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FATCA Highlights Volume 7


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  • 1. G L O B A L I N V E S T I G AT I O N S & C O M P L I A N C EFATCA HighlightsHMRC Begins to Fill In Important Due Diligence DetailsReleased January 2013Volume 7By Ellen Zimiles, Richard Kando, Jeffrey Locke and Salvatore LaScala
  • 2. I. IN T RO D U C T I O N well as raised other FATCA compliance concerns The United Kingdom recently published additional that the industry wanted the HMRC to address. details for the implementation of the Foreign Ac- On 18 December 2012 the HMRC released the Sum- count Tax Compliance Act (“FATCA”), and finan- mary of Responses and the HMRC FATCA Guidance, cial institutions operating in the United Kingdom now which together provide many of the details and ex- have additional guidance regarding FATCA com- planation necessary to better digest the U.K. FATCA pliance. On 18 December 2012, the HM Revenue & Draft Regulations. Customs (“HMRC”) released Implementation of Inter- national Tax Compliance (United States of America) I I I . KEY DETAI LS PR OV I DED IN Regulations 2013, Guidance Notes (“HMRC FATCA HM R C FATCA GUI DANCE Guidance”),1 which provides much needed detail to Below details a few of the key areas in which guid- the intergovernmental agreement (“IGA”) to imple- ance was provided. ment FATCA signed by the United Kingdom and United States on 12 September 2012 (“U.K. Signed A. Due Diligence: New Accounts IGA”).2 Additionally, draft regulations (“U.K. FATCA The HRMC FATCA Guidance allows financial insti- Draft Regulations”) were published on 18 December tutions to add further updates to their on-board- 2012.3 The U.K. FATCA Draft Regulations contain eight ing systems, policies and procedures and takes and a half pages of text and Schedule 1, which is the financial institutions one step closer to having U.K. Signed IGA. FATCA compliance become business as usual. 1. Self-certification for New Accounts,II. B A CK G RO U ND O N HM R C Simplified F A T CA GU I D A N C E A N D The FATCA self-certification for new accounts TH E U. K. F A T C A D R AF T has been simplified. Updates to on-boarding REG U LA TI O NS procedures for new individual accounts can be as simple as obtaining two statements The U.K. Signed IGA is based primarily on the Model from the potential new account holder: (1) 1 IGA released on 26 July 2012 by the governments the account holder is not a resident of the of the United States, United Kingdom, France, Italy, United States for tax purposes and (2) the ac- Spain and Germany. After the U.K. Signed IGA was count holder is not a U.S. citizen. The HMRC announced, the HMRC requested comments from FATCA Guidance states it is up to the finan- industries and organizations affected by FATCA. The cial institution to choose the wording of the HMRC asked 24 specific questions and received 69 self-certification for new accounts and pro- written responses and conducted a town hall meet- vides examples that are set forth in the ing.4 The responders answered the 24 questions as below table:51 See Implementation of International Tax Compliance (United States of America) Regulations 2012, Guidance Notes, (18 December 2012) available at See Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America to Improve International Tax Compliance and Implement FATCA (12 September 2012) (the “U.K. Signed IGA”). The U.K. Signed IGA is available at See Statutory Instruments, Taxes, The International Tax Compliance (United States of America) Regulations 2013 (2013 No.**) (released 18 December 2012) in draft form available at pdf.4 For more information about the responses see Implementing the UK-FATCA Agreement, Summary of Responses (“Summary of Responses”) (18 December 2012) available at sPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&propertyType=document&columns=1&id=HMCE_PROD1_032480.5 HMRC FATCA Guidance pp. 40–42.1 | FATCA HI G HL I G HTS | VOLUME 7
  • 3. SELF-CERTIFICATION QUESTIONS FOR NEW ACCOUNTS TYPE OF ACCOUNT OPENING QUESTIONS/EXPLANATORY LANGUAGE APPLICATION Telephone 1. Can you confirm that you are not resident in the US for tax purposes and that you are Application Example not a US Citizen? 2. The paperwork sent to the investor should include this response and require them to contact the FI if the answer is incorrect. Online 1. Tick this box if you are resident in the US for tax purposes or if you are a US citizen. Application Example 2. Tick this box if you are not resident in the US for tax purposes or a US citizen. Paper 1. Tick this box if you are resident in the US for tax purposes or if you are a US citizen. Application Example 1 2. Tick this box if you are not resident in the US for tax purposes or a US citizen. Paper 1. A box on the application includes a line for the account holder to fill in country of residence for Application Example 2 tax purposes. 2. If this is not filled in, the application is rejected. 3. The individual would have to be provided guidance that a US citizen is a US resident for tax purposes. Paper Signature box includes the wording “by signing this form you confirm that you are not resident in the Application Example 3 US for tax purposes and that you are not a US citizen”. The same questions described above can be as this may enable the Financial Institution to used for new entity accounts that are pas- comply with other reporting requirements…”7 sive non-financial foreign entities (“NFFEs”).6 This is important to note because it potential- For these accounts, the financial institution ly foreshadows future FATCA-like laws being has to determine if the controlling person is a implemented by other countries. U.S. citizen or a U.S. resident. 3. Applies to First New Account It should also be noted that collection of the The new account opening self-certification U.S. TIN is required for new accounts. only has to occur one time for each account 2. U.S. Person or Tax Resident of holder.8 If the financial institution obtains a Another Country self-certification pursuant to its FATCA com- pliant new account opening procedures, the The HMRC FATCA Guidance makes refer- account holder does not need to re-certify ence to other possible non-U.S. reporting re- his/her status as the account holder’s rela- quirements on account holders. Specifically, tionship with the financial institution grows the HMRC states, “[a] Financial Institution and additional accounts are opened. may in any case want to know where the account holder is resident for tax purposes6 In general, passive NFFEs are non-financial foreign entities that do not operate a trade or business and do not fall into one of the other exceptions that the US government and a partner country, in this case the UK, deem poses a low risk of tax evasion.7 HMRC FATCA Guidance p. 40.8 HMRC FATCA Guidance, p. 66.2 | FATCA HI G HL I G HTS | VOLUME 7
  • 4. B. Due Diligence: Pre-existing Account Review b. Pre-Existing Entity Accounts 1. Self-Certification for Pre-Existing Accounts According to the HMRC FATCA Guid- Various parts of the HMRC FATCA Guidance ance, there are three instances when a make reference to the necessary self-certifi- self-certification is necessary for pre-exist- cation being made on United States Internal ing entity accounts: Revenue Service (“IRS”) Form W-8 or Form i. An entity account holder was W-9 or another similar agreed form. Accord- identified as a Specified U.S. ing to the HMRC, “[c]urrently there is no simi- Person and the account holder lar agreed form that can be used for these disputes the categorization; purposes. In most cases this will mean that a ii. An entity account holder was Financial Institution will be required to obtain identified as a financial IRS form W-8 or W-9 to satisfy the relevant institution, but is not located in due diligence requirements.”9 Thus, as of the United Kingdom or another now, financial institutions will need to utilize partner jurisdiction; and U.S. tax forms for pre-existing accounts that require self-certification. iii. An account holder was identified as a Passive NFFE with The IRS has released updated, draft ver- an aggregated balance or sions of its Forms W-8. The draft version of the value in excess of $1 million. W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding (Enti- The HMRC FATCA Guidance sets forth ties), is six pages long and contains 25 parts.10 that in these instances the pre-existing entity account holder should provide a a. Pre-Existing Individual Accounts self-certification regarding its status and The self-certification required for pre-ex- for Passive NFFEs the self-certification also isting accounts is different than the self- needs to include whether the controlling certification required for new accounts. person is a U.S. citizen or resident.12 For pre-existing individual accounts, a 2. Aggregation Required if Systems Link Even If self-certification is required if after re- Values Do Not viewing the account holder, the finan- cial institution discovers that the account The HMRC FATCA Guidance outlines the re- holder has certain U.S. indicia.11 Other in- quirements for aggregation, which, in gen- formation from the account holder may eral, states aggregation is required if the also be necessary and is dependent on systems link the accounts by a specific data the U.S. indicia identified. element. The HMRC FATCA Guidance makes an important clarification in that aggrega- tion of accounts is still required if the finan-9 HMRC FATCA Guidance, p. 47.10 See the draft Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding (Entities), available at: U.S. indicia includes: (1) identification of the account holder as a U.S. citizen or resident; (2) unambiguous indication of a U.S. place of birth; (3) current U.S. mailing or residence address (including a U.S. post office box or U.S. “in-care-of” address); (4) Current U.S. telephone number; (5) Standing instructions to transfer funds to an account maintained in the United States; (6) Currently effective power of attorney or signatory authority granted to a person with a U.S. address; or (7) An “in-care-of” or “hold mail” address that is the sole address the Reporting United Kingdom Financial Institution has on file for the account holder. In the case of a pre-existing individual account that is a Lower Value Account, an “in-care-of” address outside the U.S. shall not be treated as U.S. indicia. U.K. Signed IGA, Annex I, II.B.1.12 HMRC FATCA Guidance, pp. 46–47.3 | FATCA HI G HL I G HTS | VOLUME 7
  • 5. cial institution systems link the accounts by a takes a position similar to the FATCA Pro- data element even if values are not currently posed Regulations and allows financial institu- summed.13 This could require some addition- tions to rely on the due diligence already per- al information technology build for financial formed with a relationship manager enquiry institutions that link accounts by customer for High Value Accounts serving as an ad- identification, but have not totaled the val- ditional verification of appropriate account ues of accounts. It should also be noted that holder classification.14 The U.K. FATCA Draft for individual accounts, relationship manag- Regulations also states that QIs do not need ers, when present, are required to aggregate to conduct the electronic or paper search accounts based on their knowledge to de- for U.S. indicia for individual accounts.15 termine if the account holder has a balance C. Confirming the Reasonableness of the or value in excess of $1,000,000 (“High Value Self-Certification Account”) at the financial institution. Significant reliance will be placed on the self- 3. QI Exception: Rely on Previous Due Diligence certification provided by the account holder. The Financial institutions that previously entered HMRC recognizes this and provided examples of into a qualified intermediary (“QI”) agree- how to check the reasonableness of the self-cer- ment with the IRS have already taken on tification. This is important because these checks some additional due diligence responsibili- will have to become business as usual by 1 Janu- ties. The U.K. Signed IGA was silent on wheth- ary 2014. The table below sets forth the examples er past due diligence in this context can be provided by the HMRC:16 relied upon. The HMRC FATCA Guidance CONFIRMING THE REASONABLENESS OF SELF-CERTIFICATION PROCESS CHECK REQUIRED New application Other information in the account opening and other information the FI has on the individual. 1. New application from individual advised by Other information in the account opening. Where no other Independent Financial Advisor (“IFA”) information exists, reasonableness can be based on account 2. IFA performs AML checks and provides certificate opening alone. 1. New application IFA provides certification to FI confirming reasonableness of the 2. IFA obtains self-certification self-certification. 1. New application Other information in the account opening. Where no other 2. FI conducts AML information exists, reasonableness can be based on account opening alone.13 HMRC FATCA Guidance, pp.47–48.14 HMRC FATCA Guidance, pp. 58 and 62.15 U.K. FATCA Draft Regulations, Section 9.6.16 HMRC FATCA Guidance pp. 43–45.4 | FATCA HI G HL I G HTS | VOLUME 7
  • 6. D. Definition of Relationship Manager There is no definition for relationship manager One area that could continue to be a point of in the U.K. FATCA Draft Regulations or the U.K. confusion will relate to the relationship manager Signed IGA. This definition will lend some guid- and his/her role. According to the Summary of ance to financial institutions as they determine Responses, “… the HMRC feels that it would be which of their employees serve the function of difficult to set out a precise definition in its regu- relationship manager for FATCA compliance. The lations and that it should be left to an institution definition of relationship manager is important to determine whether the relationship manager because the U.K. Signed IGA identifies very spe- role exists within its organization and who is best cific responsibilities for the relationship manager. placed to undertake the designated due dili- These responsibilities include: gence obligations.”17 1. For High Value Accounts, the relationship The above makes it appear that it will be left en- manager must state annually whether tirely to the financial institution to determine who they know an account to be held by a the relationship managers are for compliance Specified U.S. Person.19 purposes, but the HMRC takes a different position 2. For pre-existing accounts, the relationship in the HMRC FATCA Guidance and provides the manager must aggregate accounts the following definition: relationship manager knows are a relationship manager is assumed associated with one another to to be any person who is an officer or determine if the aggregate balance is in other employee of the Financial Institu- excess of $1,000,000.20 tion who is assigned responsibility for 3. There must be policies and procedures in specific account holders on an ongo- place that the relationship manager ing basis, who advises the account checks for change of circumstances for holders regarding their accounts and accounts, like new U.S. indicia (i.e. a arranges for the overall provision of change of an address to a U.S. address).21 financial products, services and other Ironing out the definition to be used by the finan- related assistance.18 cial institution is an important early step to move towards FATCA compliance.17 Summary of Responses, p. 19.18 HMRC FATCA Guidance, p.64.19 U.K. Signed IGA. Annex I Section II.D.4.20 U.K. Signed IGA, Annex I, Section VI.C.3.21 U.K. Signed IGA. Annex I Section II.E.5.5 | FATCA HI G HL I G HTS | VOLUME 7
  • 7. IV.C O N CLU SI O N CONTACTS » The U.K., with the release of three important docu- Ellen Zimiles ments, the HMRC FATCA Guidance, the U.K. FATCA Managing Director Draft Regulations and the Summary of Responses, Head, Global Investigations & Compliance provides guidance into how FATCA and the U.K. +1.212.554.2602 Signed IGA will be enacted into local law. Over the 100+ pages of reading many details are flushed out, Richard Kando but there are still many questions such as (1) how will Director, FATCA Task Force Leader the financial institution register and receive its FATCA Global Investigations & Compliance identification number, (2) how should reporting infor- +1.212.554.2698 mation be formatted and (3) when will a self-certifi- cation alternative to IRS Form W-8 and W-9 be avail- able? Accordingly, the HMRC is accepting additional Jeffrey Locke comments up to 13 February 2012. Director, FATCA Task Force Leader Separate and apart from the U.K., the HMRC also of- Global Investigations & Compliance fers some potential guidance to the future of FATCA +1.212.554.2694 and automatic tax information exchanges as it sug- gests that a financial institution may want to know the Salvatore LaScala tax residence of its account holder – not merely the Managing Director account holder’s U.S. or non-U.S. status. As questions Global Investigations & Compliance remain relating to whether other countries will pass +1.212.554.2611 FATCA-like statutes, financial institutions will benefit from a flexible approach to FATCA implementation and keeping an eye on further developments around Dr. Ray Nulty the globe. Managing Director Financial Services +44 (0) 788 750 3854/ +353 (0) 87 0541416 David Brown Director, Business Development Global Investigations & Compliance +1.416.777.2438© 2013 Navigant Consulting, Inc. All rights reserved. 00001129Navigant Consulting is not a certified public accounting firm and does not provide audit, attest, or public accounting services.See for a complete listing of private investigator licenses.6 | FATCA HI G HL I G HTS | VOLUME 7