Foreign Accounts Tax Compliance Act“FATCA”

Compliance with FATCA

a precursor for Lexis’ Guide to FATCA Compliance

contact David Soborski to order (David.T.Soborski@lexisnexis.com)

Author Contact DetailsProf. William Henry Byrnes, Associate Dean,Graduate & Distance Education

wbyrnes @ tjsl.edu+1 619 961 4211

The information contained herein and during this presentation is only for academic discussion, and not applicable to any specific situation. The information is of a general nature and based on authorities that are subject to frequent change.

biography

Associate Dean William H. Byrnes, IV, has achieved authoritative prominence with more than 38 book and compendium volumes, 25 book & treatise chapters, 750 articles, and a monthly subscriber tax newsletter Tax Facts Intelligence. His publishers include Lexis-Nexis and National Underwriters. He created the approach of Concept Mind-Maps for Lexis-Nexis found on the Tax Law Center.

Q1: What is FATCA?

–New Information Reporting Regime on Foreign Institutions & Entities to Assist the Internal Revenue Service Collect Identification and Financial Information about US Individual Taxpayers–Match this information to new Form 8938

Statement of Specified Foreign Financial Assets (and the Foreign Bank & Financial Accounts form FBAR)–30% withholding

Q2: What Caused FATCA?

–60+ Tax Treaty EOI articles, 20+TIEAs, MLATs, and Hague Evidence Convention– FBAR (Foreign Bank & Financial Accounts) • 1996 by BSA• in 2003 FINCEN signed MOA for IRS to enforce

–QI Regime (2000)• Approx. 5,500 financial institutions (vs. 100,000s)

Q2: QI Differences?• Expanded application of reporting– (names + specific account in(s)/out(s))

• Look through to UBO• Expanded application of reporting persons • Expanded application of reportable

transactions• FFI cannot determine customer w/h pools• Only approx. 5,500 QI v. 100,000s of FFIs and

FEs

Q2: What Caused FATCA?

Offshore Voluntary Disclosure Programs2009 & 2011: 33,000 raised $5B

2012 remains open: 1,500

UBS headline case: 17,000 hide $20B, $780m fine with $104m to convicted insider whistleblower Bradley Birkenfield

Q3: Compliance Costs?

1. Financial Costs

2. Labor / Service / Software & Systems

3. Management

Q3: Financial Costs?

Treasury: $100m per large institutionCan. Bankers Association: $1B each for 5 largest banksGenerally accepted: $250m per large bank$30m-$80m for UK investment banks E20-E50 per investor for investment funds, $1m per fund

How much did Y2K cost? EU Savings Directive? New expanded reporting?QI regime?

Q3: Labor / Systems Costs?

Which department will wear the FATCA yoke? (Tax, AML, Comp) • Employ / Outsource add. compliance manager /

staff ?• Employ / Outsource add. systems and software

integration staff (probably both, at least on short term contracts)

• Employ / Outsource FATCA consultantsleast cost is your Lexis FATCA Compliance

Handbook ;-)

Q3: Labor / Systems Costs?

- enterprise software programming/building (AML, FATCA, Internal and External treasury/client reports)- new protocols and rules- new onboarding procedures- data entry- middleware- systems maintenance

Q3: Management

Enterprise Steering Committees • Each business unit has working team• Drilling down impact by country, product

Decision making process: CCO, CTO, AMLRO, CLO (GC), and new FATCA “Responsible (Certification) Officer”?

Investment Funds re-drawing investor agreements

Q3: Other EU Cost Concerns

Data Protection & Civil Law Privacy - costs of obtaining each client’s signature on new FATCA waiver,

Q4: Who does FATCA apply to?

Two Categories: FFI & NFFEForeign Financial Institution

Non-Financial Foreign Entity

Q4: What is an FFI?

Not Territory-Organized (aka TOFI)- Accepts deposits in ordinary course of bus.- Holds financial assets for 3rdp as sub. bus.- bus. of investing, trading in securities,

commodities, p’shp interests, futures, forwardsSign FFI agreement or IGA in place

Q4: Examples of FFI?

- Investment, hedge, equity, mutual funds, unit trusts

- Clearing houses, Brokerages- Insurance (cash value), annuity, pension, - Trust companies, custodians

Q4: Exempt from FFI?

“Low Risk of Tax Evasion”

Foreign governments, Central Banks

Q4: Registered Deemed Compliant ?

Still Register with Treasury but as compliant FFI

Certain local-only banksif >98% accounts local and undertake US DD on accounts after 2011

Qualified collective investment fundno US investor over $50,000

Restrictive fund< $175m assets & < $7m revenueno US distribution + USDD after 2011

Q4: Certified Deemed Compliant?

Don’t register with IRS but certify to W/H agents

Certain small local banks with local accounts< $175m assets

Low Value Accounts< $50,000 & < $50m assets

Non-profits

Certain retirement plans

Q4: Certified Deemed Compliant?

Retirement Plansorganized locally, by local employer for local

employees, contributions tax exempt & no employee has >5% or

< 20 participants, earned income only, if outside local then < 20% of assets + < $250,000

Q: Challenges?

SWAPS – difficult to value, changing counter parties in opaque market

Funds: lack access to information for approx. 40%-45% UBOs, distributors & transfer agents must become PFFI

fund of fundsprivate equity funds & tie-up periods

Life Insurance: whole life touch points with owner

Q5: NFFE?

10% shareholders

Q6: FFI Due Diligence ?

3 categories of accounts / 2 time periods

1. < $50,0002. $50,000 - $1m3. > $1m (high value accounts)

Current (look back) vs. New (onboarding)

Q6: FFI DD

$50k - $1m Electronic Search of AML records of the KYC / CIP program

> $1m CCO -> RM communicate about account holder and if necessary, review account file docs for previous 5 years

W8Ben (foreign) or W9 (US): “Trust but Verify”

Q6: US Indicia(1) Citizenship or residency in U.S.; (2) U.S. place of birth; (3) U.S. residency or mailing address; (4) U.S. telephone number; (5) any standing instructions to transfer funds to a U.S. account; (6) any power of attorney or other signatory authority to any person with a U.S. address; or (7) Whether the account holder has provided any verified “in-care” or “hold mail” address with the U.S.

Q6: EDD for High Value AccountsRM communicate about account holder using file and KYC or CCO directly accesses file

• review account file KYC for previous 5 years

• account opening documents, signatory card

• POA / incapacitation or death instructions

Q6: DD for NFFEW-9 on file ? specified U.S. person ?

• < $250,000 - Excluded from review, until account balance exceeds $1,000,000. • Search existing CIP/KYC info/account opening docs to determine status• Passive NFFEs – Must identify substantial U.S. owners or certify that there are no substantial U.S. owners.

Q6: specified US person is not• Publicly traded corporation• Affiliates of a publicly traded corporation• Exempt organization or IRA• REIT• RIC / SEC registered (1940 Investment Company Act)• The United States• U.S. state, DC, or U.S. possession• US bank • Common trust fund• Exempt trust under section 664(c)• US registered dealer • US Broker – 26 USC 6045(c)

Participating FFIs Systems

• Documentation: evolve current AML systems to capture FATCA DD across enterprise customer base

• Reporting: implementing then maintaining annual reporting system with US (or IGA) for US individuals, including identifiers, account balances, gross payments

• Withholding: building system for 30% withholding on recalcitrant account holders

1. identity and residence of the beneficial owner;2. name and address of the paying agent;3. account number of the beneficial owner; 4. and amount of interest income earned5. TIN if available

• If resident in a country different than passport or I.D. card, then tax residence certificate

Q6: EU TSD Art 8 Info

• Report must contain– Name / address / TIN– Account No(s) / Balance(s)– Annual Gross transactions

(receipt/deposits/payments/withdrawals) • Can elect to report like US-FI (1099s)• Or w/h and close account

Q6: Foreign Info Reporting?

1. the name, address, and TIN of any person that is a resident of FATCA Partner and is an Account Holder;

2. the account number;3. the name and identifying number of the U.S.

Financial Institution;4. the gross amount of interest paid on a Depository

Account;5. the gross amount of U.S. source dividends paid or

credited to the account; and6. the gross amount of other U.S. source income paid

or credited to the account

Q6: US Info Report to IRS?

Q6: WithholdingWH agent (USWHA or PFFI) required to report annually Form 1042 and Form 1042-S

• Form 1042 to IRS, with aggregated reportable amounts and any tax withheld.

• Form 1042S to IRS, copy US specified person with reportable amounts paid.

• Form 1042-S is required for each US person, with separate Forms for each separate type of payment.

Q7: Recaltrant Accounts

Q8: IGA• No IRS agreements required for FFIs• No officer certifications directly to the IRS�• Retirement account issues addressed�• Data privacy concerns addressed�• Withholding concerns addressed�• Customer identification issues addressed�• No closing accounts of recalcitrant account hold�

Q9: Timeline Overview

TY 2011 Form 8938 (filed 4/17/12)

TBD: FFI agreement & electronic registration

Timeline DD

1/1/14: PFFIs new account USDD

6/30/14: existing accounts USDD must be completed (for prima facie FFI)

Timeline Overview12/31/14 PFFIs complete review & documentation of all other pre-existing high value individual accounts (& certified completed by FATCA officer)

12/31/15 PFFIs complete review & documentation of all other pre-existing individual accounts and all pre-existing entity accounts not previously identified as being held by prima facie FFIs (& Certify by FATCA Officer)

Timeline Withholding

– 1/1/2013: Obligations issued before are grandfathered (material modification)

– 1/1/2014: Start withholding on FDAP to non-compliant account holders

– 3/15/2015 start of annual report (for 2014) via Form 1042(S) of FATCA withholding (Foreign Person’s U.S. Source Income Subject to Withholding)

Timeline Withholding1/1/2017: Start expanded withholding on US-source gross proceeds arising from sales and redemptions &foreign pass through payments

Timeline Reporting

3/15/2015 start of annual report (for 2014) via Form 1042(S) of FATCA reportable amounts(Foreign Person’s U.S. Source Income Subject to Withholding)

Timeline Reporting3/31/2015 (for 2013 and 2014) annual report:• US accounts (name, address, TIN and account

balance)• recalcitrant account holders (aggregate reporting)

3/31/2016 + income associated with these US accounts

3/31/2017 + gross proceeds

FORM 8938

A specified foreign financial asset is:• Any financial account maintained by a foreign financial

institution

• Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely:

– Stock or securities issued by someone other than a U.S. person

– Any interest in a foreign entity, and

– Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.

8938 thresholds

Individual / Filing Separate taxpayers in the US: total value of specified foreign financial assets > $50,000 on the last day of the tax year or > $75,000 at any time during the tax year (Joint = 2x threshold)Living Abroad: foreign tax residence + bona fide or 330 days in 12 months ending in tax year > $200,000 / $300,000 (Joint = 2x threshold)

8938 Foreign Financial Account

– Foreign bank accounts– Foreign mutual funds– Foreign hedge funds– Foreign private equity funds– Certain foreign insurance products

8938 Foreign Financial Asset

– Stock or securities issued not by US person– Any interest in a foreign entity– Any financial instrument or contract that has as an issuer or counterparty that is not US person– Foreign pensions and deferred comp plans– Foreign estates

8938 Foreign Property ?

Not if direct ownership of real propertyYes if -> foreign entity -> Property (FE interest)Yes if mortgage (FA interest)

Not if direct ownership of movable assets (e.g. metals, jewels, art works)

8938 QuestionsPart II Other Foreign Assets (see instructions)Note. If you reported specified foreign financial assets on Forms 3520, 3520-A, 5471, 8621, or 8865, you do not have to include the assets on Form 8938. You must complete Part IV. See instructions.If you have more than one asset to report, attach a continuation sheet with the same information for each additional asset (see instructions).1 Description of asset 2 Identifying number or other designation3 Complete all that applya Date asset acquired during tax year, if applicable . . . . . . . . . . . . . . . . . .b Date asset disposed of during tax year, if applicable . . . . . . . . . . . . . . . . .c Check if asset jointly owned with spouse d Check if no tax item reported in Part III with respect to this asset4 Maximum value of asset during tax year (check box that applies)a $0 - $50,000 b $50,001 - $100,000 c $100,001 - $150,000 d $150,001 - $200,000e If more than $200,000, list value . . . . . . . . . . . . . . . . . . . . . . . . $5 Did you use a foreign currency exchange rate to convert the value of the asset into U.S. dollars? . . . Yes No

8938 Questions7 If asset reported in Part II, line 1, is stock of a foreign entity or an interest in a foreign entity, report the following information.

a Name of foreign entityb Type of foreign entity (1) Partnership (2) Corporation (3) Trust (4) Estatec Check if foreign entity is a PFICd Mailing address of foreign entity

8 If asset reported in Part II, line 1, is not stock of a foreign entity or an interest in a foreign entity, enter the following information for the asset.

a Name of issuer or counterpartyb Type of issuer or counterparty(1) Individual (2) Partnership (3) Corporation (4) Trust (5) Estatec Check if issuer or counterparty is a U.S. person Foreign persond Mailing address of issuer or counterparty.