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BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

FATCA MADE EASY Michael Andreola, Partner Martin Karges, Senior Director Sean Dokko, Manager Andy Le, Senior Associate June 26, 2013

FATCA Made Easy

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FATCA Made Easy

Why FATCA?

• The U.S. government wants to identify US taxpayers’ hidden foreign accounts/assets

• Use foreign financial institutions (FFIs) to provide the access to information • Penalize non-participating FFIs with a 30% withholding tax on withholding

payments

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Foreign Account Tax Compliance Act (FATCA): Key Objectives/Features • Seeks to improve tax compliance of specified US persons with offshore financial

accounts • Requires FFIs to enter into compliance agreements with US Treasury and to

identify and report on US accounts annually • Requires non-financial foreign entities (NFFEs) to (a) report substantial US

owners or (b) to certify that they have no US ownership, have an active business or are publicly traded

• Requires withholding agents to withhold 30% of payments made to FFIs that are not in compliance with FATCA

• Requires FFIs to withhold on withholdable payments to recalcitrant accounts

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What is a Foreign Financial Institution (FFI)?

• Foreign Financial Institution: FFI • Any financial institution that is a foreign entity. • A financial institution is any entity that

• (a) accepts deposits in the ordinary course of a banking or similar business; • (b) holds, as a substantial portion of its business, financial assets for the account

of others; • (c) is engaged primarily in the investing, reinvesting or trading of securities,

partnership interests, commodities, notional principal contracts, insurance or annuity contracts, or any interest in such security, partnership interest, commodity, notional principal contract, insurance contract or annuity contract; or

• (d) is an insurance company which issues contracts with an investment component.

• Generally non-U.S. entities such as banks, broker/dealers, insurance companies, fund management/advisor companies, hedge funds, securitization vehicles and private equity funds will be considered FFIs.

• Investment management companies are considered “investment entities” and therefore “FFIs”

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What is expected of FFIs?

• Sign FFI Agreement • Documentation of investors/account holders • Reporting of US accounts • Withholding when necessary

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IMMEDIATE ACTION POINTS

• Review organization chart to determine characterization of each entity as: • FFI • USFI • NFFE

• Appoint Responsible Officer • Register FFIs • Decide whether or not to refresh existing Forms W-8BEN • Determine outsourcing strategy for FATCA implementation

FATCA Made Easy

Typical Master-Feeder-Structure

US Investors

US Feeder Fund

Foreign Master Fund

Foreign Investors

Offshore Corporation

Income from foreign and US investments

Management

US Tax Exempt Entity

Foreign Investors

Portfolio Management Company (Foreign)

FATCA Made Easy

Typical Master-Feeder-Structure

US Investors

US Feeder Fund

Foreign Master Fund

Foreign Investors

Offshore Corporation

Portfolio Management Company (Foreign)

PAYORS OF WITHHOLDABLE PAYMENTS

W-9 USFI

W-9

FFI

W-8BEN-E

FFI

FFI

W-8BEN (Individuals) W-8IMY or W-8BEN-E (Entities)

W-8BEN-E

Foreign Investors

US Tax Exempt Entity

W-8IMY or W-8BEN-E

W-9 W-8BEN (Individuals) W-8IMY or W-8BEN-E (Entities)

FATCA Made Easy

REGISTERING AS FFI

• IRS Registration Portal opening July 2013 • With registration the FFI becomes a “participating” FFI – subject to the FFI

Agreement • FFI obtains Global Intermediary Identification Number (GIIN) • Alternative Registration by filing Form 8957 (Draft) • Effective Date = 1/1/2014

FATCA Made Easy

IRS Registration Portal – Practical Steps

• Do not register immediately because: • System may need some time to adjust • Cayman Island IGA not yet completed

• Register prior to October 25, 2013 in order to obtain a GIIN by January 1, 2014 • Do not file paper form 8957

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IRS Registration Portal

• 15 Questions as per electronic form 8957 • Identification and Classification of FFI • Role within Expanded Affiliate Group • Status as QI, WP, WT • Branches outside country of tax

residence • Responsible Officer • Expanded Affiliate Group Information

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FFI Responsibilities

Under the FFI Agreement, the FFI must: • undertake certain identification and due diligence procedures with respect to

its account holders; • report annually to the IRS on its account holders who are U.S. persons or

foreign entities with substantial U.S. ownership; and • withhold and pay over to the IRS 30-percent of any payments of U.S. source

income, as well as gross proceeds from the sale of securities that generate U.S. source income (withholdable payments), made to • Non-participating FFIs, • Individual account holders failing to provide sufficient information to

determine whether or not they are a U.S. person, or • NFFE account holders which are required to but fail to provide sufficient

information about the identity of substantial U.S. owners.

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INVESTOR DOCUMENTATION

• Types of accounts subject to FATCA • Pre-existing individual accounts • New individual accounts • Pre-existing entity accounts • New entity accounts

• Due diligence requirements vary per account type • Challenge is to identify U.S. accounts

• Exempt account holders • Apply U.S. indicia search

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Documentation of Investors/Account Holders: U.S. Indicia What is considered indicia of U.S. status? • Six key indicia of U.S. status:

• U.S. citizenship or lawful permanent resident (green card) status; • A U.S. birthplace; • A U.S. residence address or a U.S. correspondence address (including a

U.S. P.O. box); • Standing instructions to transfer funds to an account maintained in the

United States, or directions regularly received from a U.S. address; • An “in care of” address or a “hold mail” address that is the sole address

with respect to the client; or • A power of attorney or signatory authority granted to a person with a

U.S. address.

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WITHHOLDING CERTIFICATES

• W-9 • W-8BEN • W-8BEN-E • W-8IMY • W-8EXP • W-8ECI

FATCA Made Easy

DRAFT FORMS W-8BEN-E AND W-8IMY

• The new Forms W-8BEN-E and W-8IMY (Drafts) reflect the multitude of entity types under FATCA.

• FFI versus Nonfinancial Foreign Entity (NFFE) • Participating Versus Nonparticipating FFI • Active versus passive NFFE • Other categories

FATCA Made Easy

Form W-8BEN-E: Beneficial Owner’s Foreign Status for U.S. Tax Withholding (Entities)

Purpose of Form: • To establish non-U.S. status • Claim beneficial owner status, • Claim exemption from, or reduction in,

U.S. withholding tax, or • Claim an exemption from domestic

information reporting and backup withholding

Who must file? • A foreign entity who is a beneficial owner

of income subject to withholding • Form W-8BEN-E is given to the withholding

agent or person requesting it, not the IRS Penalties for Not Providing Form: • Denial of treaty benefits • Noncompliant for FATCA purposes and

subject to withholding

FATCA Made Easy

Form W-8BEN: Beneficial Owner’s Foreign Status for U.S. Tax Withholding (Individuals)

Purpose of Form: • To establish non-U.S. status • Claim beneficial owner status, • Claim exemption from, or reduction in,

U.S. withholding tax, or • Claim an exemption from domestic

information reporting and backup withholding

Who must file? • A foreign individual who is a beneficial

owner of income subject to withholding • Form W-8BEN is given to the withholding

agent or person requesting it, not the IRS Penalties for Not Providing Form: • Denial of treaty benefits • Noncompliant for FATCA purposes and


FATCA Made Easy

Form W-8IMY: Certificate of Foreign Intermediary, Foreign-Flow Through Entity, or Certain U.S. Branches for United States Tax Withholding

Purpose of Form: • To establish non-U.S. status

Who must file? • A foreign person who is an intermediary

holder of income subject to withholding • Qualified Intermediaries – Foreign bank

entered into “QI” agreement with IRS; QI collects documentation and may assume withholding responsibility

• Withholding Foreign Partnerships – WP Agreement

• Nonqualified Intermediaries and non-withholding foreign partnerships must submit documentation for each beneficial owner to withholding agent

• Form W-8IMY is given to the withholding agent or person requesting it, not the IRS

Penalties for Not Providing Form: • Denial of treaty benefits • Noncompliant for FATCA purposes and


FATCA Made Easy

Entity Categories Under FATCA

• Participating FFI (PFFI) • Non-Participating FFI (NPFFI) • Reporting Model 1 FFI (Model 1 FFI) • Participating FFI in a Model 2 IGA Jurisdiction

(Model 2 PFFI) • Registered Deemed Compliant FFI (RDCFFI) • Sponsored FFI that has not obtained a GIIN • Certified Deemed Compliant non-registering local

bank • Certified Deemed Compliant FFI with only low-value

accounts • Certified Deemed Compliant sponsored, closely

held investment vehicle • Certified Deemed Compliant limited life debt

investment company (only for payments made prior to 1/1/17)

• Owner Documented FFI (ODFFI) • Restricted Distributor • Nonreporting IGA FFI • Foreign Government, Government of U.S.

possession or foreign central bank of issue

International Organization Exempt Retirement Funds Entity wholly owned by exempt beneficial owners Territory Financial Institution Excepted nonfinancial group entity Excepted nonfinancial start-up company Excepted nonfinancial entity in liquidation or

bankruptcy 501(c)(3) organization Nonprofit organization Publicly Traded NFFE or Affiliate of publicly traded

NFFE Excepted territory NFFE Active NFFE Passive NFFE Not receiving withholdable/passthru payment

FATCA Made Easy

BDO’s Web Based FATCA Account Documentation Tool

• Facilitates the appropriate classification of each account holder/investor • Provides a paper trail for due diligence • Updated as the FATCA rules evolve • Provides support, but cannot replace the Responsible Officer’s due diligence

obligations

FATCA Made Easy

Withholdable Payments

• Withholdable payments include U.S. source • Interest • Dividends • Royalties • Rents • Other fixed determinable and periodic (“FDAP”) income AND • Gross proceeds from the disposition of property that can produce interest

or dividends. • The latter category is not subject to the Form 1042

reporting/withholding.

FATCA Made Easy

Withholding

FATCA imposes a 30 percent withholding tax on certain U.S. source payments to FFIs and NFFEs that fail to comply with their information reporting obligations. To avoid having tax withheld on such payments under FATCA, an FFI will have to become a participating FFI by entering into an agreement with the IRS prior to January 1, 2014 that the FFI will: • Identify U.S. accounts or interest holders; • Report certain information to the IRS regarding such U.S. accounts or interest

holders; • Verify its compliance with its obligations under the agreement; and • Ensure that a 30 percent tax on certain payments of U.S. source income is

withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.

FATCA Made Easy

Withholding

• Withholding is scheduled to be required for payments of FDAP income after December 31, 2013 and for payments of gross proceeds made after December 31, 2016.

• No withholding will be required for payments made with respect to certain obligations outstanding on January 1, 2014. Such obligations generally include any legal agreement that produces or could produce a payment withholdable under FATCA, other than an instrument that is treated as equity or that lacks a stated expiration or term. Obligations specifically mentioned in the proposed regulations as qualifying for the “grandfathering” include debt instruments, borrowings under a credit agreement in place on January 1, 2014, and notional principal contracts. A significant modification of the obligation will cause the obligation to be deemed newly issued on the date of such modification.

• The final regulations modify the grandfathered provisions • Foreign passthrough payments • Dividend equivalent payments under 871(m)

FATCA Made Easy

Withholding

• FATCA provides that every person required to withhold and deduct any tax under FATCA is made liable for such tax and is indemnified against the claims and demands of any person for the amount of any payments made in accordance with FATCA.

• The beneficial owner of a payment is entitled to a refund for any overpayment of tax actually due under other provisions of the Code.

• However, with respect to any tax properly deducted and withheld under FATCA from a payment beneficially owned by an FFI, the FFI is not entitled to a credit or refund, except to the extent required by a treaty obligation of the United States.

• No credit or refund shall be allowed or paid with respect to any tax properly deducted and withheld unless the beneficial owner of the payment provides the IRS with information to determine whether such beneficial owner is a U.S.-owned foreign entity and the identity of any substantial U.S. owners of such entity.

FATCA Made Easy

Exceptions to Withholding

• The following are exempt from the definition of Withholdable Payments: • Interest on outstanding accounts payable arising from the acquisition of goods or services

• Services (including wages and other forms of employee compensation (such as stock options))

• The use of property

• Office and equipment leases

• Software licenses

• Transportation

• Freight

• Gambling winnings, awards, prizes and scholarships

• “Grandfathered obligations”

FATCA Made Easy

Coordination with Chapter 3 Withholding

• It is intended that withholding under FATCA will be coordinated with withholding under Chapter 3.

• The reporting forms under Chapter 3 (Form 1042 series) will be modified to encompass withholding under FATCA, and certain agreements with the IRS entered into by foreign entities pursuant to Chapter 3, such as qualified intermediary agreements and withholding partnership or trust agreements, will be modified to include provisions with respect to FATCA.

• Parallel requirements: Chapter 3 provides for withholding on FDAP payments to foreign persons. Chapter 4 (FATCA) provides for a penalty of non-compliant account holder.

• Withholding certificates (W-8/W-9 series) apply to both.

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Certification by Responsible Officer

• FATCA requires a participating FFI to comply with certain verification procedures to identify U.S. accounts. The regulations provide that the Responsible Officer will be expected to certify that the FFI has complied with the terms of the FFI Agreement. Verification of such compliance through third-party audits is not mandated. If an FFI complies with the obligations set forth in its FFI Agreement, it will not be held strictly liable for inadvertent failure to identify a U.S. account.

• Responsible Officer could be the FFI’s Chief Financial Officer or Chief Compliance Officer

• Responsible Officer should be familiar with general FATCA concepts, but may delegate compliance details

FATCA Made Easy

Responsible Officer

• The Responsible Officer must oversee and periodically review the FFI’s compliance program

• The Responsible Officer must certify that there are no material failures or (if material failures exist) that appropriate action has been taken to remediate such failures

• Due Diligence Certification • Anti-Avoidance Certification • Model I IGA does not require Responsible Officer certification

FATCA Made Easy

Intergovernmental Agreements

• The U.S. Treasury Department has published model intergovernmental agreements to implement FATCA

• The model agreement follows through on the commitment to collaborate on developing an intergovernmental approach to implementing FATCA

• Currently, 7 IGAs have been concluded and over 50 more are in negotiation • There are two versions of the model agreement – IGA 1 (which includes a

reciprocal version and a nonreciprocal version) and IGA 2. • Both versions establish a framework for reporting by financial institutions of certain financial

account information to their respective tax authorities, followed by automatic exchange of such information under existing bilateral tax treaties or tax information exchange agreements

• Both versions of the model agreement also address the legal issues that had been raised in connection with FATCA, and simplify its implementation for financial institutions.

• FFIs in IGA 1 jurisdictions do not enter into an FFI agreement with the IRS. They report only to their national governments

• FFIs in IGA 2 jurisdictions must report to the IRS, however, they should be able to report non-consenting U.S. accounts to the IRS on an aggregate basis

• All FFIs in IGA jurisdictions (regardless of Model I or II) must register with the IRS and obtain a GIIN

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Intergovernmental Agreements

The reciprocal version of Model 1 also provides for the United States to exchange information currently collected on accounts held in U.S. financial institutions by residents of partner countries, and includes a policy commitment to pursue regulations and support legislation that would provide for equivalent levels of exchange by the United States. • This version of the model agreement will be available only to jurisdictions with

whom the United States has in effect an income tax treaty or tax information exchange agreement and with respect to whom the Treasury Department and the IRS have determined that the recipient government has in place robust protections and practices to ensure that the information remains confidential and that it is used solely for tax purposes.

FATCA Made Easy

Key Dates 2012-1013

• February 2012 – Draft Regulations Issued • July 2012 – Draft Model 1 IGA released • Summer 2012 – Draft Forms W-8 released • October 2012 – Announcement 2012-42 issued by IRS • November 2012 – Model 2 IGA and revised Model 1 IGA released • January 2013 – Final FATCA Regulations released • July 2013 – IRS Portal scheduled to open • October 2013 – FATCA EINs to be issued (Global Intermediary Identification

Numbers (“GIINs”)) • October 25, 2013 – Deadline to register with IRS to be included in FFI list • December 2013 – IRS to publish FFI list • December 31, 2013 – FFI agreements effective

FATCA Made Easy

Key Dates 2014

• January 1, 2014 – New account due diligence and identification procedures begin

• January 1, 2014 – FATCA withholding begins on U.S. source FDAP payments to new account holders identified as NPFFI, recalcitrant and passive NFFEs with undisclosed U.S. owners

• June 30, 2014 – Deadline for FFIs and U.S. withholding agents to begin withholding on pre-existing accounts held by prima facie FFIs

• December 31, 2014 – Deadline for FFIs to begin withholding on pre-existing high value accounts

FATCA Made Easy

Key Dates 2015

• March 15, 2015 – Forms 1042 and 1042-S due annually for the first time for FATCA reportable amounts

• March 31, 2015 – Form 8966 due for reporting 2013 and 2014 for substantial U.S. owners and ODCFFIs (due annually thereafter)

• December 31, 2015 - Deadline for FFIs and U.S. withholding agents to begin withholding on all other pre-existing accounts (aside from prima facie FFI and high value accounts)

• December 31, 2015 – Deadline to qualify for limited FFI and limited branch status

FATCA Made Easy

Key Dates 2016-2017

• February 29, 2016 – Initial annual deadline for responsible officer due diligence certification

• March 15, 2016 – Forms 1042 and 1042-S due (annually) • March 31, 2016 – Forms 8966 due (annually) • December 31, 2016 – Last day of transitional rule to be excluded from

withholdable payments • January 1, 2017 – FATCA withholding begins on certain gross proceeds to

noncompliant accounts and foreign passthrough payments

FATCA Made Easy

Steps to Take for FATCA Compliance

• Specifically, in order for foreign funds to begin the process of becoming compliant with the FATCA due diligence requirements, they should implement the following steps first:

1. Establish account opening procedures ensuring that new individual account holders provide Form W-8, W-9 or documentary evidence (e.g., passport) upon opening of an account. Account opening documents must be reviewed for US indicia. New entity account holders must be asked to submit the appropriate new Forms W-8BEN-E, W-8IMY or W-9 with supporting documentation.

2. Review existing documentation for respective shareholders/partners/account holders and determine if the account is exempt from FATCA reporting.

• Exemption threshold for existing individual account holders: $50,000

• Exemption threshold for existing entity account holders: $250,000

FATCA Made Easy


3. Conduct electronic search for US indicia for existing individual or entity account holders that are not already exempt or identified as US accounts. A paper search is required if the following documentary evidence is not on file or if the following data is not kept in an electronically searchable system:

• Nationality or residence status,

• Current residence and mailing address,

• Current telephone number,

• Whether there are standing instructions to transfer,

• Current c/o or hold mail if no other address on file, and

• Whether there are any powers of attorney or signatories on file.

FATCA Made Easy


4. Conduct enhanced review (paper search and account manager inquiry) if pre-existing individual account is in excess of $1 million or entity account is in excess of $250,000. No paper search is necessary if W-8BEN and documentary evidence is on file or if the above data is kept in an electronically searchable system.

5. Obtain W-9 and waiver (if needed) if US indicia are discovered. 6. Review the collected Forms W-8 and W-9 (including waivers and supporting

information where applicable). 7. The above due diligence procedures for pre-existing individual accounts must be

completed within 2 years of the effective date of the FFI agreement. The timeline is 1 year for accounts above $1 million.

8. For pre-existing entity accounts with a balance above $250,000: obtain within 2 years of the effective date of the FFI agreement the new Forms W-8BEN-E or W-8IMY with supporting documentation (or W-9 if US entity). The timeline is 1 year if account holder is a “prima facie FFI” (due to the presence of FFI indicia).

9. Document account holder classification for FATCA purposes.

FATCA Made Easy

TO SUMMARIZE:

• Registration as FFI in July 2013

• Implement immediately due diligence procedures for new investors

• Collect new forms W-8 and W-9 for existing investors

• Implement a system to: • Document investors under FATCA

• Report US investors

• Withhold when necessary

FATCA Made Easy

DISCLOSURES

To ensure compliance with Treasury Department regulations, we wish to inform you that any tax advice that may be contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

FATCA Made Easy

THANK YOU!

fatca made easy - welcome to learnlive … made easy page 3 cpe and support continued group...

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