Citi FATCA Education Series Session #2 · Citi FATCA Education Series Session #2 June 2013...

Update on Intergovernmental Agreements and FATCA Implementation

Debbie Mercer-Miller – Director and U.S. Securities Country Manager

Nicole Tanguy – Director and Corporate Tax Counsel

Citi FATCA Education Series Session #2

June 2013

Important: This presentation does not constitute tax advice, but is for information purposes only

Securities & Fund Services


Table of Contents

1. Purpose of IGAs 2

2. Structure and Types of IGAs 8

3. New FFI Definition and IRS Registration 10

4. Withholding Responsibilities 16

5. Account Due Diligence 14

6. Information Reporting 24

7. Enforcement 28

1

Purposes of IGAs


Purposes of IGAs

Intergovernmental Agreements (IGAs) are intended to establish a partnership between the

United States and foreign countries to:

– counter offshore tax evasion

– improve international tax compliance

– establish uniform reporting standards and an automatic information exchange

– eliminate local legal obstacles to FATCA compliance, and

– implement FATCA in a manner that will reduce compliance burdens and costs on FFIs

3


Local Legal Issues

FATCA imposes obligations on FFIs that may be in conflict with the laws of the jurisdiction in

which an FFI operates, including

– Privacy laws prohibiting the sharing of personal information on clients, including sharing with a foreign

tax authority

– Access-to-banking laws that guarantee that an account must be opened or that accounts may not be

closed unilaterally

– Laws prohibiting the withholding of taxes for a foreign government or withholding without clients’

consent

The IGAs present an opportunity for a country to support its FFIs compliance with FATCA by

– Changing local laws to remove legal obstacles to FATCA compliance

– Accepting the U.S. offer in the IGAs to modify or eliminate certain FFIs obligations that would apply

under the Final FATCA Regulations

4


Benefits to FFIs in an IGA Country

Generally, eliminates or reduces U.S. regulatory requirements for an FFI to:

– Enter into an FFI agreement with the IRS

– Withhold on payments made to FIs located in any Partner Country

– Withhold on payments made to recalcitrant accounts or close the accounts

Existence of local law obstacle to FATCA compliance is not a condition for a foreign country

to enter into an IGA

5


Progress Report

Optimistic Projections

– On 11/8/2012, U.S. Treasury announced it had engaged more than 50 countries in its efforts to gain

FATCA acceptance

– The Outreach Effort

• 1 IGA Signed (U.K.)

• 16 Agreements expected by end of 2012

• 16 countries in Active Discussion

• 15 countries in Exploratory Talks

• 6 countries Scheduled Informational Meetings

6


Progress Report (Cont’d.)

The Facts

9 Signed IGAs

– Model 1: United Kingdom, Denmark, Mexico, Ireland, Norway, Spain and Germany

– Model 2: Switzerland and Japan

– 1 Initialed IGA (unpublished)

Italy

Slower than expected roll-out of executed IGAs

Signed agreements do not provide complete guidance

– Some aspects are still governed by Final Treasury Regulations

– Additional guidance may need to be provided by local tax authorities

– The IGAs contain a mutual agreement to resolve issues on withholding on gross proceeds and foreign

pass-through payments by 2017

7

Structure and Types of IGAs


Structure of IGAs

Agreement on definitions and obligations

Annex 1 on due diligence obligations for identifying and reporting on US accounts

and certain payments

Annex II identifies types of institutions and tax-favored accounts that are exempt

from reporting requirements (“Non-reporting FIs”)

– Contains a country specific list of

• exempt beneficial owners (i.e., government and supranational organizations)

• deemed-compliant FFIs (Non-reporting FIs and Collective Investment Vehicles) , and

• exempt products or accounts (are not financial accounts)

– On 5/28/2013, the U.S. Treasury published a modified Annex II, and

• explained that it no longer intends to list country specific classes of entities or accounts that are Non-

reporting FIs or non-financial accounts

• The generic descriptions of the classes of entities and accounts in the new Annex II contains concessions

from Final FATCA Regulations and will not be further modified

– Non-reporting FFIs are not required to perform account due diligence or file information returns

under FATCA

9


Model 1 IGAs

Model 1 (2 versions)

– Reciprocal

• Provides for reciprocal reporting by USFIs to the IRS on residents of the FATCA partner country for exchange with

the FATCA partner tax authorities

– Non-reciprocal

• Does not provide for reciprocal reporting by USFIs

• For countries that the Treasury believes lack sufficient safeguards to protect the privacy/use of the information

transmitted

‒ Partner country FI will report information on U.S. accounts to local tax authorities. This will be followed

by an automatic exchange of information with the IRS on a reciprocal or non-reciprocal basis.

‒ Model 1 IGAs include a “Most Favored Nations” clause that allows a Partner Country to get the benefit

of better terms that may be negotiated in subsequent IGAs.

10


Overview of Model 1 Reporting

11


Model 2 IGAs

Partner country must

– “direct and enable” its FIs to register with the IRS,

– and “comply with the requirements of an FFI agreement”

FFIs may (ex. Switzerland) or may not (ex. Japan) need to enter into an FFI agreement

Partner country FFI will report U.S. accounts directly to IRS

Recalcitrant accounts are reported in the aggregate to the IRS

– However, the U.S. competent authority can make a group request for specific information on a

recalcitrant account

Reciprocal reporting is optional

– U.S. agrees merely to cooperate with information requests

A Model 2 FATCA FI has an option to lock-in the due diligence rules under the Treasury

regulations rather than Annex I

12

New FFI Definition and IRS Registration


Represents a departure from the Proposed FATCA Regulations and was adopted in the Final FATCA Regulations

A Financial Institution is:

– A Custodial institution: holds financial assets for the account of others as a substantial portion (20%) of its business

– A Depository institution: accepts deposits in the ordinary course of a banking or similar business

– An Investment Entity: conducts (or is managed by an entity that conducts) as a business any of these activities on behalf of a customer: (1) trading, (2) portfolio management or (3) investing, administering or managing funds or money

– A Specified Insurance Company: Issues a cash value insurance contract or annuity

This Financial Action Task Force (FATF) definition has been largely adopted in Final FATCA Regulations

Expands concept of FI to include investment advisors, money managers and certain trustees that are engaged in managing activities but not in trading or investing in assets

Contracts concept of FI to exclude small passive investment vehicles, such as family trust and personal investment companies that are not being professionally managed

New Definition of “Financial Institution”

14


IRS Registration

Partner FFIs in a Model 1 IGA country

–are NOT required to enter into an FFI agreement,

–but are required to register with the IRS and obtain a Global Intermediary

Identification Number (“GIIN”)

Partner FFIs in a Model 2 IGA country

– If in Switzerland, must enter into an FFI agreement and obtain a GIIN

– If in Japan, need only to register and obtain a GIIN

Registered deemed-compliant FFIs must register with the IRS and

obtain a GIIN regardless of country of operation

Certified deemed-compliant FFIs are not required to register

Withholding Responsibilities


Withholding Obligations

FATCA Partner Country FI has no obligation to perform FATCA withholding,

– unless the FI is a withholding QI, WP or WT

A withholding QI is one that assumed primary withholding responsibility under Chapter 3 (U.S. non-resident tax)

A non-withholding QI, NQI, NWP or NWT must instead provide sufficient information to the immediate upstream withholding agent to enable it (or another a withholding agent further upstream) to perform the withholding

Exception: Foreign branches of USFIs (other than a non-withholding QI) must perform withholding

• unless it is not acting as an intermediary, and the payment is made before 1/1/2017

17


• Obtain required documentation from account holders

as part of the due diligence process

• Validate documentation and/or apply presumptions to

assign a FATCA status to an account

• For accounts receiving U.S. source withholdable

payments, provide information needed to facilitate

withholding by an upstream withholding agent

Partner FIs must provide information to an

upstream withholding agent.

This information includes:

Withholding Statement Overview

A Withholding Statement allocates the payment to the applicable rate pools or payees to enable the upstream withholding

agent to perform FATCA withholding when required.

Required tasks by a Partner FI to determine

account holder’s FATCA status:

• Form W-8IMY documenting the FI

• Account Holder Tax Forms and supporting

documentation, if needed

• Withholding Statement

How To Elect to be Withheld Upon


Accounts Subject to FATCA Withholding

Accounts held by a non-participating FFI (NPFFI), including:

– Documented NPFFIs, and

– Limited branches and affiliates

Accounts held by FATCA partner FIs that

– Elect to be withheld upon (cannot include withholding QIs or non-QI foreign branches of a USFI ), or

– Are FATCA partner FIs treated by the IRS as NPFFIs due to significant non-compliance

Accounts held by presumed NPFFIs, including:

– Undocumented entity accounts (Pre-existing accounts after 1/1/2016 or New accounts after 1/1/2014)

– Pre-existing prima facie FFI (Form W-8IMY on file) accounts after 7/1/2014, but only

– If such accounts are maintained by a foreign branch of a USFI, a Model 2 FFI or if permitted by local authorities, a Model 1 FFI that elects to apply the due diligence rules in the Final FATCA Regulations

,

19


Excepted Account Holders

Account holders that are excepted from FATCA withholding, include:

– NPFFIs to the extent the income is owned by exempt beneficial owner(s)

– Recalcitrant accounts, provided that the FATCA Partner FI reports certain information on the recalcitrant account holder (name/address/TIN (if any)/account balance/value)

– Non-Reporting FATCA Partner FIs identified or described in Annex II (includes retirement plans and other tax-favored accounts)

– Reporting FATCA Partner FIs (including Partner FIs in other FATCA Partner Countries)

such entities are treated as registered deemed compliant FFIs,

except when significant non-compliance has been reported to the IRS by the competent authority

– Occurs when Partner FI and its GIIN no longer appear on IRS list of FFIs

20

Account Due Diligence


Account Due Diligence – In General

Annex I of the IGAs provides detailed due diligence and document requirements

Reporting Partner FIs are required to perform due diligence on their financial accounts to

identify U.S. Reportable Accounts or NPFFIs.

– Due diligence differs depending on the type of account holder (individual vs. entity ) and

type of account (new vs. pre-existing).

– Must also monitor for changes in circumstances which could impact the FATCA status of

the account holder

Non-reporting Partner FIs are not required to perform account due diligence

– Non-reporting Partner FIs are listed or described in Annex II

A Partner Country may allow Partner FIs to use either the due diligence procedures in Annex

I or those in U.S. Treasury Regulations to identify U.S. Reportable Accounts and NPFFIs.

22


Account Due Diligence for Individuals

Individual Account Holders:

– Due diligence requirements under Model 1 IGA are quite similar to the Treasury regulations

– But documentation standards are more permissive

• IGA allows a FATCA partner FI to rely on a “self-certification” to determine whether an individual is a U.S. tax

resident

– Provided the self-certification is reasonable when compared to account opening information, such as

AML/KYC documentation

– A self-certification can be included in account opening documents and no form is prescribed

– FATCA partner FIs will need a defined, reviewable process to obtain certifications.

– Forms W-8 and W-9 could be an effective solution

23


Account Due Diligence for Entities

Entity account holders:

– A FATCA partner FI can treat an entity as an Active NFFE or FATCA partner FI based on publicly available information or other information in its possession

– An entity can provide self-certifications to establish their FATCA status or use Forms W-8/W-9

– Critical to compliance is that the FATCA partner FI establish standardized processes for collecting, validating and maintaining documentation

– A FATCA partner FI is not required to apply the 10% threshold to identify U.S. owners of an NFFI

• Rather, it can rely on local AML/KYC principles to identify controlling persons of a non-US entity which generally

provide a higher threshold of 25%

24

Information Reporting


Report U.S. account holders who are:

– Specified U.S. persons,

– Non-U.S. entities having at least 1 controlling person that is a specified U.S. person

– A specified U.S. person is generally means any U.S. person other than an exempt recipient (but includes a privately held corporation that is not a related entity)

Reportable information

– Name, address and TIN of each specified U.S. person

– Name, address and TIN (if any) of a non-US entity with at controlling specified U.S. person

– Account number

– Account balance or value at year end or account closing date

– Total gross interest, dividends, other income, gross proceeds from sale or redemption of property paid or credited to the account

Form 8966 is being developed for use by FFIs in reporting on U.S. accounts

FATCA Partners in Model 2 countries must report annually the “aggregate” information required respecting U.S. accounts that do not consent to reporting

Information Reporting by FATCA Partner FIs

26


Reporting Timetable

Timing

–Phase-in reporting elements for 2013-2016

• For 2013-2014 only report account balance/value

• For 2015 also report gross income but not gross proceeds

• For 2016 also report gross proceeds

– Information exchange date between countries is no more than 9 months after

calendar year-end

• Exception: for 2013, the information will be exchanged no later than 9/30/2015

• The local tax authorities will likely prescribe due dates well in advance of the

information exchange date prescribed in the IGA

27


Coordination Issues

Reporting requirements in IGAs represent a step toward a multi-jurisdictional global

information exchange

The OECD has adopted the schema established by the IRS for reporting by FFIs on U.S.

accounts for future reporting by FFIs on tax residents of other countries

An unresolved issue for multinational U.S. groups of FIs is:

– Whether a FATCA Partner FI that is a CFC or a foreign branch of a USFI still report

payments made to US nonexempt recipients on Forms 1099?

– In the absence of guidance, U.S. groups of FIs, including Citi, may need to be ready to do

both

– Awaiting Treasury/IRS regulations containing coordination rules for Chapters 3, 4 and 61

28


Reciprocal Reporting by FIs Located in the United States

Any FI that is a USFI (excluding its non-U.S. branches) or an FFI branch located in the United States is required to report to the IRS:

Report account holders who are:

– resident in the FATCA partner country

– But apparently not those who are indirect owners of entities

Reportable accounts

– Depository accounts held by an individual who was paid more than $10 of interest

– Other Financial Accounts held by an individual or an entity

Reportable information

– Name, address and FATCA partner country TIN (or date of birth)

– Account number

– Gross amount of interest on a bank deposit, U.S. source dividends, other U.S. source income to the extent reportable under Chapter 3 or 61

Timing

– 2013 calendar year is first reporting year

– No phase in of reporting requirements

29


Reporting on Recalcitrant Accounts and NPFFIs

Reporting Partner FIs in IGA countries are required to report to the competent

authority:

–The aggregate amount of reportable amounts paid to recalcitrant accounts starting

with 2014,

–U.S. source FDAP income paid to NPFFIs (in lieu of withholding?)

–Non-U.S. source income paid to NPFFIs for 2015 and 2016

Transition to withholding and reporting on foreign pass-thru payments?

Model II FFIs are required to report the aggregate reportable payments, if the

NPFFI does not consent to reporting, and the total number of NPFFIs

30

Enforcement


Under the Model 1 IGA, a member of the expanded affiliated groups that cannot comply with FATCA after 2015 due to local law restrictions will not jeopardize the FATCA compliance status of the remaining members

– Provided the non-compliant member is treated as an NPFFI, identifies and reports its U.S. accounts, does not specifically solicit U.S. accounts that reside outside the NPFFI’s country and is not used to circumvent FATCA

Administrative and minor errors in reporting will result in the US competent authority contacting the FATCA partner FI directly

Significant non-compliance will lead to notification of the competent authority of the FATCA partner country

18 months for FFIs in Model 1 IGA countries (12 months for Model 2 IGA countries) will be allowed to remedy issues before the FATCA Partners FI will be treated as a NPFFI

The parties to the IGA will adopt requirements necessary to prevent circumvention of the reporting requirements

Enforcement

32


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