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Fatca ii defusing the bomb (ban) uab magazine september 2012


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Fatca ii defusing the bomb (ban) uab magazine september 2012

  1. 1. ££££ Study out because the foreign financial institution counsel to provide your answers and not will commence reporting annually on the US answer yourself directly. owned accounts on their books. Also remember that the IRS is already carrying out a number Q16: You are preparing an individual tax of investigations using the tax information return for a client. The client has foreign exchange agreements set up through the OECD financial asset but refused to provide more (over 800 agreements across 89 countries), its information, and asks you not to report it or own treaties and tax information exchange tell anyone. What would you do? agreements and an enhanced whistleblower A16: I would strongly advise the client to program. They are also increasing the number truthfully and openly comply with his tax of IRS agents posted overseas by opening new reporting obligations and not file a false return. IRS embassy attaché offices overseas manned If the client persisted in refusing to transparently by criminal investigation agents. report, I would withdraw from representing the client. We are in an age of global transparency Q12: Is there a statute of limitations for and there is no longer a place to hide.£ FATCA? By Bachir El Nakib A12: Under FATCA, The taxpayer is required Head of Compliance Industrial and to extend the normal 6 year criminal statute of Commercial Bank of China Doha - Qatar limitations to 8 years as a condition of making an offshore voluntary disclosure. Q13: How can I prove that I do not have a foreign account? A13: You do not have to prove that you do not have a foreign account. If you do not have one then you are automatically in compliance as far as your foreign asset filing is concerned. Remember that under FATCA a foreign account also includes bonds, investments and capital ownership of structured entities. Q14: If the IRS asks for my foreign bank account details do I need to provide it or they can find it themselves? A14: It is recommended that you always truthfully answer IRS inquiries. Keep in mind that if the IRS is asking you for the details of your foreign bank account, it is because they already have information about it. So, it is recommended that you interpose US tax (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ 131 Union of Arab Bank Magazine (September 2012)
  2. 2. ££££ Study Q5: Should you close a foreign bank accepted into the program, and truthfully account? fully report, it virtually eliminates the risk of A5: It is expected that most foreign banks will criminal prosecution. This window can close participate in FATCA so closing an account to at any time open another one would only make sense if you • They should immediately consult a US plan to repatriate funds. In any case, the best licensed international tax attorney and a US thing to do is to consult with US international licensed CPA to evaluate their best options tax specialists for your best option to getting to achieve compliance. back into compliance. Q8: Do I have to report all my foreign real Q6: What information about my foreign estate under FATCA? bank account is given to the IRS? A8: The answer to this question is multi- A6: Initially (2014) the account name, faceted. First, you have to report income from address, your US TIN (tax identification properties but not the real estate itself unless number), account number and year end closing the real estate is held under a structured entity balance. After 2014, enhanced reporting, account, trust, foundation, etc.) for which you (the same reporting as in 2014) plus income are a full or partial beneficial owner and then it amounts and gross proceeds, commences for is reportable. Also, during an investigation, real reporting years 2015 and 2016 account activity estate assets may come into play if purchased respectively. After 2016, reporting continues on with previously unreported financial assets. the same basis as for 2016. Q9: Are foreign bonds specified foreign Q7: what do you need to communicate to financial assets and do they need to be reported your client on FATCA? under FATCA? A7: As of august 2012, financial institutions A9: Yes they are treated as a financial account have to certify to the IRS that its employees are and need to be reported. not giving their clients any advice or assistance that could be construed as aiding them in tax Q10: What countries have a FATCA or tax reporting evasion. What you do need to agreement with the US? advise your client is the following: A10: Currently there are 5 FATCA partner • Foreign banks will start reporting their nations; Spain, Italy, Germany, France and the accounts to the IRS in 2014 United Kingdom. Canada already has a far • The IRS is already investigating many non- reaching bi-lateral tax information exchange compliant US taxpayers who own assets with the US and Switzerland and Japan have abroad and with this new information, these also declared their statements of intent to join investigations will escalate as FATCA partners. • There is a window of opportunity right now to become compliant through the offshore Q11: How can the IRS find out if I have a voluntary disclosure program; this typically foreign bank account? reduces overall penalties and if you are A11: Through FATCA, the IRS will find (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ Union of Arab Bank Magazine (September 2012) 132
  3. 3. ££££ Study policy objectives of foreign passthru payment recalcitrant accounts, accounts whose owners and gross proceeds withholding that minimizes refuse to provide ownership information or burden.” the necessary waivers, are reported annually in aggregate and the IRS can ask the banks or the Reporting by USFIs - The U.S. has only local governments for additional details. committed to exchange information that USFIs are currently reporting to the IRS with regard Q2: How do you know if your bank has to U.S. source income payments paid to direct signed FATCA? account holders. They do not need to look A2: participating banks in FATCA will through and report on the Partner Country register on the IRS on-line system and will owners of entities nor do they have to report be issued an FFI –EIN number. The IRS will on the account balances and other requirements publish lists of participating banks. You can also that will be imposed on reporting of U.S. ask your bank for a copy of their withholding accounts by Partner FIs. certificate which should contain their FFI –EIN number which can be checked back against the Conclusion: IRS published list. The publication of the Model is a positive development given the severe conflict of Q3: Are FATCA matters covered by attorney law problems that have plagued FATCA client privilege? implementation projects since day one. A3: Yes as long as the individual goes through However, it is clear that Partner FIs continue a US licensed tax attorney and the US licensed to have substantial FATCA compliance certified public accountant is hired through the obligations and significant downsides if they attorney. It is important to note that you should fail to meet them. The IGAs are hardly an ”out” not go through any tax or accountant service from FATCA. Financial institutions should provider who may have assisted you through a carefully assess the differences between the non compliant period as they could conceivably Model and the proposed regulations to read the be used in testimony against you. tea leaves as to what the final regulations may well contain; U.S. officials have stated publicly Q4: How many years will the foreign banks that their goal is to have uniform due diligence report? and reporting requirements under both the A4: Foreign banks will initially start IGAs and the regulations. To the extent that reporting basic account data on an annual they miss their target of uniformity, FATCA basis commencing in 2014. In 2016 they start implementation plans will need to be modified enhanced reporting on 2015 account activity. to take these differences into account. Although the banks will not report historical data, the IRS can request additional data on Q1: Does one have to report closed bank individual accounts from them at any time accounts FATCA? which could go back as far as 10 years in cases A1: There is no requirement in FATCA to of suspected fraud. report closed bank accounts to the IRS. However, (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ 133 Union of Arab Bank Magazine (September 2012)
  4. 4. ££££ Study 2014, income payments are added for 2015, and unless it is assumed that the Partner Country gross proceeds paid to a custodial account are would proactively share such information with added for 2016 and subsequent years. the IRS under its exchange agreement. However, that the reporting for 2015 includes redemption payments made outside Defusing the ”Limited” Time Bomb of a custodial account, and that these gross Partner FIs that do everything required under proceeds would not be reportable outside of the agreement are treated as complying with a Partner Country. It is not clear whether this FATCA, even if branches in other countries more burdensome result for Partner FIs was or other members of their expanded affiliated intended. In the reciprocity version of the group are not able to comply with FATCA. In Model, U.S. financial institutions are required the proposed regulations, the IRS would have to report to the IRS deposit interest and U.S. temporarily allowed ”Limited Branches” and source payments, which is largely consistent ”Limited Affiliates” until the end of 2015, but with what they are required to do currently at that point the existence of even one Limited under U.S. law. Oddly, the Model does not Branch or Affiliate would have prevented state how withholding on U.S. source income members of the group from maintaining amounts paid to NPFFIs should be reported. participating FFI status, subjecting all FFIs in Presumably, such reporting will follow the the group to 30% withholding under FATCA. proposed regulation rule of using Forms 1042- The Model defuses the ticking time bomb S. of limited status. Partner FIs are, however, Conditions for a Partner FI to Escape required to treat Limited Branches and Affiliates FATCA Withholding. Partner FIs must satisfy as NPFFIs and the branches and affiliates several key conditions to escape FATCA are required to identify and report upon U.S. withholding on payments made to them – it is accounts to the extent possible and to not solicit neither automatic by virtue of being located in a nonresident U.S. and NPFFI account holders. In Partner Country nor absolute. addition, the branches and affiliates may not be Partner FIs must report on U.S. accounts used to circumvent the IGA or FATCA. annually, report payments to nonparticipating FFIs (”NPFFIs”) for 2015 and 2016, comply with Withholding Limited to U.S. Source Income registration requirements, and either withhold - A Partner FI’s withholding obligation under 30% on U.S. source payments to NPFFIs the Model is limited to U.S. source income. or provide information to the withholding Gross proceeds and foreign passthru payments agent responsible for withholding. Significant are excluded from the definition of ”U.S. noncompliance could cause a Partner FI to source withholdable payment.” In addition, be treated as an NPFFI subject to full FATCA no withholding is required on recalcitrant withholding and the IRS will apparently accounts at Partner FIs, and such accounts publish a list of such FIs. It remains uncertain, would not need to be closed. On the other however, how the IRS would identify such non- hand, the parties agree ”to work together, along compliance if the Partner Country is charged with other partners, to develop a practical and with overseeing the Partner FI’s compliance, effective alternative approach to achieve the (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ Union of Arab Bank Magazine (September 2012) 134
  5. 5. ££££ Study the individual is a U.S. tax resident, and that implementation projects should take this the certification be reasonable in light of other into account in designing search queries for account opening information, such AML/KYC electronic databases. documentation. The self-certification can be Deadlines Extended. The deadlines for included in the account opening documents. completing preexisting account due diligence There is no prescribed form, but Partner FIs will are later under the Model. The measuring need a defined, reviewable process to obtain date for new versus preexisting accounts certifications. Forms W-8 and W-9 will remain is December 31, 2013, six months after the an effective solution for doing so. first wave of participating FFIs. High value Entities: Identification of Entity Type: individual accounts must be reviewed by the A Partner FI can treat an entity as an Active end of 2014 and other individual accounts NFFE or Partner FI (including from another must be reviewed by the end of 2015 (a six- Partner Country) on the basis of publicly month extension in both cases). Preexisting available information or other information in entity accounts must be reviewed by the end of the Partner FI’s possession. Other entities can 2015 (a six- or 18-month extension, depending establish their status with a self-certification. on the type of entity). Partner FIs do not need Key to Partner FI compliance will be the to identify ”prima facie” FFIs within one year ability to establish standardized processes for of the effective date of its FFI Agreement as collecting, validating, and maintaining this required by the proposed regulations. (See documentation. As with individuals, Forms chart at the end of this letter.) W-8 and W-9 continue to be a solution. Information Exchange. Partner Countries Change in NFFE Ownership Threshold: A and the U.S. are expected to exchange Partner FI is not required to identify 10%-or- information for a calendar year within nine greater U.S. owners of an NFFE; rather, it must months of the year-end, except that the exchange identify the ”Controlling Persons” under the for 2013 is delayed for an additional year to AML/KYC principles adopted by the FATCA September 2015. There is no explicit deadline Partner, which in many jurisdictions is a 25% for Partner FIs to provide the information to ownership threshold. This is a highly welcomed their governments. In addition, the competent change to conform the FATCA requirement authorities of the parties will make further with local AML/KYC requirements, as strongly agreements governing the details of information advocated by the industry. The Partner FI must exchange and other collaboration. (See chart at determine whether any of the Controlling the end of this letter.) Persons are U.S. individuals; if so, the account Reporting. The Model reporting largely must be treated as a U.S. account. mirrors the proposed regulations with respect The Search for U.S. Phone Numbers. The to reporting. Partner FIs must report account industry had hoped that U.S. phone numbers balances and amounts paid to account holders, would be removed from the U.S. indicia list, except that they report to the Partner Country but they remain a part of the Model. The final instead of the IRS. Like the proposed regulations, regulations are likely to also retain U.S. phone these obligations are phased in so that only numbers as indicia of U.S. status and FATCA balance information is required for 2013 and (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ 135 Union of Arab Bank Magazine (September 2012)
  6. 6. ££££ Study New ”Category 3” FFI Definition. Both the final regulations to address the troubling proposed regulations and the Model impose repercussions of treating non-professionally much of the burden of FATCA compliance on managed investment companies, which can be ”financial institutions” and largely define them quite small and unsophisticated, as ”FFIs” with in the same way – with one major exception. FATCA compliance obligations. The Model replaces the ”Category 3” FFI Due Diligence Similarities - Both the definition in the proposed regulations with a proposed regulations and the Model have new ”investment entity” category. The Model distinct rules for individual and entity accounts defines ”investment entity” as ”any entity that which are further refined for preexisting and conducts as a business (or is managed by an new accounts. entity that conducts as a business) one or more - Individual accounts of $1 million or less of the following activities or operations for or are subject to an electronic search for U.S. on behalf of a customer: indicia, and (1) trading in money market instruments; - Accounts greater than $1 million are foreign exchange; exchange, interest rate and subject to a more thorough review, which index instruments; transferable securities; or may include asking relationship managers commodity futures trading; whether they know if the account has U.S. (2) individual and collective portfolio indicia. management; or Preexisting individual accounts (and all (3) otherwise investing, administering, or individual depository accounts) of $50,000 or managing funds or money on behalf of other less and preexisting entity accounts of $250,000 persons.” or less generally can be excluded from FATCA The new definition both expands and duties. The procedures for dealing with U.S. contracts the concept of the Category 3 FFIs in indicia are also similar, and Forms W-8 would important ways. still be one of the more straightforward ways to First, entities that are not directly engaged cure that indicia. in trading or investing in various assets, but only in managing such activities, will be treated Due Diligence Differences: as FIs under the Model (such as investment Individuals. The Model is more permissive advisors and certain trustees). than the proposed regulations in the types Second, small passive investment vehicles, of documents that can be used to establish an such as family trusts and personal investment account holder’s FATCA status. For example, companies that are treated as Category 3 FFIs to establish foreign individual status for a under the proposed regulations are not treated new account, the proposed regulations would as financial institutions under the Model but require either a Form W-8BEN or government- will instead be treated as passive NFFEs unless issued identification (and require that ”none of they are being professionally managed. Its the documentation associated with the payee believed that the Model’s approach, which has contains U.S. indicia”). On the other hand, the been strongly urged by many in the financial Model requires merely a ”self-certification” industry, will ultimately be adopted by the that allows the Partner FI to determine whether (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ Union of Arab Bank Magazine (September 2012) 136
  7. 7. ££££ Study There are two categories of deemed- Where is ”Model 2”? It is expected that the compliant FFIs: U.S. to release a Model 2 IGA soon; that model - registered deemed-compliant, and would provide for reporting directly to the IRS, - certified deemed compliant. rather than the Partner Country. Japan and Registered deemed-compliant FFIs will be Switzerland announced last month that they required to apply for deemed-compliant would agree to Model 2 agreements. status with the IRS and certify every three Structure of the Model - The Model consists years to the IRS. of three parts: a seven-article body, an annex Certified deemed compliant FFIs (e.g., non- covering due diligence, and another annex registering local banks, retirement funds, covering entities and accounts in each country non-profits, certain owner-documented that are considered to be outside the scope of FFIs, FFIs with low value account only) are FATCA reporting. Only the second annex is not required to register with the IRS. likely to differ substantially from country to country. One of the basic problems with FATCA Limited Shelf Life? The Model anticipates has been that it imposes obligations on that the parties will ”consult in good faith” to foreign financial institutions (”FFIs”) that may amend the agreement to ”reflect progress” on contravene the laws of other jurisdictions, such a variety of issues, including the treatment of as reporting information to the IRS or closing withholding on ”foreign passthru payments” the accounts of uncooperative customers. IGAs and gross proceeds and the development of are agreements between the U.S. and FATCA a common reporting and exchange model. In ”Partner Countries” intended to allow ”FATCA addition, the Model suggests that the parties Partner Financial Institutions” (”Partner will work with the OECD and, as appropriate, FIs”) to comply with both FATCA and local the EU to adapt the agreement to become a law. Yesterday the U.S. government released common model for automatic exchange of two versions of the FATCA ”Model 1” IGA information and financial institution due (”Model”). diligence. Such ”developments” are a two- The Two Versions - The Model provides edged sword for the industry. that Partner FIs would report to their local government rather than to the IRS. One They could be beneficial if they lead to a less version provides that the U.S. and the Partner burdensome compliance approach. However, Country will exchange information about each they could also require systems and procedures other’s taxpayers (the “reciprocal version) and currently under development by Partner FIs apparently will be used by France, Germany, to be substantially modified to reflect the Italy, Spain and the United Kingdom. The ”evolution” in the regime. The industry should “nonreciprocal version does not require the U.S. work with these bodies to urge them to take into to share information with the Partner Country, consideration that new requirements can lead and would be used if the U.S. believes that to costly overhauls to systems and procedures there are insufficient safeguards in the Partner and modify their governmental wish lists Country to protect any transmitted information. accordingly. (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ 137 Union of Arab Bank Magazine (September 2012)
  8. 8. ££££ Study FATCA Part II – Defusing the ”Limited” Time Bomb” FATCA: What should Financial Institutions As well as, “any class of payments identified do right now? by the U.S. Treasury Secretary for purposes As anyone in the financial services industry of this subsection as posing a low risk of knows, FATCA’s implications affects just tax evasion.” FFI can be assigned one of the about any institution doing business with US following Chapter 4 statuses: customers. FATCA generally requires that - Deemed Compliant withholding agents withhold a tax equal to - Limited Branch 30% on Withholdable payments made to an - Limited FFI FFI or NFFE, with certain exceptions. The - Nonparticipating FFI withholding exceptions, Section 1472 of the - Participating FFI. Hiring Incentives to Restore Employment Act, which implements FATCA, include payments Non-participating FFI status is most likely in which the beneficiary: to result in 30% withholding penalties, and (A) any corporation the stock of which is to be avoided. Majority of the FFI will have regularly traded on an established securities to obtain Participating FFI status which will market, require registration with IRS (via online portal), (B) any corporation which is a member of preferably before 30 June 2013, otherwise, FFI the same expanded affiliated group (as defined may be considered a Participating FFI with in section 1471(e)(2) without regard to the last regard to 2014 only. sentence thereof) as a corporation described in To maintain a Participating FFI status, FFI subparagraph (A), must provide certain compliance certificates (C) any entity which is organized under the and report certain data to IRS. The first certificate laws of a possession of the United States and is to confirm that participating FFI completed which is wholly owned by one or more bona required review of the pre-existing high-value fide residents (as defined in section 937(a)) of accounts within one year of the effective date such possession, of the FFI agreement. The certificate should (D) any foreign government, any political state that FFI did not have any procedures in subdivision of a foreign government, or any place at any time from August 6, 2011 to assist wholly owned agency or instrumentality of any account holders in the avoidance of chapter one or more of the foregoing, 4. Therefore, the initial focus of the review is (E) any international organization or any on high-value accounts (e.g., USD 1M+ for wholly owned agency or instrumentality individual accounts) opened before the FFI thereof, agreement date. (F) any foreign central bank of issue, or With regard to the exemption, FFI must (G) any other class of persons identified by obtain Chapter 4 status “Deemed-Compliant” the Secretary for purposes of this subsection,” to be relieved from FATCA obligations. (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ Union of Arab Bank Magazine (September 2012) 138