FOREIGN ACCOUNT TAX COMPLIANCE ACT

(FATCA) PROVISIONS AND COMPLIANCE WITH

REPORT OF FOREIGN BANK AND FINANCIAL

ACCOUNTS (FBAR) REQUIREMENTS

Institute of International Bankers

June 21, 2010

Steven A. Musher

Associate Chief Counsel (International), IRS

Faye Tannenbaum

Partner, Deloitte Tax LLP

Yaron Z. Reich

Partner, Cleary Gottlieb Steen & Hamilton LLP

Mark Naretti

Director, KPMG LLP

Jonathan Jackel

Senior Counsel, Burt, Staples & Maner, LLP

Joyce Burns

Director, BNP Paribas SA (Moderator)

FOREIGN ACCOUNT TAX

COMPLIANCE ACT

3

FATCA: Table of Contents

Overview

– Background

– FATCA provisions: FFIs and NFFEs

Scope of FFIs

Identifying U.S. accounts

Withholdable payments, passthru payments and withholding agents

Flow chart and decision trees

FFI Agreement

Elections under FATCA

Refunds and credits

Tiered entities considerations

Effective date and grandfather clause

FATCA planning: what can be done now?

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FATCA – Overview

The Foreign Account Tax Compliance Act (“FATCA”) provisions

are included in the Hiring Incentives to Restore Employment

(“HIRE”) Act, signed into law on March 18, 2010

Purpose is to prevent the perceived tax abuse by U.S. persons

using off-shore financial facilities

Requires non-U.S. financial institutions to provide the Internal

Revenue Service (“IRS”) with information on U.S. persons invested

in accounts outside of the U.S. and for non-U.S. entities to provide

information about U.S. owners to withholding agents for reporting

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FATCA – Overview (cont’d)

The incentive to encourage these entities to provide this

information is a new withholding requirement on certain payments

unless these provisions are followed

The new provisions of Chapter 4 financially compel, through the

use of withholding taxes, foreign financial intermediaries to identify

and report specified U.S. account holders to the U.S. Treasury

FATCA will require the withholding agent to withhold 30% of

payments made to foreign financial institutions (“FFIs”) that do not

enter into an agreement with the IRS and on payments made to

non-financial foreign entities that do not disclose substantial U.S.

owners

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FATCA – Overview (cont’d)

The FATCA legislation amalgamates previous proposals including

the Stop Tax Haven Abuse Act and the Greenbook proposals

It is clear that detailed regulations are crucial to implementation of

these rules

Represents a major change to the information reporting and

withholding tax regime, and imposes extensive new compliance

obligations

Cost of non-compliance includes both financial liability and

reputational damage

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Current Rules

FATCA provisions supplement the current rules under Code

Section 1441 dealing with withholding on certain U.S. payments to

foreign persons

30% withholding on U.S. source FDAP income paid to non-U.S.

persons

Reduction of the 30% rate by treaty or statutory exemption with

appropriate documentation

No withholding on gross proceeds

No separate classification of foreign entities

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FATCA Provisions

Code Sections 1471 – 1474 require withholding of 30% on withholdable payments paid to a non-U.S. entity UNLESS the payee agrees to provide information on its U.S. customers or owners

Withholdable payment includes any U.S. source FDAP (interest, dividends, royalties, etc.), as well as gross proceeds from the sale of any property that can produce U.S. source interest or dividends

Applies even where treaty or portfolio interest exemption relief would normally apply

New rules apply to all payors (withholding agents)

Significant tax and penalty exposure possible from failure to comply

Statute grants extensive regulatory authority to IRS

New FATCA rules effective January 1, 2013

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FATCA Provisions (cont’d)

FATCA splits all foreign entities into Foreign Financial Institutions

(FFIs) and Non-Financial Foreign Entities (NFFEs)

– Broadly, the purpose of the legislation is to identify and report all U.S.

persons who have an account with an FFI or an interest in an NFFE

FATCA creates two regimes:

– Section 1471 regime for FFIs

– Simpler Section 1472 regime for NFFEs

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FFIs – Definition

An FFI includes any non-U.S. entity that:

– accepts deposits

– holds financial assets for the account of others or

– engages primarily in the business of investing or trading securities,

commodities, partnerships, or any interests in such positions

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FFI Agreement with the IRS

The FFI must agree to:

– Obtain information to determine which holders are U.S. accounts

– Comply with verification and due diligence procedures on such accounts as

required by the IRS

– Report annually

– Deduct and withhold the 30% tax on payments to recalcitrant account

holders, electing FFIs and FFIs that did not enter into an FFI agreement

with the IRS

– Recalcitrant account holder is any account holder that does not provide

documentation as to its status as U.S. or foreign or fails to provide a waiver if

located in a foreign jurisdiction that prevents reporting of any information on the

account holder

– Comply with requests from the IRS for additional information

– Where foreign law would prevent such reporting, to close the account if a

valid waiver of the law cannot be obtained from the account holder

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FFIs – Required Annual Reporting

An FFI will meet the annual information reporting obligation under an FFI Agreement by providing the following information on each U.S. account:

– Name, address and TIN of each account holder that is a specified U.S. person;

– Name, address and TIN of each substantial U.S. owner of any account held by a U.S. owned foreign entity;

– Account number;

– Account balance or value; and

– Unless guidance provides otherwise, gross receipts and gross withdrawals/payments from the account

In lieu of annual reporting and withholding, FFI can elect to provide Form 1099 reporting for each specified U.S. person and U.S. owned foreign entity

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Payments to NFFEs

Non-financial foreign entity (NFFE) includes any foreign entity that is not an FFI, subject to certain exceptions

Withholding agents will be required to withhold 30% on withholdable payments to an NFFE unless the NFFE:

– Certifies to the withholding agent that it has no substantial U.S. owners

– Provides the names, addresses and U.S. taxpayer identification numbers of the substantial U.S. owners to the withholding agent to report the information to the IRS, or

– Is a specifically excepted entity

Substantial U.S. owner includes any U.S. person who owns directly or indirectly the following:

– More than 10% of the stock (either by vote or value) of a corporation

– More than 10% of the profit or capital interest in a partnership

– Any U.S. owner of a grantor trust or more than 10% of the beneficial interest in a trust

Special rule for investment vehicles – the ownership interest for a substantial U.S. Owner is reduced to zero

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NFFEs – Excepted Entities

The rules do not apply to payments to one of the following

specifically excluded entities:

– Corporations that are publicly traded and their subsidiaries

– An entity organized under the laws of a U.S. possession and wholly owned

by bona fide residents of the U.S. possession

– Any foreign government

– Any international organization or wholly owned agency or instrumentality

– A foreign central bank of issue or

– Any other class of persons identified by the Secretary as posing a low risk

of tax evasion

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Scope of FFI – Who Is Subject to Full Section

1471 Regime?

The broad definition of an FFI would include all forms of

investment entities such as:– Hedge funds

– Private equity funds

– Mutual funds

– Family investment vehicles

– CBO issuers

– Pension plans

– Insurance companies

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Scope of FFI – Who Is Subject to Full Section

1471 Regime? (cont’d)

Broad definition encompasses many tens of thousands of entities

– Massive administrative burden

– Risk of widespread “opt-outs” from FATCA

Possible solutions:

– Exclude low-risk entities?– For example: pension plans, certain pooled investment vehicles, widely held investment

vehicles

– Exclude foreign investment entities with a small number of investors or only small accounts?

– Exclude QIs that are eligible for the QI external audit waiver?

– Exclude U.S. branches of foreign banks?

Complete exclusion vs. “1471-lite” or NFFE-type reporting regime?

How to identify FFIs, NFFEs, exempt entities and those subject to other regimes?

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Identifying U.S. Accounts: Concepts

A U.S. account is defined as a financial account held by a

specified U.S. person or a U.S. owned foreign entity

A specified U.S. person is any U.S. person other than a publicly

traded corporation, bank, REIT, RIC, government entity and certain

tax-exempt entities

– Includes dual citizens, green card holders, and those satisfying the

substantial presence test

A U.S owned foreign entity is:

– Corporation, partnership or trust with more than 10% ownership held,

directly or indirectly, by a specified U.S. person

– Grantor trust with any specified U.S. person owner

– Foreign investment entity with any interest held by a specified U.S. person

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Identifying U.S. Accounts: Concepts (cont’d)

Financial account includes depositary and custodial accounts

maintained by a financial institution and non-publicly traded equity

and debt interests in a financial institution

– Exceptions:

– Depositary accounts of $50,000 or less (in the aggregate) held by individuals

(unless an FFI elects not to to have the exception apply)

– Accounts of FFIs with sec. 1471 agreements

– Accounts of holders subject to other reporting requirements

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Identifying U.S. Accounts: Issues

FFIs essentially have to prove that an account is not held by a

specified U.S. person or a U.S. owned foreign entity

AML/KYC information in most jurisdictions does not yield the level

of diligence required by FATCA

– Standard EU AML data only reaches 25% ownership threshold

– AML rules have a different concept of beneficial ownership

– AML’s risk assessment approach means little data collection in some cases

Some business lines have not historically collected U.S. tax

documentation

An FFI may have millions of accounts to sift through

– Also need to identify U.S. accounts maintained by members of FFI’s

expanded affiliate group (50% common ownership)

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Identifying U.S. Accounts: Possible Solutions

Require different levels of due diligence for:

– Existing vs. new accounts: Institutions can change their account-opening

procedures, but for existing accounts, there is no easy way to obtain or sort

through information

– For pre-FATCA accounts, a “reasonable methodology” of database searches for

U.S. status indicia (e.g. address, citizenship, residency, any U.S. tax

documentation)?

– Even for post-FATCA accounts, it will be difficult to obtain U.S. tax documentation

if accounts are not invested in U.S. securities and where the customer base is

largely non-U.S.

– Direct account owners vs. accounts owned by entities with substantial U.S.

owners: Direct owners are easier to identify. KYC/AML data often do not

reach FATCA’s 10% threshold

– Allow eyeball tests?

– Increase the ownership threshold to, for example, 25%?

– Reasonable methodology search?

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Identifying U.S. Accounts: Possible Solutions

(cont’d)

– Accounts invested in U.S. securities vs. bank accounts and accounts invested in non-U.S. securities: FFIs have leverage to request information when withholding tax is at stake. The same is not true for accounts invested only in non-U.S. securities or bank accounts.– Collect new W-8BENs with FATCA information for those accounts investing in U.S.

securities?

– For those accounts not investing in U.S. securities, distinguish between high- and low-risk entities (e.g., passive vs. operating companies, treaty vs. tax haven jurisdictions)?

Issue a new Form W-8BEN requiring details to facilitate FATCA diligence

– For individuals, certify non-U.S. status or provide U.S. indicia

– For entities, indicate status as FFI or NFFE or exceptions– If FFI, whether participating or not

– If NFFE, whether it has substantial U.S. owners or not, information regarding substantial U.S. owners

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Identifying U.S. Accounts: Possible Solutions

(cont’d)

Create presumption/eyeball rules

– Eyeball tests for identifying FFIs, NFFEs, entities subject to the FFI-Lite

regime, and those excluded from the definitions

– Publish lists for withholding agents to be able to rely on

Utility of $50,000 threshold? Difficult for FFIs to aggregate

accounts, especially if Treasury requires aggregating across the

affiliate group

– Allow automatic deemed election?

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Payors and Payments Covered: Withholdable

Payments

Withholdable payment is defined as:

– U.S. source FDAP

– Gross proceeds of a sale or disposition of property that can produce U.S. source

dividends or interest

– Includes interest paid on deposits by foreign branches of domestic banks

– Applies even where treaty relief or portfolio interest exemption would normally apply

– Exception for ECI

System changes are required to implement withholding on gross

proceeds

What types of payments might be appropriately excluded from the

definition of withholdable payments?

– Exclude miscellaneous FDAP not related to securities investments?

– Exclude payments that are also excluded under Chapter 3 withholding (e.g., short-

term interest, market discount, OID on non-redemption sales)?

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Payors and Payments Covered: Passthru

Payments

FFIs must withhold on passthru payments, defined as withholdable

payments and payments “to the extent attributable to a withholdable

payment,” made to recalcitrant account holders or non-participating FFIs

The concept, if applied expansively, could deter U.S. investments

– How should an FFI determine if a payment is attributable to a withholdable payment?

– Require a traceable link between account holder and withholdable payment?

– Examples: Payments by an investment entity to an account holder on account of a portfolio

of U.S. securities? U.S. source payments from custodial accounts?

– Not: payments of interest on deposits and straight debt securities issued by financial

institutions?

– If no tracing required, the concept could result in a ratable portion of, e.g., interest on foreign

bank deposits by recalcitrant holders being subject to Chapter 4 withholding where a bank

earns U.S. source FDAP income or gross proceeds

– How does an FFI allocate among different payments and among recalcitrant and

compliant holders?

– Will allocations be audited?

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Payors and Payments Covered: Withholding

Agents

Withholding agent includes any person (U.S. or foreign) having the control, receipt, custody, disposal, or payment of a withholdable payment

Withholding agents must be able to:

– Classify entities as FFIs, NFFEs, entities subject to a hybrid system as may be provided by regulations, or entities excepted from those categories

– Determine if an FFI is participating

– Collect and report information from NFFEs on substantial U.S. owners

Limit the definition to financial institutions and those making more than a threshold amount of payments annually?

– Otherwise individuals and non-financial businesses would need to set up FATCA compliance mechanisms for miscellaneous FDAP payments and U.S. source gross proceeds

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Payors and Payments Covered: Withholding

Agents (cont’d)

Where there are multiple withholding agents, who should have the

responsibility to withhold?

– Examples: Investment manager, custodian and broker in a securities sale;

multiple trustees

– Limit withholding responsibility to the agent actually paying the amount and

equipped to perform FATCA withholding?

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FATCA Payment Flow Chart & Decision Trees

Sample Payment Flow Chart

Payments to Foreign Entities

Payments to NFFEs

Payments to Direct Recalcitrant Account Holders

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Sample Payment Flow Chart

U.S.Withholding Agent

FFI

Individual FFI BankNQI BankNFFE

Fund

U.S. Source FDAP/Gross Proceeds

Foreign

Individual

NFFE Custodial

Account Holder

IndividualIndividual

U.S. Deposit

Account HolderForeign Corp. Private Co.Substantial

U.S. Owner

Foreign

Individual Fund

of Funds

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Withholding Agent Decision Tree 1- Payments to

Foreign Entities

Withholding Agent

Is it a withholdable payment?

Is it paid to a financial account?

Is payee an FFI?

Is the beneficial owner exempt?

Has FFI concluded an agreement with the IRS?

Generally out of scope.

Out of scope.

Payee is an NFFE.See Decision Tree 2.

Out of scope.

FFI is subject to 30% withholding.

Withhold in accordance with instructions received.Has FFI instructed you to withhold on passthru payments

allocable to any recalcitrant account holder?

No penal Chapter 4 withholding required.Ready for Chapter 3 analysis.

Yes

Yes

Yes

No

Yes

No

No

No

No

Yes

No

Yes

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Withholding Agent Decision Tree 2 - Payments to

NFFEs

Out of scope.

No further action required for Chapter 4 withholding. Ready for Chapter 3 analysis.

Withholding Agent reports.Ready for Chapter 3 analysis.

Has NFFE provided details ofsubstantial U.S. owners?

Payee is a recalcitrant account holder.See Decision Tree 3

Has NFFE certified there are no substantial U.S. owners?

Is the beneficial owner exempt?

NFFE

Withholding Agent

Yes

Yes

Yes

No

No

No

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Withholding Agent Decision Tree 3 - Payments to

Direct Recalcitrant Account Holders

Withholding

Agent

Recalcitrant

Account Holder

Is payment a No Is payment attributable to No Out

withholdable payment? a withholdable payment? of scope.

Yes Yes

30% withholding 30% withholding

applies. applies.

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FFI Agreement

Format

– Model document similar to QI Agreement?

– Variances?

Application and approval process

– Electronic transmittal?

– Affiliated groups?

– Publicly available list of FFIs?

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FFI Agreement (cont’d)

Verification of compliance

– Self-certification?

– Use of internal audit function?

– External audit?

– Agreed-upon-procedures (AUP)?

– Scope and frequency?

– Combined with QI external audits?

– Limiting the cost to FFIs

– Consequences of identified non-compliance?

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FFI Agreement (cont’d)

Reporting

– Account balance timing and calculation

– Gross receipts and withdrawals included?

– If yes, period and calculation method?

– Segregation of cash and security values?

– Electronic filing?

– Paper acceptable?

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FFI Election to be Withheld Upon

How will an FFI’s election to push withholding on “recalcitrant”

account holders upstream to another withholding agent be

implemented?

– Revise Form W-8IMY?

– Other communication between institutions?

– What if the implementing withholding agent has no relationship to the

proceeds of the transaction?

– Only by by mutual agreement?

– How would the election apply to gross proceeds?

What does it mean that an FFI making this election must “waive

any right under any treaty of the United States with respect to any

amount deducted or withheld”?

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Form 1099 Alternative to FFI Annual Report

As an alternative to producing an annual FFI report, an FFI can

choose to file Forms 1099 to the same extent as a U.S. domestic

financial institution, but

– Generally limited to 1099-B, -DIV, -INT, and -MISC

– Treat the holder of a U.S. account as a natural person/U.S. citizen

Will FFIs be required to do cost basis reporting?

Should Forms 1099 be provided to U.S. owned foreign entities,

rather than the U.S. owners?

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Refunds and Credits

Section 1474 provides that credits or refunds will be given for

overwithheld amounts

– Exception for FFI beneficial owner in which case no credit or refund is

allowed if FFI is not a treaty resident

– If FFI is a treaty resident, the amount of any credit or refund shall not exceed the

amount of credit or refund attributable to the treaty reduced rate

– No interest is allowed with respect to such credit or refund

What procedures will apply?

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Refunds and Credits (cont’d)

Potentially vast increase in need for IRS to process “reclaims” from

(1) “good” beneficial owners behind “bad” FFIs; and (2) treaty-

eligible FFIs

Need for procedures

– Standards of proof, documentation, etc.

– IRS staff to process the claims.

Inadvertent withholding?

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Tiered Entities Considerations

Tiered entities present numerous complexities

How will duplicative FATCA withholding down the chain be

prevented? Will beneficial owners simply have to apply for a

refund?

How will Chapter 3 withholding be prevented where FATCA

withholding has already been imposed? Again, will beneficial

owners simply have to apply for a refund?

Who has withholding responsibility when an entity down the chain

elects to be withheld upon?

What responsibilities does each withholding agent in the chain

have? Should each payor be responsible only for verifying its

immediate payee’s status?

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Effective Date

FATCA’s general effective date is January 1, 2013

IRS has said guidance is to be issued in several tranches

Is it realistic to expect institutions to implement systems in time?

Options

– Delay/stagger effective date?

– Prioritize guidance?

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Grandfather Clause

FATCA withholding does not apply to “any payment under any

obligation outstanding on [March 18, 2012] or from the gross

proceeds from any disposition of such an obligation”

What is an “obligation”?

– Hybrid securities

When is an obligation “outstanding”?

– Revolvers

– Delay draws

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FATCA Planning: What Can Be Done Now?

Internal awareness

Senior management education and buy in

Identify all group entities impacted

Identify all business lines impacted

Identify accounts potentially impacted

Training for relevant resource

Initial workshops for institutional clients

FOREIGN BANK ACCOUNT

REPORTING

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FBAR: Table of Contents

Basic requirements

Background

Proposed regulations

Relief for “signature authority” filers

Continued areas of concern

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Basic Requirements

Applies to “U.S. persons” who have:

– a “financial interest” in, or

– “signature or other authority” over,

A bank, securities, or other financial account in a foreign country

Provided the aggregate maximum value of all such accounts

during the year exceeds $10,000

File Form TD F 90-22.1, “Report of Foreign Bank and Financial

Accounts,” a.k.a. “FBAR”

Tax practitioners are often involved in the preparation of the FBAR

because there is a checkbox regarding FBAR on income tax

returns

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46

Why FBAR?

Money laundering

Tax evasion

Terrorism

46

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Historical Exceptions

Some persons who solely had signature authority did not have to

file:

– Bank officer/employee

– Public/large company/group officer/employee (if notified)

– Foreign sub officer/employee (if notified)

Some account types are exempt:

– Nostro/correspondent accounts

– Military banking facilities

– Abbreviated filing for 25 or more accounts owned

– Did not apply to those with only signature authority

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FBAR’s Profile Rises

Concerns about terrorist financing post 9/11

Use of foreign accounts for U.S. tax evasion attracts attention

– Large foreign institutions targeted

– Levin hearings

– Voluntary compliance initiative

Controversy over 2008 revision to form

– Who is required to file (definition of “U.S. person”)?

– Which accounts are covered (hedge funds)?

– No regulations – virtually all of the “law” is in the instructions to the forms

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What’s in the Proposed Regulations?

The “law” is now in the proposed regulations, not the instructions

No need for employers to notify employees that an exception

applies to the employees

Officer/employee exceptions

– Federally supervised banks & credit unions

– SEC/CFTC-examined “financial institutions”

– SEC-registered “authorized service providers” to mutual funds & other 1940

Act companies

– Entities listed on U.S. national exchange (including foreign entities)

– Plus U.S. subs reported on a consolidated report

– Not foreign subs

– U.S. entity with registered section 12(g) securities

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What’s in the Proposed Regulations? (cont’d)

Participants and beneficiaries in qualified retirement plans will not

be required to file an FBAR with respect to a foreign financial

account held by or on behalf of the plan (the same rules apply to

IRAs)

Beneficiaries of a trust do not have to file if the trust (or a trustee or

agent) is a U.S. person that files for the trust

Consolidated reports available for any kind of parent or member

entity, not just corporations, so long as parent is U.S. person

Abbreviated filing for signature authority over 25 or more accounts

Definition of who must file (“United States person”) carved back

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What’s in the Proposed Regulations? (cont’d)

Foreign-located U.S. citizens get modified filing. No foreign sub

officer/employee exception

Foreign financial accounts are defined to include "mutual fund or

similar pooled fund" accounts, but not hedge funds, private equity

funds, etc. (for now)

Signature authority defined as something an individual, not an

entity, may have

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Relief for “Signature Authority” Filers

No need to file this month!

Notice 2010-23 says that those with signature or other authority

over (but no financial interest in) an account have until June 30,

2011, to file

– Applies to all open years

– No need to amend tax returns for 2009 and earlier just because they

indicate no reportable accounts

– Must adhere to FBAR guidance in effect at the time the FBAR is filed (not

when it was due)

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Continued Areas of Concern

Exceptions not quite broad enough, even where they apply

– Foreign subs

– SEC-registered entities that are not “financial institutions”

– State-chartered banks

Many employees still have to file, maintain records for employer

accounts

– IIB requested modified filing, like for foreign-employed U.S. citizens

– IIB requested that employees have no obligations to maintain records, even

assuming they have to file

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Continued Areas of Concern (cont’d)

U.S. employees of foreign publicly traded groups may not qualify

for an exception unless they work for the parent (e.g., via U.S. a

branch)

– Technical issue because employees of U.S. subs can only be covered by a

consolidated report, and only U.S. parents can file one

– IIB requested that a U.S. sub or branch be allowed to file a consolidated

report to excuse U.S. employees

Some exceptions appear to apply (unintentionally) even though no

one files for an account, e.g. employees of U.S branches of foreign

banks

– IIB requested that employees be exempted but that the branch be able to

file

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