Embed Size (px)
Citation preview
Everything You Didn’t Want to Know About FATCA and Hoped You Would Never Have to Ask
April 18, 2013
www.pwc.com
PwC
PwC’s Presenter today...
Slide 2
Paul Eldridge Managing Director – Tax PwC Bermuda +1 (441) 299.7148 [email protected]
April 2013
PwC
IRS Circular 230 Disclosure
Any Conclusions, Analysis and Commentary contained in the document is based on the completeness and accuracy of our understanding of the facts and any representations as set forth below If any of the facts or representations are not entirely complete or accurate, it is imperative that we be informed immediately, as the inaccuracy or incompleteness could have a material effect on our Commentary. In rendering our views, we are relying upon the relevant provisions of the Internal Revenue Code of 1986, the regulations there under, and the judicial and administrative interpretations thereof. These authorities are subject to change, retroactively and/or prospectively, and any such changes could affect the validity of our Commentary. We will not update our Comments for subsequent changes or modifications to the law and regulations or to the judicial and administrative interpretations thereof.
The written advice contained in this document is “Other Written Advice” as defined by Circular 230. Accordingly, this document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties.
The present analysis is exclusively based on the review of the following official documents in the form in which these are available to date: Hiring Incentives to Restore Employment Act dated 18 March 2010, Notices 2010-60, 2011-34, 2011-53 and 2012-42 dated August 27, 2010, April 8, 2011, July 25, 2011 and October 24, 2012, proposed regulations dated February 8, 2012 respectively, and final regulations January 17, 2013.
This document cannot be construed as reflecting any official position of the US tax authorities or PwC. Therefore, we cannot exclude the risk that the US tax authorities would ultimately interpret any provision of the FATCA rules and guidance differently or that they would adopt a position which is not in line with any of the statements set forth under the present memorandum.
Slide 3
April 2013
PwC
FATCA in 3 minutes or less
Summary of the key elements of the legislation
Slide 4
April 2013
PwC
The Genesis of FATCA
• Passed in the aftermath of UBS scandal
• Intent is to “detect, deter, and discourage tax evasion” by US persons, through the use of non-US accounts and non-US entities
• Obtaining information on US persons is the primary objective: this is reinforced through the threat of a 30% withholding on certain US based principal income, gross proceeds of sales of U.S. Securities, and foreign pass-thru payments.
• Withholding can be avoided if Foreign Financial Institutions (FFIs) enter agreements with IRS under which they “agree” to furnish the information on “US persons”
• “Meet the Parents” problem – Are you in the DeNiro Circle of Trust?
Slide 5
April 2013
PwC
What is a Foreign Financial Institution?
Slide 6
Activity: Examples:
A. Accepts deposits in the ordinary course of a banking or similar business;
• Commercial banks • Savings and Loan
Associations
• Credit unions • Co-operative banking
institutions
B. Holds financial assets for the account of others, as a substantial portion of its business;
• Broker Dealers • Clearing Organisations • Trust Companies
• Custodial banks • Custodian of Employee
Benefit Plan
C. Is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities or any interest in such assets (including derivatives such as forwards, futures or options) includes portfolio management, administering or managing funds
• Mutual Funds • Funds of Funds • ETF • Hedge Funds • Venture Capital Funds • Sovereign Wealth Funds
• Private Equity Funds • Commodity Pools • Managed Funds • Collective Investment
Vehicles
D. Is an insurance company (or the holding company of an insurance company) that issues or is obligated to make payments to a “financial account” eg., insurance policies with cash value and annuities
Life Insurance companies/products
E. Holding companies and treasury centers (see next slide)
A Non Foreign Financial Entity (“NFFE”) is any foreign entity which is not an FFI.
April 2013
PwC
‘Holding companies’ and ‘treasury centers’
Slide 7
Definition
An entity that is a holding company or treasury center that:
1. is part of an expanded affiliate group (EAG) that includes other financial institutions, or
2. if formed in connection with investment vehicles such as private equity funds, mutual funds, hedge funds, etc.
What’s new?
Expanded definition
Key takeaways
Holding companies and treasury centers are FIs if:
• the EAG includes a depository institution, custodial institution, insurance company or an investment entity, or
• the entity is formed or availed of by any fund or similar investment vehicle
April 2013
PwC
How has the concept of ‘financial institution’ changed under the final regulations?
Slide 8
Proposed regulations (4 types of institutions)
Final regulations (5 types of institutions)
Type of change
1. Depository institution 1. Depository institution New concepts and
exceptions
2. Custodial institution 2. Custodial institution Minor clarifications
3. Insurance company 3. Insurance company Expanded definition
4. Entities that
invest/trade
4. Investment entities - entities
that trade, invest or manage
financial assets as a business
on or behalf of customers
Significant new concepts
N/A 5. Certain holding companies
and treasury centers
New type of financial
institution
April 2013
PwC
‘Depository institutions’
Slide 9
Definition
Accepts deposits in the ordinary course of a banking or similar business
What’s new?
New concepts and exceptions
Key takeaways
• lessors and lenders solely accepting deposits as collateral are not considered to be in a banking or similar business
• charge and credit card services are not considered a banking or similar business
April 2013
PwC
‘Insurance companies’
Slide 10
Definition
• is a company regulated as an insurance company in its country of operation,
• has gross income arising from insurance, reinsurance, and annuity contracts that exceeds 50 percent of gross income, or
• has assets associated with insurance, reinsurance, and annuity contracts that exceeds 50 percent of gross assets
What’s new?
Expanded definition
Key takeaways
• provides certainty when identifying an insurance company
• single cash value contract cannot alone create an insurance company FFI
• requirement that insurer be regulated under local law provides clarity, as opposed to a determination under US criteria
April 2013
PwC
‘Investment entities’
Slide 11
Definition
Entity primarily conducts as a business one or more of the following activities or operations for or on behalf of a customer:
(1) trading in certain financial products
(2) individual or collective portfolio management
(3) investing, administering or managing money or financial assets on behalf of others
Entities that hold themselves out as collective investment vehicles, mutual funds, private equity funds, etc.
What’s new?
Significant new concepts and expanded definition
Key takeaways
• small non-professionally managed entities (e.g., family trusts, PICs, etc.) will be positively impacted
• investment managers could be investment entities
April 2013
PwC
New exclusions – excepted inter-affiliate FFIs
Slide 12
• Treated as excepted NFFE (not an FFI)
• Conditions:
- entity is a member of a PFFI group
- maintains no financial accounts outside EAG
- does not hold an account with or receive payments from any withholding agent outside EAG
- does not make withholdable payments to persons outside EAG
Key takeaway
May significantly reduce and ease registration requirements in certain situations
April 2013
PwC
Deemed-compliant FFIs
Slide 13
Two types of deemed-compliant categories do not need to sign an FFI agreement with the IRS, but still have obligations:
Registered deemed-compliant FFIs
Must register with the IRS, agree to deemed-compliant criteria, and certify every 3 years to its compliance
• local FFI
• non-reporting member of Participating FFI (PFFI) group
• qualified collective investment vehicle
• restricted fund
• sponsored investment entities and controlled foreign corporations (CFCs)
Certified deemed-compliant FFIs
Must certify to a withholding agent that it meets the requirements on a Form W-8 and provide any other required documentation
• non-registering local bank
• FFIs with only low value accounts
• limited life debt investment vehicle
• qualified credit card issuers
• sponsored closely held investment entity
• owner documented FFI
Retirement funds and non-profit organizations are recategorized
April 2013
PwC
New deemed-compliant FFIs
Slide 14
New deemed-compliant FFIs
Features
Sponsored FFI • Sponsored FFIs do not need their own global intermediary identification number (GIIN) until 2016
• Key requirements of sponsoring FFIs: ― Authorized to manage FFI and enter into contracts for FFI ― Registers with IRS as a sponsoring FFI ― Agrees to perform due diligence, reporting and withholding
on behalf of a sponsored FFI
Limited life debt investment vehicles
• Transitional status - valid prior to 2017 • Prescriptive requirements must be met • Primarily addresses collateralized loan obligations (CLOs) and
collateralized mortgage obligations (CMOs) • Entity was in existence prior to 2012
Qualified credit card issuers
Must have a policy to return amounts in excess of $50k or prohibit customer deposits over $50k
April 2013
PwC
What does FATCA make FFI’s do to avoid 30% Withholding on U.S. Source Income Starting January 1, 2014?
◦ Register through FATCA portal by October 25, 2013 by filling out Form 8926
◦ Update new client on boarding procedures by January 1, 2014
◦ Complete identification and review on high value accounts (Individual accounts over a million dollars in value) by December 31, 2014
◦ Complete identification and review procedures for prima facie FFI accounts by July 1, 2014
◦ Complete identification review procedures for all remaining pre-existing accounts by December 31, 2015
◦ Start reporting information on US account holders to the IRS by March 31, 2015
◦ Start Foreign pass thru withholding on payments to recalcitrant account holders and non participating FFIs and on gross proceeds of US securities sales, both starting on January 1, 2017
Slide 15
April 2013
PwC
How NFFEs can avoid 30% Withholding on U.S. Source Income Starting January 1, 2014
• NFFE receiving withholdable payments for purposes of 30% FATCA withholding tax must:
• Prior to January 1, 2014, NFFEs must fill out Form 8966 and give it to their withholding agents
• Form 8966 requires the NFFE to indicate it has no substantial U.S. owners (eg. 10% or more), or if it does, to provide information on them (eg. Name, address and TIN)
• Requirement doesn’t apply if you are an excepted NFFE
Slide 16
April 2013
PwC
Summary of Changes for PFFIs
Requirement Original Date Revised Date Change
Procedures in place for new account
opening July 1, 2013 January 1, 2014 6 months
Document pre-existing prima-facie
FFIs June 30, 2014 June 30, 2014 same
Document remaining preexisting entity
accounts June 30, 2015 December 31, 2015 6 months
Document preexisting high-value
individual accounts June 30, 2014 December 31, 2014 6 months
Document preexisting individual
accounts other than high-value
accounts
June 30, 2015 December 31, 2015 6 months
Reporting with respect to U.S.
accounts
September 30, 2014 for
calendar year 2013
March 31, 2015 for calendar
years 2013 and 2014 6 months
FATCA Withholding on gross proceeds January 1, 2015 January 1, 2017 2 years
• Deadlines for PFFIs have effectively been deferred for six months • The table below assumes an FFI Agreement that is effective at the earliest date possible (January 1, 2014)
Slide 17
April 2013
PwC
Summary of Changes for USFIs
Slide 18
Requirement Original Date Revised Date Change
Effective for New Account Opening January 1, 2013 January 1, 2014 1 year
Document pre-existing prima-facie
FFIs December 31, 2013 June 30, 2014 6 months
Document remaining preexisting entity
accounts December 31, 2014 December 31, 2015 1 year
Withholding on gross proceeds goes
into effect January 1, 2015 January 1, 2017 2 years
• Deadlines for USFIs have effectively been deferred for one year
April 2013
PwC
Intergovernmental Agreements (IGAs)
Summary of the agreements, advantages, and disadvantages
Slide 19
April 2013
PwC
IGAs
• FFIs will either report U.S. account information to IRS (no IGA or Model 2) or the local country government if Model 1 IGA
• Agreements are necessary because local country confidentiality & privacy laws often conflict with FATCA 'tasks’
• Two versions:
• UK - Model 1
• Switzerland - Model 2
• Difference in Models is whether exchange of information is government to government, or not
• Basic FATCA ‘tasks’ (except foreign pass-through withholding) must still be performed
• IGA’s signed or initialed: UK, Denmark, Mexico, Ireland, Switzerland and Germany , Italy and Norway
Slide 20
April 2013
PwC
IGA Advantages
• Advantage of IGAs is avoiding pass-through withholding and having to close recalcitrant accounts in financial institutions within the FATCA partner country
• Annex II (non reporting financial institutions), determines with specificity who are exempt beneficial owners (e.g., governments and retirement funds), what are deemed compliant categories, and exempt products
Slide 21
April 2013
PwC
IGA Challenges
• Challenges - IGAs are water’s edge type agreements; geographic centric
• Companies that have operations in many countries can be under IGA Type 1, IGA Type 2, or FATCA Final Regulations in different locations
• Although U.S. Treasury is trying to keep terms consistent, as IGAs proliferate, harder to ensure consistency between IGAs in implementation
• Once agreement is made the implementation will be different based on interpretation of local country laws
• Major challenge for multinational financial institutions trying to implement automated standardized software system
Slide 22
April 2013
PwC
Haiti IGA?
• What discussion between government and industry groups have been held?
• What decisions have been made?
• UK wants its overseas territories and dependencies to adopt IGA version 1 and submit a “Son of FATCA” report of similar information on British citizens and residents on financial accounts in Cayman, Bermuda, Guernsey, Jersey, and Isle of Man.
• On April 9, 2013, the UK announced an agreement with France, Germany, Italy, and Spain, to develop a multi-lateral automatic tax information exchange. A wide range of financial information will be automatically exchanged amongst these five countries using an IGA model. A letter has been sent to the European Commission encouraging broader adoption by all European Union member states.
Slide 23
April 2013
PwC
IGA Map
Slide 24
April 2013
PwC
What will FFIs do with regard to Pre-Existing Accounts (accounts held at 12/31/13)?
• FFIs must conduct due diligence with respect to pre-existing accounts and group such accounts into the following categories:
• U.S. Accounts,
• Non-U.S. Accounts, and
• Recalcitrant Accounts.
Different procedures apply for individuals and entities.
• In addition, FFIs must determine whether any of their investors or account holders are potential FFIs themselves or passive NFFEs.
Slide 25
April 2013
PwC
Pre-Existing Account Due Diligence: Individual Accounts
• For individual accounts, FFIs must ask the following questions:
• Has any individual account been previously documented as a U.S. person under existing withholding or information reporting rules? If yes, the account holder is a “specified U.S. person” and a U.S. account under FATCA.
• If no, you must next determine the account balance. Any account bearing a value of $50,000 or less can be disregarded for FATCA purposes (unless the balance of such account grows to $1 million in a subsequent year).
Slide 26
April 2013
PwC
Pre-Existing Account Due Diligence: Individual Accounts (continued)
• For individual accounts between $50,000 and $1 million, you must perform an electronic review in search of seven specific indicia of U.S. investor status. If any of the 7 indicia are found, you must request further documentation to determine if they are U.S. or non-U.S. investors. If none of the indicia are found, those accounts can be classified as non-U.S. accounts.
• For individual accounts which exceed $1 million, you must perform an enhanced review. This requires performing the electronic search as outlined above, but also a review of any paper current customer master files and certain other paper files. Also, any relationship manager must be interviewed for actual knowledge
Slide 27
April 2013
PwC
Pre-Existing Account Due Diligence: Specified U.S. Persons & NFFEs
• Anyone other than the following is considered a “Specified U.S. Person:”
• A corporation whose stock is publicly traded (or at least 50% owned by a publicly traded corporation);
• Any organization exempt from U.S. income tax under §501(a), including charitable organizations, pension and profit sharing plans, trade associations, labor unions, religious organizations, etc.
• The U.S. Government or any wholly owned agency or instrumentality of the U.S. Government
• Any U.S. state, the District of Columbia, U.S. territory/possession, any political subdivision of any of the aforementioned, or a wholly owned agency or instrumentality thereof
Slide 28
April 2013
PwC
Pre-Existing Account Due Diligence: Specified U.S. Persons & NFFEs (continued)
• Anyone other than the following is considered a “Specified U.S. Person” (continued):
• A bank or trust company incorporated in the U.S. and doing business under Federal Law, the law of any of the 50 states or the District of Columbia. A “substantial part” of the business of the bank or trust company must be receiving deposits, making loans, or exercising fiduciary powers.
• A real estate investment trust (“REIT”), or a regulated investment company (“RIC”) or entity registered with the SEC under the Investment Company Act of 1940
• A charitable remainder trust, or a common trust fund (a fund maintained by a bank for collective investment of trust, estate, or guardian assets, or a custodian under a uniform gift to minors act or under similar fiduciary duties of a trustee or executor)
• A dealer in securities, commodities, or derivatives that is registered under U.S. laws or that of any of the 50 states
• A broker (dealer, barter exchange, or anyone who acts as a middle man with respect to property or services)
Slide 29
April 2013
PwC
Pre-Existing Account Due Diligence: Specified U.S. Persons & NFFEs
• NFFEs are non-financial foreign corporations. They are divided between “active” and “passive”
• A passive NFFE is one where more than 50% of gross income is passive income (i.e., dividends, interest, rents and royalties, annuities, gains from the sale of passive assets, etc.), and more than 50% of assets are held for the production of passive income
• All other NFFEs are classified as “active”
Slide 30
April 2013
PwC
New Accounts Opened after 1/1/14 – What you can Expect
• FFI will request and retain certain documentation from account holders to establish their FATCA status as U.S., non-U.S., or recalcitrant account holders.
• To establish yourself as a non-U.S. person you will need to furnish withholding certificates, W-8BEN; and documentary evidence certifying citizenship in a country other than the U.S.
• FFIs will review all account opening information collected under its existing procedures such as anti-money laundering (“AML”)/know your client (“KYC”) to determine if any U.S. indicia exist. (If none, account holder will be classified as non-U.S. person)
• If U.S. indicia are found, FFI will need to obtain additional documentation to establish non-U.S. status
Slide 31
April 2013
PwC
What types of Financial Accounts are Affected?
Slide 32
TYPE EXAMPLES / DEFINITION
Depository Account •Commercial, checking, savings, time or thrift account •Account evidenced by a certificate of deposit or indebtedness, etc. •Any amount held by an insurance company under a guaranteed investment contract or under a similar agreement to pay or credit interest thereon
Custodial Account •An arrangement for holding a financial instrument, contract, or investment for the benefit of another person maintained by a financial institution
Equity or Debt Interest •Equity or debt interest in a holding company or investment entity (i.e., entity’s gross income is primarily attributable to investing, reinvesting or trading in financial assets or the entity holds itself out as a collective investment vehicle)
Insurance and Annuity Contracts •A contract issued or maintained by an insurance company that has a cash value or is an annuity contract. •Indemnity reinsurance contracts between two insurance companies are not included in this definition
Savings Accounts •Retirement and Pension Accounts •Non-retirement savings accounts •Rollovers
April 2013
PwC
What types of Financial Accounts are Affected?
Slide 33
TYPE EXAMPLES / DEFINITION
Term life insurance Contracts •If coverage period ends before the insured attains age 90, contract must meet several criteria (i.e., periodic premiums are payable at least annually, contract has no contract value that any person can access without terminating contract, etc.)
Accounts held solely by an estate •The account must provide documentation including a copy of the deceased’s will or death certificate
Escrow Accounts •Established in connection with a court order or judgment, or a sale, exchange, or lease of real or personal property
Certain Annuity Contracts •Non-investment linked, non-transferable, immediate life annuity contract that monetizes a retirement or pension account
April 2013
PwC
If you are found to be a U.S. Person, What Information will the FFI Report to the IRS?
Slide 34
For accounts owned by a specified US person
For accounts owned by US owned foreign entities, and owner-documented FFIs
• name, address and TIN of each specified US person
• account number
• account balance or value
• payments of income and gross proceeds (if any)
• name, address and TIN of the entity
• account number
• account balance or value
• payments of income and gross proceeds
• name, address, and TIN for:
― each substantial US owner of a US-owned foreign entity
― each specified US person of an owner-documented FFI
April 2013
PwC
If you are found to be a U.S. Person, What Information will the FFI Report to the IRS? (continued)
Slide 35
Requirement to report payments is phased in
Rules for recalcitrant accounts
• first report due in 2015 with respect to 2013 and 2014 information
• income payments are not reportable until calendar year 2015
• gross proceeds are not reportable until calendar year 2016
• need to provide the aggregate number and aggregate balance of recalcitrant accounts that:
― are held by passive NFFEs
― are held by US persons
― are dormant accounts
― have US indicia (other than passive NFFEs, US persons, and dormant accounts)
― have no US indicia (other than dormant accounts)
April 2013
PwC
Form 8966 for US withholding agents
Slide 36
For accounts owned by US owned foreign entities, and owner-documented FFIs
• name, address and TIN of the entity
• account number
• account balance or value
• payments of income and gross proceeds (if any)
• name, address, and TIN for:
― each substantial US owner of a US-owned foreign entity
― each specified US person of an owner-documented FFI
Highlights
• no reporting for accounts directly owned by specified US persons
• reporting begins in 2015 for calendar year 2014
• no phased reporting
• no aggregate reporting on recalcitrant accounts
April 2013
PwC
Relief for certain grandfathered obligations
Slide 37
The final regulations provide:
• an extended cut-off date to January 1, 2014
• withholding agents can rely on written statements by the issuer of the grandfathered obligation for:
- grandfathered status
- material modifications
• an exemption for a payment with respect to collateral posted to secure a grandfather obligation
• obligations that give rise to withholdable payments under IRC section 871(m) or foreign passthru payments will be grandfathered if outstanding on or before the date that is 6 months after a specified date to be determined by future regulations
April 2013
PwC
Clarification of FATCA withholding on payments made in the ordinary course…
Slide 38
Not exempt
• lending transactions (including loans of securities), forwards, futures, options, or notional principal contracts
• insurance premiums
• cash value insurance or annuity contract payments
• dividends
• interest
• investment advisory fees
• custodial fees
• bank or brokerage fees
Exempt
• service fees
• rent and other lease payments
• license fees or royalties
• transportation or freight charges
• gambling winnings, awards or prizes
• scholarships
• interest on AP arising from the acquisition of goods or services
April 2013
PwC
Foreign Financial Institution (FFI) compliance
Slide 39
April 2013
PwC
FFI registration portal
Slide 40
What is it used for?
• registration of participating FFIs, registered deemed-compliant FFIs (including FFIs covered under an IGA)
• responsible officer certifications
• enables FFIs to interact with IRS
Key dates
No later than July 15, 2013
Registration portal will be available online
October 25, 2013
Last day to register on portal to be on first IRS list of FFIs
December 2, 2013
IRS will post the first list of FFIs and intends to update the list monthly
April 2013
PwC
FFI compliance program requirements
Slide 41
The final regulations require an FFI to:
1. appoint a responsible officer
2. establish policies, procedures and processes sufficient to satisfy agreement
3. periodically review and certify as follows:
Type of certification One time or ongoing? When is certification required?
Compliance and effective internal controls
Ongoing, every 3 years
6 months after each 3-year review period
Due diligence on pre-existing accounts
One time 60 days after 2nd anniversary
Not assisting account holders in avoidance of chapter 4
One time 60 days after 2nd anniversary
April 2013
PwC
Compliance and effective internal controls certification
Slide 42
The responsible officer must certify that the FFI has completed the following activities:
• established a compliance program that is in effect
• reviewed the compliance program against the requirements of the FFI agreement
With respect to material failures the responsible officer must certify:
• that there were no material failures, or
• if there were material failures, appropriate actions were taken to remediate and prevent reoccurrence
April 2013
PwC
Material failures
Slide 43
• deliberate action by employee or agent to avoid requirements of FFI agreement
• error attributable to failure of FFI to implement sufficient internal controls
• certain criminal or civil penalties imposed on an FFI by regulators in connection with failure to properly identify account holders as part of its anti-money laundering (AML) procedures
• establishment of a tax reserve or provision related to lack of compliance with FFI agreement
A material failure will constitute an event of default if it occurs in more than limited circumstances or when the FFI has not substantially complied with its FFI agreement
April 2013
PwC
Events of default
Slide 44
Failure to perform one or more of the following are examples of events of default:
• obtain reporting waiver when required
• significantly reduce over time account holders and payees that are recalcitrant or nonparticipating FFIs
• maintain compliance program
• take timely corrective actions to remedy material failures
• make required certifications
• cooperate with IRS on requests for additional information
April 2013
PwC
Qualified Certifications
Slide 45
If the responsible officer is unable to make the compliance and effective internal control certification, it must make a qualified certification.
Conditions requiring a qualified certification
Contents of a qualified certification
• responsible officer detects a material failure or event of default, and
• failure or event is not corrected as of date of certification
• an event or failure has been identified
• FFI will pay tax, interest and penalty and file appropriate return
• will respond to any notice of default
• if requested, will provide description of failure and plan to remediate
April 2013
PwC
Certification about policies not assisting account holders in avoidance of chapter 4
Slide 46
“… to the best of responsible officer’s knowledge after conducting a reasonable inquiry, that the PFFI did not have any formal or informal practices or procedures in place from August 6, 2011 through the date of certification to assist account holders in the avoidance of chapter 4.”
Reasonable inquiry written inquiry such as e-mail requests to relevant lines of business
requires response from relevant customer on-boarding and management personnel
Bad practices
suggesting account holders:
―split up accounts to avoid high-value
―close or transfer accounts to avoid reporting
―remove US indicia from records
intentional failure to disclose US account
manipulating account balances to avoid detection
April 2013
PwC
FATCA’s Impact on Trusts
Slide 47
April 2013
PwC
FATCA Impact on Trusts
• The Final FATCA Regulations have confirmed that the trusts will be treated as an “Investment Entity,” subject to performing FATCA’s six compliance tasks, and certifying their timely completion
• The Final FATCA Regulations follow the model Intergovernmental Agreements (“IGA’s”) to exclude passive non-commercial investment entities as Non-Foreign Financial Entities (“NFFE’s”), such as some family trusts. The exception will be if the trust is professionally managed by a bank, custodial institution, or investment entity that is a professional investment advisor
Slide 48
April 2013
PwC
FATCA Impact on Trusts (continued)
• The Final FATCA Regulations also include as investment entities subject to FATCA, entities which provide customers with the following services:
• Trade a list of financial instruments
• Provide individuals or collective portfolio management
• Otherwise invest, administer or manage funds
Slide 49
April 2013
PwC
FATCA Impact on Trusts (continued)
Trusts have options under the Final FATCA Regulations that will involve less compliance effort than performing the six FATCA tasks and certifications
• The owner documented FFI option and the Auditor’s Letter Substitute (“ALS”) alternatives are both still available under the final FATCA Regulations
• The designated withholding agents for the payments to the owner documented FFI can also be a model 1 IGA FFI, in addition to a U.S. financial institution or a participating FFI
• The owner documented FFI option still has the drawback of having to disclose all the beneficiaries to withholding agent
Slide 50
April 2013
PwC
FATCA Impact on Trusts (continued)
• The alternative of signing an ALS (when an accounting or law firm has an office in the U.S.) received no further clarification in the Final FATCA Regulations
• As an example, PwC Bermuda has professionals (including me) who are licensed in the United States and also has a U.S. office.
• The ALS only has to be completed once every four years unless there were changes in the Trust beneficiaries
Slide 51
April 2013
PwC
FATCA Impact on Trusts (continued)
• The ALS has made some interesting changes in defining who can provide the ALS
• The signer of the ALS can now be from an auditor or attorney that is licensed in the United States or whose firm has a location in the United States
• Although this will need to be vetted further, I believe a fair reading of the language would indicate a Non-U.S. accounting firm or law firm could do the work that supports the letter as long as a U.S. licensed auditor or attorney signs the letter
Slide 52
April 2013
PwC
FATCA Q&A for Insurance Companies from the Release of Final FATCA Regulations
Slide 53
April 2013
PwC
Questions and Answers for Insurance Companies Contained in the Final FATCA Regulations
Q- Which Final FATCA Law do Insurance Companies have to comply with?
• Final FATCA Regulations (Type 2 Intergovernmental Agreement (“IGA”)- Swiss model) or Type 1 IGA- U.K. Model
• E. U. Son of FATCA? UK Son of FATCA?
Q- What insurance policies, annuities, and services are in scope that will make an insurance company an FFI?
• Universal or whole life insurance policies, • Term insurance with front loaded premiums • Annuities • Assumption Reinsurance • Investment advisor and asset managers are now included in FATCA definition
of Investment Entities.
Slide 54
April 2013
PwC
Out of Scope Policies
Q- What policies are out of scope and what will make us an NFFE?
• Health and dental insurance
• Disability insurance
• Home, renter’s insurance, and liability insurance
• Marine, auto, bike and travel
• Property casualty
• Group Life
• AD&D
• Indemnity reinsurance (not assumption reinsurance)
• Term insurance (as long as premiums are level or increasing and not front loaded)
• Immediate annuities that monetise retirement or pension accounts that use non-investment linked, not transferable immediate annuities (most retirement and pension plans will be).
Note: Policies above are out of scope as long as they don’t have cash value features in addition to pure insurance greater than $50,000
Slide 55
April 2013
PwC
Other modifications and clarifications in the Final FATCA Regulations that affect Insurance Companies 1. Insurance related definitions were simplified to replace most reference to U.S. tax law with plain
language descriptions and with appropriate reference to local law treatment.
2. The final Regulations have clarified that any distribution, including redemptions made to an account holder with respect to cash value life insurance policies and annuities are withholdable payments for FATCA purposes regardless of their U.S. tax treatment. Therefore, death benefits payments, and policy holder dividends, must be treated as withholdable payments even if not taxable income to recipients.
3. Insurance and reinsurance premium payments are withholdable payments. This rule will apply to transactions U.S. Companies have with foreign counter parts, brokers, and reinsurers.
4. Required documentation has been reduced for life insurance beneficiaries. FATCA presumes beneficiaries to be a foreign person unless U.S. indices are present, or insurance company has knowledge (or should) of that person is a U.S. Person. Most beneficiaries (as opposed to owners will not be subject to due diligence or documentation).
5. Certain group life insurance and group annuities will not require documentation until amounts are payable to an employee’s certificate holder or beneficiary.
6. Reserve activity will not cause an insurance company to qualify under another category of FFI.
Slide 56
April 2013
PwC
Grandfathered Obligations Q&A
Q- What insurance policies and annuities can be “Grandfathered”?
A. In final regulations the IRS extended the grandfathered period for an additional year until December 31, 2013
a) A grandfathered obligation is exempt from FATCA withholding unless there is a “material modification” in the policy or annuity
Q- What is a grandfathered insurance contract depend on when the contract “originated” and whether it is an “obligation”?
A. Life insurance contract payable no later than upon death of insured
B. Immediately annuity contract payable for a period certain or for life of annuitant
Slide 57
April 2013
PwC
Grandfathered Obligations Q&A Continued…
Q- What is an insurance contract which is not an “obligation”
A. Insurance policy or annuity without a stated expiration date or term
B. Deferred annuity
C. Variable life or annuity contract
D. Life or annuity contract that permits substitution of a new person as the insured or annuitant under contract”
Slide 58
April 2013
PwC
PwC’s Approach to FATCA Compliance
• We have a process for helping companies become FATCA compliant
• The FATCA “playbook” breaks down the FATCA tasks into a series of work streams or modules
• These work streams are ordered in terms of which ones must be done first according to the staggered IRS deadlines
• For example registration through the IRS portal must be done by October 25, 2013 (See Time Line)
• New account holder on -boarding procedures are next as they must be FATCA Compliant by January 1, 2014
• Each work stream can be performed by client personnel, PwC employee or a combination of the two
Slide 59
April 2013
PwC
Which Companies are FFI’s and which are NFFE’s?
Slide 60
April 2013
PwC
PwC’s Approach to FATCA Compliance
• Identify all “gaps” between current process / systems and FATCA compliance process / systems
Create a target operating model and implementation plan which address the following:
a. Organizational awareness / education
b. Legal entity analysis
c. Investment analysis
d. On boarding process
e. Pre-existing account due to diligence
f. How to report information for US persons to IRS and U.S. WH Agents
Slide 61
April 2013
PwC
PwC’s Approach to FATCA Compliance
g. Identify foreign pass thru withholding requirements- Close recalcitrant accounts
h. Coordination with administrators and other market participants Roles and responsibilities
i. Written governance and internal control procedures will be necessary
j. Responsible officer and certification
Slide 62
April 2013
PwC
FATCA Playbook – Detailed Projects
Work stream 1 – Corporate Legal Entity Management
Project 1- Classify affiliates into appropriate FATCA Categories
Project 2- FFI Agreements or “Registration”
Work stream 2 – Identify and classify financial accounts
Project 3- Identify and classify financial accounts
Work stream 3 – Enhance Business As Usual (BAU) processes for New Accounts
Project 4- Modify existing processes for opening new INDIVIDUAL accounts
Project 5 - Modify existing processes for opening new ENTITY accounts
Work stream 4 – Due Diligence for pre- existing account holders
Project 6 – Perform FATCA due diligence requirements to classify pre- existing INDIVIDUAL accounts
Project 7 – Perform FATCA due diligence requirements to classify pre- existing ENTITY accounts
Slide 63
April 2013
PwC
FATCA Playbook – Detailed Projects (continued)
Work stream 5 – Documentation Monitoring
Project 8 – Extracting and recording relevant information from documentation
Project 9 – Account holder documentation monitoring for expiration / renewal
Project 10- Account holder documentation / information monitoring for change circumstances
Project 11 – Annual retesting for U.S. $ value threshold
Project 12 – Grandfathered Obligations
Project 13 – Identify and Track U.S. Source Income
Project 14 – Withholding
Project 15 – Annual Reporting Process
Project 16 – Governance, Internal Control and Certifications
Slide 64
April 2013
PwC
Summary of Deadlines
Slide 65
April 2013
Questions?
This content is for general information purposes only, and should not be used as a substitute
for consultation with professional advisors.
PwC Bermuda helps organisations and individuals create the value they’re looking for. With
more than 240 people, we are committed to delivering quality in assurance, tax and advisory
services in both local and global markets. PwC Bermuda is a member of the PwC network of
firms with 180,000 people in 158 countries. Tell us what matters to you and find out more by
visiting us at www.pwc.com/bm
© 2013 PricewaterhouseCoopers (a Bermuda partnership).
All rights reserved. PwC refers to the Bermuda member firm, and may sometimes refer to the
PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure
for further details.
PwC
Appendix 1 – Due Diligence: Indicia of Potential U.S. Status
Indicia Required Documentation
a) U.S. citizenship or lawful permanent resident (green card holder)
•Form W-9 and obtain a valid and effective waiver (if applicable)
b) U.S. place of birth •Form W-9 and obtain a valid and effective waiver (if applicable) •Form W-8 BEN and -Non-U.S. passport or similar government-issued document establishing client’s citizenship in a country other than U.S. (if applicable) and - Written explanation regarding client’s renunciation of U.S. citizenship or reason why client did not acquire U.S. citizenship at birth (if applicable)
c) Residence address or correspondence address in the U.S. (including U.S. post box office) d) U.S. telephone number
•Form W-9 and obtain a valid and effective waiver or •Form W-8 BEN and non-U.S. passport or similar government –issued document establishing client’s citizenship in a country other than the U.S. (if applicable)
e) Standing instructions to transfer funds to an account maintained in the U.S.
•Form W-9 and obtain a valid and effective waiver or •Form W-8 BEN and documentary evidence establishing non-U.S. status of client (if applicable)
f) Power of attorney or signature authority granted to a person with a U.S. address g) “In care of” or “hold mail” address that is the sole address with respect to the client
•Form W-9 and obtain a valid and effective waiver or •Form W-8 BEN, or •Documentary evidence establishing non-US status of individual account holder (if applicable)
*Participating FFI is entitled to rely on the documentation received from account holder unless it knows or has reason to know that the information contained in such documentation is unreliable or incorrect.
