Final FATCA Regulations:
Implications for U.S. Taxpayers Leveraging Benefits for Taxpayers Holding Assets in Offshore Financial Institutions or Other Vehicles
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THURSDAY, MARCH 28, 2013
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Randall Andreozzi, Partner, Andreozzi Bluestein Fickess Muhlbauer Weber Brown, Clarence, N.Y.
Susan Segar, Partner, Burt Staples & Maner, Washington, D.C.
Kelli Wooten, Of Counsel, Burt Staples & Maner, Boston
Matthew D. Lee, Partner, Blank Rome, Philadelphia
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Final FATCA Regulations: Implications for U.S. Taxpayers
March 28, 2013
Kelli Wooten, Burt Staples & Maner
Matthew Lee, Blank Rome
Randall Andreozzi, Andreozzi Bluestein
Fickess Muhlbauer Weber Brown
Susan Segar, Burt Staples & Maner
Today’s Program
FATCA Background and Goals
[Matthew D. Lee]
[Susan Segar]
FATCA And OVDI
[Randall Andreozzi]
Planning and Strategies
[All Speakers]
FATCA’s impact on financial institutions
[Kelli Wooten]
Slide 8 – Slide 22
Slide 56 – Slide 57
Slide 23 – Slide 34
Slide 35 – Slide 43
Slide 44 – Slide 55
Overview of FATCA provisions
Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
Matthew D. Lee is a former U.S. Department of Justice trial attorney who concentrates his practice on all aspects of white collar criminal defense and federal tax controversies. He has extensive experience in advising clients on issues regarding foreign bank account reporting (FBAR) obligations, the Foreign Account Tax Compliance Act (FATCA), and the Internal Revenue Service’s 2009 Offshore Voluntary Disclosure Program, 2011 Offshore Voluntary Disclosure Initiative, and 2012 Offshore Voluntary Disclosure Program. He has represented hundreds of U.S. taxpayers with undisclosed foreign bank accounts. Mr. Lee has published numerous articles regarding the IRS voluntary disclosure programs and FBAR and FATCA reporting obligations and speaks frequently on these topics.
He has also represented clients in all stages of proceedings before the Internal Revenue Service, including audits, appeals, and collections, and Tax Court litigation. Mr. Lee also has experience in conducting corporate internal investigations and advising clients as to corporate compliance issues involving the Bank Secrecy Act, the USA Patriot Act, and anti-money laundering laws and regulations.
Mr. Lee has represented both corporations and individuals in criminal investigations involving tax, money laundering, health care, securities, public corruption, and fraud offenses, and has significant experience in handling all stages of federal litigation including trials and appeals.
Matthew D. Lee
Matthew D. Lee
Partner
Blank Rome LLP
215.569.5352
9
The U.S. Government’s Crackdown On Offshore Tax Evasion
Former IRS Commissioner Douglas H. Shulman: • “Combating international tax evasion is a top priority for the IRS. We
have additional cases and banks under review. The situation will just get worse in the months ahead for those hiding assets and income offshore.” (February 8, 2011)
• “Tax secrecy continues to erode. . . . We are not letting up on international tax issues, and more is in the works. For those hiding cash or assets offshore, the time to come in is now. The risk of being caught will only increase.” (February 8, 2011)
• “Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers . . . . As we’ve said all along, people need to come in and get right with us before we find you. . . . We are following more leads and the risk for people who do not come in continues to increase.” (January 9, 2012)
10
Justice Department Offshore Compliance Initiative
“The Tax Division’s top litigation priority is the concerted civil and criminal
effort to combat the serious problem of non-compliance with our tax laws by U.S. taxpayers using secret offshore bank accounts – a problem that a 2008 Senate report concluded costs the U.S. Treasury at least $100 billion annually.”
– U.S. Department of Justice website
11
Enforcement Efforts To Date
• UBS Deferred Prosecution Agreement (Feb. 2009)
• Approximately 150 investigations of offshore account holders are underway since 2009
– 49 account holders have been criminally charged;
– 41 guilty pleas have been entered;
• A number of facilitators who helped clients hide assets offshore at UBS and other banks have been indicted, including 19 bankers and 2 attorneys
• 8 independent financial advisors have been charged, one of whom was convicted, and the rest are awaiting trial
12
Enforcement Efforts To Date (Cont.)
• Indictment, guilty plea, and sentencing of Wegelin & Co. (Switzerland’s oldest bank)
– DOJ Press Release: “This case represents the first time that a foreign bank has been indicted for facilitating tax evasion by U.S. taxpayers and the first guilty plea and sentencing of such a bank.”
• Other banks under criminal investigation in Switzerland, Israel, and India
13
What Is FATCA?
• “The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.” (www.IRS.gov)
• “FATCA was enacted in 2010 by Congress to target non-compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.” (www.treasury.gov)
14
FATCA History
• Enacted by Congress in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act; added Chapter 4 of Subtitle A of Internal Revenue Code, and new IRC sections 1471 through 1474
• Preliminary guidance issued: Notice 2010-60; Notice 2011-34; and Notice 2011-53
• Proposed regulations issued February 15, 2012
• Numerous comments received; public hearing held on May 15, 2012
• Announcement 2012-42 issued October 24, 2012
• Final regulations issued January 17, 2013
15
FATCA Policy In Context Of U.S. Tax Laws
• U.S. taxpayers’ investments have become increasingly global in scope
• Recognition that foreign financial institutions (FFIs) are in best position to identify and report with respect to their U.S. account holders
• Absent reporting by FFIs, some U.S. taxpayers may attempt to evade U.S. tax by hiding money in offshore accounts
• “To prevent this abuse of the U.S. voluntary tax compliance system and address the use of offshore accounts to facilitate tax evasion, it is essential in today’s global investment climate that reporting be available with respect to both the onshore and offshore accounts of U.S. taxpayers.” (Preamble to Final Regulations)
16
What Does FATCA Require?
• FATCA requires Foreign Financial Institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. In order to avoid withholding under FATCA, a participating FFI will have to enter into an agreement with the IRS to:
– Identify U.S. accounts,
– Report certain information to the IRS regarding U.S. accounts, and
– Withhold a 30 percent tax on certain U.S.-connected payments to non-participating FFIs and account holders who are unwilling to provide the required information.
• Registration will take place through an online system. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.
17
International Coordination And Model Intergovernmental Agreements
• Treasury is collaborating with foreign governments to develop two alternative model intergovernmental agreements that facilitate the effective and efficient implementation of FATCA.
• Model 1 IGA: FFIs in jurisdictions that have signed Model 1 IGAs report the information about U.S. accounts required by FATCA to their respective governments who then exchange this information with the IRS.
• Model 2 IGA: A partner jurisdiction signing an agreement based on the Model 2 IGA agrees to direct its FFIs to register with the IRS and report the information about U.S. accounts required by FATCA directly to the IRS.
19
International Coordination (Cont.)
• To date, United Kingdom, Mexico, Denmark, Ireland, Switzerland, Spain, and Norway have signed or initialed model agreements.
• Treasury is engaged with more than 50 countries and jurisdictions to curtail offshore tax evasion, and more signed agreements are expected to follow in the near future.
20
Final Regulations Issued Jan. 17, 2013
• “These regulations give the Administration a powerful set of tools to combat offshore tax evasion effectively and efficiently. The final rules mark a critical milestone in international cooperation on these issues, and they provide important clarity for foreign and U.S. financial institutions.”
– Treasury Department press release
21
FATCA Also Requires Reporting Of Foreign Assets By U.S. Taxpayers
• U.S. taxpayers with “specified foreign financial assets” that exceed certain thresholds must now report those assets to the IRS.
• A specified foreign financial asset includes (1) financial accounts maintained by foreign financial institutions and (2) other foreign financial assets held for investment such as foreign stocks or securities, interests in a foreign entity, any financial instrument or contract that has as an issuer or counterparty that is other than a U.S. person, foreign pensions and deferred compensation plans, and certain foreign trusts and estates
• Form 8938, “Statement of Foreign Financial Assets,” must be filed with the tax return.
22
FATCA As A Reporting Regime
I. The goal of FATCA is to require foreign financial institutions (“FFIs”)
and non-financial foreign entities (“NFFEs”) to provide information
to the IRS identifying U.S. persons invested in non-U.S. bank and
investment accounts.
II. The policy of FATCA is to reduce U.S. tax evasion by improving the
information available to the IRS about the offshore accounts of U.S.
persons.
I. Applies to accounts directly owned by U.S. persons as well as to
accounts of non-U.S. entities that are owned by U.S. persons
III. Treasury/IRS accordingly describe FATCA as a “reporting regime.”
IV. FATCA also impacts U.S. financial institutions.
24
FATCA’s Stick: A New Withholding Tax
I. FATCA’s lever to achieve this goal is a NEW 30% withholding
tax levied on “withholdable payments” made to non-
compliant FFIs and NFFEs.
II. “Withholdable payments” include most U.S. source income
(“FDAP”) and gross proceeds from the sale or disposition of
any property of a type that can produce interest or dividends
from U.S. sources.
III. Withholding may also apply to non-U.S. source payments
because of the “foreign passthru payment” concept (reserved
in the Regulations).
25
Financial Institutions
I. Broad definition that includes any entity that:
A. Accepts deposits
B. Holds financial assets for the account of others
C. Acts as an “investment entity”, or
D. Engages in certain insurance businesses.
II. Foreign financial institution (“FFI”) - Any financial institution that is
a foreign entity (i.e., in general, an entity organized or created
outside the U.S.)
III. U.S. Financial Institutions (“USFI”) – Generally, any financial
institution that is a U.S. entity
I. Does not include branches of U.S. financial institutions in IGA
countries
26
FATCA Evolution I. FATCA is still evolving, primarily because FATCA raises a number of
jurisdictional conflicts and data privacy issues
II. FATCA is evolving on two tracks:
A. Intergovernmental Agreements (“IGAs”) – This is a bilateral automatic
exchange of information agreement between the U.S. and a Partner
Country
A. Model 1 – Reporting financial institutions report on U.S. account
holders and U.S. owners to the local Partner Country government
rather than to the IRS; includes both reciprocal and non-reciprocal
information exchange versions
B. Model 2 – Reporting financial institutions report directly to the U.S.
as directed and enabled by the Partner Country
B. Non-IGA Countries – For countries without an IGA, the FFI would report
on U.S. account holders and U.S. owners directly to the IRS, as required
under the FATCA regulations
27
Compliant FFIs
I. To avoid FATCA withholding on withholdable payments, an FFI must
be compliant with FATCA.
II. To achieve compliance, an FFI must do one of the following:
A. In general, be located in an “intergovernmental agreement”
(“IGA”) jurisdiction and comply as a “reporting financial
institution.”
B. Enter into an “FFI Agreement” with the IRS with the attendant
obligations (“participating FFI”).
C. Belong to a class of institutions that Treasury/IRS – or an IGA
(including in IGA Annex II) – have designated as exempt or
“deemed-compliant.”
III. FFIs that are not deemed-compliant or that are not otherwise
compliant with FATCA are considered non-participating FFIs, and are
subject to FATCA withholding on withholdable payments.
28
Reporting IGA FIs
I. Reporting IGA FIs are generally subject to the rules set forth in
the IGA that was signed by their home country government, and
not those in the FATCA regulations
II. As with FFIs that are not in IGA countries, Reporting IGA FIs have
an due diligence, reporting and withholding obligations
I. Those obligations, however, are generally less stringent than
those applicable FFIs in non-IGA countries
III. Reporting IGA FIs are deemed to be compliant with FATCA, and
thus are not subject to 30% FATCA withholding on withholdable
payments received
IV. To date, the U.S. Treasury has signed or initialed Model 1 IGA
Agreements with 8 countries, and one Model 2 IGA Agreement.
29
Participating FFIs
I. A participating FFI (“PFFI”) must enter into an FFI agreement with the IRS to
do all of the following:
A. Identify its “U.S. accounts” including by all its worldwide affiliates;
B. Comply with due diligence criteria to ensure that it has really identified
its U.S. accounts;
C. Provide the IRS with an annual report with details about the U.S.
accounts that it has found;
D. Deduct and withhold 30% on withholdable payments made to
“recalcitrant account holders” or non-participating FFIs;
E. Provide any follow-up information requested by the IRS with respect to
the U.S. accounts; and
F. Request a waiver from any U.S. account holder if disclosure would
otherwise be prohibited on the basis of non-U.S. law (e.g., privacy or
bank secrecy laws), and close the account if the account holder refuses
to cooperate.
30
Deemed-Compliant FFIs
I. Treasury and the IRS have determined that certain financial institutions pose
a low risk of harboring U.S. tax evaders, and therefore should be deemed to
comply with FATCA.
II. There are two types of deemed-compliant FFIs – registered deemed-compliant
FFIs and certified deemed-compliant FFIs.
III. Registered deemed-compliant FFIs must still register with the IRS but are not
required to enter into an FFI Agreement.
A. Examples include Reporting IGA FFIs, and certain qualified collective
investment vehicles and qualified credit card issuers.
IV. Certified deemed-compliant FFIs are not required to register with the IRS but
must certify their status on Form W-8.
A. Examples include certain non-registering local banks and FFIs with only
low value accounts.
V. The IGAs also set forth in Annex II certain home country FIs that are treated
as deemed-compliant with FATCA.
32
NFFEs
I. Non-financial Foreign Entities (“NFFEs”) are non-U.S. entities that
are not FFIs.
II. Under the Regulations, the goal is to find “substantial U.S. owners”
of these entities.
A. “Substantial” means >10% U.S. owners of non-U.S. corporations
or partnerships and >10% beneficiaries of non-U.S. trusts.
B. A U.S. grantor of a grantor trust is always considered a
“substantial U.S. owner.”
III. Under the IGAs, identify any “controlling persons” who are U.S. (an
AML/KYC concept based on local FATF implementation).
A. Examples include certain non-registering local banks and FFIs
with only low value accounts.
33
“Good” NFFEs
I. NFFEs are considered “good” NFFEs exempt from FATCA
withholding if:
A. Belong to a class of NFFEs that Treasury/IRS or an IGA
designate as per se “good” and not subject to FATCA
withholding;
B. Engage in an “active business”;
C. Certify to the withholding agent that the NFFE has no
substantial (or controlling) U.S. owners; or
D. Provide the names, addresses, and U.S. taxpayer
identification numbers (“TINs”) of substantial (or controlling)
U.S. owners to be reported to the IRS.
II. Examples of per se “good” NFFEs include certain nonfinancial
group entities, start-up companies, and non-profit organizations.
34
FATCA Requirements
I. Governance
I. FFI Agreement or Registration
II. Responsible Officer Certifications
II. Due Diligence
I. New Account Due Diligence
II. Preexisting Account Due Diligence
III. Reporting
I. U.S. Accounts
II. Payments
IV. Withholding
36
Governance
I. FFI Agreement or FFI Registration Process
I. Registration will be exclusively online via IRS web portal.
II. Portal will open on or before July 15, 2013. Must register
on or before October 25, 2013 in order for Global
Intermediary Identification Number (“GIIN”) to be
included on December 2013 IRS FFI List.
III. Responsible officer or point of contact will need to initiate
registration process.
IV. Expanded affiliated groups will be required to register
together.
V. GIIN will be provided following registration process.
37
Responsible Officer Certifications
I. Responsible Officer is required to implement policies and procedures that will
assure the FFI is in compliance with FATCA and will be required to make
certifications regarding the FFI’s compliance with FATCA and its internal
controls.
I. Preexisting Account Due Diligence Certifications – Due within 60 days of
conclusion of preexisting account due diligence period.
I. High value individual accounts have been documented or are being
treated in compliance with FFI Agreement.
II. No formal or informal policies or procedures in place as of August 6,
2011 to assist clients in evasion of FATCA.
III. All other accounts have been documented or are being treated in
compliance with FFI Agreement.
II. Periodic Certifications – Required once every three years. Prior to
certification must conduct a compliance review.
38
Due Diligence
I. FATCA requires financial institutions to perform specified due
diligence and identification procedures to establish:
I. The identity of individual U.S. persons;
II. The substantial U.S. owners of certain NFFEs; and
III. The FATCA status of FFIs and NFFEs.
II. Due diligence procedures include:
I. Documenting account holders in accordance with FATCA
requirements.
II. Reviewing tax documentation against all account documentation.
III. Validating certain elements on an annual basis – e.g., GIIN.
IV. Monitoring for changes in circumstance.
39
Preexisting Account Due Diligence
I. FATCA requires PFFIs to perform certain due diligence procedures
with respect to accounts opened on or before December 31, 2013.
A. Low Value Accounts Excluded
1. Individual Accounts < $50K, Entity Accounts <$250K
B. High Value Accounts – Individual accounts in excess of $1million
USD.
1. Electronic search acceptable if certain defined fields
capable of being electronically searched. If not, manual
review required.
2. Relationship manager query.
C. All Other Accounts
1. Review of electronically searchable information for U.S.
indicia.
40
Reporting
I. FATCA introduces significant new reporting requirements
A. U.S. Account Reporting – NEW Form 8966
1. Specified U.S. Persons.
2. Substantial U.S. Owners of Passive NFFEs
3. Specified U.S. Persons owning an interest in an owner
documented FFI.
B. FATCA Reportable Payments – Form 1042-S
1. Reporting of payments actually subject to FATCA withholding.
C. Recalcitrant Account Reporting – NEW Form 8966
D. Transitional NPFFI Reporting – Form 1042-S
1. Foreign reportable amounts paid to NPFFIs in calendar years
2015 and 2016.
42
Who Is Subject To Withholding
I. 30% FATCA withholding will apply to payments of U.S. source FDAP
income made on or after January 1, 2014 to the following account
holders:
I. NPFFIs
II. Passive NFFEs which fail to certify either no substantial U.S.
owners or provide information regarding their substantial U.S.
owners.
III. Recalcitrant individual account holders of a PFFI
IV. Electing PFFIs
II. Non-financial payments (e.g. ordinary course of business payments)
are out of scope.
III. Payments of gross proceeds from the sale of property producing U.S.
source dividends or interest are in scope as of January 1, 2017.
43
FATCA AND THE OFFSHORE VOLUNTARY DISCLOSURE INITIATVE (OVDI)
Randall Andreozzi, Andreozzi Bluestein Fickess Muhlbauer Weber
Brown
“U.S. Account” And “Account Holder”
I. U.S. Account - Any financial account maintained by a foreign
financial institution (“FFI”) that is held by one or more specified U.S.
persons or U.S. owned foreign entities.
Exception for accounts with balance of $50,000 or less.
II. Account Holder – Each individual holder is treated as an account
holder for purposes of determining whether the account is a U.S.
account.
46
What Must FFIs Report?
Name, address, TIN
Name, address, TIN of substantial U.S. owners of an entity
Account Numbers
Year – End account balance or value
Gross receipts/withdrawals from account
47
Intergovernmental Agreements
• Treasury continues to announce new agreements with foreign
countries or cooperation with FATCA
• Model 1 Inter-Governmental Agreement
For example, US/UK Agreement
• Model 2 Inter-Governmental Agreement
For example, US/Switzerland Agreement
48
U.S. Account Holder Filing Obligations
Form 1040
Form 8938
T.D. F 90-22.1
Form 3520/3520-A
Other possible filing obligations ...
49
The IRS Voluntary Disclosure Programs
• The effect of reporting requirements on Account Holders who
have delinquent reporting and/or payment obligations.
• Who should participate in one of the Voluntary Disclosure
Initiatives offered by the IRS?
• Which of the Voluntary Disclosure Initiatives, if any, is
appropriate for your client?
52
Voluntary Disclosure (Cont.)
2012 Offshore Voluntary Disclosure Program (OVDP)
Miscellaneous penalty of 27.5%
Streamlined disclosure procedures
Available to Non-resident U.S. Taxpayers
Traditional Voluntary Disclosure pursuant to IRM guidelines
“Quiet” Disclosure
The IRS generally discourages this form of disclosure
53
Streamlined Filing Compliance Procedures For Non-Resident, Non-Filer Taxpayers Questionnaire
http://www.irs.gov/pub/irs-utl/nonresident_questionnaire.pdf
54
Recent Developments
• IRS Revocation of criminal pre-clearance
• Protocol for moving between/among programs
• Role of Centralized Review Committee
• Penalties may become more extreme as IRS gets information
under FATCA and IGAs
55
PLANNING AND STRATEGIES – NEXT STEPS
Matthew D. Lee, Blank Rome LLP
Susan Segar, Burt, Staples & Maner LLP
Kelli Wooten, Burt, Staples & Maner LLP
Randall Andreozzi, Andreozzi Bluestein Fickess Muhlbauer Weber
Brown