Foreign Account Tax Compliance Act
FATCA
Paul DePasquale – Baker & McKenzie, Zurich
Greg Lamont – PwC, Bangkok
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AGENDA
I. FATCA Overview
II. What We Know – Guidelines Issued So Far
III. What are the Consequences of Not Complying
with FATCA
IV. How to Avoid the FATCA Withholding
V. Other Points
VI. Exemptions from FATCA
VII. Time Line & Effective Dates
VIII. Current Withholding & Tax Treaties
IX. Key Points
X. What FFIs Should Do Now
FATCA OVERVIEW - BACKGROUND
• U.S. taxes it citizens and residents on
worldwide income
• Perceived inadequacy of current regimes
• UBS affair
• Swiss (and other countries) bank secrecy
laws
• U.S. Congress reacts with FATCA
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WHAT FATCA IS ATTEMPTING TO DO
• Enlist Foreign Financial Institutions (FFIs)
in the U.S. efforts to catch U.S. citizens and
residents evading U.S. tax
• By getting FFI’s to report to the U.S. IRS
information about U.S. account holders
• U.S. cannot force FFIs to report to IRS
• So FATCA creates a “voluntary” reporting
scheme for FFIs
• If a FFI fails to “volunteer”, the FFI will
suffer a U.S. tax
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FATCA OVERVIEW
• U.S. tax law that applies to non-U.S. “Foreign
Financial Institutions” (FFIs)
• Subjects FFIs to U.S. tax information reporting
requirements
• If FFI does not comply, it will suffer an additional
30% U.S. withholding tax on its U.S. income (and
possibly some non-U.S. income)
• The information reporting requirements are
burdensome and will require systems, process
and control modifications
• Effective Jan 1, 2013 – but delay announced on
July 14 6
FFI – WHAT IS IT?
Any non-U.S.:
• Bank
• Securities Broker/ Dealer
• Asset manager
• Funds – Mutual, Hedge, VC, Private Equity
• Some insurance companies
• Other?
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COMMNLY USED TERMS
• FFI – “Foreign Financial Institution” – is any non- U.S. bank, broker, mutual fund or other financial institution
• PFFI – “Participating Foreign Financial Institution” – is any FFI which has entered into written agreement with the IRS to report and withhold under FATCA. A PFFI will not suffer FATCA withholding on its U.S. source withholdable payments
• NPFFI – “Non Participating Foreign Financial Institution” – is any FFI which has not entered into an FFI agreement with the IRS. NPFFI’s will be subject to 30% withholding on their U.S. (and possibly some non U.S.) withholdable payments
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GUIDANCE ISSUED
• Under FATCA, Congress has granted wide authority to the
Treasury Department to issue regulations to implement and
enforce FATCA
• Treasury Dept issued a 62 page “Notice and Request for
Comments Regarding Implementation” in August 2010.
(Notice 2010-60)
• Issued Notice 2011-34 (46 pages) in April 2011 with additional
guidance
• Notice 2011-53 on July 14,2011 announcing delayed and
phased-in implementation timeline
• Comprehensive proposed regulations expected by end of 2011
• There is a lot we do not know and many unanswered
questions
• But with the 3 Notices there is enough information for FFIs to
begin evaluating their response to FATCA
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WHAT IS THE U.S. WITHHOLDING TAX
IMPOSED ON? • If a FFI fails to comply, there is 30% withholding
on the FFI’s :
• Interest income from U.S. sources
• Dividend income from U.S. sources
• Gross proceeds (not the gain, if any) from the
disposition of U.S. assets producing interest or
dividends
• Certain other U.S. source income – (Derivatives,
Hedges, Swaps, etc.?)
• Certain non-U.S. source income may also be
subject to withholding under “Passthru
Payment” rules
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IMPACT ON FFI IF NOT FATCA COMPLIANT:
DIRECT US IMVESTMENT
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Interest Income
of US$ 10M
US Withholding
Tax of US$ 3M
Loss Realized on
the Sale ; Gross
Proceeds from the
Sale of US$ 200M
US Withholding
Tax of US$ 60M
FFI
US
Treasuries*
• FFI makes an investment in U.S. Treasuries that generates U.S. source
interest income and eventually realizes loss on the sale of such U.S.
Treasuries.
• If FFI does not enter into an FFI agreement with the IRS, 30% tax would
be withheld on payments of interest income and sale or redemption
proceeds.
* Not limited to U.S. Treasury securities, same result if U.S. company
bonds or stock
WITTHOLDING ON PASSTHRU PAYMENTS
• In addition to 30% withholding on direct
payments of interest, dividends, and gross
proceeds there can be withholding on
indirect payments – “Passthru Payments”
• Each PFFI must compute and publish its
Passthru Payment Percentage (“PPP”)
• PPP is total U.S. assets / total worldwide
assets
• A PFFI must withhold 30% tax on Passthru
Payments it makes to NPFFIs based on its
PPP
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PASSTHRU PAYMENTS - EXAMPLE
• Bank A and Bank B are Malaysian Banks. Bank A is a PFFI and Bank B is a NPFFI.
• Bank B has Baht deposits with Bank A and earns interest of Ringgit 2000
• Bank A has a PPP of 10%
• Bank A must withhold U.S. tax of 60 (Ringgit 2000 x 10% x 30%) if the payment from Bank A to Bank B is a Passthru Payment
• Same result if Bank A is any other country (non-U.S.) bank and same result no matter what currency
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Malaysian
Bank B
(NPFFI)
Malaysian
Bank A
(PFFI)
Deposit in Ringgit
Interest in Ringgit
PASSTHRU PAYMENTS – QUERY?
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• Can Bank A legally withhold U.S. tax on the
interest payment to Bank B?
• Will Bank A have to “gross up” the payment
to cover the withholding thus essentially
suffering the withholding cost itself?
• Will PFFIs lose business to NPFFIs as a
result of the Passthru Payment rules?
REQUIREMENTS TO AVOID FATCA
WITHOLDING
• To avoid FATCA withholding on its U.S.
investments and Passthru Payments, the FFI must
enter into an “FFI Agreement” with the IRS.
• The FFI Agreement is a written contract
• Under the FFI Agreement, the FFI will need to
agree to:
‒ Obtain information on U.S. account holders
‒ Comply with verification and due diligence procedures
as specified by U.S. Treasury Dept.
‒ Deduct tax & withhold on payments to recalcitrant
account holders and Passthru Payments
‒ File an annual information report with the IRS.
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PFFI IS A WITHHOLDING AGENT UNDER A FFI
AGREEMENT
• If the FFI chooses to comply and become a
PFFI it will be required to withhold U.S. tax
on:
‒ Direct U.S. source payments to NPFFIs
‒ Passthru Payments to NPFFIs
‒ Payments to “recalcitrant” account holders
• “recalcitrant” account holders are those who
refuse to provide information to the PFFI
such as U.S. TIN or other required
information
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ANNUAL INFORMATION REPORT
• Must contain :
1. The name, address, and U.S. Tax Identification Number
(“TIN”) of each account holder that is a specified U.S.
person;
2. The name, address, and TIN of each substantial U.S.
owner of any account holder that is a U.S. owned
foreign entity;
3. The account number;
4. The year end account balance or value; and
5. Gross interest, dividends, other income and gross
proceeds paid or credited to the account
• Must be filed electronically in a format specified by
U.S. Treasury
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“SPECIFIED U.S. PERSON” and “U.S. OWENED
FOREIGN ENTITY”
• If the FFI enters into an FFI Agreement it must track
and report on accounts of “Specified U.S. Persons”
and “U.S. Owned Foreign Entities”
‒ A “Specified U.S. Person” includes:
• Individuals
• Corporations, companies, partnerships, trusts and other
entities
‒ A “U.S. Owned Foreign Entity” is any Malaysian (or
other country) company, corporation, etc. with a
“Substantial U.S. Owner”
‒ Substantial U.S. Owner is any Specified U.S. Person
owning directly or indirectly more than 10%
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IDENTIFICATION OF U.S. ACCOUNT HOLDERS
• Key requirement is that the PFFI must have policies
and procedures in place to identify U.S. account
holders
• Accounts are segregated into 4 categories:
1. Pre-existing Individual Accounts
2. New Individual Accounts
3. Pre-existing Entity (company) Accounts
4. New Entity (company) Accounts
• The procedures that a PFFI must follow for each of
the 4 categories will vary.
• Detailed preliminary guidance has been issued only
for category 1
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PRE–EXISTING* INDIVIDUAL ACCOUNTS
• A 6 step process must be followed to identify pre-existing individual
accounts
‒ What is required is a search of the FFI’s electronically searchable
information for indications of U.S. ownership
‒ Indications of U.S. ownership to search for:
• Any identification as U.S. citizen or resident
• U.S. place of birth
• Standing instructions to transfer funds to the U.S.
• U.S. address
• An “ in care of” or “ hold mail” address
• Power of attorney or signature authority for person with U.S.
address
‒ Special and additional procedures for:
• High value accounts ($500,000 or more)
• Private Banking Accounts
* Pre-existing means an account opened prior to January 1,2013
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NON–INDIVIDUAL (COMPANY) ACCOUNTS
• The PFFI must have a process and
procedure to identify company accounts
with substantial (more than 10%) U.S.
Owners
• Guidance not yet issued on how to do this
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LOCAL PRIVACY OR BANK SECRECY LAWS
• What if local country privacy laws (or other
such laws) prohibit a FFI from disclosing
information to a third party such as the U.S.
IRS?
• The FFI must seek a waiver from the account
holder
• If the account holder refuses to provide the
waiver the FFI must treat the account as a
recalcitrant account
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AFFILIATED GROUP RULES
• For a FFI Agreement to be effective all
members of an affiliated group must enter
into a FFI Agreement
• Cannot “Cherry Pick” and house all U.S.
investments in one compliant entity
• Affiliated group is more than 50% common
direct or indirect ownership
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ANNUAL CERTIFICATION BY CHIEF
COMPLIANCE OFFICER
• The Chief Compliance Officer (or equivalent title)
of every PFFI must annually personally certify
(under penalty of perjury) that the FFI has adhered
to all aspects of the FFI agreement
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EXEMPT FROM FATCA REPORTING &
WITHHOLDING
• Any foreign government, political
subdivisions and wholly owned foreign
government agencies
• Any “Foreign Central Bank of Issue” – e.g.
Bank Negara
• U.S. branches of a FFI
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EXEMPTION FOR U.S. ACCOUNT HOLDERS -
$50,000
• A FFI need not report on U.S. account
holders if the account is $50,000 or less
• $50,000 threshold is based on average
monthly balances
• Must aggregate all of holder’s accounts
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DEEMED COMPLIANT– CERTAIN LOCAL
BANKS
Local banks will be deemed compliant if all of the following
conditions are met by the bank and every FFI in its affiliated
group:
1. Each FFI is licensed as a bank in its country of
organization and does not engage primarily in trading
securities, commodities or financial products;
2. Each FFI is organized in the same country;
3. Each FFI does not maintain operations outside its
country of organization
4. Each FFI does not solicit account holders outside its
country of organization; and
5. Each FFI implements policies and procedures to ensure
it does not open or maintain accounts that could contain
U.S. holders 32
• If all tests are met then the deemed
compliant local bank is exempt from
withholding and reporting
• But must still register with IRS to obtain
deemed compliant status
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DEEMED COMPLIANT– CERTAIN LOCAL
BANKS
TIME LINE & EFFECTIVE DATES
• Original effective date for all aspects of
FATCA was January 1, 2013
• Notice 2011-53 issued July 14, 2011 provides
a delay and a new timeline
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KEY EFFECTIVE DATES IN NOTICE 2011-53
• January 1, 2014 – Withholding on interest,
dividends and other income paid to NPFFIs
• January 1, 2015 – Withholding on gross
proceeds & Passthru Payments
• June 30, 2013 – FFI Agreement must be
filed to avoid withholding on January 1,
2014
• Due diligence on new & certain existing
accounts must still begin in 2013
• Additional time for private banking and
high value accounts
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CURRENT WITHHOLDING UNDER EXISTING
U.S. LAW
• U.S. payers must withhold 30% U.S. tax on
“Passive Income” (interest, dividends,
royalties, rents)
• 30% withholding may be reduced under a tax
treaty
• There is no current withholding on “Gross
Proceeds” or capital gains
• Interest – most interest is exempt today from
withholding under rule known as “Portfolio
Interest Exemption”
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U.S. INCOME TAX TREATY MONETARY
NETWORK IN S.E. ASIA
• FFIs in the following countries will suffer
the full FATCA 30% withholding which will
be a final tax:
Malaysia, Singapore, Hong Kong, Vietnam,
Laos, Cambodia
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U.S TREATIES WITH OTHER S.E. COUNTRIES
• NPFFI’s will initially suffer the full 30% FATCA withholding
• NPFFIs in India, Indonesia, Philippines and Thailand will be
able to seek partial refunds
• For example, Thai FFIs can seek refunds of 30% withholding
down to treaty rate:
‒ Interest 10%
‒ Dividends 10%
‒ Proceeds 0%
• But must file U.S. tax return and refund process could be as
long as 24 months and must maintain detailed records to claim
refunds
• The “Portfolio Interest Exemption” is effectively repealed, the
U.S. so the treaty withholding rate will be a new cost
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FATCA IS AN OPERATIONAL/COMPLIANCE
ISSUE – NOT JUST A TAX ISSUE
• FFIs that treat FATCA as a “Tax Issue” are making a mistake
• FATCA is an operational and compliance issue caused by U.S.
tax law
• FATCA will impact multiple business and operational areas
- Customer on boarding - Internal treasury & cash management
- KYC & AML processes - Legal
- Products & services offered - Compliance
- Systems & controls - Operations
- IT - Private Banking departments
- Insurance affiliates - Trust company affiliates
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FATCA IS NOT AIMED AT RAISING U.S. TAX
REVENUE THROUGH WITHHOLDING TAX
• The U.S. Treasury has stated they hope
there would be no withholding tax
collected from FFIs
• The goal of FATCA is to identify
unreported income by U.S. persons
• The U.S. simply wants FFIs to sign up and
report their U.S. account holders
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KEY POINTS
• Not having any U.S. account holders does
NOT exempt the FFI from FACTA
• It is the FFI itself who suffers the withholding
• Only those FFIs with no U.S. source income
that can possibly dismiss FATCA (but be
careful of affiliated group and Passthru
Payment rules)
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FFIs MUST DECIDE WHETHER TO COMPLY
• The U.S. cannot force compliance, but will
withhold 30% on the FFI’s U.S. income if it
chooses not to comply
• Even FFIs with no U.S. account holders must
enter into an “FFI Agreement”
• Decision factors:
‒ Compliance costs
‒ Amount of U.S. source income potentially
subject to withholding
‒ Passthru Payments?
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IF FFI CHOOSES TO COMPLY
• Will need to make systems and controls
modifications to capture necessary
information and to have the ability to verify
• The systems and controls need to be in
place and operating before the various
effective dates
• The original Jan. 1, 2013 effective date and
announced additional delay was chosen
knowing there would be a long lead time for
FFIs to implement
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SYSTEMS & PROCESSES NEEDED TO
COMPLY
• A Partial list
1. Systems to search electronic records for existing
U.S. accounts
2. Process for new accounts to identify U.S. persons
and collect needed information (including
substantial U.S. owners of entities with accounts)
3. System to track and identify counter party FFIs as
participating or non-participating
4. System to withhold U.S. tax on Passthru Payments
5. System to capture information needed for annual
electronic report to U.S. Treasury
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SUGGESTED ACTIONS
1. Determine all touch points with U.S. that
generate U.S. source income and proceeds
across all business lines
2. Evaluate what information currently exists
to possibly identify existing U.S. account
holders
3. Consider implementing new identification
procedures for new account holders
4. Prepare preliminary estimate of costs of
compliance versus withholding costs
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CIRCULAR 230 DISCLOSURE
Pursuant to requirements relating to practice
before the Internal Revenue Service, any tax
advice in this communication (including any
attachments) is not intended to be used, and
cannot be used, for the purpose of (i)
avoiding penalties imposed under the United
States Internal Revenue Code, or (ii)
promoting, marketing, or recommending to
another person any tax-related matter.