24th Annual Health Sciences Tax Conference - ey.com · Page 2 FATCA: yes, it really does apply to...

24th Annual Health Sciences Tax ConferenceFATCA: yes, it really does apply to your organization

December 10, 2014

FATCA: yes, it really does apply to your organization

Disclaimer

► EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the U.S.

► This presentation is © 2014 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of U.S. and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.

► Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP.

► This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances.

► These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.


Presenters

► Deborah PfliegerErnst & Young LLPWashington, [email protected]+1 202 327 5791

► Dawn McGuireErnst & Young LLPBoston, [email protected]+1 617 375 3737

► Frani AufieroDirector, US Group TaxShire Pharmaceuticals


Today’s agenda

► Foreign Account Tax Compliance Act (FATCA) overview and timeline

► Legal entity FATCA classifications► Employee benefit plans► Withholdable payments, processes and procedures


The information reporting and withholding houseChapters 3, 4 and 61

Chapter 4

FATCA (effective July 1, 2014): Collection, validation and reporting of certain

information and documentation to identify offshore investments of US persons

Purpose – Ensure US persons pay US tax on income received through offshore investment

Chapter 3Withholding (generally at 30%) and reporting on certain US source income paid to foreign

persons; also addresses effectively connected income of foreign partners and gains from the sale of real property

Purpose – Collect tax on US source income of foreign persons

Chapter 61Reporting on US and foreign source income paid to US persons (i.e., Form 1099 reporting);

backup withholding applicable only where Taxpayer Identification Number (TIN) and documentation requirements not met

Purpose – Enable Internal Revenue Service (IRS) to match income paid with tax filings of US recipients


FATCA overview

► The Foreign Account Tax Compliance Act was enacted in March 2010► FATCA was generally effective on July 1, 2014, but with phased-in

effective dates► Aimed at ensuring that US persons with financial assets outside the

US are paying US tax on their worldwide income► Requires foreign financial institutions (FFIs) to disclose the identities

and account information of US persons holding accounts with such institutions

► Requires non-financial foreign entities (NFFEs) to disclose the identities of their substantial US owners

► Requires a 30% withholding tax on any “withholdable payment” made to a non-participating FFI or NFFE that has not made proper certifications about its US owners

6


FATCA timeline: significant dates

► July 1, 2014 – first effective date of FATCA► Withholding and due diligence requirements begin for new accounts► Cutoff date for defining grandfathered obligations

► September 1, 2014► Can no longer collect old versions of Forms W-8BEN from individuals

► January 1, 2015► Withholding requirement begins for pre-existing accounts of a prima facie FFI► Cutoff date for defining pre-existing accounts► Can no longer collect old versions of Forms W-8BEN, W-8IMY, W-8EXP and W-8ECI from

entities

► March 15, 2015 – first (limited) FATCA reporting required on Form 1042-S

► March 31, 2015 – first reporting on Form 8966 “FATCA Report”

► January 1, 2016 – end of transitional relief for FATCA (and conforming regulations under chapters 3 and 61) as provided by Notice 2014-33

► July 1, 2016 – withholding and due diligence requirements begin for pre-existing accounts (other than prima facie FFIs)

► January 1, 2017 – withholding requirements begin for gross proceeds


Intergovernmental agreements and local country law

► The FATCA Intergovernmental Agreement (IGA) is an agreement between the US Treasury Department and another country or tax jurisdiction to enable local country administration and certain changes to FATCA requirements that the US government deems appropriate based on local country considerations.

► For certain IGAs (i.e., Model 1 IGAs), local country law is required to be enacted to interpret and enforce the IGA.

► IGAs can alter FATCA entity classifications within a local jurisdiction.► IGA and/or local country law have not been completed for many countries.

Changes to FATCA classifications of entities may be required as IGAs and local country law develop.

► More than one FATCA classification may be applicable to an entity, depending upon where the entity and its account or payor/withholding agent resides.

► Official IRS forms do not accommodate all potential FATCA classifications under IGAs and local country laws.


Today’s agenda

► FATCA overview and timeline► Legal entity FATCA classifications► Employee benefit plans► Withholdable payments, processes and procedures


Legal entity FATCA classifications

► A multinational organization must classify its entities into three general categories:► US entities► Foreign financial institutions ► Non-financial foreign entities

► A US entity must generally provide a Form W-9 to document itself as a US person► In the absence of a Form W-9, apply presumption rules

► An FFI must generally provide a Form W-8BEN-E with a US Global Intermediary Identification Number (GIIN)► Banks, custodians, investment entities and certain insurance companies

► Holding companies

► Treasury centers and internal banks

► Captive insurance companies

► An NFFE must generally provide a Form W-8BEN-E and a certification with respect to substantial US owners


NFFEs

► Active NFFE► Foreign entity that is not a financial institution► Less than 50% of the entity’s gross income from the preceding calendar year is

passive income► Less than 50% of the assets held by such entity are assets that produce or are held

for the production of passive income ► Passive NFFE

► Not a financial institution► Also not a:

► Publicly traded NFFE (or affiliate of a publicly traded entity) ► Excepted territory NFFE ► Active NFFE ► Direct reporting NFFE► Sponsored direct reporting NFFE

► Must provide information regarding all substantial US owners, including names, addresses and TINs, or certification that it has no substantial owners


Today’s agenda



Employee benefit plans under FATCA

► Many benefit plans (e.g., retirement funds) are “investment entities” and therefore classified as FFIs for FATCA purposes► Typically “Exempt Beneficial Owners” (EBOs)

► Employee benefit plan qualifies as an EBO if it meets certain requirements► See Treasury Regulation §1.1471-6(f) and/or Annex II of the IGA of the

country where the plan is domiciled and/or operates► An EBO is excepted from registration and due diligence requirements► Examples of EBOs include:

► Broad participation retirement funds► Narrow participation retirement funds► US qualified plans► Plans eligible for treaty benefits


FATCA requirements: plan that is an EBO

EBO – foreign plan or trust

(relying on administrator)

FFI – foreign custodian

Account holders –plan participants

US withholding agent (USWA) – US financial

institution$

$

$W-8

certifying EBO status

W-8 with GIIN

No IRS registration, GIIN, account due diligence or reporting required under FATCA


FATCA requirements: plan that is an FFI

FFI – foreign plan or trust(relying on administrator)

FFI – foreign custodian

Account holders –plan participants

US withholding agent (USWA) –

US financial institution$

$

$ W-8 with GIIN

W-8 with GIIN

Register with IRS, obtain GIIN and perform due diligence and reporting on account holders


Client experiences and common issues with benefit plans

Distinguish funded from unfunded arrangements► Unfunded

arrangements remain assets of the employer not subject to a separate FATCA analysis

Ascertain the responsible party for FATCA classification► Assets may be held

by party outside the control of employer and may be that party’s responsibility to classify

Apply the EBO and IGA standards ► US-based rules and

standards may not be readily met


Today’s agenda



Payments subject to FATCA

► FATCA introduces the term “withholdable payment,” which includes:► Fixed or determinable, annual or periodical income (FDAP as

defined under Treasury Regulation §1441) that is US source► Gross proceeds from the disposition of property that can produce

interest or dividends that are US source FDAP (e.g., sale of US securities)

► FATCA regulations provide for certain exclusions such as specified “non-financial” payments

► A withholding agent must track the types of payments it makes to identify its FATCA obligations

► A withholding agent must carefully document the source of any FDAP income paid


FATCA withholdable payments and exclusions

► Types of FDAP income included or excluded for FATCA purposes (i.e., chapter 4)Note: All US source FDAP income is subject to chapter 3, unless specifically excluded

* Not subject to chapter 3

FATCA withholdable payments► Insurance premiums* ► Annuities and taxable insurance payments► Bank and brokerage fees► Investment advisory fees► Custodial fees (e.g., fund manager fees)► Payments in connection with lending

transactions► Forward, futures, option or notional principal

contracts► Dividends on US securities► Interest (with certain exceptions)► Original issue discount (excluding short

term)► Certain dividend equivalent payments► Financing leases

Excluded from FATCA► Payments for tangible goods (non-FDAP)*► Fees paid for non-financial services► Software licensing fees► Rent for office space► Lease payments on equipment► Payments for use of other property (e.g.,

royalty or intellectual property)► Freight and transportation expenses► Interest on outstanding bills arising from

services► Interest on deferred purchases (e.g., goods

purchased on credit)


Process flow for USWAs taking into account chapters 3, 4 and 61

► Step 1: payment type. Determine whether an amount to be paid is FDAP income or gross proceeds from the sale of US securities► If it is not, no documentation, withholding or reporting is required

► Step 2: payee type. If the income is FDAP (or gross proceeds from the sale of US securities), solicit a valid Form W-9 from the payee or determine payee is an entity with foreign indicia► If the payee furnishes a Form W-9 and is not an exempt recipient, report

payment on a Form 1099► All payees without a Form W-9 should be backup withheld upon unless it

is an entity with foreign indicia► Step 3: foreign indicia, source. If no Form W-9 received and there

is foreign indicia, determine and document source of income► If the income is foreign source, no withholding or reporting is required



► Step 4: US source but not chapter 4 withholdable payment. If the income is US source, determine whether the payment is a “withholdable payment” for chapter 4 purposes► If the income is not a “withholdable payment” for chapter 4 purposes,

solicit a valid Form W-8 (no FATCA classification required) or Form 8233 and apply chapter 3 rules► Impose 30% withholding (or reduced withholding rate if the payee furnishes a

valid treaty claim, or 0% if the payee certifies that the income is effectively connected with their conduct of a trade or business in the US)

► Report the income and any tax withheld on a Form 1042-S► Note: insurance premiums and gross proceeds on US securities are subject to chapter

4 withholding, but not chapter 3 (gross proceeds become subject to chapter 4 withholding in 2017)



► Step 5: chapter 4 withholdable payment. If the payment is a “withholdable payment” for chapter 4 purposes, determine whether the payee furnished valid chapter 4 certifications with its Form W-8► If the payee has furnished valid chapter 4 certifications, apply chapter 3

(see step 4)► Step 6: document or withhold. If the payee has not furnished valid

chapter 4 certifications, withhold 30% under FATCA and report the income and tax withheld on a Form 1042-S ► Note: FATCA withholdable payments and related withholding that are

allocable to certain US owners of certain NFFEs and owner documented FFIs must be reported on Forms 8966 along with relevant information about such US persons


Presumption rules in the conforming regulations

► For withholdable payments (chapter 4 type payments), the following presumption rules apply to determine the status of the payee as US or foreign in the absence of documentation: ► Undocumented individuals are presumed to be US persons► Certain exempt recipients (The Bad 8) are presumed foreign payees (thus,

when undocumented, nonparticipating FFIs subject to FATCA withholding)► Corporations, foreign governments, international organizations, foreign central

banks of issue, financial institutions, nominees and custodians, brokers and swap dealers

► Note, this rule does not apply if the payor classified the payee as an exempt recipient prior to July 1, 2014

► All other entities (including The Good 9) are subject to the old indicia test –treat as foreign if indicia of foreign status is present► Added foreign telephone number as type of foreign indicia (for accounts opened

on or after July 1, 2014)


Documentation

► Faxed or emailed Forms W-8► Effective March 6, 2014, withholding agents may rely on faxed or pdf versions of

valid withholding certificates (Forms W-8)► Unless the withholding agent knows the sender transmitted the document without the

authority of the person who signed the form

► “Evergreen” Forms W-8► Valid Forms W-8 furnished after June 30, 2014, may be treated as evergreen if:

► No US indicia (individuals only)► The Form W-8 is completed in full and no changes in circumstance have occurred► Documentary evidence furnished with the Form W-8

► Treaty claims cannot be evergreen► For purposes of both chapter 3 and chapter 4, a withholding agent making or

documenting a payment to an entity payee or account holder can obtain the prior version of a Form W-8 until January 1, 2015► Does not apply to individuals

► New Form W-8BEN (Revised February 2014) must be obtained effective September 1, 2014


Documentation

► Treaty claims on Forms W-8► Prior law – a valid treaty claim required a US TIN, unless the claim

related to a payment of interest or dividends on actively traded securities► Effective March 6, 2014, a valid treaty claim can provide either a US TIN

or a foreign TIN (from the country whose treaty benefits are being claimed)► Exceptions for treaty benefits on interest and dividends from actively traded

securities remains and independent personal services► Substitute Forms W-8

► May omit FATCA status on substitute form when not relevant to withholding agent (e.g., traditional vendor payments)

► Use of affidavits for retroactive Forms W-8► Affidavit required when withholding certificate is received more than 30

days after the payment was made► Documentary evidence also required when received more than one year

after the payment was made


New Form W-8BEN-E

► Form W-8BEN-E and related instructions dated February 2014 and June 2014, respectively

► Form W-8BEN-E will be furnished by entities► This is a completely new form – what was once one page is now eight pages► On the final form:

► There are 31 Chapter 4 (FATCA) potential classifications from which a foreign entity must choose its status

► There is a separate certification section for each entity classification that contains specific FATCA certifications

► There is one penalties of perjury statement, signature line and “print name line” at the end of the form► The capacity line has been replaced by a check box indicating authorized

signer► Part XXX requires a list of any substantial US owners of a passive NFFE► An additional sentence has been added to the certifications agreeing to submit a

new form if any certification made on the form becomes incorrect


Reporting

► Currently used by withholding agents to perform their current reporting responsibilities under Chapter 3 (non-resident alien (NRA) withholding and reporting)► Form 1042-S is used to report payments subject to withholding under

Chapters 3 and 4 ► Reporting is to the IRS and to the NRA

► Form 1042 is used for reporting to the IRS the consolidated information reported on Forms 1042-S► Reporting is to the IRS

► New Form 8966 “FATCA Report” will be used to report each account held by:► Substantial US owners of passive NFFEs► Owner-documented FFIs with an owner that is a specified US person


Questions?

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Ernst & Young LLP is a client-serving member firm ofErnst & Young Global Limited operating in the US.

© 2014 Ernst & Young LLP.All Rights Reserved.

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