This document discusses the requirements and challenges of FATCA compliance for foreign financial institutions and entities. It provides examples of different types of entities that would be considered FFIs, such as investment funds, insurance companies, and trusts managed by financial institutions. It also discusses exemptions from FFI status, such as foreign governments and registered deemed compliant entities. Implementation of FATCA poses significant financial and operational challenges for covered entities in modifying systems and processes to comply with new reporting and withholding requirements.

1. Exchange of Information
and FATCA
William Byrnes
www.profwilliambyrnes.com
LexisNexis® Guide
to FATCA Compliance
University of Amsterdam
Centre for Tax Law

2. What is FATCA?
– Information Reporting Regime on Foreign
Institutions & Entities to 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 FinCEN Form 114)
– 30% withholding

3. 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.

4. EOI Requirements
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
identity of the person under examination or investigation;
a statement of the information sought including its nature;
the tax purpose for which the information is sought;
the information is held in the requested party or is in the
possession or control of a person within the jurisdiction;
to the extent known, the name and address of any person
believed to be in possession of the requested information;
a statement that the request is in conformity with the law
and administrative practices of the applicant party,
would be able to obtain the information under the laws of
the applicant party;
a statement has pursued all means available, except
disproportionate difficulties

5. What Caused FATCA?
7.6 million U.S. citizens reside abroad
more U.S. residents have foreign accounts
only 807,040 FBAR submissions in 2012
Offshore Voluntary Disclosure Programs
2009 & 2011: 33,000 raised $5B
2012 remains open: 1,500 (total $5.5B)
UBS headline case: 17,000 hide $20B,
$780m fine with $104m to convicted insider
whistleblower Bradley Birkenfield

6. Art 26 expansion
[1] Information for Non-Tax Purposes
[2] Groups of Taxpayers
[3] Reasonable Possibility of Relevancy

7. EU
Data Protection & Civil Law Privacy
- costs of obtaining each client’s signature on new
FATCA waiver
EU TSD and 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

8. EU
Sabou case (22 Oct. 2013)
Mr Sabou claimed to incur expenditure in several Member States with a
view to a possible transfer to one of the football clubs in those Member
States. The Czech tax authorities, however, raised doubts over the
truthfulness of that expenditure and carried out an inspection involving
requests for information from the tax authorities of the Member States
concerned.
The Czech tax authorities sought assistance from the Spanish, French and
United Kingdom tax authorities. None of the clubs allegedly approached
knew either Mr Sabou or his agent.
The Czech tax authorities also contacted the Hungarian tax authorities
about a number of invoices submitted by Mr Sabou concerning services
allegedly provided by a company established in Hungary.
On 28 May 2009, the Czech tax authorities issued an additional notice of
assessment for approximately EUR 9,800.

9. ECJ Sabou Case
Mr Sabou claimed that the Czech tax authorities
had obtained information about him illegally.
(1) not informed him of their request, so that he
had not been able to take part in formulating the
questions addressed to those authorities.
(2) he had not been invited to take part in the
examination of witnesses in other Member
States, in contrast to the rights he enjoys under
Czech law in similar domestic proceedings.

10. ECJ
(i) whether EU law, as it results in particular from Directive
77/799 and the fundamental right to be heard, confers on a
taxpayer from a Member State the right to be informed of a
request, to take part in formulating the request addressed to the
requested Member State, and to take part in an examination of
witnesses organised by the requested Member State, and
(ii) whether Directive 77/799 must be interpreted as meaning
that, (1) the taxpayer may challenge the information concerning
him conveyed to the tax authorities of the requesting Member
State, and, (2) when the tax authorities of the requested
Member State convey the information gathered, they are bound
to disclose the sources of the information and how that
information was obtained.

11. ECJ
(1) the purpose of Directive 77/799 is to govern
cooperation between the tax authorities of
Member States by imposing certain obligations on
the Member States.
(2) The directive does not confer specific rights on the
taxpayer, and does not lay down any obligation for
the competent authorities of the Member States
to consult the taxpayer.
(3) necessary to consider whether the taxpayer may
nevertheless derive from the ‘rights of the
defence’ a right to participate in the exchange of
information between the competent authorities

12. ECJ
a fundamental distinction between:
(i) the tax inspection procedures which constitute an
investigation stage, during which information is
collected and which includes the request for
information by one tax authority to another, and
(ii) the contentious stage, between the tax authorities
and the taxpayer, which begins when the taxpayer
is sent the proposed adjustment

13. Various Initiatives
Convention on Mutual Administrative Assistance in
Tax Matters
(63 signatories, 13 by extension, 4 to sign)
UK – LDF / Swiss RUBIK / soF disclosure facilities
son of FATCA IGA
OECD TRACE (Treaty Relief & Compliance
Enhancement)

14. EU TSD Art 8 Info
1.
2.
3.
4.
5.
identity and residence of the beneficial owner;
name and address of the paying agent;
account number of the beneficial owner;
and amount of interest income earned
TIN if available
• If resident in a country different than passport
or I.D. card, then tax residence certificate

15. EU’s FATCA Equivalent
• income from employment,
• director’s fees,
• life insurance products not covered by other EU
legal instruments on the exchange of
information,
• pensions, and
• ownership of and income from immovable
property.

16. EU’s FATCA Equivalent
(a) may be a loss of tax in the other Member State;
(b) a person liable to tax obtains a reduction in, or an
exemption from, tax in one Member State which would give
rise to an increase in tax or to liability to tax in the other
Member State;
(c) Income shifting: business dealings are conducted
through one or more countries that a saving of tax may
result from artificial transfers of profits within groups;
(d) Transfer pricing: a saving of tax may result from artificial
transfers of profits within groups of enterprises;
(e) may be relevant in assessing liability to tax in the latter
Member State.

17. 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

18. 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

19. 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

20. Taxpayer
Character of
Income
IRC 1471
Non Participating
FFI
Withholding Tax
Withholding Agent
Exemption
30% gross
Chapter
4
U.S Payor
Payment whose
beneficial owners
are:
-Foreign
governments
“withholdable
payments”:
which in Theory
includes all of
Chapter 3
-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??

21. Compliance Costs?
1. Financial Costs
2. Labor / Service / Software & Systems
3. Management

22. Financial Costs?
Treasury: $100m per large institution
Can. Bankers Association: $1B each for 5 largest
banks
Generally accepted: $250m per large bank
$30m-$80m for UK investment banks
E20-E50 per investor for investment funds, $1m per
fund
How much did Y2K cost?
EU Savings Directive? New expanded reporting?
QI regime?

23. 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 ;-)

24. 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

25. 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

26. Who does FATCA apply to?
Two Categories: FFI & NFFE
Foreign Financial Institution
Non-Financial Foreign Entity

27. What is an FFI?
- Accepts deposits in ordinary course of
bus.
- Holds financial assets for 3rdp as sub.
bus.
- bus. of investing, trading in securities,
commodities, p’shp interests, futures,
forwards

28. Examples of FFI?
- Investment, hedge, equity, mutual funds, unit
trusts
- Clearing houses, Brokerages
- Insurance (cash value), annuity, pension,
- Trust companies, custodians

29. FFI Example 1
An Investment Advisor case. A Fund Manager is an
investment entity that organizes and manages various
types of funds including Fund A. Fund A invests
primarily in equities. An Investment Advisor (a foreign
entity) is hired by the Fund Manager to advise and
provide discretionary management of a portion of the
financial assets held by Fund A. More than 50 percent
of the Investment Advisor’s gross income was earned
for the last three years from providing similar
services. The Investment Advisor is an investment
entity and an FFI as well since it primarily conducts a
business of managing financial assets on behalf of
clients.

30. FFI Example 2
An entity managed by an FFI. The facts are the
same as above Example 1. In addition, Fund A has
earned more than 50 percent of its gross income
from investing in financial assets in every year
since its formation. Because Fund A is managed by
a Fund Manager and an Investment Advisor and
has gross income primarily from
investing, reinvesting, or trading in financial
assets, Fund A is an investment entity.

31. FFI Example 3
An Investment Manager case. An Investment
Manager (a U.S. entity) is an investment entity
that organizes and registers Fund A in a country
outside the U.S. Purchases and sales of financial
assets are facilitated by the Investment Manager.
Fund A has earned more than 50% of its gross
income from investing, reinvesting, or trading in
financial assets in every year since its formation.
Fund A is an investment entity and an FFI.

32. FFI Example 4
foreign real estate investment fund that is
managed by a FFI. The facts are the same as in
Example 3, except that Fund A’s assets consist of
only non-debt, direct interests in real property
located inside the U.S. and around the world.
Since Fund A has less than 50 percent of its gross
income from investing, reinvesting, or trading in
financial assets, Fund A is not an investment entity

33. FFI Example 5
A fund with a feeder. The facts are the same as in
Example 4, except that some investors come into
Fund A through a non-U.S. corporate “feeder” or
“blocker” vehicle that owns stock of Fund A and
does not hold significant other assets. This feeder
is also managed by the investment manager (or an
affiliate). The feeder is likely to be an investment
entity, and an FFI since it directly holds financial
assets (equity in Fund A), notwithstanding that
the Fund is invested primarily in nonfinancial
assets (the real estate).

34. FFI Example 6
A trust managed by an individual.
On January 1, 2013, Trust A (a nongrantor foreign
trust) was formed by X (an individual) for the
benefit of his or her children. Trustee A (an
individual) was appointed by X to act as the
Trustee. The assets of the Trust are managed by
Trustee A. The Trust only holds financial assets
and its sole source of income is from these
financial assets. Trustee A does not hire any thirdparty. Since it is managed only by Trustee A (an
individual), Trust A is not an investment entity.

35. FFI Example 7
A trust managed by a trust company.
The facts are the same as in Example 6, except
that X hires a Trust Company (a FFI) to act as
Trustee for Trust A. Under the terms of the Trust
Instrument, the Trust Company manages the
assets of Trust A as Trustee for the benefit of X’s
children. Because Trust A is managed by a FFI,
Trust A is an investment entity and a FFI as well.

36. FFI Example 8
individual Introducing Broker. Person B is an
Individual Introducing Broker who provides
investing advice to his or her clients. B retains the
services of a foreign entity to conduct and execute
trades for his or her clients. For the past three
years, B has earned 50 percent or more of his or
her gross income from his or her services as an
investment advisor. Because B is an individual, he
or she is not an investment entity. But if
entity, then is IE and FFI.

37. Exempt from FFI?
“Low Risk of Tax Evasion”
Foreign governments, Central Banks

38. Registered Deemed Compliant ?
Still Register with Treasury but as compliant FFI
Certain local-only banks
if >98% accounts local and undertake US DD
on accounts after 2011
Qualified collective investment fund
no US investor over $50,000
Restrictive fund
< $175m assets & < $7m revenue
no US distribution + USDD after 2011

39. Certified Deemed Compliant?
Don’t register with IRS but certify to W/H agents
Certain small local banks with local accounts
< $175m assets
Low Value Accounts
< $50,000 & < $50m assets
Non-profits
Certain retirement plans

40. Certified Deemed Compliant?
Retirement Plans
organized locally, by local employer for local
employees, contributions tax exempt & no
employee has >5% or
< 20 participants, earned income only, if
outside local then < 20% of assets + < $250,000

41. 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

42. 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 W-8BEN-E

43. FFI Due Diligence ?
3 categories of accounts / 2 time periods
1. < $50,000
2. $50,000 - $1m
3. > $1m (high value accounts)
Current (look back) vs. New (onboarding)

44. 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”

45. 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.

46. 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

47. 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.

48. 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)

49. 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

50. Foreign Info Reporting?
• Report must contain
– Name / address / TIN
– Account No(s) / Balance(s)
– Annual Gross transactions
(receipt/deposits/payments/withdrawals)
• Can elect to report like US-FI (1099s)
• Or w/h and close account

51. US Info Report to IRS?
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

52. Withholding
Portfolio interest
Repayment of note principal
Proceeds from sale of real estate if FIRPTA applies
Sale of shares
Not on services or goods in ordinary course of
business

53. 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.

54. 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)

55. IGA
•
•
•
•
•
•
•
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

56. What is FATCA?
– U.S. Domestic Tax Compliance law
(2010)
– Supporting regulations
(2012, 2013, evolving)
– Intergovernmental Agreements
Force countries to provide U.S.
Treasury detailed financial
information about all U.S. persons

57. U.S. Constitutional Framework
• Constitution Article 2 , Section 2
He [President] shall have power, by and with
the advice and consent of the Senate, to
make treaties, provided two-thirds [66%] of
the Senators present concur

58. U.S. Constitutional Framework
US Constitution Article 1
Section 7: “All bills for raising revenue shall
originate in the House of Representatives; but the
Senate may propose or concur with amendments
as on other Bills.”
Section 8: “The Congress shall have power to lay
and collect taxes, … To regulate commerce with
foreign nations, …”

59. Types of Tax Agreements
• Treaty (e.g. Tax Treaty, Double Tax Convention)
U.S. not a signatory Vienna Convention on
Law of Treaties (VCLT)
but is Public International Law (PIL)
• Tension between Treaty Clause and Tax
“Origination” Clause

60. Types of Agreements
• Congressional-Executive Agreements
e.g. Tax Information Exchange Agreements
(TIEA) and Trade Agreements
Requires Congressional Statutory Pre-Approval
Internal Revenue Code (IRC) Section
274(h)(6)(C)(i): “…The Secretary is authorized
to negotiate and conclude an agreement for
the exchange of information with any
beneficiary country. …”

61. Types of Agreements
• Derivative Agreements of a Treaty
e.g. Protocols to Tax Agreements
Must be within scope of original treaty
e.g. procedural mechanisms, definitions

62. Types of Agreements
• Sole Executive Agreement
e.g. Protocols to Tax Agreements
administrative and routine matters only,
e.g. procedural mechanisms, definitions

63. Discussion Items
•
•
•
•
Is a TIEA or an IGA a treaty?
What does Treasury say either is?
What may the other State (NL) consider either?
Is an IGA an aspect of the tax system and tax
policy?
• Does it regulate commerce between nations?

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

65. 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

66. FORM 8938 (WILLIAM)
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.

67. 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)

68. 8938 Foreign Financial Account
– Foreign bank accounts
– Foreign mutual funds
– Foreign hedge funds
– Foreign private equity funds
– Certain foreign insurance products

69. 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

70. 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)

71. 8938 Questions
Part II Other Foreign Assets (see instructions)
Note. If you reported specified foreign financial assets on Forms 3520, 3520A, 5471, 8621, or 8865, you do not have to include the assets on Form 8938. You
must complete Part IV. See instructions.
If you have more than one asset to report, attach a continuation sheet with the same
information for each additional asset (see
instructions).
1 Description of asset 2 Identifying number or other 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

72. 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.