Post on 10-May-2018
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
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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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Why FBAR?
Money laundering
Tax evasion
Terrorism
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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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