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FATCA for swiss banks workshop latam

The document provides a comprehensive overview of the Foreign Account Tax Compliance Act (FATCA), detailing its purpose, requirements, and implications for foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs). It includes insights from Professor William Byrnes, who discusses the compliance challenges, financial costs, and operational impacts of FATCA on financial institutions globally. The document also addresses specific provisions, timelines, and reporting obligations associated with FATCA, highlighting key exemptions and due diligence processes.

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Overview of the FATCA (Foreign Account Tax Compliance Act) Prof. William Byrnes
to pre-order with 20% discount LexisNexis® Guide to FATCA Compliance contact Nicole Hahn, Lexis Manger Nicole.Hahn@lexisnexis.com Discount Code: FATCA13
Primary Author Prof. William Byrnes, International Tax & Financial Services williambyrnes@gmail.com +1 786 271 5202 The information contained herein and during this presentation is only for academic discussion, and not applicable to any specific situation. The information is of a general nature and based on authorities that are subject to frequent change.
biography Associate Dean William H. Byrnes, IV, has achieved authoritative prominence with more than 38 book and compendium volumes, 93 book & treatise chapters and supplements, 800 articles, and a monthly subscriber tax newsletter Tax Facts Intelligence that complements Tax Facts Online. He advised TSPs, CSPs, and institutions globally, working for Coopers & Lybrand.
Q1: What is FATCA? – Information Reporting Regime on Foreign Institutions & Entities to Assist the Internal Revenue Service Collect Identification and Financial Information about US Individual Taxpayers – Match this information to new Form 8938 Statement of Specified Foreign Financial Assets (and the Foreign Bank & Financial Accounts form FBAR) – 30% withholding
Congress Push to Provide Additional Tools to Avoid Tax Evasion • Problem: Country Sovereignty and Bank Secrecy Laws used to Promote Non-Tax Compliance • Congressional Solution: – New Chapter 4 – • Creates a Withholding Tax not for the sake of Collecting Tax, but to Encourage (Coerce some would say) FFIs into providing detailed account information of U.S. persons
Chapter 3 vs. New Chapter 4 • Collecting Tax on Chapter 3 – – Collecting Withholding Tax • Encouraging (some would say “coercing”) – Providing Information – Re: Accounts • Practical Benefits of Getting in “Old” W-8s – Foreign Taxpayer ID – Presumably now also from W-8-BENE
Chapter 3 Taxpayer Character of Income Withholding Tax Withholding Agent Exemption IRC §1441 NRA’s Foreign Partnerships -FDAP Income: Interest, Premiums, Annuities, Dividends, Compensations, Rents, Royalties, Salaries, Wages, Remunerations, Emoluments, etc. 30% gross Payor -ECI -Portfolio Interest -Interest and Dividends from 80/20 Corporations - Real Estate (871) IRC §1442 Foreign Corps. Idem 30% gross Payor Idem IRC §1445 Foreign Persons Real Estate Dispositional Income 10% gross Payor Certificate of Reduced WH’ IRC §1446 Foreign Partner Partnership Income Effectively Connected to a U.S. Trade or Business Progressive tax rate Payor Income not ECI
Chapter 4 Taxpayer Character of Income Withholding Tax Withholding Agent Exemption IRC §1471 Non Participating FFI “withholdable payments”: which in Theory includes all of Chapter 3 30% gross U.S Payor Payment whose beneficial owners are: -Foreign governments -international Organizations -foreign central bank of issue -“Low risk tax evaders” . U.S. Recalcitrant Account Holders “pass-thru payments” 30% gross FFI What happens with the withholding exemptions or modifications under IRC Chapter 3??
Q2: What Caused FATCA? –60+ Tax Treaty EOI articles, 20+TIEAs, MLATs, and Hague Evidence Convention –FBAR (Foreign Bank & Financial Accounts) • 1996 by BSA • in 2003 FINCEN signed MOA for IRS to enforce –QI Regime (2000) • Approx. 5,500 financial institutions (vs. 100,000s) – OECD TRACE (Treaty Relief & Compliance Enhancement) multi-lateral auto info exchange
Q2: QI Differences? • Expanded application of reporting – (names + specific account in(s)/out(s)) • Look through to UBO • Expanded application of reporting persons • Expanded application of reportable transactions • FFI cannot determine customer w/h pools • Only approx. 5,500 QI v. 100,000s of FFIs and FEs
Q2: What Caused FATCA? Offshore Voluntary Disclosure Programs 2009 & 2011: 33,000 raised $5B 2012 remains open: 1,500 (and now up to $5.5B) UBS headline case: 17,000 hide $20B $780m fine with $104m to convicted insider whistleblower Bradley Birkenfield
Q3: Compliance Costs? 1. Financial Costs 2. Labor / Service / Software & Systems 3. Management
Q3: Financial Costs? Treasury: $100m per large institution Can. Bankers Association: $1B each for 5 largest banks Generally accepted: $250m per large MN bank $30m-$80m for UK investment banks E20-E50 per investor for investment funds, $1m per fund Mexican banks - $5m each How much did Y2K cost? EU Savings Directive? New expanded reporting? QI regime?
Q3: Labor / Systems Costs? Which department will wear the FATCA yoke? (Tax, AML, Comp) •Employ / Outsource add. compliance manager / staff ? •Employ / Outsource add. systems and software integration staff (probably both, at least on short term contracts) •Employ / Outsource FATCA consultants least cost is your Lexis FATCA Compliance Handbook ;-)
Q3: Labor / Systems Costs? - enterprise software programming/building (AML, FATCA, Internal and External treasury/client reports) - new protocols and rules - new onboarding procedures - data entry -middleware -systems maintenance
Q3: Management Enterprise Steering Committees •Each business unit has working team •Drilling down impact by country, product Decision making process: CCO, CTO, AMLRO, CLO (GC), and new FATCA “Responsible (Certification) Officer”? Investment Funds re-drawing investor agreements
Q3: EU Cost Concerns Data Protection & Civil Law Privacy - costs of obtaining each client’s signature on new FATCA waiver New EU Tax Exchange Directive (2013 by request / 2015 automatic of 2014 info) (a) income from employment (b) director's fees (c) life insurance products (d) pensions (e) ownership of and income from immovable property
Q4: Who does FATCA apply to? Two Categories: FFI & NFFE Foreign Financial Institution Non-Financial Foreign Entity
Q4: What is an FFI? Not Territory-Organized (aka TOFI) -Accepts deposits in ordinary course of bus. -Holds financial assets for 3rd p as sub. bus. -bus. of investing, trading in securities, commodities, p’shp interests, futures, forwards Sign FFI agreement or IGA in place (still must get GIIN)
Q4: Examples of FFI? - Investment, hedge, equity, mutual funds, unit trusts - Clearing houses, Brokerages - Insurance (cash value), annuity, pension, - Trust companies, custodians
Q4: Exempt from FFI? “Low Risk of Tax Evasion” Foreign governments, Central Banks
Q4: Registered Deemed Compliant ? Still Register with Treasury but as compliant FFI Certain local-only banks Qualified collective investment fund Restrictive fund
Q4: Certified Deemed Compliant? Don’t register with IRS but certify to W/H agents Certain small local banks with local accounts Non-profits Certain retirement plans
Q: Challenges? SWAPS – difficult to value, changing counter parties in opaque market Funds: lack access to information for approx. 40%-45% UBOs, distributors & transfer agents must become PFFI fund of funds private equity funds & tie-up periods Life Insurance: whole life touch points with owner
Q5: NFFE? Exemptions •foreign governments, IGO, central banks; •publicly traded companies and entities within their expanded group of affiliates; •U.S. possessions Active NFFEs (less than 50% of gross income from assets that produce passive income). If not exempt: US (10%) shareholders or IGA “control” FATF standard
Q6: FFI Due Diligence ? 3 categories of accounts / 2 time periods 1.< $50,000 (low value accounts) 2.$50,000 - $1m 3.> $1m (high value accounts) Current (look back) vs. New (onboarding)
Q6: FFI DD $50k - $1m Electronic Search of AML records of the KYC / CIP program > $1m CCO -> RM communicate about account holder and if necessary, review account file docs for previous 5 years W8Ben (foreign) or W9 (US): “Trust but Verify”
Q6: US Indicia (1) Citizenship or residency in U.S.; (2) U.S. place of birth; (3) U.S. residency or mailing address; (4) U.S. telephone number; (5) any standing instructions to transfer funds to a U.S. account; (6) any power of attorney or other signatory authority to any person with a U.S. address; or (7) Whether the account holder has provided any verified “in-care” or “hold mail” address with the U.S.
Q6: EDD for High Value Accounts RM communicate about account holder using file and KYC or CCO directly accesses file •review account file KYC for previous 5 years •account opening documents, signatory card •POA / incapacitation or death instructions
Q6: DD for NFFE W-9 on file ? specified U.S. person ? • < $250,000 - Excluded from review, until account balance exceeds $1,000,000. • Search existing CIP/KYC info/account opening docs to determine status • Passive NFFEs – Must identify substantial U.S. owners or certify that there are no substantial U.S. owners.
Q6: specified US person is not • Publicly traded corporation • Affiliates of a publicly traded corporation • Exempt organization or IRA • REIT • RIC / SEC registered (1940 Investment Company Act) • The United States • U.S. state, DC, or U.S. possession • US bank • Common trust fund • Exempt trust under section 664(c) • US registered dealer • US Broker – 26 USC 6045(c)
Participating FFIs Systems • Documentation: evolve current AML systems to capture FATCA DD across enterprise customer base • Reporting: implementing then maintaining annual reporting system with US (or IGA) for US individuals, including identifiers, account balances, gross payments • Withholding: building system for 30% withholding on recalcitrant account holders
1. identity and residence of the beneficial owner; 2. name and address of the paying agent; 3. account number of the beneficial owner; 4. and amount of interest income earned 5. TIN if available 6. If resident in a country different than passport or I.D. card, then tax residence certificate Q6: EU TSD Art 8 Info
• Report must contain –Name / address / TIN –Account No(s) / Balance(s) –Annual Gross transactions (receipts/deposits/payments/ withdrawals) • Can elect to report like US-FI (1099s) • Or w/h and close account Q6: Foreign Info Reporting?
1. the name, address, and TIN of any person that is a resident of FATCA Partner and is an Account Holder; 2. the account number; 3. the name and identifying number of the U.S. Financial Institution; 4. the gross amount of interest paid on a Depository Account; 5. the gross amount of U.S. source dividends paid or credited to the account; and 6. the gross amount of other U.S. source income paid or credited to the account Q6: US Info Report to IRS?
Q6: FATCA 30% Withholding • FDAP • portfolio interest • loan principal • Real estate proceeds (FIRPTA subject payments) • Proceeds from sale of stock in US corp. or other non-dividend distributions Not payments for ordinary course of business for non-financial services like consulting (but FDAP applies)
Q6: Withholding WH agent (USWHA or PFFI) required to report annually Form 1042 and Form 1042-S •Form 1042 to IRS, with aggregated reportable amounts and any tax withheld. •Form 1042S to IRS, copy US specified person with reportable amounts paid. •Form 1042-S is required for each US person, with separate Forms for each separate type of payment.
Q7: IGAs • No IRS agreements required for FFIs • ƒ No officer certifications directly to the IRS • ƒ Retirement account issues addressed • ƒ Data privacy concerns addressed • ƒ Withholding concerns addressed • ƒ Customer identification issues addressed • ƒ No closing accounts of recalcitrant account hold
Q7: IGAs • Effects of Signing IGA • Reciprocal Agreements? • Language i.e. “reporting under Chapter 3”
Q7: IGA definitions 40 terms defined “Any term not otherwise defined in this Agreement shall, unless the context otherwise requires or the Competent Authorities agree to a common meaning (as permitted by domestic law), have the meaning that it has at that time under the law of the Party applying the Agreement, any meaning under the applicable tax laws of that Party prevailing over a meaning given to the term under other laws of that Party”
Q7: IGA definitions (a) the definition of financial institution is expanded to include investment entities (b) the definition of Substantial U.S. Owner in the proposed regulations has been replaced by one for Controlling Persons which is expected to be interpreted in a manner consistent with the recommendations of the Financial Action Task Force and better aligned to KYC procedures
Q8: Latin America Impact? BIS stats as indicators US <-> Argentina: $12.9B in US v . $4.6B in Arg. US <-> Brazil: $34.4B v. $81.4B (b/c of structures) Mexico: $67.2B in US banks (DTA) Chile: $27.4B (DTA but not yet ratified by US) Panama: $8.7B Venezuela: DTA
Q8: Mexico IGA US Reporting (1) the name, address, and Mexican TIN of any person that is a resident of Mexico; (2) the account number; (3) the name and identifying number of the Reporting U.S. Financial Institution; (4) the gross amount of interest paid on a Depository Account; (5) the gross amount of U.S. source dividends paid or credited to the account; and (6) the gross amount of other U.S. source income subject to US reporting.
Q8: TIEAs Antigua & Barbuda, Aruba, Bahamas, Barbados, Bermuda, Brazil, Cayman Islands, Costa Rica, Dominica, Dominican Republic, Grenada Honduras, Jamaica, Mexico, Panama, Peru, St. Lucia, and Trinidad & Tobago DTAs: Barbados, Jamaica, Mexico, Venezuela, and Trinidad & Tobago (+ Chile signed)
Q8: US-Brazil TIEA US Taxes Covered (i) federal income taxes; (ii) federal taxes on self-employment income; (iii) federal estate and gift taxes; and (iv) federal excise taxes
Q8: US-Brazil TIEA Brazil Taxes Covered (i) individual and corporate income tax (IRPF and IRPJ, respectively); (ii) industrialized products tax (IPI); (iii) financial transactions tax (IOF); (iv) rural property tax (ITR); (v) contribution for the program of social integration (PIS); (vi) social contribution for the financing of the social security (COFINS); and (vii) social contribution on net profits (CSLL).
Q9: Timeline TY 2011 Form 8938 (filed 4/17/12) FFI agreement & electronic registration 15 July – 25 Oct. 2013
Q9: Timeline DD 1/1/14: PFFIs new account USDD 6/30/14: existing accounts USDD must be completed (for prima facie FFI)
Q9: Timeline Overview 12/31/14 PFFIs complete review & documentation of all other pre-existing high value individual accounts (& certified completed by FATCA officer) 12/31/15 PFFIs complete review & documentation of all other pre-existing individual accounts and all pre- existing entity accounts not previously identified as being held by prima facie FFIs (& Certify by FATCA Officer)
Q9: Timeline Withholding – 1/1/2013: Obligations issued before are grandfathered (material modification) – 1/1/2014: Start withholding on FDAP to non- compliant account holders – 3/15/2015 start of annual report (for 2014) via Form 1042(S) of FATCA withholding (Foreign Person’s U.S. Source Income Subject to Withholding)
Q9: Timeline Withholding 1/1/2017: Start expanded withholding on US-source gross proceeds arising from sales and redemptions & foreign pass through payments
Q9: Timeline Reporting 3/31/2015 (for 2013 and 2014) annual report: •US accounts (name, address, TIN and account balance) •recalcitrant account holders (aggregate reporting) 3/31/2016 + income associated with these US accounts 3/31/2017 + gross proceeds
Q10: FORM 8938 A specified foreign financial asset is: •Any financial account maintained by a foreign financial institution •Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely: – Stock or securities issued by someone other than a U.S. person – Any interest in a foreign entity, and – Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.
Q10: 8938 thresholds Individual / Filing Separate taxpayers in the US: total value of specified foreign financial assets > $50,000 on the last day of the tax year or > $75,000 at any time during the tax year (Joint = 2x threshold) Living Abroad: foreign tax residence + bona fide or 330 days in 12 months ending in tax year > $200,000 / $300,000 (Joint = 2x threshold)
Q10: 8938 Foreign Financial Account – Foreign bank accounts – Foreign mutual funds – Foreign hedge funds – Foreign private equity funds – Certain foreign insurance products
Q10: 8938 Foreign Financial Asset – Stock or securities issued not by US person – Any interest in a foreign entity – Any financial instrument or contract that has as an issuer or counterparty that is not US person – Foreign pensions and deferred comp plans – Foreign estates
Q10: 8938 Foreign Property ? Not if direct ownership of real property Yes if -> foreign entity -> Property (FE interest) Yes if mortgage (FA interest) Not if direct ownership of movable assets (e.g. metals, jewels, art works)
Q10: 8938 Questions Part II Other Foreign Assets (see instructions) 1 Description of asset 2 Identifying number or other designation 3 Complete all that apply a Date asset acquired during tax year, if applicable . . . . . . . . . . . . . . . . . . b Date asset disposed of during tax year, if applicable . . . . . . . . . . . . . . . . . c Check if asset jointly owned with spouse d Check if no tax item reported in Part III with respect to this asset 4 Maximum value of asset during tax year (check box that applies) a $0 - $50,000 b $50,001 - $100,000 c $100,001 - $150,000 d $150,001 - $200,000 e If more than $200,000, list value . . . . . . . . . . . . . . . . . . . . . . . . $ 5 Did you use a foreign currency exchange rate to convert the value of the asset into U.S. dollars? . . . Yes No
Q10: 8938 Questions 7 If asset reported in Part II, line 1, is stock of a foreign entity or an interest in a foreign entity, report the following information. a Name of foreign entity b Type of foreign entity (1) Partnership (2) Corporation (3) Trust (4) Estate c Check if foreign entity is a PFIC d Mailing address of foreign entity 8 If asset reported in Part II, line 1, is not stock of a foreign entity or an interest in a foreign entity, enter the following information for the asset. a Name of issuer or counterparty b Type of issuer or counterparty (1) Individual (2) Partnership (3) Corporation (4) Trust (5) Estate c Check if issuer or counterparty is a U.S. person Foreign person d Mailing address of issuer or counterparty.
Q11: Diagrams etc Foreign Institution US Payor person Foreign Institution US Payor Entity
Q11: Trusts (a)“simple trusts” (b) default “grantor trusts” or (c)“complex trusts.”
Q11: Trusts • A person treated as an owner under §§671-679 of the Code, or • A person who holds a beneficial interest: Right to receive directly or indirectly (e.g. through a nominee) a mandatory distributor or may receive, directly or indirectly, a discretionary distribution
Q11: Trusts Example 1: On January 1, 2013 Y, an individual, establishes Trust Z, a nongrantor foreign trust for the benefit of Z’s children. Y appoints his brother W to act as trustee of Trust Z. The assets of Trust Z are stocks and bonds, and its income is derived from those financial assets. Under the terms of the trust, Trustee W manages and administers the trust property himself. W does not hire any third party professional manager. Trust Z is not an investment entity and FFI.
Q11: Trusts Example 2: The facts are the same as in Example 1, except that Y hires a Trust Co., an FFI to act as trustee on behalf of the Trust Z. As trustee, Trust Co. manages and administers the assets of the trust in accordance with the trust instrument for the benefit the beneficiaries (in this example the children). Trust Z will be an investment entity and an FFI, since it is managed by an FFI.
Q11: Trusts Example 3: a Trust Co., a professional trustee, acts as trustee for the Z Family Trust, a foreign trust for the benefit of the family of Mr. Z. Trust Co. is unable to determine the type of trust Z Family Trust is for U.S. tax purposes. Accordingly, Z Family Trust will be treated as a grantor trust by the withholding agent.
Q11: Trusts Mandatory beneficial interests: A specified US person has more than a 10% interest if the value of the person’s interest exceeds 10% of the value of all the assets held by the trust Mandatory and discretionary beneficial interests: A specified US person has a more than 10% interest in the trust if the value exceeds either 10% of the value of all distributions made by the trust during the year or 10% of the value of all assets of the trust Exception for substantial US Owner: •Discretionary distributions. The value of the currency or other property distributed to the specified US person during the calendar year must exceed $5,000 •Mandatory distributions or mandatory/discretionary distributions. The value of such person’s interest (determined under the valuation rules) exceeds $50,000
Q11: Trusts Example 4 -- Determining the 10% Beneficial Interest in a Foreign Trust. Andrea and her cousin Ralph are both discretionary beneficiaries in AnRa Family Trust, a foreign trust. The trustee distributes $25,000 to Andrea and $5,000 to Ralph in Year 1. Total distributions from the AnRa Family Trust to beneficiaries for year 1 were $200,000. Andrea’s beneficial interest in the trust will exceed 10% of the total distributed for Year 1, therefore she is considered a substantial U.S. owner. Ralph, on the other hand, will not be considered a substantial U.S. owner in the trust as his distribution of $5,000 is de minimis.

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FATCA for swiss banks workshop latam

  • 1.
    Overview of theFATCA (Foreign Account Tax Compliance Act) Prof. William Byrnes
  • 2.
    to pre-order with20% discount LexisNexis® Guide to FATCA Compliance contact Nicole Hahn, Lexis Manger Nicole.Hahn@lexisnexis.com Discount Code: FATCA13
  • 3.
    Primary Author Prof. WilliamByrnes, International Tax & Financial Services williambyrnes@gmail.com +1 786 271 5202 The information contained herein and during this presentation is only for academic discussion, and not applicable to any specific situation. The information is of a general nature and based on authorities that are subject to frequent change.
  • 4.
    biography Associate Dean WilliamH. Byrnes, IV, has achieved authoritative prominence with more than 38 book and compendium volumes, 93 book & treatise chapters and supplements, 800 articles, and a monthly subscriber tax newsletter Tax Facts Intelligence that complements Tax Facts Online. He advised TSPs, CSPs, and institutions globally, working for Coopers & Lybrand.
  • 5.
    Q1: What isFATCA? – Information Reporting Regime on Foreign Institutions & Entities to Assist the Internal Revenue Service Collect Identification and Financial Information about US Individual Taxpayers – Match this information to new Form 8938 Statement of Specified Foreign Financial Assets (and the Foreign Bank & Financial Accounts form FBAR) – 30% withholding
  • 6.
    Congress Push toProvide Additional Tools to Avoid Tax Evasion • Problem: Country Sovereignty and Bank Secrecy Laws used to Promote Non-Tax Compliance • Congressional Solution: – New Chapter 4 – • Creates a Withholding Tax not for the sake of Collecting Tax, but to Encourage (Coerce some would say) FFIs into providing detailed account information of U.S. persons
  • 7.
    Chapter 3 vs.New Chapter 4 • Collecting Tax on Chapter 3 – – Collecting Withholding Tax • Encouraging (some would say “coercing”) – Providing Information – Re: Accounts • Practical Benefits of Getting in “Old” W-8s – Foreign Taxpayer ID – Presumably now also from W-8-BENE
  • 8.
    Chapter 3 Taxpayer Character ofIncome Withholding Tax Withholding Agent Exemption IRC §1441 NRA’s Foreign Partnerships -FDAP Income: Interest, Premiums, Annuities, Dividends, Compensations, Rents, Royalties, Salaries, Wages, Remunerations, Emoluments, etc. 30% gross Payor -ECI -Portfolio Interest -Interest and Dividends from 80/20 Corporations - Real Estate (871) IRC §1442 Foreign Corps. Idem 30% gross Payor Idem IRC §1445 Foreign Persons Real Estate Dispositional Income 10% gross Payor Certificate of Reduced WH’ IRC §1446 Foreign Partner Partnership Income Effectively Connected to a U.S. Trade or Business Progressive tax rate Payor Income not ECI
  • 9.
    Chapter 4 Taxpayer Character of Income WithholdingTax Withholding Agent Exemption IRC §1471 Non Participating FFI “withholdable payments”: which in Theory includes all of Chapter 3 30% gross U.S Payor Payment whose beneficial owners are: -Foreign governments -international Organizations -foreign central bank of issue -“Low risk tax evaders” . U.S. Recalcitrant Account Holders “pass-thru payments” 30% gross FFI What happens with the withholding exemptions or modifications under IRC Chapter 3??
  • 10.
    Q2: What CausedFATCA? –60+ Tax Treaty EOI articles, 20+TIEAs, MLATs, and Hague Evidence Convention –FBAR (Foreign Bank & Financial Accounts) • 1996 by BSA • in 2003 FINCEN signed MOA for IRS to enforce –QI Regime (2000) • Approx. 5,500 financial institutions (vs. 100,000s) – OECD TRACE (Treaty Relief & Compliance Enhancement) multi-lateral auto info exchange
  • 11.
    Q2: QI Differences? •Expanded application of reporting – (names + specific account in(s)/out(s)) • Look through to UBO • Expanded application of reporting persons • Expanded application of reportable transactions • FFI cannot determine customer w/h pools • Only approx. 5,500 QI v. 100,000s of FFIs and FEs
  • 12.
    Q2: What CausedFATCA? Offshore Voluntary Disclosure Programs 2009 & 2011: 33,000 raised $5B 2012 remains open: 1,500 (and now up to $5.5B) UBS headline case: 17,000 hide $20B $780m fine with $104m to convicted insider whistleblower Bradley Birkenfield
  • 13.
    Q3: Compliance Costs? 1.Financial Costs 2. Labor / Service / Software & Systems 3. Management
  • 14.
    Q3: Financial Costs? Treasury:$100m per large institution Can. Bankers Association: $1B each for 5 largest banks Generally accepted: $250m per large MN bank $30m-$80m for UK investment banks E20-E50 per investor for investment funds, $1m per fund Mexican banks - $5m each How much did Y2K cost? EU Savings Directive? New expanded reporting? QI regime?
  • 15.
    Q3: Labor /Systems Costs? Which department will wear the FATCA yoke? (Tax, AML, Comp) •Employ / Outsource add. compliance manager / staff ? •Employ / Outsource add. systems and software integration staff (probably both, at least on short term contracts) •Employ / Outsource FATCA consultants least cost is your Lexis FATCA Compliance Handbook ;-)
  • 16.
    Q3: Labor /Systems Costs? - enterprise software programming/building (AML, FATCA, Internal and External treasury/client reports) - new protocols and rules - new onboarding procedures - data entry -middleware -systems maintenance
  • 17.
    Q3: Management Enterprise SteeringCommittees •Each business unit has working team •Drilling down impact by country, product Decision making process: CCO, CTO, AMLRO, CLO (GC), and new FATCA “Responsible (Certification) Officer”? Investment Funds re-drawing investor agreements
  • 18.
    Q3: EU CostConcerns Data Protection & Civil Law Privacy - costs of obtaining each client’s signature on new FATCA waiver New EU Tax Exchange Directive (2013 by request / 2015 automatic of 2014 info) (a) income from employment (b) director's fees (c) life insurance products (d) pensions (e) ownership of and income from immovable property
  • 19.
    Q4: Who doesFATCA apply to? Two Categories: FFI & NFFE Foreign Financial Institution Non-Financial Foreign Entity
  • 20.
    Q4: What isan FFI? Not Territory-Organized (aka TOFI) -Accepts deposits in ordinary course of bus. -Holds financial assets for 3rd p as sub. bus. -bus. of investing, trading in securities, commodities, p’shp interests, futures, forwards Sign FFI agreement or IGA in place (still must get GIIN)
  • 21.
    Q4: Examples ofFFI? - Investment, hedge, equity, mutual funds, unit trusts - Clearing houses, Brokerages - Insurance (cash value), annuity, pension, - Trust companies, custodians
  • 22.
    Q4: Exempt fromFFI? “Low Risk of Tax Evasion” Foreign governments, Central Banks
  • 23.
    Q4: Registered DeemedCompliant ? Still Register with Treasury but as compliant FFI Certain local-only banks Qualified collective investment fund Restrictive fund
  • 24.
    Q4: Certified DeemedCompliant? Don’t register with IRS but certify to W/H agents Certain small local banks with local accounts Non-profits Certain retirement plans
  • 25.
    Q: Challenges? SWAPS –difficult to value, changing counter parties in opaque market Funds: lack access to information for approx. 40%-45% UBOs, distributors & transfer agents must become PFFI fund of funds private equity funds & tie-up periods Life Insurance: whole life touch points with owner
  • 26.
    Q5: NFFE? Exemptions •foreign governments,IGO, central banks; •publicly traded companies and entities within their expanded group of affiliates; •U.S. possessions Active NFFEs (less than 50% of gross income from assets that produce passive income). If not exempt: US (10%) shareholders or IGA “control” FATF standard
  • 27.
    Q6: FFI DueDiligence ? 3 categories of accounts / 2 time periods 1.< $50,000 (low value accounts) 2.$50,000 - $1m 3.> $1m (high value accounts) Current (look back) vs. New (onboarding)
  • 28.
    Q6: FFI DD $50k- $1m Electronic Search of AML records of the KYC / CIP program > $1m CCO -> RM communicate about account holder and if necessary, review account file docs for previous 5 years W8Ben (foreign) or W9 (US): “Trust but Verify”
  • 29.
    Q6: US Indicia (1)Citizenship or residency in U.S.; (2) U.S. place of birth; (3) U.S. residency or mailing address; (4) U.S. telephone number; (5) any standing instructions to transfer funds to a U.S. account; (6) any power of attorney or other signatory authority to any person with a U.S. address; or (7) Whether the account holder has provided any verified “in-care” or “hold mail” address with the U.S.
  • 30.
    Q6: EDD forHigh Value Accounts RM communicate about account holder using file and KYC or CCO directly accesses file •review account file KYC for previous 5 years •account opening documents, signatory card •POA / incapacitation or death instructions
  • 31.
    Q6: DD forNFFE W-9 on file ? specified U.S. person ? • < $250,000 - Excluded from review, until account balance exceeds $1,000,000. • Search existing CIP/KYC info/account opening docs to determine status • Passive NFFEs – Must identify substantial U.S. owners or certify that there are no substantial U.S. owners.
  • 32.
    Q6: specified USperson is not • Publicly traded corporation • Affiliates of a publicly traded corporation • Exempt organization or IRA • REIT • RIC / SEC registered (1940 Investment Company Act) • The United States • U.S. state, DC, or U.S. possession • US bank • Common trust fund • Exempt trust under section 664(c) • US registered dealer • US Broker – 26 USC 6045(c)
  • 33.
    Participating FFIs Systems •Documentation: evolve current AML systems to capture FATCA DD across enterprise customer base • Reporting: implementing then maintaining annual reporting system with US (or IGA) for US individuals, including identifiers, account balances, gross payments • Withholding: building system for 30% withholding on recalcitrant account holders
  • 34.
    1. identity andresidence of the beneficial owner; 2. name and address of the paying agent; 3. account number of the beneficial owner; 4. and amount of interest income earned 5. TIN if available 6. If resident in a country different than passport or I.D. card, then tax residence certificate Q6: EU TSD Art 8 Info
  • 35.
    • Report mustcontain –Name / address / TIN –Account No(s) / Balance(s) –Annual Gross transactions (receipts/deposits/payments/ withdrawals) • Can elect to report like US-FI (1099s) • Or w/h and close account Q6: Foreign Info Reporting?
  • 36.
    1. the name,address, and TIN of any person that is a resident of FATCA Partner and is an Account Holder; 2. the account number; 3. the name and identifying number of the U.S. Financial Institution; 4. the gross amount of interest paid on a Depository Account; 5. the gross amount of U.S. source dividends paid or credited to the account; and 6. the gross amount of other U.S. source income paid or credited to the account Q6: US Info Report to IRS?
  • 37.
    Q6: FATCA 30%Withholding • FDAP • portfolio interest • loan principal • Real estate proceeds (FIRPTA subject payments) • Proceeds from sale of stock in US corp. or other non-dividend distributions Not payments for ordinary course of business for non-financial services like consulting (but FDAP applies)
  • 38.
    Q6: Withholding WH agent(USWHA or PFFI) required to report annually Form 1042 and Form 1042-S •Form 1042 to IRS, with aggregated reportable amounts and any tax withheld. •Form 1042S to IRS, copy US specified person with reportable amounts paid. •Form 1042-S is required for each US person, with separate Forms for each separate type of payment.
  • 39.
    Q7: IGAs • NoIRS agreements required for FFIs • ƒ No officer certifications directly to the IRS • ƒ Retirement account issues addressed • ƒ Data privacy concerns addressed • ƒ Withholding concerns addressed • ƒ Customer identification issues addressed • ƒ No closing accounts of recalcitrant account hold
  • 40.
    Q7: IGAs • Effectsof Signing IGA • Reciprocal Agreements? • Language i.e. “reporting under Chapter 3”
  • 41.
    Q7: IGA definitions 40terms defined “Any term not otherwise defined in this Agreement shall, unless the context otherwise requires or the Competent Authorities agree to a common meaning (as permitted by domestic law), have the meaning that it has at that time under the law of the Party applying the Agreement, any meaning under the applicable tax laws of that Party prevailing over a meaning given to the term under other laws of that Party”
  • 42.
    Q7: IGA definitions (a)the definition of financial institution is expanded to include investment entities (b) the definition of Substantial U.S. Owner in the proposed regulations has been replaced by one for Controlling Persons which is expected to be interpreted in a manner consistent with the recommendations of the Financial Action Task Force and better aligned to KYC procedures
  • 43.
    Q8: Latin AmericaImpact? BIS stats as indicators US <-> Argentina: $12.9B in US v . $4.6B in Arg. US <-> Brazil: $34.4B v. $81.4B (b/c of structures) Mexico: $67.2B in US banks (DTA) Chile: $27.4B (DTA but not yet ratified by US) Panama: $8.7B Venezuela: DTA
  • 44.
    Q8: Mexico IGAUS Reporting (1) the name, address, and Mexican TIN of any person that is a resident of Mexico; (2) the account number; (3) the name and identifying number of the Reporting U.S. Financial Institution; (4) the gross amount of interest paid on a Depository Account; (5) the gross amount of U.S. source dividends paid or credited to the account; and (6) the gross amount of other U.S. source income subject to US reporting.
  • 45.
    Q8: TIEAs Antigua &Barbuda, Aruba, Bahamas, Barbados, Bermuda, Brazil, Cayman Islands, Costa Rica, Dominica, Dominican Republic, Grenada Honduras, Jamaica, Mexico, Panama, Peru, St. Lucia, and Trinidad & Tobago DTAs: Barbados, Jamaica, Mexico, Venezuela, and Trinidad & Tobago (+ Chile signed)
  • 46.
    Q8: US-Brazil TIEA USTaxes Covered (i) federal income taxes; (ii) federal taxes on self-employment income; (iii) federal estate and gift taxes; and (iv) federal excise taxes
  • 47.
    Q8: US-Brazil TIEA BrazilTaxes Covered (i) individual and corporate income tax (IRPF and IRPJ, respectively); (ii) industrialized products tax (IPI); (iii) financial transactions tax (IOF); (iv) rural property tax (ITR); (v) contribution for the program of social integration (PIS); (vi) social contribution for the financing of the social security (COFINS); and (vii) social contribution on net profits (CSLL).
  • 48.
    Q9: Timeline TY 2011Form 8938 (filed 4/17/12) FFI agreement & electronic registration 15 July – 25 Oct. 2013
  • 49.
    Q9: Timeline DD 1/1/14:PFFIs new account USDD 6/30/14: existing accounts USDD must be completed (for prima facie FFI)
  • 50.
    Q9: Timeline Overview 12/31/14PFFIs complete review & documentation of all other pre-existing high value individual accounts (& certified completed by FATCA officer) 12/31/15 PFFIs complete review & documentation of all other pre-existing individual accounts and all pre- existing entity accounts not previously identified as being held by prima facie FFIs (& Certify by FATCA Officer)
  • 51.
    Q9: Timeline Withholding –1/1/2013: Obligations issued before are grandfathered (material modification) – 1/1/2014: Start withholding on FDAP to non- compliant account holders – 3/15/2015 start of annual report (for 2014) via Form 1042(S) of FATCA withholding (Foreign Person’s U.S. Source Income Subject to Withholding)
  • 52.
    Q9: Timeline Withholding 1/1/2017:Start expanded withholding on US-source gross proceeds arising from sales and redemptions & foreign pass through payments
  • 53.
    Q9: Timeline Reporting 3/31/2015(for 2013 and 2014) annual report: •US accounts (name, address, TIN and account balance) •recalcitrant account holders (aggregate reporting) 3/31/2016 + income associated with these US accounts 3/31/2017 + gross proceeds
  • 54.
    Q10: FORM 8938 Aspecified foreign financial asset is: •Any financial account maintained by a foreign financial institution •Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution, namely: – Stock or securities issued by someone other than a U.S. person – Any interest in a foreign entity, and – Any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person.
  • 55.
    Q10: 8938 thresholds Individual/ Filing Separate taxpayers in the US: total value of specified foreign financial assets > $50,000 on the last day of the tax year or > $75,000 at any time during the tax year (Joint = 2x threshold) Living Abroad: foreign tax residence + bona fide or 330 days in 12 months ending in tax year > $200,000 / $300,000 (Joint = 2x threshold)
  • 56.
    Q10: 8938 ForeignFinancial Account – Foreign bank accounts – Foreign mutual funds – Foreign hedge funds – Foreign private equity funds – Certain foreign insurance products
  • 57.
    Q10: 8938 ForeignFinancial Asset – Stock or securities issued not by US person – Any interest in a foreign entity – Any financial instrument or contract that has as an issuer or counterparty that is not US person – Foreign pensions and deferred comp plans – Foreign estates
  • 58.
    Q10: 8938 ForeignProperty ? Not if direct ownership of real property Yes if -> foreign entity -> Property (FE interest) Yes if mortgage (FA interest) Not if direct ownership of movable assets (e.g. metals, jewels, art works)
  • 59.
    Q10: 8938 Questions PartII Other Foreign Assets (see instructions) 1 Description of asset 2 Identifying number or other designation 3 Complete all that apply a Date asset acquired during tax year, if applicable . . . . . . . . . . . . . . . . . . b Date asset disposed of during tax year, if applicable . . . . . . . . . . . . . . . . . c Check if asset jointly owned with spouse d Check if no tax item reported in Part III with respect to this asset 4 Maximum value of asset during tax year (check box that applies) a $0 - $50,000 b $50,001 - $100,000 c $100,001 - $150,000 d $150,001 - $200,000 e If more than $200,000, list value . . . . . . . . . . . . . . . . . . . . . . . . $ 5 Did you use a foreign currency exchange rate to convert the value of the asset into U.S. dollars? . . . Yes No
  • 60.
    Q10: 8938 Questions 7If asset reported in Part II, line 1, is stock of a foreign entity or an interest in a foreign entity, report the following information. a Name of foreign entity b Type of foreign entity (1) Partnership (2) Corporation (3) Trust (4) Estate c Check if foreign entity is a PFIC d Mailing address of foreign entity 8 If asset reported in Part II, line 1, is not stock of a foreign entity or an interest in a foreign entity, enter the following information for the asset. a Name of issuer or counterparty b Type of issuer or counterparty (1) Individual (2) Partnership (3) Corporation (4) Trust (5) Estate c Check if issuer or counterparty is a U.S. person Foreign person d Mailing address of issuer or counterparty.
  • 61.
    Q11: Diagrams etc Foreign Institution USPayor person Foreign Institution US Payor Entity
  • 62.
    Q11: Trusts (a)“simple trusts” (b)default “grantor trusts” or (c)“complex trusts.”
  • 63.
    Q11: Trusts • Aperson treated as an owner under §§671-679 of the Code, or • A person who holds a beneficial interest: Right to receive directly or indirectly (e.g. through a nominee) a mandatory distributor or may receive, directly or indirectly, a discretionary distribution
  • 64.
    Q11: Trusts Example 1:On January 1, 2013 Y, an individual, establishes Trust Z, a nongrantor foreign trust for the benefit of Z’s children. Y appoints his brother W to act as trustee of Trust Z. The assets of Trust Z are stocks and bonds, and its income is derived from those financial assets. Under the terms of the trust, Trustee W manages and administers the trust property himself. W does not hire any third party professional manager. Trust Z is not an investment entity and FFI.
  • 65.
    Q11: Trusts Example 2:The facts are the same as in Example 1, except that Y hires a Trust Co., an FFI to act as trustee on behalf of the Trust Z. As trustee, Trust Co. manages and administers the assets of the trust in accordance with the trust instrument for the benefit the beneficiaries (in this example the children). Trust Z will be an investment entity and an FFI, since it is managed by an FFI.
  • 66.
    Q11: Trusts Example 3:a Trust Co., a professional trustee, acts as trustee for the Z Family Trust, a foreign trust for the benefit of the family of Mr. Z. Trust Co. is unable to determine the type of trust Z Family Trust is for U.S. tax purposes. Accordingly, Z Family Trust will be treated as a grantor trust by the withholding agent.
  • 67.
    Q11: Trusts Mandatory beneficialinterests: A specified US person has more than a 10% interest if the value of the person’s interest exceeds 10% of the value of all the assets held by the trust Mandatory and discretionary beneficial interests: A specified US person has a more than 10% interest in the trust if the value exceeds either 10% of the value of all distributions made by the trust during the year or 10% of the value of all assets of the trust Exception for substantial US Owner: •Discretionary distributions. The value of the currency or other property distributed to the specified US person during the calendar year must exceed $5,000 •Mandatory distributions or mandatory/discretionary distributions. The value of such person’s interest (determined under the valuation rules) exceeds $50,000
  • 68.
    Q11: Trusts Example 4-- Determining the 10% Beneficial Interest in a Foreign Trust. Andrea and her cousin Ralph are both discretionary beneficiaries in AnRa Family Trust, a foreign trust. The trustee distributes $25,000 to Andrea and $5,000 to Ralph in Year 1. Total distributions from the AnRa Family Trust to beneficiaries for year 1 were $200,000. Andrea’s beneficial interest in the trust will exceed 10% of the total distributed for Year 1, therefore she is considered a substantial U.S. owner. Ralph, on the other hand, will not be considered a substantial U.S. owner in the trust as his distribution of $5,000 is de minimis.