Foreign Account Tax Compliance Act (FATCA)

October 15, 2014

+1.604.482.0090 | jkutner@hyperwallet.com | www.hyperwallet.com

Presented by: Jonathan KutnerGeneral Counsel

hyperWALLET Systems Inc. | Suite 300, 950 Granville Street | Vancouver BC, Canada | V6Z 1L2

Outline

Discussion of FATCA in this presentation is from the broadest relevance to the most narrow. Early topics are relevant to the largest number of attendees.

1) Background on FATCA

2) Payments to foreign payees

3) Application to multinationals

4) FATCA diligence and forms

Key takeaways:

5) If you have not already done so, familiarize yourself with withholding obligations applying to Foreign distributors’ earnings and other international payments.

6) Confirm that your foreign banks and your foreign affiliates’ banks are FATCA compliant.

7) Respond promptly and ensure your foreign affiliates respond promptly to requests for withholding certificates (e.g., IRS Forms W-8BEN-E, W-8IMY).

FATCA Background

The Foreign Account Tax Compliance Act (“FATCA”) took effect July 1, 2014.

Aim: Limit offshore tax evasion by requiring Foreign Financial Institutions (“FFIs”) to report information regarding U.S. accountholders and owners.

Who: Payers and non-U.S. recipients of U.S sourced fixed, determinable, annual or periodical (“FDAP”) income (e.g., sales commissions from a U.S. company

under certain circumstances).

How: Imposes a 30 percent penalty (FATCA tax). “Comply or else.”

Intent: Is not to collect the FATCA tax, rather it is to force FFIs to report information to the IRS regarding US accounts.

“COMPLY OR ELSE”

Payments to Foreign Payees

Taxation guidance relevant to MLMs was released October, 2013 (CCA 201343020): Foreign distributors’ earnings based on purchases by “lower-tier distributors” in

the MLM’s “sponsorship chain” constitute personal services income sourced where the services are performed.

U.S. MLM is required to withhold tax on such income paid to a foreign corporation or non-resident alien (‘NRA”) for services performed in the United States.

For MLM’s foreign distributors, there is often two sources of income:o Buying products directly from MLM and reselling them to customers; oro Down-line income from purchases by lower tier distributors in sponsorship chain.

The CCA only addressed the second source, down-line income. According to the guidance:o The income represents compensation for services (recruiting, sponsoring, training etc.)o The source of income is where the services are performed (can be reasonably split).

Payments to Foreign Payees

What does this mean for FATCA compliance?o Sections 1441, 1442 require any person making a payment of U.S. source FDAP income to

a non-resident alien (NRA) or foreign corporation to withhold 30% of the gross income.o In practical terms, payees with foreign accounts may only receive 70% of their payments. o For Financial Institutions to withhold, they must know or have reason to know that the

payment is a withholdable payment.

Exemption:o The regs provide a payment exemption for most effectively connected income. (e.g.,

foreign corporate distributors are exempt from withholding tax on U.S. source services income as long as the foreign corporation provides a Form W-8ECI to you or your bank.)

o This exemption does not apply to individuals including non-resident aliens (NRAs).

Income tax treaties with foreign governments may modify the tax treatment:o Many treaties make NRA personal services income, or foreign corporate distributor

income, exempt if there is no permanent establishment in the U.S. o Non-resident alien (NRA) must provide a completed form 8233. Foreign corporate must

provide completed form W-8BEN to the US Taxpayer prior to payment.

Application to Multinationals

Who is a withholding agent? Any US entity paying US FDAP income or US source gross proceeds to an FFI or

Non Financial Foreign Entity (“NFFE”). NFFEs are ever so clearly defined as any entity that is not an FFI.

The definition is incredibly broad; nearly everyone is a withholding agent.

Multinationals must determine whether U.S. source vendor and other payments are withholdable. FATCA tax applies to FDAP payments the U.S. entity sends to international

subsidiaries unless the payments go through an FFI that has an agreement with the IRS to Identify and report on its “U.S. Accounts”.

This can be confirmed on the IRS’ website.

Application to Multinationals

What is the FATCA status of your payees? Identifying payees:

o This is generally the person to whom the payment is made; HOWEVERo For payments made to a financial account, the account holder is the payee.

Determine FATCA status through reliance on IRS Forms:o W-8 for foreign payees (W-8BEN-E for foreign entities)o For some offshore obligations you may be able to rely on other written statements or

documentation (FFI’s GIIN, for example).

Exceptions exist for certain payees and payments:o NOTABLY: Participating FFIs.o Deemed Compliant FFIs, Exempt beneficial owners, excepted NFFE… The list goes on.

Application to Multinationals

Mechanics: Your bank likely will confirm online that the foreign bank / entity is registered with the IRS. If so, there should not be withholding of your

international payments.

No withholding

Possible Withholding at 30% Depending on the IGA

No withholding

Withholding at 30%

Withholding Agent

Payment Subject to Withholding at 30%

Payment Not Subject to Withholding at 30%

FFI Complies with FATCA (participating)

FFI Does not comply with FATCA (non-participating)

FFI

NFFE certifies thatit does not have over 10% US ownership (They give you a form!)

NFFE fails to certify thatit does not have over 10% US ownership

NFFE

FATCA diligence

Be Proactive in your approach to FATCA: Diligently store and track all forms and documentation you receive. Submit reporting to the IRS (or risk penalties).

Identify whether any FFIs you bank with are non-compliant: Review your organizational chart for Foreign Subsidiaries. If your Foreign Subsidiaries or your U.S. Entity are banking with small foreign

institutions, confirm FATCA compliance. This may require additional confirmation, such as checking their GIIN at the IRS website.

Note, some foreign FFI’s are exempt, such as Canadian credit unions.

FATCA forms

Each form is quite complex. Understanding what you are providing is key.

Ex. Instructions for attached form W-8BEN-E were not released until June of 2014. This is what a NFFE would use to certify status.

FATCA forms

There are W-8 and W-9 Forms that apply to a number of various situations. Understand what you are asking for or providing.

FATCA affects Intent: Prevent US individuals and businesses from

FATCA does not apply to accounts transferred to a US person.

Withholding cannot apply if the parties in the payment chain do not know or have reason to know that the payment is withholdable.

Withholding does not apply so long as everyone in the payment chain is FATCA compliant or the payment is not a FATCA withholdable payment. Therefore, make sure your foreign banks are FATCA Compliant Participating FFIs.

For example, if your U.S. entity transfers funds to its Canadian affiliate’s bank (a Participating FFI), and the funds are for a variety of activities that include withholdable payments, then the Canadian affiliate and its bank will provide the appropriate withholding certificates to the appropriate banks to avoid withholding.

Financial Institutions and anyone else in the payment chain can avoid withholding if they provide withholding certificates (e.g., IRS Forms W-8BEN-E, W-8IMY) demonstrating FATCA compliance.

The lack of a GIIN will not trigger withholding if the FFI provides a withholding certificate that indicates that the FFI has registered but has not received a GIIN.

FATCA Fun Facts and Summary

Foreign Account Tax Compliance Act (FATCA)

hyperWALLET Systems Inc. | Suite 300, 950 Granville Street | Vancouver BC, Canada | V6Z 1L2

+1.604.482.0090 | jkutner@hyperwallet.com | www.hyperwallet.com

Presented by: Jonathan KutnerGeneral Counsel