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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
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CPE AND SUPPORT CPE Participation Requirements
To receive CPE credit for this Webcast: • Actively participate throughout the event. • Be responsive to at least 75% of the pop-ups.
Certificate of Attendance If you are logged in the entire time and respond to the appropriate number of pop-ups, you will be notified via email when your certificate is available. • BDO USA professionals – CPE will automatically be issued in CPE Tracking &
Reporting. Your certificate will be sent after you have been issued credit. • All others will be emailed instructions on how to access your certificate.
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CPE AND SUPPORT CONTINUED Group Participation – to receive credit • Sign-in sheets must list a Proctor name and CPA license number. • Clients and Contacts – email sign-in sheets to [email protected] within 24 hours. • BDO USA professionals - Submit your sign-in sheets using a General Talent Development Request in BDO Service Now found at: BDOWorld > Applications & Resources > BDO Service Now > Service Catalog Talent Development > Make a Request.
Q&A – Submit all questions using the Chat feature on the lower right corner of the screen. The presenter(s) will respond to questions during or at the end.
Technical Support – If you should have technical issues, please use the Support tab or call1-888-228-4188.
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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
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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)
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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)
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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
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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
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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
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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
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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
subject to withholding
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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
subject to withholding
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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
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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
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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.
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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.
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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)
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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.
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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”
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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
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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
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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.
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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
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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
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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
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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
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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
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Steps to Take for FATCA Compliance
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.
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Steps to Take for FATCA Compliance
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.
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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
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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.