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The Impact of FATCA and CRS on Employee Share Plans and Share
Ownership
Panayiota Burquier, Gibson Dunn & Crutcher LLP
June Davenport, Solium
John D. Heaton, Equiniti
Jeffrey M. Trinklein, Gibson Dunn & Crutcher LLP
Topics • Origins of the Problem • US Response
• UK Response • International Response
• Effects on Participants, Issuers, Service Providers and Advisors
• Hope for the future?
Origins of the Problem • Extraterritorial reach of the “Taxman”
– Many jurisdictions tax long-term residents on worldwide income
– The United States even taxes nonresident citizens on worldwide income
– No longer “One for you, Nineteen for me” but rates are still high enough
• Perception of widespread tax evasion – Sales of confidential bank information to tax authorities in Europe
– Stories of private bankers shuttling money and even diamonds in toothpaste tubes between Switzerland and the United States
• Conflict between the old and new way of doing things – Bank secrecy was sacrosanct in Switzerland and elsewhere
– In a digital age, diminished expectations of privacy and massive information transfers
US Response • Foreign Account Tax Compliance Act
– Law enacted in 2010
– Either “foreign financial institutions” collect information for the IRS on US accountholders, or else FFIs must suffer 30% withholding tax on dividends, interest and capital gains generated by US stocks and bonds
• Mechanics of FATCA – Under the law, FFIs must register with the IRS
– “Inter-Governmental Agreements” are based on one of two models • Model I: FFIs do not need to report to the IRS, but rather report to the tax authorities in their own
jurisdictions
• Model II: FFIs report to the IRS but with certain modifications
– The key to compliance: understanding who is and is not an FFI
US Response • For US employers with US employee benefit arrangements
benefiting only US employees, FATCA is not an issue and the only compliance burden relates to collecting Forms W-9 and withholding the right amount of tax
• Are non-US retirement plans FFIs? Look for exemption: – broad participation retirement fund
– narrow participation retirement fund
– treaty-qualified retirement fund
– fund similar to a U.S. qualified plan
– investment vehicle for these funds
• Does the IGA change the result?
Sample of IGA Provisions: Canada • FATCA – Canada
– IGA exempts ‘tax deferred’ arrangements from reporting – RRSPs, pension programs, Tax Free Savings Plans
– General share purchase plans /corporate nominee ‘like’ accounts subject to reporting
– Canadian banks lobbying to get share plans removed from reporting obligations
– Privacy is of significant concern (cannot ask for nationality to identify US persons)
– FBAR/FATCA reporting confusing for individuals – many cross border employees impacted by reporting
Sample of IGA Provisions: Australia • FATCA – Australia
– IGA much broader for reporting exemptions
– Any account which qualifies as an employee share scheme or an employee share trust is not reportable
– Corporate nominee arrangements/Vested Share Accounts – still reportable if not covered as part of the share scheme
Sample of IGA Provisions: UK FATCA – UK • Excluded products
– Pension schemes
– Investment trusts
– Share registers
– CSNs
– Dissenter registers
– Depositary Instruments
• In scope – Investment Account
– Global nominee (nominees not falling into CSN category)
Sample of IGA Provisions: UK FATCA – UK
• Excluded products – Share Incentive Plans (Schedule 2 SIP)
– Save As You Earn (Schedule 3 SAYE Option Scheme)
– Company Share Option Plan (Schedule 4 CSOP)
– Profit Sharing Schemes (Approved by HMRC under the Income and Corporation Taxes Act 1988)
• EBTs – In scope - non-tax advantaged SIPs and other trusts (where trust identifies beneficiary)
– Not in scope - if EBT holds unallocated shares, an unallocated right does not constitute a Financial Account - when shares become allocated and the trustee is directed as soon as reasonably possible to transfer the assets, the Trust will not be treated as maintaining a Financial Account for the duration of time it takes to complete the transfer
UK Response • UK Intergovernmental Agreements (“Son of FATCA”)
– 2012 UK Autumn Statement announced that UK would enter into intergovernmental agreements (IGA) with Crown Dependencies and Overseas Territories
– Each of the Crown Dependencies IGAs are reciprocal. Only one of the Overseas Territories IGA is reciprocal - that with Gibraltar
– All of the UK IGAs except one follow the US Model 1. Bermuda IGA follows the US Model 2
– General framework similar to US FATCA
– Key difference is that UK IGAs do not form part of a withholding tax regime – UK’s political power over overseas possessions enough to encourage them to sign up to the IGAs
International Response • In April 2013, the G20 Finance Ministers endorsed the idea of
automatic exchange of information. From that moment, the Common reporting standard (or “CRS”) was born
• The proposed OECD CRS is based on the Model 1 IGA – Many similarities to FATCA
– Also many “false cognates”
• 52 jurisdictions have agreed to begin exchanging information in either September 2017 or September 2018, depending on the country. Absent from the list: the United States
International Response • Why is the US reluctant to participate?
– The US has unique views on tax residency, taxing all citizens and US corporations
– The OECD CRS model looks to tax residency or place of effective management in the relevant jurisdiction, which is more or less the standard in the rest of the world
– As a result, unlikely that the US will ever commit to the CRS • Unlike FATCA, CRS has no de minimis threshold, which means
that all accounts are currently eligible for CRS reporting regardless of the account balance
• A common reporting schema is being developed. However, authorities in individual countries are likely to amend CRS to accommodate their local needs
OECD CRS in the UK • New UK legislation came into effect yesterday
– The International Tax Compliance Regulations 2015 and the International Tax Compliance (Crown Dependencies and Gibraltar) (Amendment) Regulations 2015 were made on 24 March and came into force on 15 April
– Apart from a few minor changes, they are in line with what was expected and replicate the FATCA exemptions for Employee Share Plans
– The UK government has introduced an additional dormant account exemption, but that is unlikely to be relevant to this audience
– HMRC Guidance Notes about what the Regulations mean in practice will not be published until after the General Election, possibly as late as June which is of concern
– Urgent clarification is needed as to the status of Corporate Sponsored Nominees, which are exempt under FATCA. No one has yet suggested that their status changed under CRS, but if the Guidance Notes reflect a change in their treatment, there is insufficient time to make the necessary changes
International Response
FATCA* OECD CRS Financial Institutions
Custodial Institution Depository Institution Investment Entity Specified Insurance Company
Custodial Institution Depository Institution Investment Entity Specified Insurance Company Investment Trust Companies
Exempt/Non-Reporting Financial Institutions
Government Entities International Organizations Central Banks Certain Pension and Retirement Funds Qualified Credit Card Issuers Certain Collective Investment Vehicles
Government Entities International Organizations Central Banks Certain Pension and Retirement Funds Qualified Credit Card Issuers Certain Collective Investment Vehicles Low-Risk Non-Reporting Financial Institutions
FATCA vs OECD CRS:
Entities Required to Report
* Based on Model 1 IGA provisions
International Response
FATCA* OECD CRS Information Exchange Model
Bilateral (reporting required with respect to US persons)
Multilateral (reporting required with respect to all partner jurisdiction persons)
Persons Subject to Reporting
Specified US Persons and Non-US Entities with one or more Controlling Persons that is a Specified US Person
Reportable Jurisdiction Person and Passive NFEs with one or more Controlling Persons that is a Reportable Jurisdiction Person
Basis for Specified US Person/Reportable Jurisdiction Person Status**
US citizen or resident individual Partnership or corporation organized in the United States or under the laws of the United States or any State thereof
A trust if (i) a court within the United States would have authority under applicable law to render order or judgments concerning substantially all issues regarding administration of the trust and (ii) one or more US persons have authority to control all substantial decisions of the trust
An estate of a decedent that is a citizen or resident of the United States
An individual or Entity that is resident in a Reportable Jurisdiction under the laws of such jurisdiction, or an estate of a decedent that was a resident of a Reportable Jurisdiction. For this purpose, an Entity such as a partnership or similar legal arrangement that has no residence for tax purposes shall be treated as resident in the jurisdiction in which its place of effect management is situated
FATCA vs OECD CRS: Persons Subject to Reporting
* Based on Model 1 IGA provisions ** Persons described in this row may be exempt from reporting under one of the exemptions to Specified US Person status under FATCA IGAs or Reportable Person status under the OECD CRS
International Response
FATCA* OECD CRS Exemptions from Specified US Persons/Responsible Person Status
Corporations the stock of which is regularly traded on one or more established securities markets (“Publicly Traded Corporations”)
Any corporation that is a member of the same expanded affiliated group (as defined under US law) as a Publicly Traded Corporation
The United States or any wholly owned agency or instrumentality thereof
Any State of the United States, any US Territory, any political subdivision of any of the foregoing, or any wholly owned agency or instrumentality of any one or more of the foregoing
Certain tax exempt organizations, retirement plans, and trusts
Banks REITs and Regulated Investment Companies Certain trust funds Registered dealers in securities, commodities or
derivative financial institutions Brokers
Publicly Traded Corporation Any corporation that is a Related Entity with respect to a
Publicly Traded Corporation Governmental Entities International Organizations Financial Institutions
FATCA vs OECD CRS:
Persons Exempt from Reporting
* Based on Model 1 IGA provisions
International Response • FATCA vs. OECD • How different are the CRS definitions?
• Limits for reporting? • Other differences?
Effects on the Participants • Participants may see reduced value of equity plans
– Complexity of personal filing obligations
– Fines for non compliance at individual level can be severe (penalty could exceed plan benefit)
• US participants who sign on foreign accounts also have FBAR reporting – Compliance is an individual burden and is mixed in with participant’s personal
assets
– Unlike FATCA, penalties for willful failure to comply can be enormous—50% of the highest amount of the account balance each year
– Many companies just eliminate US citizens from signature authority
Effects on the Issuers • Significant complexity for global share plans
– Where are the assets?
– Whose IGA or CRS scheme applies?
Choices for the Issuer • Paternalistic approach or ‘do it yourself’ • What support should the issuer provide to plan participants, if
any? – Issuer plans create reporting requirements – Potential obligation to provide employees with information to assist with
personal tax filing requirements – Who do you need support from?
• Liability – Guidance versus advice – Specificity – e.g. including a country missing another
Effects on Service Provider/Advisor • Registration as FFI • Database scanning • Questionnaires • How do you identify the individuals to report on
– Same employee may have reportable and non reportable plans – Data privacy legislation considerations in certain jurisdictions – Global plans & mobility can add complexity – Asset value calculations broader than plan assets
• Non standardised filing formats under different IGAs • Legislation evolving – unlikely to see more exemptions for
share plans under CRS
Sample Questions • Name • Address • Date of birth
• Place of birth • Country of birth
• Nationality • Dual nationality • Country of tax residency
– Taxpayer reference number
• Additional country of tax residency – Taxpayer reference number
• Third country of tax residency – Taxpayer reference number
• Do you hold US residency or citizenship or a Green Card
Is there Hope for the Future?
Early protoypes for a USB drive?
Is there Hope for the Future? • Blame it on the computer
– If the data can be collected, it will
– It is too easy for digital information to get around state imposed confidentiality restrictions
– Going back to the Stone Age is not generally seen as a desirable outcome
• What can we do? – Make the systems work together as closely as possible
– Keep the government administrators in the loop
– Manage participant expectations
Thank You Panayiota Burquier
Gibson Dunn & Crutcher LLP [email protected]
John D. Heaton
Equiniti [email protected]
June Davenport Solium
Jeffrey M. Trinklein Gibson Dunn & Crutcher LLP [email protected]
