Exchange of Information and FATCA

William Byrneswww.profwilliambyrnes.com

LexisNexis® Guideto FATCA Compliance

University of AmsterdamCentre for Tax Law

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

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)

EOI Requirements(a) identity of the person under examination or investigation; (b) a statement of the information sought including its nature; (c) the tax purpose for which the information is sought;(d) the information is held in the requested party or is in the

possession or control of a person within the jurisdiction;(e) to the extent known, the name and address of any person

believed to be in possession of the requested information; (f) a statement that the request is in conformity with the law

and administrative practices of the applicant party, (g) would be able to obtain the information under the laws of

the applicant party; (h) a statement has pursued all means available, except

disproportionate difficulties

What Caused FATCA?

7.6 million U.S. citizens reside abroadmore U.S. residents have foreign accountsonly 807,040 FBAR submissions in 2012

Offshore Voluntary Disclosure Programs2009 & 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

Art 26 expansion

[1] Information for Non-Tax Purposes

[2] Groups of Taxpayers

[3] Reasonable Possibility of Relevancy

EU

Data Protection & Civil Law Privacy - costs of obtaining each client’s signature on new FATCA waiverEU 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

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.

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.

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.

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

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

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)

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 earned5. TIN if available

• If resident in a country different than passport or I.D. card, then tax residence certificate

EU TSD Art 8 Info

• 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.

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.

EU’s FATCA Equivalent

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

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

Chapter 3

Taxpayer Character of Income Withholding Tax

Withholding Agent Exemption

IRC §1441 NRA’s ForeignPartnerships

-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 DispositionalIncome

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 §1471Non Participating

FFI“withholdable payments”:which in Theoryincludes all ofChapter 3

30% gross U.S Payor Payment whose beneficial owners are:-Foreigngovernments

-international Organizations

-foreign centralbank of issue

-“Low risk taxevaders”.

U.S. RecalcitrantAccount Holders

“pass-thrupayments”

30% gross FFI

What happens with the withholding exemptions or modifications under IRC Chapter 3??

Compliance Costs?

1. Financial Costs

2. Labor / Service / Software & Systems

3. Management

Financial Costs?

Treasury: $100m per large institutionCan. Bankers Association: $1B each for 5 largest banksGenerally 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?

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 consultantsleast cost is your Lexis FATCA Compliance

Handbook ;-)

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

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

Who does FATCA apply to?

Two Categories: FFI & NFFEForeign Financial Institution

Non-Financial Foreign Entity

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

Examples of FFI?

- Investment, hedge, equity, mutual funds, unit trusts

- Clearing houses, Brokerages- Insurance (cash value), annuity, pension, - Trust companies, custodians

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.

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.

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.

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

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).

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 third-party. Since it is managed only by Trustee A (an individual), Trust A is not an investment entity.

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.

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.

Exempt from FFI?

“Low Risk of Tax Evasion”

Foreign governments, Central Banks

Registered Deemed Compliant ?

Still Register with Treasury but as compliant FFI

Certain local-only banksif >98% accounts local and undertake US DD on accounts after 2011

Qualified collective investment fundno US investor over $50,000

Restrictive fund< $175m assets & < $7m revenueno US distribution + USDD after 2011

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

Certified Deemed Compliant?

Retirement Plansorganized 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

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 fundsprivate equity funds & tie-up periods

Life Insurance: whole life touch points with owner

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

FFI Due Diligence ?

3 categories of accounts / 2 time periods

1. < $50,0002. $50,000 - $1m3. > $1m (high value accounts)

Current (look back) vs. New (onboarding)

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”

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.

EDD for High Value AccountsRM 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

DD for NFFEW-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.

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

• 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

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; and6. the gross amount of other U.S. source income paid

or credited to the account

US Info Report to IRS?

WithholdingPortfolio interestRepayment of note principalProceeds from sale of real estate if FIRPTA appliesSale of shares

Not on services or goods in ordinary course of business

WithholdingWH 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.

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)

IGA• No IRS agreements required for FFIs• No officer certifications directly to the IRS�• Retirement account issues addressed�• Data privacy concerns addressed�• Withholding concerns addressed�• Customer identification issues addressed�• No closing accounts of recalcitrant account hold�

What is FATCA?

– U.S. Domestic Tax Compliance law (2010)

– Supporting regulations (2012, 2013, evolving)

– Intergovernmental AgreementsForce countries to provide U.S. Treasury detailed financial information about all U.S. persons

U.S. Constitutional Framework

• Constitution Article 2 , Section 2He [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

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, …”

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

Types of Agreements

• Congressional-Executive Agreements e.g. Tax Information Exchange Agreements (TIEA) and Trade AgreementsRequires Congressional Statutory Pre-ApprovalInternal 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. …”

Types of Agreements

• Derivative Agreements of a Treatye.g. Protocols to Tax AgreementsMust be within scope of original treatye.g. procedural mechanisms, definitions

Types of Agreements

• Sole Executive Agreemente.g. Protocols to Tax Agreementsadministrative and routine matters only, e.g. procedural mechanisms, definitions

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?

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)

Timeline Reporting3/31/2015 (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

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.

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)

8938 Foreign Financial Account

– Foreign bank accounts– Foreign mutual funds– Foreign hedge funds– Foreign private equity funds– Certain foreign insurance products

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

8938 Foreign Property ?

Not if direct ownership of real propertyYes if -> foreign entity -> Property (FE interest)Yes if mortgage (FA interest)

Not if direct ownership of movable assets (e.g. metals, jewels, art works)

8938 QuestionsPart II Other Foreign Assets (see instructions)Note. If you reported specified foreign financial assets on Forms 3520, 3520-A, 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 designation3 Complete all that applya 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 asset4 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 - $200,000e 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

8938 Questions7 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 entityb Type of foreign entity (1) Partnership (2) Corporation (3) Trust (4) Estatec Check if foreign entity is a PFICd 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 counterpartyb Type of issuer or counterparty(1) Individual (2) Partnership (3) Corporation (4) Trust (5) Estatec Check if issuer or counterparty is a U.S. person Foreign persond Mailing address of issuer or counterparty.