july 2013 fatca regulations training session #3citibank.com/.../materials/docs/fatca_diligence.pdf1....

Update on Changes to New Account Due Diligence Based on Final Regulations

Debbie Mercer-Miller – Director and U.S. Securities Country Manager

Nicole Tanguy – Director and Corporate Tax Counsel

Important: This presentation does not constitute tax advice, but is for information purposes only.

FATCA Regulations Training Session #3July 2013

Transaction Services

Table of Contents

1. FATCA Statuses 2

2. Account Onboarding Procedures 8

3. Validity Periods 37

4. Document Specifications 45

1 Important: This presentation does not constitute tax advice, but is for information purposes only.

1. FATCA Statuses

Basic Principles

For new accounts opened on/after January 1, 2014, a withholding agent must:– Identify the payee–Determine the FATCA status of the payee based on documentation – If no appropriate documentation is provided, apply the presumptions to determine

the payee’s FATCA status–Manage changes in circumstances

For FFIs that maintain financial accounts, all payees, both individual and entity, will have a FATCA status.

For USFIs, all entity payees will have a FATCA status. Individuals will not be subject to FATCA withholding; however, they still must be classified as U.S. or non-U.S. persons.

The FATCA status of the payee will determine whether or not a payment is subject to FATCA withholding


Determining Who is the Payee

General Rule:–The payee is the person to whom a payment is made, whether or not that person

is the beneficial owner Example: The holder of a financial account is the payee

Exceptions:– If the account holder is a foreign agent or intermediary, treat the person on whose

behalf the agent/intermediary collects the payment as the payee, unless The agent/intermediary is a QI that assumed primary withholding responsibility, Or Is a U.S. branch of a foreign bank that is treated as a U.S. person (i.e., has

certified it will perform withholding when required)– If the account holder is a foreign flow-through entity Treat the partner, beneficiary or owner as the payee (looking through all flow-

through entities), unless The flow-through entity is an NPFFI, a WP or WT, an excepted NFFE or is

receiving effectively connected income


Additional Exceptions

– If the account holder is a U.S. intermediary or an agent of a foreign person, Treat the foreign person as the payee, unless the intermediary is a U.S. financial

institution–If the account holder is a disregarded entity (i.e., an entity that is disregarded as

separate from its single owner) Treat the single owner as the payee

–A U.S. branch of a foreign bank that is treated as a U.S. person (a certified participating FFI or registered deemed-compliant FFI that acts as an intermediary and agrees to perform withholding) is a payee

–A foreign branch of a U.S. bank is treated as a U.S. payee, unless The branch is a QI, then the branch is treated as an FFI


Individual U.S. Tax Statuses

An individual is foreign person only if he/she cannot be identified as a U.S. person

U.S. person– U.S. citizen (by birth or naturalization).– A dual citizen where one country of citizenship is the U.S. – Non-U.S. citizen that is a U.S. permanent resident (i.e. green card holder).– Non-U.S. citizen with substantial presence in U.S. (greater than 183 days). 31 days during current calendar year, AND 183 days during 3-year period including current year and 2 prior years

– All of the days present during current calendar year.– 1/3 days present during 1 year before current year.– 1/6 days present during 2 years before current year.


Recalcitrant Individuals

FATCA withholding applies only to accounts of individuals maintained by PFFIs.

Recalcitrant payee:– any individual that fails to comply with a request for documentation or information required

to determine whether the account is a U.S. account– A U.S. person who fails to provide valid Form W-9 or waiver (if required under local law to

permit reporting).– An individual fails to provide required documentation in response to ‘B’ Notice (incorrect

TIN notice). – Individual failing to provide appropriate “cure” documentation when U.S. indicia is identified

on an account.


FFI FATCA Statuses

Foreign Financial Institutions– Participating FFIs (PFFIs).– Non-participating FFIs (NPFFIs). – Registered Deemed Compliant FFIs (RDCFFIs). Includes Model 1 Reporting FFIs, Local FFIs, Qualified Collective Investment Vehicles, Restricted

Funds, Non-Reporting Member of PFFI Group, Qualified Credit Card Issuers, and Sponsored Investment Entities.

– Certified Deemed Compliant FFIs (CDCFFIs). Includes Non-registering Local Banks, FFIs with Low-Value Accounts, Sponsored Closely-Held

Investment Vehicles, Owner-Documented FFIs, and Limited Life Debt Investment Entities (transitional rule).

– Territory FFIs.


Other Entity FATCA Statuses

Exempt Beneficial Owners (EBOs)– Includes Exempt Beneficial Owners per Model 1 or Model 2 IGAs, Foreign Governments,

Government of U.S. Territories, International Organizations, Foreign Central Banks, Retirement Funds, and Entities Wholly Owned by Exempt Beneficial Owners.

Non-financial Foreign Entities (NFFEs)– Includes non-financial group entities, non-financial start-up entities, entities in bankruptcy or

liquidation, Section 501(c) organization, non-profit organization, publicly traded corporation, affiliate of a publicly traded corporation, territory NFFEs, active NFFEs, and passive NFFEs. A PFFI is required to treat a passive NFFE which fails to either certify that it has no substantial U.S.

owners or provide detail on those substantial U.S. owners as a recalcitrant account holder.


2. Account On-boarding Procedures

Due Diligence Process

Step 1: Document Payee.

Step 2: Validate Documentation.

Step 3: Verify Chapter 4 FATCA Status.

Step 4: Manage Changes in Circumstance.

Step 5: Apply Presumptions in Absence of Valid Tax Documentation.


Step 1: Document Payee

Obtain the appropriate documentation from each payee. – For onshore accounts: Obtain Form W-9 or Form W-8. – For offshore accounts: Relaxed documentation rules may apply. Obtain Forms W-8 / W-9,

documentary evidence, written statements, or self-certifications.– CAUTION: Forms W-8 remain the only way to make a claim for reduced withholding

pursuant to a treaty under Chapter 3 U.S. non-resident reporting and withholding. Do not become FATCA compliant at the expense of becoming non-compliant with

existing regulatory regimes.– Alternative documentation collected for offshore accounts or offshore payments may not be

relied upon for payments made to accounts maintained in the United States


U.S. Persons

Treat payee as a U.S. person if a valid Form W-9 is provided– For new accounts, the Form W-9, as revised for FATCA, must be provided. This Form is expected

during the second half of calendar year 2013. – A PFFI must treat a payee providing a valid Form W-9 as a specified U.S. person unless the Form W-9 indicates that the payee is other than a specified U.S. person.

– If a PFFI knows or has reason to know a payee’s claim of status as other than a specified U.S. person is incorrect, must treat payee as a specified U.S. person subject to FATCA reporting e.g., an individual is always a specified U.S. person.

– If withholding agent is a Model 1 / Model 2 FFI, can treat payee as a U.S. person based on self certification, and must obtain U.S. TIN. For ease of administration and consistency, Citi will likely require Form W-9 globally from

all U.S. persons


Specified U.S. Persons

Specified U.S. persons is any person OTHER THAN: – A publicly traded corporation or member of its expanded affiliated group;– Organization exempt from tax under Section 501(a) or an individual retirement plan;– The U.S., the District of Columbia, any state, any U.S. territory, any political subdivision the

foregoing, or any wholly-owned agency or instrumentality thereof;– Banks; REITS; RICs,– Common trust fund or trust exempt from tax;– A U.S. registered dealer in securities, commodities or derivatives; or– A broker.

Above list is similar to list of “exempt recipients” used to identify persons exempt from Form 1099 reporting, except that certain private corporations are specified U.S. persons


Waiver

If foreign law will prevent a participating FFI from complying with FFI reporting requirements for U.S. persons absent a waiver, the FFI must request a waiver.

If payee does not provide the waiver, participating FFI is required to treat the account as recalcitrant or nonparticipating.

If waiver not obtained in reasonable amount of time, FFI is required to CLOSE the account.


Non-U.S. Persons

Treat as a non-U.S. person if the payee provides:– A valid Form W-8. Required for payments made onshore or to onshore accounts Alternative documentation may be permitted (but may not be practical) for offshore accounts However, certain FATCA statuses will require a Form W-8 (regardless of whether onshore or

offshore obligation): CDCFFI non-registering local bank, CDCFFI low-value FFI, CDCFFI limited life debt investment entity.

– For offshore accounts, alternative types of documentation may be permitted a valid written statement

– contains the same recitals for a particular FATCA status as does a Form W-8– difficult to administer separate written statements for each FATCA status

Specified types of documentary evidence.– As specified in FATCA regulations to establish FATCA status, and– As specified in a country attachment to a QI agreement to establish foreign status.

– For accounts maintained by a Model 1 Reporting FI Self certifications may be used (may be developed by local tax authorities)


Forms W-8

Forms W-8.– Obtain Form W-8BEN-E from a non-U.S. entity that is a beneficial owner (i.e. is acting for

its own account). – Obtain Form W-8ECI from a non-U.S. person claiming that the U.S. source income is

effectively connected with the conduct of a trade or business in the U.S. – Obtain Form W-8EXP from a non-U.S. person that is a beneficial owner and that is exempt

from U.S. taxation under the Internal Revenue Code (e.g. international organization, foreign government, or tax-exempt organization.).

– Obtain Form W-8IMY and withholding statement (if applicable) from a non-U.S. person that acts as an intermediary (e.g., QI, NQI) or an agent on behalf of another person, or is a flow thru entity (partnership, simple trust, grantor trust).


Written Statements

Written statements can be used for offshore obligations only.

A written statement is a statement made by the payee that provides the payee’s FATCA status and any other information required, such as whether person receiving payment is a beneficial owner, intermediary, etc.

Must include signed and dated certification that the information is accurate and will be updated within 30 days of any change in circumstance.

Certification not required to be under penalties of perjury unless receiving U.S. source income.

Can be obtained in any format acceptable to withholding agent including via account onboarding documentation.


Self-Certifications

Self-certifications can only be used to document payees of IGA jurisdiction financial institutions.

Open question as to whether self-certifications will evolve as a global standard, vary country to country, or even be Partner FI specific? Given only four countries have executed IGA Agreements, there has not been a considerable amount of guidance regarding self-certification.

U.K. guidance indicates there will be a “U.S. centric” approach – e.g., it is not sufficient to just indicate U.K. tax residency, payee must certify it is not a U.S. citizen or tax resident.


Documentary Evidence of Foreign Status

Documentary evidence can be used for offshore obligations only.

Documentary evidence includes:– Certificate of tax residence.– For individuals - valid identification issued by government body that is typically used for

identification purposes. – For entities – documentation from government body indicating name of entity, address of

principal office in country or country in which incorporated. – For offshore accounts maintained in a QI jurisdiction – appropriate documentary evidence

pursuant to QI Agreement.– For individuals with offshore accounts only - third party credit report.


Documentary Evidence of FATCA Status

Documentary evidence can be used for offshore obligations only.

General documentary evidence for entities other than PFFIs or RDCFFIs. – Examples include organizational documents, financial statements, third-party credit reports,

letter from government agencies, statements from government websites, etc.

Payee specific documentary evidence.– Examples include letter from a U.S. based auditor or attorney with that is not related to the

withholding agent or payee and is subject to the authority of a regulatory body, a bankruptcy filing, corporate resolution, stock market index, etc.

Documentation rules will vary depending on whether payee is receiving U.S. source or non-U.S. source income.


Reliance on Documentary Evidence

Utilizing documentary evidence collected under AML or KYC regimes to classify a payee in lieu of a Form W-8 / W-9 or written statement can alleviate some due diligence burdens; however, it can also pose challenges for FFIs. – It is considered a material failure for a PFFI to have a criminal or civil penalty or sanction

imposed by a regulator or government agency based on a failure of the PFFI to comply with its AML due diligence procedures.

– Will existing AML processes meet requirements for ongoing verification – e.g. active NFFE status requires annual verification.


Step 2: Validate Documentation

Citi must perform due diligence to validate the payee’s Form W-9, Form W-8, documentary evidence, or self-certification. This requires confirming that the documentation is complete and reviewing the documentation against all other information pertaining to the account to make sure the tax claim is consistent with the other information – e.g. account on-boarding documentation, AML/KYC documentation, etc. – A Form W-8 or documentary evidence that contains indicia of U.S. status is not valid unless

cure documentation supports non-U.S. status.

Reviewing for U.S. indicia is part of document validation; however, reviewing for U.S. indicia alone will not meet validation requirements.

Clients should be aware that Citi may be required to collect additional documentation or information to support a claimed FATCA status


Validation Standard

A payee is validly documented if it provides a valid Form W-9 or Form W-8 or other acceptable documentation.

The withholding agent may rely upon claims made in the documentation, unless it knows or has reason to know that the documentation is incorrect or inconsistent with other information in the possession of the withholding agent.

The payee is responsible for determining its own FATCA status. Citi may not advise the payee on what the payee’s FATCA status is or should be. Citi is not in the business of giving tax advice to its clients.


Curing U.S. Indicia

If any U.S. indicia is present, Citi must obtain the documentation required to “cure” the U.S. indicia.

Each type of U.S. indicia that appears in account documentation must be cured. If indicia can be cured using the same documentation (e.g. Certificate of Incorporation), Citi will not need to collect such documentation twice.

Citi is likely to request documentation at the time of account opening pursuant to anti-money laundering or know-your-customer laws that may be sufficient to cure U.S. indicia that may be present or added to the account, including:–a Certificate of Incorporation or other formation document from entities, or–an identification document, such as a passport, a national identity card or a

driver’s license from individuals.


U.S. Indicia – Entity Accounts


Cures for U.S. Indicia – Individual Accounts held by a PFFI


Step 3: Verifying Chapter 4 FATCA Status

If an entity claims that it is a PFFI or a Registered Deemed Compliant FFI (RDCFFI), it must:– Provide a GIIN, or– State that a GIIN has been Applied For. Citi must obtain a GIIN from the PFFI or RDCFFI within 90 days after the claim is made.

Once Citi has received the GIIN, it must validate against IRS list within 90 days of its receipt. This check must be repeated annually.

Citi must validate that the PFFI or the branch submitting the form is not located within a limited jurisdiction.

For payments made before January 1, 2015, a reporting Model 1 FFI may be treated as such if it provides a Form W-8 to that effect even if it does not provide a GIIN.


Owner Documented FFIs

An owner documented FFI (“ODFFI”) is an entity primarily engaged in the business of investing or trading in securities.

As a practical matter, the ODFFI will apply to closely held trusts or personal investment corporations that are professionally managed.

If Citi decides to act as a withholding agent for an ODFFI, it will require the following documentation:– Form W-8 or written statement (offshore obligation only) for owner documented FFI; and – Documentation (either Form W-9, W-8, or documentary evidence) for all owners of the

owner documented FFI.


Passive NFFEs

Passive NFFEs are NFFEs which are not otherwise excluded from FATCA requirements. Based on the final regulations, closely held trusts or personal investment companies which are not professionally managed will be treated as passive NFFEs.

Professionally managed means managed by a group or entity responsible for providing professional management or financial services. Having an individual managing investments does not meet the professionally managed threshold.

In order to avoid 30% FATCA withholding, passive NFFEs must either certify that they do not have any substantial U.S. owners, or provide the name, address, taxpayer identification number, and ownership percentage of each substantial U.S. owner.


Passive NFFEs (cont’d.)

A substantial U.S. owner is generally any U.S. person owning a greater than 10% interest in the entity. However, in the case of a grantor trust, a substantial U.S. owner is any U.S. owner (e.g. even a .01% ownership interest qualifies as a substantial U.S. owner).

Passive NFFEs are only required to provide identifying information on substantial U.S. owners – they are not required to provide Forms W-9 or W-8.


Step 4: Managing Changes in Circumstance

A change in circumstance is any change impacting the Chapter 4 status of the payee.

Withholding Agent Responsibilities:– Can rely on tax certification without inquiry into changes of circumstance unless withholding

agent knows or has reason to know circumstances have changed. – Documentation becomes invalid as of date notified or if withholding agent has reason to

know of change.– CAN provide a grace period equal to the shorter of 90 days or until a withholdable payment

is made to the account. – May require new withholding certificate at any point regardless of knowledge or reason to

know.


Changes in Circumstance

Payee Responsibility:– Must notify withholding agent within 30 days and provide new withholding certificate, written

statement, and / or documentary evidence as required. – Forms W-8 include this as a provision and written statements must also include this

certification.


Step 5: Apply Presumptions

Apply presumptions in the absence of valid documentation for a payee.

For individuals:– General rule: Presume an undocumented individual to be a U.S. person.– Exception: Presume an undocumented individual to be a non-U.S. person, if payment is

made outside the U.S. with respect to an offshore obligation and the withholding agent does not “know” the individual is a U.S. person.

FATCA withholding impact:– PFFI must treat undocumented individuals as recalcitrant account holders subject to 30%

FATCA withholding.


Presumption Rule for Entities:

Presume undocumented entities to be specified U.S. persons, unless an exception applies:– Presume non-U.S. entity if there are foreign indicia: The withholding agent has actual knowledge of the person’s EIN and that number begins with the

two digits “98”; or The withholding agent’s communications with the person are mailed to an address in a foreign

country; or The withholding agent has a telephone number for the person outside of the United States; or The name of the entity indicates that it is a per se foreign corporation.

– Presume non-U.S. entity if payment is made outside the U.S. on an offshore obligation and the withholding agent does not know the payee is a U.S. person.

– Presume non-U.S. entity if payment is made to an certain types of exempt recipients (e.g., corporation, foreign government, international organization, foreign central bank, securities, commodities or NPC dealer, financial institution, nominee or custodian, broker or swap dealer.).

FATCA Withholding Impact:– Withholding agent must treat an undocumented non-U.S. entity as an NPFFI subject to

30% FATCA withholding. 35 Important: This presentation does not constitute tax advice, but is for information purposes only.

Modified Eyeball Test

If the payment is made to an entity that:– Can be identified as a certain type of exempt recipient under the “eyeball” test (e.g., tax-

exempt organization, individual retirement plan, U.S. government, state government, securities, commodities or NPC dealer, real estate investment trust, regulated investment company, common trust fund or certain tax-exempt trusts), and

– The withholding agent also has documentary evidence (typically an organizational document) to support the U.S. status of the account,

– The account will be presumed a U.S. non-specified exempt recipient.


3. Validity Periods

Validity Period of Forms W-8

Generally, a Form W-8 remains valid until the last day of the third calendar year after the year in which it is signed.

The Final Regulations have introduced the concept of indefinite validity, in some circumstances.

However, certain additional requirements must be met in order to grant indefinite validity and there must be ongoing monitoring for changes in circumstance.


Validity Period for Documentary Evidence

Documentary Evidence of Foreign Status:– Valid until later of last day of third calendar year following year in which provided (i.e. same

as Form W-8 expiration date); OR– Valid until change in circumstance makes unreliable; OR– If later, the date the documentation expires.

Example – Passport provided as documentary evidence for Form W-8BEN expiring 12/31/2016. Passport expires 06/30/2016. Can be used as documentary evidence until 12/31/2016.


Indefinite Validity Period

Withholding certificates, written statements, or documentary evidence, to the extent applicable, remain valid indefinitely, unless there is a change in circumstances, when provided in the following circumstances:– PFFI or RDCFFI with a verified GIIN (subject to annual monitoring).– Individual beneficial owner claiming foreign status if the withholding certificate is furnished

with documentary evidence supporting the individual’s claim of foreign status and the withholding agent does not have a current U.S. residence or U.S. mailing address for the payee and does not have one or more current U.S. telephone numbers that are the only telephone numbers the withholding agent has for the payee.


More Indefinite Validity

A withholding certificate, written statement or documentary evidence provided for an offshore obligation by one of the following types of entities:

–Section 501(c) entity.–Non-profit organization.–Nonreporting IGA FFI.–Territory financial institution that agrees to be treated as a U.S. person.–NFFE the stock of which is regularly traded on an established exchange.–An NFFE that is an affiliate of an NFFE the stock of which is regularly traded.–An active NFFE (provided ongoing AML monitoring does not indicate the

determination is incorrect).–A sponsored FFI.

A beneficial owner withholding certificate provided by any of the above types of entities, along with documentary evidence of foreign status, has indefinite duration for onshore obligations


More Indefinite Validity

–A intermediary, flow-through entity, or U.S. branch Form W-8 (not including the underlying documentation or withholding statement).

–A withholding certificate, written statement, or documentary evidence of a foreign government, central bank, international organization, or entity wholly owned by such an organization.

–Documentary evidence in support of that is not generally renewed or amended (e.g., certificate of incorporation).


Indefinite Validity for Offshore Obligations

Additional Indefinite validity period rules for offshore obligations. – A Form W-8BEN or documentary evidence provided by an individual claiming non-U.S.

status if there is no current U.S. indicia.– A withholding certificate of an ODFFI.– A withholding statement of an ODFFI if the account balance is $ 1 million or less (and there

are no contingent or designated classes with unidentified beneficiaries).– A withholding certificate of a passive NFFE if the account balance is $ 1 million or less and

the withholding agent does not know or have reason to know the entity does not have contingent beneficiaries or designated classes of beneficiaries).


Situations Without Indefinite Validity

Indefinite validity does not currently apply to documentation obtained for purposes of Chapter 3 U.S. non-resident reporting and withholding.

Indefinite validity will not apply to documentation used to claim treaty benefits on payments of U.S. source income for purposes of Chapter 3. The IRS has indicated this will NOT change as part of the coordination rules.


4. Document Specifications

Forms can be either official IRS forms or substitute forms which meet detailed requirements. –Citi will be using official IRS tax forms and does not accept substitute forms

The Final FATCA Regulations allow both Forms W-9 and Forms W-8BEN to be submitted electronically. –Citi expects to establish procedures for accepting tax forms that are submitted

electronically through facsimile machines or email Requires being able to identify that the sender of form is the person identified on

the form or an authorized representative

Form Specifications


Documenting Multiple Accounts

A withholding agent must collect documentation on an account-by-account basis, unless an exception applies.

Citi is exploring the requirements in the Final FATCA Regulations for sharing tax documentation among multiple accounts of the same payee, including–a single branch system where multiple accounts held at the same branch are

treated as consolidated obligations,–a universal account system where multiple accounts at different branch locations

or different members of the expanded affiliated group can be retrieved systemically through the use of a customer identifier, and

–A shared account system where the accounts are treated as consolidated accounts and each member can easily access the information and documentation on the shared system.

Each of these methods compel the sharing of all information relevant to the determination of the validity of the shared tax form, including any changes in circumstance.


Sunset Rule

The Final FATCA Regulations contain a six-month sunset period for new tax forms;–Withholding agents have six months following the issuance of a new form to

transition to the new form. –A withholding agent cannot accept a previous version of a form more than six

months after a new form is issued.


Payee identification.

Obtain tax certification, written statement, or other documentation required to meet offshore account exception.

Confirm tax certification is valid.

Review all account documentation for U.S. indicia.

“Cure” U.S. indicia as applicable.

Manage changes in circumstance.

Maintain records in accordance with IRS requirements.

Recap of Due Diligence Procedures


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Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.

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