Proposed regulations and a recent IRS Announcement phase-in the rollout of FATCA due diligence and withholding. FATCA

withholding on US source FDAP will be required as of January 1, 2014 and withholding on gross proceeds is required as of January 1, 2017. These rules (which will generally be incorporated into final regulations), should provide FFI's with more clarity to take the project planning forward in order to comply with the forthcoming final regulations.

• These timeframes and associated activities are by no means set in stone and are purely illustrative.


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What does this all mean?Changes to business processes and systemsChanges to business processes and systems

• Become compliant to avoid 30% withholding tax on US sourced portfolio payments

• Processes that need attention– Identifying accounts (existing, new, changes in y g ( g g

account status)– Withholding– Paying– Reporting


p g– Reconciling

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Identifying accounts (existing, new, changes in account status)account status)

System reports• Deemed Compliant FFI

– 98% of accounts must be

Process changes• Deemed Compliant FFI

– Establish policies and98% of accounts must be domestic

• Pre-existing accounts– Ensure tax rules turned into

Establish policies and procedures to identify accounts opened or maintained by U.S. persons Ensure tax rules turned into

correct logic• New accounts

– Possible extra data to gather

• Pre-existing accounts– Document electronic search– Document paper file review for Possible extra data to gather

– Logic to flag U.S. persons 'high value' accounts• New accounts

– Document new customer


process - identify 'recalcitrant account holders'

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Calculations, deductions, and reporting

• Deduct, withhold and pay 30% of (certain) pass through payments to 'recalcitrant account holders'

• Ensure tax rules are turned into correct logic• Reporting (over time)

– Name, address, TIN, account number, account balance– And then (over time)

• Income associated with U S accounts• Income associated with U.S accounts• Aggregate number and balance of recalcitrant

accounts


• Gross proceeds22

Demonstrate FATCA Compliance to IRS

• Adopt written policies and procedures for compliance with due diligence, withholding and p g , greporting

• Conduct periodic reviews of complianceConduct periodic reviews of compliance• Responsible officers to certify compliance!

Thi d t dit t i d– Third party audits not required


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Thank you!

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