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Seminar Fatca update

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The New proposed regulations of February 8, 2012: highlights and insights

The New proposed regulations of February 8, 2012: highlights and insights

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  • 1. Briefing on new proposedFATCA regulationsFinancial Services15 March 2012
  • 2. Agenda1) Welcome and introductory comments Koen Marsoul2) The New proposed regulations of February 8, 2012: highlights and insights Koen Marsoul ► Overview and highlights of new proposed regulations ► Market Reaction ► Key changes ► Insights and implications ► What next?3. The FATCA Challenge Sylvie Goethals4. Wrap-up and question time Koen Marsoul and Sylvie GoethalsPage 2 15 March 2012 Briefing on new proposed FATCA regulations
  • 3. Welcome and introductorycommentsby Koen Marsoul15 March 2012
  • 4. The New proposed regulationsof February 8, 2012: highlightsand insightsby Koen Marsoul15 March 2012
  • 5. Overview and highlights of new proposedregulations
  • 6. Overview of draft regulations • Abolishment of concept of Private Banking • ―High value‖ individual account threshold increased to US$1m • de minimis thresholds for insurance contracts and entity accounts introduced: US$250k • Expanded scope of ―Deemed Compliant‖ Foreign Financial Institutions (FFI) • Introduction of ―Limited FFIs‖ to help with legal and data privacy barriers some FFIs face in complying with FATCA • Deadlines unchanged for enhancements to new account onboarding processes and systems • Reliance on existing KYC/AML processes and information for account due diligence and new account on-boarding Highlights • Significant clarity on due diligence required for Non Financial Foreign Entities (NFFE) • Clarifies scope and responsibilities for US and foreign (Non-US) withholding agents • IRS reporting on ―Specified US Persons‖ in 2014 and 2015 focused on account holder identification • Reporting on Specified US Persons in 2016 and 2017 phases-in income and gross proceeds reporting • Phased withholding begins in 2014 for US sourced income and gross proceeds • Withholding on foreign passthru payments no earlier than 1 January 2017 • No obligation to check if account holders have a green card or dual nationality individuals • ―Grandfathered obligation‖ exception extended to 1 January 2013 • Treasury also released a joint statement from the United States, France, Germany, Italy, Spain and the United Kingdom announcing an agreement to explore an intergovernmental approach to FATCA implementation Potential • Would allow FFIs in each ―FATCA partner‖ country to report required information to each intergovernmental countrys tax authority, rather than to the IRS directly. Foreign tax authorities would, in turn, FATCA approach pass information to the IRS under the respective countries‘ Treaty Exchange Information Agreements • Eliminates certain onerous aspects of FATCA, such as foreign passthru payment withholding, for FFIs in partner countriesPage 6 15 March 2012 Briefing on new proposed FATCA regulations
  • 7. Market Reaction
  • 8. Market reactions to draft regulations► On 8 February the proposed regulations were published by the IRS covering 388 pages, including a preamble of 93 pages. Do not underestimate the time required for sign off from key stakeholdersPage 8 15 March 2012 Briefing on new proposed FATCA regulations
  • 9. Key changes
  • 10. Section #1. GeneralSection and overall scope
  • 11. 1. General and overall scopeAdditional guidance has been provided on what constitutes a financial institution or financial account, but otherwise theoverall scope for banking and asset management is broadly speaking unchanged. Insurance companies have greaterclarity on which products are in and out of scope.No. Category Guidance under the Notices Proposed Regulations Implications1.1 FFI Agreements Each FFI that intends to become The Treasury and the IRS intend to Despite the lack of a draft FFI a participating foreign financial publish a draft model FFI Agreement Agreement, the Proposed institution (PFFI) will be required in early 2012 and a final model in Regulations set forth the general to execute an FFI Agreement autumn 2012. requirements that will apply to an FFI with the IRS. The exact terms under the FFI Agreement. Especially and language of the agreement in light of the relative short comment have not yet been released. period for the Proposed Regulations, FFIs should commence assessing their capacity to comply with the Agreement‘s requirements and, if applicable, may want to consider providing comments to the Treasury and the IRS.1.2 Joint statement A joint statement was made by the While this approach may deal with UK, France, Germany, Italy, Spain any potential conflicts between and the United States that they will FATCA and laws in FFI home states develop an intergovernmental and mitigate the more onerous approach to FATCA in exchange for a remove the worst aspects of FATCA, reciprocal agreement by the United in particular the passthru payment States. It is likely that if this approach regime, it appears that customer is pursued then other countries would identification and documentation follow suit, both in the EU and requirements will broadly remain the elsewhere. same.Page 11 15 March 2012 Briefing on new proposed FATCA regulations
  • 12. 1. General and overall scopeThe concept of deemed compliance has been expanded.No. Category Guidance under the Notices Proposed Regulations Implications1.3 Deemed Certain FFIs may be deemed The deemed compliance rules have Deemed compliance status may Compliance compliant even though they do been expanded beyond earlier especially be of interest to certain not enter into an FFI Agreement, guidance. Certain FFIs may be retirement funds, non-profit provided certain conditions are treated as deemed-compliant without organisations, and members of met. For example, a local FFI having to register with the IRS, if they groups with other members that are with no operations or customer satisfy certain conditions. participating FFIs. Because of the solicitation outside of its home restrictions in place, other types of However, depending on the type of country, which engages in financial institutions such as banks FFI, geographical restrictions on the customer identification to ensure may find it difficult to avail location of business, restrictions on there are no US (or certain other themselves of deemed-compliant permitted account holders, limitations types of) accounts, and which status. on the value of balance sheet assets, agrees to transfer or close any etc., may apply in order to qualify for such account that it finds, may deemed compliance status. qualify as a deemed-compliant FFI if certain requirements are satisfied.Page 12 15 March 2012 Briefing on new proposed FATCA regulations
  • 13. 1. General and overall scopeThe Expanded Affiliated Group can contain a Non-participating FFI during two years. The concept of the Limited FFI doesinvolve being withheld upon.No. Category Guidance under the Notices Proposed Regulations Implications1.4 Expanded For groups of financial Members of an EAG generally must The window allowed for bringing all Affiliate Group institutions each member of the be either a PFFI or a registered members of the EAG into compliance (EAG) ‗expanded affiliate group‘ (EAG) deemed-compliant FFI. However, should be welcome relief for certain must be a PFFI or a deemed- certain branches and FFI affiliates that FFI groups. However, it is important compliant FFI in order for any are unable to comply with all the that the conditions are satisfied and group member to avoid requirements in the FFI Agreement that alternative solutions are effected withholding under FATCA. An because of local law restrictions will before the end of the ―grace period‖. EAG generally includes every not necessarily ―taint‖ other members non-US financial institution that of the EAG before 1 January 2016 is more than 50% owned by a During this ―grace period‖, such common parent. Each EAG branches and affiliates are generally generally is required to treated as non-participating FFIs and designate a lead FFI to act as a are required to satisfy certain other central contact point with the requirements. IRS for certain issues concerning the members of the group.Page 13 15 March 2012 Briefing on new proposed FATCA regulations
  • 14. 1. General and overall scopeInsurance products remain in scope but de minimus rule for pre-existing contracts has been introduced. Changes toprevious deemed compliance rules for funds may not be satisfactory.No. Category Guidance under the Notices Proposed Regulations Implications1.5 Product Scope There is some uncertainty Insurance companies (and holding Insurance remains in scope for (Insurance) around the product scope for companies of insurance companies) FATCA despite many of the insurance. Guidance suggests generally are expressly included in representations made by global that the insurance contracts with the definition of financial institutions. insurance companies. The de a cash value or investment minimis rule for pre-existing Insurance contracts with a cash value component are within scope. contracts will significantly reduce the will be in scope subject to a $250,000 number of contracts which have to de minimis rule for pre-existing be reviewed. However, changes for contracts. new customers will remain a key issue for securing FATCA compliance.1.6 Product Scope There is some uncertainty There is additional guidance on the Asset managers will need to assess (Asset around the product scope for application of FATCA to funds and the the impact across their fund range Management) certain investment vehicles. The asset management industry. However and quickly determine where IRS and the Treasury are many of the technical issues raised by uncertainties in the Proposed considering whether, for asset managers in comments to Regulations still raise concerns and example, exchange traded funds Treasury have not been addressed. consider highlighting these to the may qualify as deemed- IRS. Additionally, the scope for deemed- compliant FFIs. compliant status for investment funds has been expanded but contains some key restrictions.Page 14 15 March 2012 Briefing on new proposed FATCA regulations
  • 15. 1. General and overall scopeCompliance self-certification required.No. Category Guidance under the Notices Proposed Regulations Implications1.7 CCO The Chief Compliance Officer or The FFI Agreement will require the Mechanisms and procedures need to another equivalent-level officer PFFI to adopt written policies and be established to allow and support (responsible officer) of an FFI procedures on due diligence and to the officer sign-off and certification. will be required to certify to the conduct periodic reviews of its In large and diverse organisations IRS to compliance with these policies and establishing and maintaining the (1) the timely completion of procedures. appropriate control mechanisms may various steps in the account In addition, a responsible officer must be burdensome. identification procedure as also certify to the IRS that (1) the PFFI prescribed in Notice 2011-34, has completed various stages in the The Treasury Department and the (2) the absence of any activity or account review and identification IRS request comments regarding the policy in place between the process at prescribed times and (2) scope and content of such reviews publication date of Notice 2011- the PFFI did not have any formal or and the factual information and 34 and the effective date of the informal practices in place from 6 representations FFIs should be FFI Agreement assisting or August 2011 through the date of the required to include as part of such encouraging circumvention of certification to assist account holders certifications US account identification in avoiding the FATCA rules. procedures and For a registered deemed-compliant (3) the existence of written FFI the Chief Compliance Officer (or policies and procedures in place an individual of equivalent standing) as of the effective date of the also has certification obligations FFI Agreement prohibiting regarding the FFI‘s satisfaction of employees from advising US relevant requirements. account holders on how to avoid having their US accounts identified..Page 15 15 March 2012 Briefing on new proposed FATCA regulations
  • 16. 1. General and overall scopeExternal audits not routinely required. De minimis rule for individuals is largely unchanged. Aggregation rules have beenfurther detailed with new role for relationship manager. New de minimis rule for entities.No. Category Guidance under the Notices Proposed Regulations Implications1.8 External audit The existence of a requirement The FFI agreement will not require It is being considered to coordinate to have external audits that compliance be verified through the audit requirements for QIs with performed was unclear. third-party audits on a predetermined the verification procedures for PFFIs. or random basis. In case IRS has concerns about compliance it may impose , enhanced compliance verification requirements such as an external audit .1.9 De minimis Accounts held by individuals The de minimis rule for individual Aggregation was the most significant Rule with a balance not exceeding accounts is largely unchanged. change (to Banks in particular) when $50,000 may be treated as non- Aggregation in applying the de applying the de minimis rules. These US and therefore outside the minimis threshold is only required changes mean that FFIs will need to scope of the FATCA where the accounts are already linked revisit decisions made around documentation and reporting by the FFI‘s computerised systems or applying the de minimis thresholds requirements. For purposes of for accounts that a relationship and should reduce the compliance determining the account manager has reason to know are burden in retail banking in particular. balance, an FFI is required to owned by the same person. The de minimis rule may remove the treat as a single account all A new de minimis threshold of need to establish whether an entity is accounts treated by the FFI (or $250,000 has been introduced in excepted (for example as trading) or its affiliates) as commonly respect of entity accounts. establish the ownership for entities owned under the FFI‘s and will be particularly beneficial to computerized recordkeeping commercial and SME relationships systems. meaning a significant reduction in cost for those segments of the business.Page 16 15 March 2012 Briefing on new proposed FATCA regulations
  • 17. 1. General and overall scopeNo. Category Guidance under the Notices Proposed Regulations Implications1.10 Private Banking There are heightened account The additional private banking Whilst high value accounts remain a identification requirements on requirements have been removed. focus of the Proposed Regulations, FFIs with respect to accounts Instead there is an ‗enhanced review‘ the changes result in a better defined classified as private banking for all preexisting individual accounts framework for private banking accounts. The definition is with a balance or value exceeding departments and wealth managers to based on a number of criteria $1m. apply and should reduce the scale of and potentially includes areas the task faced. This enhanced review involves an not typically considered to be inquiry into the knowledge of the Relationship managers will still be within private banking. In relationship manager and a review of involved in this process and may addition, Relationship Managers a defined list of documents—there is need to identify changes in are required to personally no longer a requirement to review all circumstances of an account. perform identification documents held by the FFI. procedures on certain private Overall there remains a substantial banking clients, and to create training and compliance burden of and maintain lists of US, non- private banks and on the relationship US and recalcitrant accounts. managers.1.11 Grandfathered Withholding under FATCA Grandfathering has been extended to Extended grandfathering means that Obligations generally is not required with cover obligations outstanding on 1 more products are likely to be out of respect to obligations January 2013. scope. For example, a life insurance outstanding on 18 March 2012. contract that is payable upon the earlier of reaching a stated age or death is grandfathered if it is outstanding on 1 January 2013.Page 17 15 March 2012 Briefing on new proposed FATCA regulations
  • 18. 1. General and overall scopeNo. Category Guidance under the Notices Proposed Regulations Implications1.12 Certain New New provisions have been introduced The scope of products benefiting Provisions to exclude certain retirement, pension from this rule will need to be and other tax-favoured accounts from considered in each local market but the scope of FATCA provided they this should reduce the process and meet specific criteria. system changes. Debt and equity interests in financial institutions other than investment vehicles generally are not treated as financial accounts unless the value of the interests is determined primarily by reference to assets that give rise to withholdable payments.Page 18 15 March 2012 Briefing on new proposed FATCA regulations
  • 19. Section #2. NewSectionaccounts
  • 20. 2. New accountsThe most pressing deadline for FFIs is to have a FATCA compliant on-boarding process by 1st July 2013. Despite positivecommentary from Treasury accompanying their release on FFIs being able to rely extensively on existing customer intakeprocedures, changes may be needed to FFIs’ processes.No. Guidance under the Notices Proposed Regulations Implications2.1 Obtain documentary evidence to Whilst the intent appears to be that FFIs The requirement to review and/or obtain establish if a customer is a US or generally may rely on existing account- paper copies may create a significant non-US person. opening procedures, the requirement to burden for those markets where paperless obtain/review government-issued AML/KYC checks are in place. This will identification for individuals generally has involve a material change to procedures remained. particularly for telephone and on-line channels.2.2 Review the customer file for US Broadly, the scope of US indicia is Manual or automated processes will need indicia and if US indicia are identified unchanged except that a US telephone to be put in place to review information obtain the appropriate documentation number has been added as one of the captured during the on-boarding process to establish status. US indicia include possible US indicia. to check for US indicia. US citizenship or permanent resident ―Care of‖ addresses outside of the US New processes will need to be created for status, a US birthplace, a US remain one of the US indicia for new accounts where US indicia are identified to residence or correspondence accounts. gather additional documentation. address, standing instructions to transfer funds to an account in the Critically, there is no positive duty on FFIs US, an ―in care of‖ or ―hold mail‖ to capture new information above what is address that is the sole address for currently required by KYC/AML the client, etc. Documentation requirements to positively rule out all US required to be furnished may include indicia. Subject to the issue with one or more of the following: a US documentary evidence above, no additional tax certificate (Form W-9 or Form W- information gathering is mandated for 8BEN), a non-US passport, written individuals. explanation regarding renunciation of or failure to acquire US citizenship, etc.Page 20 15 March 2012 Briefing on new proposed FATCA regulations
  • 21. 2. New accountsAdditional classifications for identification of Payees have been introduced and NFFE treatment has changed.(Additionally changes to the proposed regulations have been announced)No. Guidance under the Notices Proposed Regulations Implications2.3 Establish the status of each entity The Proposed Regulations contain very Many FFIs are already aware that the account holder as a US entity, PFFI, specific details on the identification of entity analysis was complex. The non-financial foreign entity (NFFE), entities - with the documentation Proposed Regulations indicate that the etc., and if necessary obtain requirements varying according to the entity complexity remains but the end result information on the ownership of an type and potential FATCA classification. should be that FFIs would need to entity account holder. ascertain the ownership makeup of fewer There is a significant amount of detail entities. contained in these rules, including standards of knowledge and presumption rules, indicating that new entity identification may be a complex procedure for FFIs to apply.Page 21 15 March 2012 Briefing on new proposed FATCA regulations
  • 22. Section #3. Pre-existing accountsSection
  • 23. 3. Pre-existing accountsChanges have been made to the process of reviewing pre-existing accounts– for example, the heightened reviewprocedures for private banking accounts have been replaced by an enhanced review requirement on high-value accounts– but the overall framework is largely similar.No. Guidance under the Notices Proposed Regulations Implications3.1 Perform a diligent (paper file) review Enhanced review for pre-existing individual The higher threshold amount below which of records of pre-existing private accounts with a balance or value exceeding electronic searching is permissible should banking accounts and accounts with $1m, as described in 1.9 above. reduce the burden of many FFIs. a balance or value of $500k or more.3.2 Search electronic records on pre- The requirements to search for US indicia, The change of rules on ―care of‖ existing accounts for US indicia as well as what constitutes US indicia, are addresses, whilst appearing relatively (subject to the de minimis exception largely unchanged, although a US minor, should significantly reduce the for individual accounts described telephone number has been added as one numbers of customers impacted by above). For accounts with US indicia, of the possible US indicia. In addition, FATCA with no connection to the US. obtain additional documentation to solely for purposes of electronic searches A challenge for FFIs will be to design an establish account as US or non-US. on pre-existing individual accounts, an ―in appropriate search which correctly US indicia include US citizenship or care of‖ address that is outside of the identifies US telephone numbers and does permanent resident status, a US United States by itself does not give rise to not pick up accounts in other countries birthplace, a US residence or US indicia. such as Canada. correspondence address, standing instructions to transfer funds to an account in the US, an ―in care of‖ or ―hold mail‖ address that is the sole address for the client, etc. Documentation required to be furnished may include one or more of the following: a US tax certificate (Form W-9 or Form W-8BEN), a non- US passport, written explanation regarding renunciation of or failure to acquire US citizenship, etc.Page 23 15 March 2012 Briefing on new proposed FATCA regulations
  • 24. 3. Pre-existing accountsInsurance companies should benefit significantly from the new de minimis limit.No. Guidance under the Notices Proposed Regulations Implications3.3 Establish the status of each entity The Proposed Regulations contain very There is a significant amount of detail account holder as a US entity, PFFI, specific details on the identification of contained in these rules, indicating that NFFE, etc., and if necessary obtain entities - with the documentation review of pre-existing entity accounts may information on the ownership of an requirements varying according to the entity be a complex procedure for FFIs to apply. entity account holder. type and potential FATCA classification. The end result should be fewer entities which the FFI is required to look through to identify US owners.3.4 Annual retest of all pre-existing Across-the-board annual retesting is not Whilst an ongoing monitoring process individual accounts to determine if required under the Proposed Regulations. needs to be put in place, the higher limits the high-value threshold ($500,000), However, pre-existing accounts that were will reduce the numbers of customers which would trigger heightened out of scope under the de minimis rule lose breaching the $1m limit each year. review procedures, is met (beginning their status if the balance or value exceeds in the third year following the $1m. effective date of the FFI Agreement).Page 24 15 March 2012 Briefing on new proposed FATCA regulations
  • 25. Section #4. ReportingSection
  • 26. 4. ReportingUnder the Proposed Regulations, reporting requirements for PFFIs are phased in over several years.No. Guidance under the Notices Proposed Regulations Implications4.1 Key Dates for PFFIs: Key Dates for PFFIs: ► First reporting to IRS by 30th First reporting by 30 September 2014 on September 2014, if received a accounts treated as US accounts or as W-9 by 30th June 2014 recalcitrant accounts as of 30 June 2014. Thereafter, annual reporting on accounts generally due by 31 March of each year.4.2 Annual reporting requirements on all The information required to be reported is The phased reporting period is likely to be US accounts: largely unchanged. Special reporting rules welcome by FFIs. However in developing phasing in the amount of information the solution design the full reporting ► Name, address and Taxpayer required) apply to the 2013, 2014 and 2015 requirements will need to be considered. Identification Number of tax years. Account balances and payments account holder may be reported either in US dollars or in ► Name, address and Taxpayer the currency in which the amount is Identification Number of certain denominated. Conversion to US dollars is US owners of certain entity to be applied using the spot rate on the last account holders day of the year (or, for the balance of an ► Account number account that was closed during the year, ► Account balance the date of closure). ► Certain other information on certain payments into and out of the account (gross amount of dividends, interest and other income paid or credited to the account, etc.)Page 26 15 March 2012 Briefing on new proposed FATCA regulations
  • 27. 4. ReportingA new requirement to report certain payments made to non-participating FFIs for 2015 and 2016 has been introduced.No. Guidance under the Notices Proposed Regulations Implications4.3 Annual reporting of the number and The aggregate reporting requirements Whilst not an immediate priority for aggregate value of financial accounts applicable to recalcitrant accounts are implementation FFIs FATCA solution will held by recalcitrant account holders, generally unchanged, although a new need to consider recalcitrant and dormant non-participating FFIs, and requirement to report on the number and account reporting. recalcitrant account holders with US aggregate value of dormant accounts has indicia been added.4.4 New Requirement A PFFI is required to report the aggregate Those FFIs who expect to hold accounts amount of certain payments made to each of non-participating FFIs will need to build non-participating FFI for each of 2015 and reporting requirements into the final 2016. Such reportable payments include FATCA solution non-US source dividends and interest.Page 27 15 March 2012 Briefing on new proposed FATCA regulations
  • 28. Section #5. WithholdingSection
  • 29. 5. WithholdingThe rules on withholding on payments other than foreign passthru payments are generally unchanged.No. Guidance under the Notices Proposed Regulations Implications5.1 A withholding tax of 30% is imposed The definition of withholdable payments is The carveouts from the definition of on certain US-source income, e.g., generally unchanged. However, some withholdable payments should reduce the dividend, interest (FDAP payments), important carveouts have been introduced; burden of compliance, and the likelihood and on gross proceeds on the sale of for example, interest on certain short-term of being withheld upon, for many assets generating US-source interest obligations and "ordinary course" payments institutions. or dividends, paid to non- for wages, office and equipment leases, participating FFIs or to recalcitrant software licenses, etc., are not withholdable account holders. payments5.2 Withholding is to be implemented in Withholding on foreign passthru payments For those PFFIs impacted developing a phases: is further delayed and will not apply until withholding solution for US-source FDAP 2017 at the earliest. needs to be built into FATCA ► withholding on US-source implementation plans. However for PFFIs FDAP payments commences that are not directly making US sourced on 1 January 2014; FDAP payments to account holders, ► withholding on gross sales developing a withholding capability may proceeds and withholding not be an immediate priority (except, for under the ―passthru payment‖ example, if the PFFI is a QI with primary rules described below withholding responsibility). commence on 1 January 2015.Page 29 15 March 2012 Briefing on new proposed FATCA regulations
  • 30. 5. WithholdingThere is no further clarification in the Proposed Regulations with respect to foreign passthru payments.No. Guidance under the Notices Proposed Regulations Implications5.3 Key Dates: Withholding on foreign passthru payments See below is further delayed and will not apply until ► Withholding on gross sales 2017 at the earliest. proceeds and withholding under the ―passthru payment‖ rules described below commence on 1 January 20155.4 In addition to the US-source income There is no further clarification in the Developing a solution to foreign passthru and gross proceeds mentioned Proposed Regulations. The IRS has withholding and calculation of PTP% above, a PFFI is also required to indicated that further guidance would be should be de-prioritized until greater clarity withhold on certain non-US source issued on a later date. is available. payments made to non-participating However, the industry should engage with FFIs or to recalcitrant account the IRS to develop a workable solution. holders to the extent of the ‗passthru payment percentage‘ (PTP%) of the applicable paying or issuing FFI. Each FFI is required to calculate and publish its PTP% on a quarterly basis. An FFI‘s PTP% is determined by dividing the sum of its US assets over its total assets held on each of the last four quarterly testing dates.Page 30 15 March 2012 Briefing on new proposed FATCA regulations
  • 31. FATCA – Proposed RegulationsModified Implementation Timeline Identification procedures should be Identification procedures should completed within 1 year of the effective be completed within 2 years of date of FFI Agreement for pre-existing the effective date of the FFI On-boarding process for new Agreement for remaining pre- accounts must be operational by accounts of ―prima facie FFIs‖ and for pre- Identification of pre-existing US existing high-value (> $1m) individual existing entity and individual the effective date of FFI Agreement accounts should start by 1 st July 2013 accounts accounts (1 st July 2013 at the earliest) 2012 2013 2014 2015 2016 2017 First reporting Registration (FFI agreement) 03 for the 2013 Registration with the IRS (1) Effective calendar year Extended period for full EAG compliance (2) Date due by 30 September 2014 Client identification and account classification on accounts New accounts (3) treated as US Preexisting individual accounts accounts or as High-value accounts > USD 1 million (4) recalcitrant Remaining accounts ≤ USD 1 million (5) accounts as of Preexisting entity accounts 30 June 2014 Accounts of prima facie FFIs (4) Remaining accounts (5) Withholding Withholding on US-source FDAP payments Withholding on Withholding on gross proceeds foreign passthru Withholding on foreign passthru payments payments is further delayed Reporting (6) and will not Reporting of U.S. accounts apply until 2017 30.09.2014 31.03.2015 identifying info (7) + account balance at the earliest 31.03.2016 + income paid or credited to account 31.03.2017 + gross proceeds Aggregated reporting of recalcitrants (8) Thereafter, Reporting of payments made to NPFFIs (9) annual reporting on accounts Withholding on US-source FDAP payments generally due by commences on 1 January 2014 31 March of each year (1) The online process for registering an FFI as a PFFI or a Deemed Compliant FFI will be open no later than January 1, 2013. The effective date of the FFI agreement will be July 1, 2013 or later. (2) Certain ―limited branches‖ and ―limited FFIs‖ that are unable to be fully compliant as a result of local law restrictions may remain non-participating until December 31, 2015 without tainting the other members of the EAG group, although they may be subject to withholding. (3) Accounts opened on or after the effective date of the FFI agreement. (4) Within one year of the effective date of the FFI agreement—earliest effective date is July 1, 2013. (5) Within two years of the effective date of the FFI agreement—earliest effective date is July 1, 2013. (6) This slide does not address reporting requirements of withholding agents that are not FFIs. (7) Name, address, TIN and account number either (i) of the account holder that is a specified U.S. person or (ii) of the U.S. owned foreign entity (TIN if available) and of each substantial U.S. owner of such entity. (8) Separate reporting of recalcitrants with U.S. indicia and of dormant accounts (each on an aggregated basis) required. (9) Payments of ―foreign reportable amounts‖ (including non-U.S. source FDAP payments) to NPFFIs made in 2015 and 2016 required to be reported.Page 31 15 March 2012 Briefing on new proposed FATCA regulations
  • 32. Insights and implications
  • 33. Proposed regulations introduce newconcepts and new timelines Participation ► The IRS has published 380+ pages of proposed regulations. Within these, steps have been made to reduce the implementation effort ► The Lead FFI will remain responsible for the coordination of the application process for the entire Expanded Affiliated Group ► A new class of ―Limited FFIs‖ has been introduced to allow the transition of members of an EAG that have laws prohibiting the tax withholding or reporting required under FATCA. These limited FFIs are provided additional time to (fully) implement FATCA (max 2 years) ► Introduction of an additional ―joint statement‖, separate from the proposed regulations, entailing that an agreement is made between local tax authorities and the U.S., replacing the need for FFIs in the respective ―partner‖ countries to sign an agreement with the IRS Preliminary conclusion: the FFI will face less legal barriers but will be confronted with a ‗two tier‘ FATCA (partner countries versus non-partner countries)Page 33 15 March 2012 Briefing on new proposed FATCA regulations
  • 34. Proposed regulations introduce newconcepts and new timelines Identification ► For new accounts the identification procedures and necessary documentation are aligned with local AML/KYC legislation ► Threshold for manual reviews increased from $500K to $1,000K for pre- existing individual accounts ► Threshold for pre-existing entity accounts, of $250K has been introduced ► The special rules in the Notices for so-called "private banking accounts― are eliminated ► Relationship manager involved in the aggregation of accounts. ► New complex regulations on the identification of payees are introduced Preliminary conclusion: the FFI will face less stringent rules in identification, but will be confronted with additional requirements on payee identificationPage 34 15 March 2012 Briefing on new proposed FATCA regulations
  • 35. Proposed regulations introduce newconcepts and new timelines Transition rules for affiliated groups / reporting ► The limited FFI status prevents a non-participating FFI or branch that is subject to foreign laws that prohibit FATCA compliance from disqualifying an otherwise participating FFI group during a transition period. The transition period will end January 1, 2016 and these limited FFIs or branches will be subject to withholding upon receipt of withholdable payments. ► The proposed regulations extend the transition period on the scope of information reporting by FFIs as follows: ► 2014 and 2015: FFIs must begin reporting name, address, TIN and account balance of U.S. accounts ► 2016: FFIs must begin reporting income associated with U.S. accounts ► 2017: FFIs must begin reporting gross proceeds from securities transactions Preliminary conclusion: the FFI will face less legal barriers in reporting and is allowed more time to meet the reporting requirementsPage 35 15 March 2012 Briefing on new proposed FATCA regulations
  • 36. Proposed regulations introduce newconcepts and new timelines Withholding ► Scope of withholding per 1 January 2014 is limited to NPFFIs and withholdable payments to recalcitrant account holders ► Full withholding will not start before January 1, 2017 ► Passthru payments concept will not be introduced earlier than 1 January 2017. The definition of passthru payments has been delayed. ► Many additional regulations (~100 pages) have been published for withholding. Market induced changes are expected for the final regulations in the summer of 2012. Preliminary conclusion: FFIs can await the summer regulations to identify the activities that are needed to sustain its decision to avoid withholding. This allows for full focus on identification and reporting first.Page 36 15 March 2012 Briefing on new proposed FATCA regulations
  • 37. De minimis ruleThe proposed FATCA regulation provides thresholds (de minimis rule) on the balance or value of accounts to limit efforts of FFI’s in identification of their preexisting accounts Preexisting individuals accounts Preexisting entity accounts ► FFI is allowed to treat preexisting ► FFI is allowed to treat any preexisting individuals depository accounts entity financial accounts with a balance previously documented as U.S. or value of $250K or less as Non U.S. accounts with a balance or value of $50K accounts or less as Non U.S. accounts ► FFI is allowed to treat any preexisting other individuals financial accounts with a balance or value of $50K or less as Non U.S. accounts ► FFI is allowed to treat preexisting cash value insurance or annuity contracts with a balance or value of $250K or less as Non U.S. accountsPage 37 15 March 2012 Briefing on new proposed FATCA regulations
  • 38. High value accounts and aggregation rulesThe proposed FATCA regulation provides thresholds (de minimis rule)or value balance or value of High value account - preexisting individual accounts that have a balance on the that exceedsaccountsat the end of theof FFI’s in identification thetheir preexistingthe participating FFI‘s $1,000K to limit efforts calendar year preceding of effective date of accounts agreement with the IRS, or at the end of any subsequent calendar year High-value account subject to the additional enhanced review requirements that include ► relationship manager inquiry (if there is such a manager in an FFI) and ► a review of the current customer master file and other documents (e.g. account opening contract, documentation for purposes of AML due diligence, any power of attorney) that are associated with the account and were obtained by the participating FFI within the last five years Aggregation of accounts (applicable to de minimis rule and High value accounts) ► For purposes of applying de minimis rule and identification of High value accounts FFI should aggregate value of accounts held by an individual and maintained by the FFI, or members of its expanded affiliated group. ► However aggregation is required only to the extent that the FFI‘s computerized systems link the accounts by reference to a data element such as client number or taxpayer identification number. ► FFI is also required to aggregate all accounts of a High value account holder that a relationship manager has the ability to aggregatePage 38 15 March 2012 Briefing on new proposed FATCA regulations
  • 39. Section #1. Banking specificSectionimplications
  • 40. Insights and implications of the draftregulations Topic Obligations Implications ► Removes all individual relationship- 1. Private ► Private banking concept removed and managed business below $1m from Banking replaced with >$1m threshold diligent review ► Applies to accounts >$1m ► Reduced number of customers to review 2. Diligent ► Electronic review required plus ―paper ► Must be completed within 1 year review search‖ of documents ► Defined set of documents to review threshold changes ► Relationship Manager to act on ► Procedures required to track change of knowledge of change of circumstances circumstance 3. Pre- ► $50k de minimis remains, raised to ► All customers will need to be classified existing $250k for cash value insurance and annuity contracts ► Identification of customer data individual customers ► Indicia searches modified ► Management of search output to provide (<$1m) evidence of customer status ► Account aggregation rules clarified ► Reliance on existing KYC/AML ► Unclear status of e-KYC: need to see 4. New processes, but… ―documentary evidence‖ individual customers ► Response required if US indicia arise ► Exceptions process needed if US indicia during due diligence processes identified through existing KYC/AMLPage 40 15 March 2012 Briefing on new proposed FATCA regulations
  • 41. Insights and implications of the draftregulations Topic Obligations Implications 5. Pre- ► 12 months to review and document FFI ► Identification of FFIs existing customers ► Identification of NFFE type entity ► < $250k excluded ► 10% ownership threshold for passive customers ► Passive NFFEs key focus NFFEs ► Documents required to define NFFE in ► Actively trading non-financial foreign active trade or business 6. New entity entities are exempt customers ► Need to obtain certification from account ► Passive NFFEs, e.g. investment entities holder to establish US owners for clarified as the major focus passive entities ► Jan 1 2014 – FDAP 7. Passthru & ► Jan 1 2015 + gross proceeds ► ―foreign passthru payments‖ not defined Withholding ► Withholding not required on foreign in regulations passthru payments until Jan 1, 2017 Extension of timelines: ► Data must be collected about the year ► Initial US accounts reporting for 2013 & prior to reporting 8. Reporting 2014 ► Design options for timing of building ► Income reporting starts 2015 reporting capability vs. activation ► Gross proceeds reporting starts in 2016Page 41 15 March 2012 Briefing on new proposed FATCA regulations
  • 42. Insights and implications of the draftregulations Topic Obligations Implications ► Simplified compliance for FFIs in partner ► Timing uncertain – domestic legislation countries 9. Joint to be enacted ► Reporting to local tax authorities instead Statement ► Information still required of direct to IRS ► Potential for additional partner countries ► No withholding within partner countries ► Apply by 30 June 2013 ► Draft FFI agreement due early 2012 ► Periodic attestation by responsible ► FFI required to have written policies & 10. FFI officer procedures Agreement ► Mechanics of group or multiple ► Transitional arrangement possible for attestations / FFI agreements not some members of EAG defined ► New categories of deemed compliant FFIs (more may be added) 11. Deemed ► Restrictions on definitions may reduce Compliance ► Intent to focus FATCA on global usefulness of status investment community rather than truly local entitiesPage 42 15 March 2012 Briefing on new proposed FATCA regulations
  • 43. Section #2. Insurance specificSectionimplications
  • 44. Proposed Regulation Highlight for InsurersHighlights for Insurers► The increase in de minimis for contracts with a value in excess of $250,000 is good news for all insurers.► Confirmation that insurance contacts which do not have a cash surrender or termination value are out of scope is also welcome.► Retirement exemptions broadened► ―Care of‖ address indicia for existing accounts has been modified.► Grandfathering is now extended to contacts outstanding on 1 January 2013 AND where the contract is payable on the earlier of a stated age or death.► Detailed review threshold has been increased to greater than $1m.► Private banking proposal have dropped (but some concepts move to detailed review).Some of the less welcome changes are► No de minimis exclusion for new contracts► Annuities generally included► Complex rules for retirement saving and annuitiesPage 44 15 March 2012 Briefing on new proposed FATCA regulations
  • 45. Retirement plans – deemed compliance andexempt beneficial ownersDeemed compliance conditions include:► The fund is organized for the provision of pension benefits in its country of organization,► Contributions must come from the employer, employee or the government and be restricted by reference to earned income and must be tax advantaged in some way.► No one beneficiary can be interested in more than 5% of the assets of the pension plan.There are different requirements for small retirement plans with less than 20members.Exempt beneficial owner conditions include that the entity must be:► the beneficial owner of payments made to it,► established in a country with which the US has an income tax treaty in force,► generally exempt from income taxation in its country of establishment and► entitled to treaty benefits under the applicable US treaty.Entities wholly owned by exempt beneficial owners are themselves exempt.Page 45 15 March 2012 Briefing on new proposed FATCA regulations
  • 46. Impact on insurance product rangeHigh impact anticipated Cash FATCA Products Remarks value? impact Offshore bonds are likely to require significant focus in Single and regular premium Yes meeting FATCA requirements and this is expected to offshore investment products be a key area for your FATCA programme Bonds and investment products are likely to require Single and regular premium UK significant focus in meeting FATCA requirements and YesSome impact anticipated investment products this is expected to be a key area for your FATCA programme Under current drafting these are in-scope unless they Individual pensions Yes qualify for an exemption under the definition of retirement plan (refer to slide 6 and appendix) Under current drafting these are in-scope unless they Corporate pensions Yes qualify as deemed compliant or for an exemption(referNo impact anticipated to slide 6 and appendix) Protection business (e.g. Critical No cash value and current drafting implies out of illness, long term care, term No scope assurance) Under current drafting these are in-scope even if they Pension annuities No have no cash value. Would be covered by an exemption except the Individual Savings Accounts (ISA) YesKey exemption demands contributions from earned incomePage 46 15 March 2012 Briefing on new proposed FATCA regulations
  • 47. Retirement product overview Pension Savings Products Retirement Funds Contract Based Pensions (e.g. Trusts) (e.g. Individual Pension) • The retirement fund exemption is not applicable to contract based pensions however it could qualify as a retirement account which provides a separate exemption • The requirements for a contract based pension to be anDeemed Compliant Exempt Fund exempt account are as follows. It is important to note that in the UK, no contract based pension will be an exempt account due to annual contributions being limited toSelf certify deemed compliance if • Other retirement funds $50,000 or lesscertain conditions are met including: may be considered• Organisation under law of country ―exempt beneficial owner‖ in which established or operate; posing a low risk of tax• Contributions only from evasion employee, employer, government • A retirement fund will be by reference to earned income; considered an exempt• No beneficiary has right to 5% or beneficial owner of a more of the assets; and payment if it meets one of• Income tax deferral on two retirements detailed contributions on slide 19Special requirements are in placefor small funds Page 47 15 March 2012 Briefing on new proposed FATCA regulations
  • 48. Section #3. AM specificSectionimplications
  • 49. The key challenges for the funds industry Asset managers Administrators Most asset managers operate within a complex Service providers will have to address their own network of relationships with their distributors FATCA impacts and consider how they can and service providers. They will have to: support their fund clients in achieving FATCA • Determine direct impacts to their operating compliance model and initiate plans accordingly • Assess the services clients require and • Consider the degree of their dependency to determine the business case – onboarding, third parties to achieve FATCA compliance investor identification, reporting, PPP • Manage their reputational risk, by working calculation and withholding closely with their distributors to ascertain their • Determine their own impacts and obligations intentions for becoming compliant with FATCA and initiate plans accordingly • Identify a Responsible Officer to certify their • Align their own Group requirements to their status client requirements and address areas of conflictPage 49 15 March 2012 Briefing on new proposed FATCA regulations
  • 50. What are the specific FATCA challenges Topic Proposed regulations Challenges & implications • Intent to focus FATCA on • Restrictive conditions – significant impact likely in global investment order to achieve deemed compliant status in community rather than truly many cases local entities • Additional complexity for onboarding and existing • May help reduce most customer analysis – many categories significant FATCA issue – • Potential significant legal work to update withholding distributor agreements, prospectus etc • Operational complexity in: • May require redemptions of US investors, 1. Deemed • Meeting requirements recalcitrants Compliance • Determining status • Saves you reporting and withholding • Operational obligations • Funds – QCIVs, restricted funds • Banks/distributors – Local FFIs, local banksPage 50 15 March 2012 Briefing on new proposed FATCA regulations
  • 51. What are the specific FATCA challenges FFI2. EAG & FFI Agreements EAG Entities (p271) Non-US (Foreign Financial Institution) (p121, 293-296) Participating FFI (p122) (status to be Participating FFI resolved Limited (with transitional by end Branch arrangement) of 2015) (p272) (p226) Local FFI US Territory FI (p298) (p126) (p128) Limited FFI (with• Significant number of potential entity transitional agreement) (p276) Non-reporting member of PFFI Group (p301) Unlikely to be in EAG but classifications within an EAG funds managed by the group Registered may be) Deemed Compliant Qualified collective Non-Participating Deemed Compliant FFI investment vehicles (p302)• Still uncertainty in regards how FFI FFI FFI (RDCFFI) (p122) (p298) (p298) Restricted Funds (p302) agreements will work – particularly for Owner Unlikely to qualify under Documented current proposed regs: all Excepted FFI (p311) entities in the EAG must be (p121, 295-8) local banks in the same (Note: treated as country funds excepted NFFE) Certified Deemed Compliant FFI (p306) Non registering local bank (p307)• Organizations will need to determine their NFFE Retirement Fund (p308) Unlikely to be in EAG unless the retirement fund of a (Non-Financial Excepted NFFE Active NFFE business within EAG. framework to enable responsible officer Key Classification group Foreign Entity) (p124) (p328) (p331) Most of the non-FI businesses will fall here, Non-profit organisations Must have no shareholders Time-limited status including insurance (p310) certification FATCA classification type Potential end status Publically traded (p328) companies without “financial accounts” - ie issuing only protection policies. with a proprietary or beneficial interest in its income or assets• How will this work for funds and Certain territory FFI with only low value Unlikely to apply within EAG entities accounts (p311) Passive NFFE (p331) (p124) Note: other excepted NFFEs exist – eg foreign Rules include limits of not administrators? governments, retirement funds etc more than $50m assets in entire EAG Note: this chart refers to the Legal Entities of an EAG. It does not include such excepted entities as governmental agencies or central banks which are subject to an exclusion from the definition of FFI or NFFE under the statutePage 51 15 March 2012 Briefing on new proposed FATCA regulations
  • 52. What are the specific FATCA challenges Topic Proposed regulations Challenges & implications • Simplified compliance for • Huge uncertainty – how do you plan? FFIs in partner countries • Timing uncertain and time required for domestic 3. Joint • Reporting to local tax legislation to be enacted Statement authorities instead of direct • Countries involved? to IRS • Specific requirements? • No withholding within • Reaction from US financial institutions? partner countries • Reliance on existing • Unclear status of e-KYC: need to see KYC/AML processes, but… ―documentary evidence‖ • Response required if US • Exceptions process needed if US indicia identified indicia arises during due through existing KYC/AML 4. New diligence processes • Need to obtain certification from account holder to individual & • Actively trading non- establish US owners for passive entities entity financial foreign entities are • Some exempt entities – how do you confirm status customers exempt – actively trading NFFEs, Charities, Retirement • Passive NFFEs, e.g. funds investment entities clarified as the major focusPage 52 15 March 2012 Briefing on new proposed FATCA regulations
  • 53. What are the specific FATCA challenges Topic Proposed regulations Challenges & implications • Joint statement • Still have the conflicts with local laws – unlikely 5. Legal • Transitional arrangement intergovernmental arrangements can be provided conflicts for certain members of with all countries globally eg Hong Kong, EAG Singapore • Withholding agents/ PFFIs • The use of third parties to fulfil FATCA who fail to withhold despite compliance (eg, administrators) will not relieve a 6. Liability knowing or having reason withholding agent/ PFFI for compliance failures Issues to know that a claim of US and under-withheld taxes. status is unreliable or incorrect will be liable for the tax plus interest. • The timeline for FATCA implementation is complex 7. Timing & with multiple deadlines plan • Phased timeline • Key dependencies to manage in delivering all parts of FATCA compliancePage 53 15 March 2012 Briefing on new proposed FATCA regulations
  • 54. Section #4. JointSection StatementInsights
  • 55. Joint statement on intergovernmentalapproach to FATCASets out potential framework for intergovernmental approach to FATCACompliance► The U.S. and ―FATCA partner‖ country would agree that FFIs in the FATCA partner country could report information required under FATCA to the tax authority of that country, rather than to IRS► Under this intergovernmental agreement, FFIs in the FATCA partner country would not need to enter into FFI agreements with IRS► Would eliminate FATCA withholding on payments to FFIs in that country► FFIs would not be required to terminate accounts if recalcitrant account holders or impose passthru payment withholding► The U.S. would commit to reciprocal treatment regarding reporting of information on U.S. accounts of residents in the FATCA partner countryPage 55 15 March 2012 Briefing on new proposed FATCA regulations
  • 56. First analysis of the impact of the jointstatement Reciprocal automatic information exchange Reciprocal automatic information exchange The statement acknowledges that some countries may have legal restrictions making compliance with FATCA difficult. It further provides that the U.S. is willing to collect and exchange information on accounts held in U.S. financial institutions by residents of EU countries. In summary, the consequences of this joint statement between the IRS and their ‗FATCA partners‘ are thought to be the following: FFIs in the FATCA partner do not have to enter Not required to impose passthru payment 1 into a separate FFI agreement with the IRS withholding on payments to other FFIs organized 5 in the FATCA treaty partner or in another FFIs in the FATCA partner can report to the local jurisdiction with which the United States has a 2 authorities rather than directly to the IRS FATCA implementation agreement. No U.S. withholding on payments to FFIs 3 established in the FATCA partner FATCA partner is not required to impose 6 passthru payment withholding on payments to FATCA partner is not required to terminate the recalcitrant account holders 4 account of a recalcitrant account holder; Although the joint statement offers some advantages it is unclear whether the obligations of FFIs will be significantly lessened, the effort may remain substantially similar depending on the way the reciprocity principle is going to be applied.Page 56 15 March 2012 Briefing on new proposed FATCA regulations
  • 57. Next Steps
  • 58. Priorities for the next few weeks… ► Review, digest and interpret the draft FATCA regulations ► Review existing assumptions to confirm requirements and identify areas of remaining Interpretation of uncertainty the draft ► Develop high level design principles and agree strategic questions which need to be regulations resolved ► Communicate implications to your various stakeholders ► Build / update business requirements Engagement with ► Identify points for submission to the IRS the IRS (optional) ► Engage with the IRS based on the interpretation of the regulations by 30 April 2012 ► Initiate and complete business impact assessment…or, Complete / validate ► Assess implications and modify impact assessment work completed to date impact assessment ► Confirm critical path and underlying design & implementation plans and plans ► Confirm resource needs and project governance arrangements ► Re-visit cost assumptions / business case Initiate / continue ► Initiate business and IT solutions design for ‗high certainty‘ areas solution design ► Obtain sign-off to solution design and commence build…..test……implementPage 58 15 March 2012 Briefing on new proposed FATCA regulations
  • 59. The FATCA Challengeby Sylvie Goethals15 March 2012
  • 60. Uncomplicating thecomplexities of compliance
  • 61. The FATCA challengeChallenge What does this mean to you?  FATCA, although a tax legislation, has huge operational implications and reporting obligationsA tax legislation with which quickly translates to requiring changes in systems and processes in addition to policiesimplications across different regarding products and customers.functions of an FFI  FATCA brings into inter-play tax, risk, legal and compliance functions of an FFI together  FATCA is global in nature and all business units and functions (which are in scope of FATCA) are required to comply with it.Global compliance and local  In addition, each BU also needs to comply with the local rules and regulations (e.g. privacy anddelivery data protection rules) adding another layer of complexity.  Non compliance by a single business unit/function will result in the whole FFI being deemed as ‗non-compliant‘.  The delivery of FATCA compliance needs to complete by 01 July 2013 for on-boarding procedures or in 15 months.Challenging time scale tobecome compliant  Delivering a huge global programme within such a short timeline requires meticulous planning and experienced people across tax, compliance and operations, and IT to ensure a fail-safe delivery in the first instance.  Unlike many other regulatory change, FATCA has direct impact on the customers, new and existing, of an FFI.Impact on customers - newand existing  impact on customers during account opening or data privacy for documentation or reporting will need to be considered. Delivering FATCA compliance requires a global approach coupled with effective local deliveryPage 61 15 March 2012 Briefing on new proposed FATCA regulations
  • 62. Fatca projectFrom Thought to Implementation
  • 63. What is our approach?► ―shrink the problem, shrink the effort‖ Based on a 2-phase method, we aim at ensuring compliance in the most cost effective manner within the required timelines. 1. Phase I: Current state analysis – Impact assessment 2. Phase II: Solution optimisation and efficient implementation ► Validate impact assessment – efficient and thorough review ► Overall solution design – effective global compliance ► Implementation – confidence in deliveryPage 63 15 March 2012 Briefing on new proposed FATCA regulations
  • 64. FATCA solution overview – key components Where are we in the market cycle? Governance Program Assist in setting up and structuring the FATCA program office, defining governance and stakeholder management FATCA awareness Provide training and internal communication FATCA impact assessment High-level assessment of a business‘ current processes against FATCA requirements Tax team Support regulatory Legal entity and business unit analysis interpretation, Assessment of your legal entity structure and identification of where FATCA applieseducation, and lobbying (e.g., which are FFIs, where assets are being held) advice Provide continuing Onboarding and Customer and Withholding and support and guidance reporting systemsto all workstreams and KYC processes counterparty data Assessment ofcurrent onboarding Assessment of current customer Identification of paymentsystemsprocesses at all levels (e.g., account opening) and KYC data infrastructure, quality and where information reporting will be Ernst & Young processes and documentation rationalization required and withholding will apply accompaniment to meetings with the Treasury Department Business model and IRS Evaluation of strategic options Planning for implementation Define and gain consensus around a road map for implementation of FATCA, including scope, budget, high-level design approach and timeline Page 64 15 March 2012 Briefing on new proposed FATCA regulations
  • 65. Our 2-phase methodology Phase I – Current state analysis Phase II – Solution Optimisation and Efficient implementation Enterprise Apply Business Solution Roadmap development Roll out scope Filters priorities design and implementation plans Entity 1 Enterprise Scope Apply Filters Business priorities Solution design Roadmap & Implementation Plans Impact Pre- Project weeks Workstream project start 1 2 3 4 5 6 7 8 9 10 11 12 PMO and Tax 1. Project Mobilization Program plan/PMO & work products template/kick off meetings management and Global governance structure On-going global & local FATCA coordination, issue tracking, communications, & tools & deliverables templates global governance Governance structure assessment 2. Tax team Liaise between EYFATCA team & Swiss Re business operations/technology teams, providing access to global tax resources & training as needed Obtain / Classify legal reconcile list of entities Legal entity classification legal entities Preliminary view of Current state analysis (Phase I) 3. Legal entity and FATCA impacts on Document high level product Swiss Re BU & flows & identify FATCA impacts High level product flows business unit products Strategic decisions ―Shrink the problem‖ analysis Define preliminary FATCA strategic FATCA strategic assumptions Processes and systems assumptions Define impact across legal entities, business lines & products FATCA enterprise wide impact score card Filter EY detailed FATCA business requirements & data Detailed transaction flows model for Swiss Re business FATCA Traceability Matrix Data classification tool results: Customer segmentation and data quality assessment 4. Detailed impact Identify, capture, and prioritize gaps assessment Gap assessment report Document detailed process & system transaction flows Utilize EY FATCA data classification tool to analyze customer data Identify key data, process & systems gaps based on traceability matrix High 5. FATCA strategic Update FATCA strategic options & assumptions Review & agree FATCA strategy: FATCA strategy & assumptions, design decisions Identify & evaluate potential solutions principles & solutions FATCA solutions Entity 2 ► Remediated accounts Future state analysis (Phase II) Legal entities Define Swiss Re specific business requirements to close Swiss Re specific identified gaps business requirements 6. Target operating impact Define target operating model ―Shrink the effort‖ model design Organization High-level Customers Functional view operating model Technical architecture Identify & prioritize remediation activities Remediation plan Products New account opening FATCA roadmap Target operating ► 7. Planning for Develop FATCA Implementation Roadmap implementation Business case Evaluate in-flight initiatives by Document Document high level business unit and region communication plan business case Communication Plan 8. FATCA knowledge Evaluate EY tool options transfer – process Define Swiss Re process for on-going legal entity/customer & tool transition account classification & change monitoring model FATCA classification Provide EY tool training ► Revised systems and process Low + Swiss Re timeline 2011 2012 2013 2014 procedures impact Swiss Re projects Q3 Q4 Q1 Q2 Q3 Q4 gap analysis FATCA timeline Phase 1 & 2 Swiss Re program Phase 1 & 2 Phase 1 & 2 complete PROPOSED REGULATIONS ANTICIPATED Phase 2 kick-off Phase 2 initiated FINAL REGULATIONS ANTICIPATED FFI AGREEMENTS EFFECTIVE & FATCA IMPLEMENTED ► Revised operating model Program close Phase 2 FATCA program management handover to BAU management Entity 3 Swiss Re FATCA design authority, IRS communication, requirements definition, third party/product Detailed design and third party negotiations complete 1. Central project strategy Design authority, program ► Systemic monitoring Swiss Re procedures Swiss Re FATCA legal and compliance – Certification, risk and internal audit updates, FFI agreements, procedures sign-off FATCA compliant management, legal, tax Program and project board/managers Relationship, compliance and and compliance FATCA education engaged and mobilized FATCA training operations teams trained New customer on-boarding requirements On-boarding process Changes to on-boarding defined and validated against final regulations operational tasks to be managed within each gathering New customer on-boarding and existing customer identification Detailed design and third party engagement Changes to on-boarding defined and validated against final regulations 2. New customers Benefits Build & test Implement Changes to on-boarding procedures complete delivery business division Training On-boarding teams trained in new procedures, controls in place Existing customer (FFI and investor) requirements Investor search requirements, expected Begin to identify US accounts gathering FFIs and changes to T&Cs defined Identify existing FFIs and confirm expected FATCA status All expected FFIs engaged and FATCA status agreed Finish identification of No accounts with US indicia or 3. Existing customers Technology options Engage third parties in existing customer detailed design >$500,000, review entity Third party capabilities, implementation and costs agreed classification and document status FATCA customer record fields implemented Update records Requirements gathering and detailed design IRS reporting requirements defined, validated against final regulation, third parties engaged and design complete 4. IRS reporting project impact Implement and Benefits First IRS Build and test IRS reporting complete train delivery reporting likely 5. Withholding project Requirements gathering Withholding requirements defined and validated against final regulation Withholding tax operational Manual or automated Third parties engaged, withholding mechanism to withhold on Withholding detailed design method, costs and fund impact agreed recalcitrants 6. Passthru project Requirements gathering Passthru requirements defined and validated against final regulation Calculation and Calculation & publication detailed design Third parties engaged, passthru publication method and impact agreed publication of passthru Benefits Build and test Implement Passthru publication percentage delivery complete 7. Ongoing customer Ongoing customer communications communications 8. Ongoing IRS Entity 4 Ongoing IRS engagement engagement Strategic Assumptions Database Global program set-up and governance Ongoing tax advisoryPage 65 15 March 2012 Briefing on new proposed FATCA regulations
  • 66. End-to-end implementation timeline 2011 2012 2013 2014 2015 2016 2017 Impact assessment Phase 1 Impact Assessment Scope Gap analysis Plan Systems FATCA Compliance Readiness Management 01/07/2013 Global on-boarding program Design Development Implementation Post Client Recertification of pre-existing accounts Identification & Electronic search on Solicit Certify FATCA classification US indicia documents classification Validate, Procedures completion  pre-existing accounts of ―prima facie FFIs‖ & high value individual accounts: 01/07/2014 Design Procedures completion  for remaining pre-existing entity and individual accounts: 01/07/2015 Phase 2 and Withholding system enhancement Build Withholding Design Development Implementation Post Start of withholding on withholdable payments: 01/01/2014 Start of withholding on withholdable payments: 01/01/2017 IRS reporting 30/09/2014 – 1st reporting on acc. IRS reporting Treated as US acc. Or as recalcitrant Design Development Implementation Post acc. As of 30/06/2014 Documentation Remediation Monitor and update Current tax law remediation Engagement with the IRS Tax advisory On-going tax advisory support and treasury Program and change management Project set-up On-going global and local FATCA coordination Communication and change managementPage 66 15 March 2012 Briefing on new proposed FATCA regulations
  • 67. Accelerate your solutions
  • 68. Phase I: Current state analysis and impact assessment Workstream FATCA impact assessment 1. Project management Granular assessment of a business‘ current processes against FATCA Global governance and requirements management structure and global governance 2. Tax team Legal entity & business analysis No impact Assessment of your legal structure and identification of where FATCA 3. Legal entity analysis applies (e.g., which entities are FFIs, where US assets are held) Low 4. FATCA compliance impact monitoring & reporting On-boarding & Customer & Payment, KYC processes counterparty data withholding &Questionnaire work 5. Questionnaire reporting systems f acilitation High Diagnostic Assessment of your Assessment of current Identif ication of your impact stream 6. Qualitative assessment current on-boarding customer data payment systems where of gaps (e.g., account opening) inf rastructure, quality inf ormation reporting will and KYC processes and and rationalisation be required and documentation withholding will apply 7. Planning f or implementation Page 68 15 March 2012 Briefing on new proposed FATCA regulations
  • 69. FATCA impact assessment – key findings► New accounts: The customer on-boarding processes will be required to change to ensure that they are FATCA compliant. There will be significant challenges in adapting the on-boarding process for documentary evidence and recording. For the financial services industry in the UK, this has a significant impact with regards to paperless processing.► Pre-existing accounts: A large proportion of the effort identified relates to designing and implementing processes to identify existing customers who trigger U.S. Indicia and seek documentary evidence to establish their US or non US status. Right search and customer contact strategies can reduce the likely significant number of recalcitrant customers.► Reporting: An effective reporting solution will be required to report account details of US persons, their TIN number and balances to the IRS. Although the first date of reporting is in September 30, 2014, reporting requirements need to be built into the new customer processes.► Withholding: Building a withholding capability is seen as a significant challenge. Whilst some clients have some withholding processes in place, FATCA will require calculating the ‗US source income‘ portion which is seen to be complex.Page 69 15 March 2012 Briefing on new proposed FATCA regulations
  • 70. FATCA impact assessment – lessons learnt► It‘s not just about tax but also operating model changes and IT solutions► Do not underestimate the time required for sign off from key stakeholders► Governance is crucial and takes some time to set up► Impact on customers and staff is a critical part of the assessment► Systems do not generally store (or have the possibility to store) all the necessary FATCA related data► Lack of system synergies at group level, information tends to be stored locally in various systems and formats which consequently lead to retrieval issuesPage 70 15 March 2012 Briefing on new proposed FATCA regulations
  • 71. Phase II: Solution optimisation and efficientimplementation Phase II Solution Optimisation and Efficient implementation 4 to 6 weeks 2 to 3 months a. Validate impact assessment b. Overall solution design Interpretation of proposed Build FATCA business requirements regulations Evaluate solution design options Validating impact assessment Design high level business and Evaluating compliance strategy systems solutions BAU transition options Optimising solution (including local and business amendments) Development of route map Detailed implementation plan (incl. costing and resourcing) 2 to 3 years IRS engagement c. Implementation New accounts Pre-existing accounts Reporting Withholding Pass thru payments Efficiency Assurance – on-going activities: programme management, central coordination, education, communication, and liaison FATCA tools and enablers Global program set-up and governance Tax, legal and compliancePage 71 15 March 2012 Briefing on new proposed FATCA regulations
  • 72. DATA – a major FATCA challenge? Data aspect Key FATCA data challenges ► Co-ordination and volume of searches across divisions and jurisdictions. ► Ensuring robustness, consistency, audit ability and quality over individual searches. Customer analysis ► Accuracy of technical translation and implementation of search rules. ► Potential need for fuzzy or partial matching of free text customer data. ► Inefficient due diligence of unstructured or paper based data. ► Managing and aggregating large volumes of search outputs across the organisation. ► Process of consolidation and follow – up preparation of search outputs. Data management ► Co-ordinating and managing the investigation and analysis of search outputs. ► Data governance will play a key role in maintaining FATCA compliant data. ► Resolving conflicting FATCA classifications. ► De-duplication of customer search outputs. Data quality ► Identifying poor data quality hot spots that will drive process and system changes for new on boarding processes. ► Establishing a legitimate, lawful basis for end-to-end processing of personal data for FATCA (including notice to customers, terms and conditions, transfers outside EEA, etc.). Data privacy ► Navigating and accommodating differences in data privacy legislation/regulation across Europe and globally. ► Implementing appropriate technical and organisational controls over personal data processed for FATCA purposes.Page 72 15 March 2012 Briefing on new proposed FATCA regulations
  • 73. What are the key IT impacts for an ForeignFinancial Institution? Area Impacts ► IT will need to evidence that the systems will enable compliance. Technology challenges: Business model and products ► Identify systems architecture and core technologies. ► FATCA may require multiple changes in multiple systems in multiple locations to be completed by a set deadline. ► Identify variances in systems across different geographies, ► Each system may require different Sales and business units and divisions. changes, use different technologies anddistribution models ► Include system version numbers. have different support. ► Potential impact on other systems that are ► Review KYC and documentation systems. not directly affected by FATCA but need to ► Enhancements may be needed to CRM and risk systems. be updated due to changes elsewhere. New customers ► Workflow support for handling investigations. ► likely for new systems for reporting, withholding and workflow to manage investigations into identified potential US ► Search customer records electronically. persons. Pre-existing ► Workflow for investigation of potential US persons. customers ► Enhance customer record systems. ► Identify accounts with US indicia. Cost impact: ► Sourcing of data for reports. ► The costs of IT change will be a substantial ► Consolidation across FFIs. Reporting component of the overall compliance costs ► Production of reports.  both in systems change and resource ► Distribution to IRS. costs. ► Develop withholding capability. ► Mitigating the costs will be key  explore Withholding and ► Develop pass-thru capability. opportunities to integrate FATCA into payments ► Calculation of pass-thru percentage. existing IT projects and plans and reduce ► Distribution of withheld funds to IRS. system changes to a minimum.Page 73 15 March 2012 Briefing on new proposed FATCA regulations
  • 74. Making compliance less disruptive andmore efficient
  • 75. The next steps...Interpretation of the proposed regulations► Review and interpret the proposed FATCA regulations► Review existing assumptions to confirm requirements and identify areas of remaining uncertainty► Develop high level design principles and agree strategic questions which need to be resolved► Communicate implications to your various stakeholders► Build / update business requirementsEngagement with the IRS (optional)► Identify points of concern for submission to the IRS► Engage with the IRS based on the interpretation of the regulations by 30 April 2012Page 75 15 March 2012 Briefing on new proposed FATCA regulations
  • 76. The next steps... (2)Complete / validate impact assessment and plans► Review impact assessment with respective business units► Conduct workshops with all business units to gather input and confirm FATCA impacts► Validate design principles and implementation plans► Re-visit cost assumptions / business caseInitiate / continue solution design► Initiate business and IT solutions design for ―high certainty‖ areas► Obtain sign-off to solution design and commence build...test...implementPage 76 15 March 2012 Briefing on new proposed FATCA regulations
  • 77. It’s critical to be compliantIt’s essential to be cost effective
  • 78. Summary► FATCA has an impact on all Banks, Brokers, Investment Funds, Hedge Funds, Private Equity Funds and certain Insurance Companies.► Even with the draft regulations, the complexity of the task at hand to become compliant remains. Final regulations are expected by summer 2012.► Complete and correct compliance with the new rules is a must.► Non-compliance entails huge risks, e.g.: ► Financial impact due to the 30% WHT ► Reputational risks ► Inability to operate in the market► EY‘s understanding combined with their hands on experience of global FATCA projects, can help your organisation achieve FATCA compliance in a cost effective manner.Page 78 15 March 2012 Briefing on new proposed FATCA regulations
  • 79. Wrap-up and question timeby Koen Marsoul and Sylvie Goethals15 March 2012
  • 80. Ernst & Young disclaimersCircular 230 disclaimerAny US tax advice contained herein was not intended or written to be used, and cannot be used, for thepurpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable stateor local tax law provisions.These slides are for educational purposes only and are not intended, and should not be relied upon, asaccounting advice.Ernst & Young disclaimersThis presentation is intended to provide only a general outline of the subjects covered. It should neitherbe regarded as comprehensive nor sufficient for making decisions, nor should it be used in place ofprofessional advice. Ernst & Young accepts no responsibility for any loss arising from any action taken ornot taken by anyone using this material.This presentation is © 2011 Ernst & Young. All rights reserved. No part of this document may bereproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical,including by photocopying, facsimile transmission, recording, rekeying, or using any information storageand retrieval system, without written permission from Ernst & Young. Any reproduction, transmission ordistribution of this form or any of the material herein is prohibited and is in violation of U.S. andinternational law. Ernst & Young expressly disclaims any liability in connection with use of thispresentation or its contents by any third party.Page 80 15 March 2012 Briefing on new proposed FATCA regulations
  • 81. Contact Details Koen Marsoul Sylvie Goethals Partner Partner Ernst & Young Tax Consultants Ernst & Young Reviseurs De Kleetlaan 2 dEntreprises/Bedrijfsrevisoren B – 1831 Diegem De Kleetlaan 2 Tel. : +32 2 774 99 54 B – 1831 Diegem koen.marsoul@be.ey.com Tel. : +32 2 774 95 18 sylvie.goethals@be.ey.comPage 81 15 March 2012 Briefing on new proposed FATCA regulations
  • 82. Ernst & YoungAssurance | Tax | Transactions | Advisory2012 Ernst & Young Transaction Advisory ServicesAll rights reserved.About Ernst & YoungErnst & Young is a global leader in assurance, tax,transaction and advisory services. Worldwide, our152,000 people are united by our shared valuesand an unwavering commitment to quality. Wemake a difference by helping our people, ourclients and our wider communities achieve theirpotential.Ernst & Young refers to the global organization ofmember firms of Ernst & Young Global Limited,each of which is a separate legal entity.Ernst & Young Global Limited, a UK companylimited by guarantee, does not provide services toclients.For more information about our organization,please visit www.ey.com/be.Follow us: twitter.com/EY_BelgiumPage 82 15 March 2012 Briefing on new proposed FATCA regulations