Michael H. Plowgian

August 9, 2014

FATCA, Extraterritoriality, and the Path to the OECD-

Standard on Automatic Exchange of Information

(“AEOI”)

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Foreign Account Tax Compliance Act (FATCA)

New U.S. reporting and withholding tax regime

Effective Date: 1 July 2014

Goal: reduce tax evasion by U.S. individuals investing in non-U.S. accounts and offshore financial vehicles

Reporting: – foreign (non-U.S.) financial institutions (banks, custodians, investment funds,

administrators, investment managers, etc.)– must identify and report to the IRS– certain information about their U.S. account holders

Withholding: Foreign financial institutions that do not comply are subject to a new 30% withholding tax on certain payments received from U.S. payors

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How FATCA Operates

Payments subject to FATCA Withholding

U.S. source investment income (“FDAP – interest, dividends, royalties, rents, etc.)

Gross proceeds from the sale or exchange of U.S. assets that produce U.S. interest and dividends

Banks / credit unions / other depository institutions

Custodians / entities that hold other people’s money

Entities that invest other people’s money (collective investment vehicles, certain asset managers)

Certain insurance companies (mainly life)

Certain treasury and holding companies

Foreign Financial Institutions (“FFIs”)

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Need for Different Approach

In many jurisdictions, complying with the FATCA regulations is not possible for financial institutions:

– Identifying and reporting account holders to the IRS without the account holder’s consent

would violate applicable privacy or data protection laws– Withholding on payments to uncooperative account holders and nonparticipating financial

institutions also conflicts with laws in many jurisdictions

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Intergovernmental Agreements (IGA) Address Extraterritoriality Concerns

Intergovernmental agreements provide an alternative and less burdensome means for financial institutions to comply with FATCA

Provides means of resolving legal impediments to reporting by financial institutions (e.g., privacy laws)

Under an IGA, partner government agrees to create rules that will allow its financial institutions either to:

– Report to their home government, which will exchange the information with the IRS, potentially on a reciprocal basis, or

– Report directly to the IRS

IGAs require the same information to be reported by financial institutions, but provide greater flexibility for governments to implement in their own jurisdictions

39 signed IGAs; additional 62 agreed in substance

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FFI FFI FFI

National Government

National Government

Reciprocal AgreementNon-Reciprocal Agreement

Comparison of FATCA Model 1 and Model 2 IGA (Flow of information)

Reporting on U.S. Account holders on individual basis and recalcitrant account holders on an aggregated basis

Request for information

Request information

Info

Info

No Intergovernmental Agreement

Intergovernmental Agreement Model 1

Intergovernmental Agreement Model 2

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13 February: OECD publishes new global standard for automatic exchange of information (“Common Reporting Standard”)

22-23 February : G20 endorsement

“We endorse the Common Reporting Standard for automatic exchange of tax information on a reciprocal basis and will work with all relevant parties, including our financial institutions, to detail our implementation plan at our September meeting. In parallel, we expect to begin to exchange information automatically on tax matters among G20 members by the end of 2015. We call for the early adoption of the standard by those jurisdictions that are able to do so. We call on all financial centres to match our commitments.”

IGAs Lead to OECD/G20 Standard

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Bank

Country A

US

Account Holder

BankAccount Holder

Country B

1. Model 1 IGA reporting2. Model 1 IGA exchanges3. Leveraging on Model 1 IGA implementation to

develop standardised automatic exchange in a multilateral context

Account Holder

Bank

Automatic exchange standardBasic approach

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Bank

Country A

Account Holder

BankAccount Holder

Country B

Reporting of information based on Common Reporting and Due Diligence Standard (CRS) implemented via domestic law

Automatic exchange standard Basic approach - CRS + CAA = exchange standard

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Automatic exchange of information based on MTC Article 26 or MAC, & Model CAA

Reporting of information based on Common Reporting and Due Diligence Standard (CRS) implemented via domestic law

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Automatic exchange standardMain differences from FATCA

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Individuals

• Residence (not including citizenship)• No thresholds• Residence address test for pre-existing

accounts building on EU Savings Directive

• Simplified indicia search

Entities

• Look-through for Reportable Entities that are Passive NFEs

• Look-through for professionally managed investment entities in non-participating jurisdictions

Low risk FIs and products

• General exclusion for country specific low-risk reporting financial institutions and accounts

No Withholding

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Automatic exchange standardNext steps

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Global Forum

• Establish mechanisms to monitor and review implementation of standard• Work on developing country issues and assist them in meeting the standard

Participating countries

• Adopt CRS in domestic law• Conclude CAA• Consult and work with financial institutions on implementation• Put in place IT and administrative process• Ensure confidentiality of information

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U.S. Adoption of CRS?

Impact of CRS on FATCA

Ability to enter into IGAs

Will CRS satisfy FFIs’ obligations under FATCA?

Impact on USFIs

Will U.S. adopt CRS for reporting by USFIs?

What is response from G-20, other countries?

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