FATCA Highlights Volume 7

FATCA Highlights HMRC Begins to Fill In Important Due Diligence Details

Released January 2013 Volume 7

By Ellen Zimiles, Richard Kando, Jeffrey Locke and Salvatore LaScala

G L O B A L I N V E S T I G A T I O N S & C O M P L I A N C E

1 | FATCA HIGHLIGHTS | VOLUME 7

I . INTRODUCTIONThe United Kingdom recently published additional details for the implementation of the Foreign Ac-count Tax Compliance Act (“FATCA”), and finan-cial institutions operating in the United Kingdom now have additional guidance regarding FATCA com-pliance. On 18 December 2012, the HM Revenue & Customs (“HMRC”) released Implementation of Inter-national Tax Compliance (United States of America) Regulations 2013, Guidance Notes (“HMRC FATCA Guidance”),1 which provides much needed detail to the intergovernmental agreement (“IGA”) to imple-ment FATCA signed by the United Kingdom and United States on 12 September 2012 (“U.K. Signed IGA”).2 Additionally, draft regulations (“U.K. FATCA Draft Regulations”) were published on 18 December 2012.3 The U.K. FATCA Draft Regulations contain eight and a half pages of text and Schedule 1, which is the U.K. Signed IGA.

I I . BACKGROUND ON HMRC FATCA GUIDANCE AND THE U.K. FATCA DRAFT REGULATIONS

The U.K. Signed IGA is based primarily on the Model 1 IGA released on 26 July 2012 by the governments of the United States, United Kingdom, France, Italy, Spain and Germany. After the U.K. Signed IGA was announced, the HMRC requested comments from industries and organizations affected by FATCA. The HMRC asked 24 specific questions and received 69 written responses and conducted a town hall meet-ing.4 The responders answered the 24 questions as

well as raised other FATCA compliance concerns that the industry wanted the HMRC to address. On 18 December 2012 the HMRC released the Sum-mary of Responses and the HMRC FATCA Guidance, which together provide many of the details and ex-planation necessary to better digest the U.K. FATCA Draft Regulations.

I I I .KEY DETAILS PROVIDED IN HMRC FATCA GUIDANCE

Below details a few of the key areas in which guid-ance was provided.

A. Due Diligence: New AccountsThe HRMC FATCA Guidance allows financial insti-tutions to add further updates to their on-board-ing systems, policies and procedures and takes financial institutions one step closer to having FATCA compliance become business as usual.

1. Self-certification for New Accounts, Simplified

The FATCA self-certification for new accounts has been simplified. Updates to on-boarding procedures for new individual accounts can be as simple as obtaining two statements from the potential new account holder: (1) the account holder is not a resident of the United States for tax purposes and (2) the ac-count holder is not a U.S. citizen. The HMRC FATCA Guidance states it is up to the finan-cial institution to choose the wording of the self-certification for new accounts and pro-vides examples that are set forth in the below table:5

1 See Implementation of International Tax Compliance (United States of America) Regulations 2012, Guidance Notes, (18 December 2012) available at http://www.hmrc.gov.uk/drafts/uk-us-fatca-guidance-notes.pdf.2 See Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America to Improve International Tax Compliance and Implement FATCA (12 September

2012) (the “U.K. Signed IGA”). The U.K. Signed IGA is available at http://www.hm-treasury.gov.uk/d/facta_agreement_tax_compliance_140912.pdf.3 See Statutory Instruments, Taxes, The International Tax Compliance (United States of America) Regulations 2013 (2013 No.**) (released 18 December 2012) in draft form available at http://www.hmrc.gov.uk/drafts/uk-us-fatca-regulations.

pdf.4 For more information about the responses see Implementing the UK-FATCA Agreement, Summary of Responses (“Summary of Responses”) (18 December 2012) available at http://customs.hmrc.gov.uk/channelsPortalWebApp/channel-

sPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&propertyType=document&columns=1&id=HMCE_PROD1_032480.5 HMRC FATCA Guidance pp. 40–42.


The same questions described above can be used for new entity accounts that are pas-sive non-financial foreign entities (“NFFEs”).6 For these accounts, the financial institution has to determine if the controlling person is a U.S. citizen or a U.S. resident.

It should also be noted that collection of the U.S. TIN is required for new accounts.

2. U.S. Person or Tax Resident of Another Country

The HMRC FATCA Guidance makes refer-ence to other possible non-U.S. reporting re-quirements on account holders. Specifically, the HMRC states, “[a] Financial Institution may in any case want to know where the account holder is resident for tax purposes

as this may enable the Financial Institution to comply with other reporting requirements…”7 This is important to note because it potential-ly foreshadows future FATCA-like laws being implemented by other countries.

3. Applies to First New Account

The new account opening self-certification only has to occur one time for each account holder.8 If the financial institution obtains a self-certification pursuant to its FATCA com-pliant new account opening procedures, the account holder does not need to re-certify his/her status as the account holder’s rela-tionship with the financial institution grows and additional accounts are opened.

6 Ingeneral,passiveNFFEsarenon-financialforeignentitiesthatdonotoperateatradeorbusinessanddonotfallintooneoftheotherexceptionsthattheUSgovernmentandapartnercountry,inthiscasetheUK,deemposesalowriskof tax evasion.

7 HMRC FATCA Guidance p. 40.8 HMRC FATCA Guidance, p. 66.

SELF-CERTIFICATION QUESTIONS FOR NEW ACCOUNTS

TYPE OF ACCOUNT OPENING

APPLICATIONQUESTIONS/EXPLANATORY LANGUAGE

Telephone Application Example

1. Can you confirm that you are not resident in the US for tax purposes and that you are not a US Citizen?2. The paperwork sent to the investor should include this response and require them to contact the FI if the answer is incorrect.

Online Application Example

1. Tick this box if you are resident in the US for tax purposes or if you are a US citizen.2. Tick this box if you are not resident in the US for tax purposes or a US citizen.

Paper Application Example 1

1. Tick this box if you are resident in the US for tax purposes or if you are a US citizen.2. Tick this box if you are not resident in the US for tax purposes or a US citizen.


1. A box on the application includes a line for the account holder to fill in country of residence for tax purposes.2. If this is not filled in, the application is rejected.3. The individual would have to be provided guidance that a US citizen is a US resident for tax purposes.


Signature box includes the wording “by signing this form you confirm that you are not resident in the US for tax purposes and that you are not a US citizen”.


B. Due Diligence: Pre-existing Account Review1. Self-Certification for Pre-Existing Accounts

Various parts of the HMRC FATCA Guidance make reference to the necessary self-certifi-cation being made on United States Internal Revenue Service (“IRS”) Form W-8 or Form W-9 or another similar agreed form. Accord-ing to the HMRC, “[c]urrently there is no simi-lar agreed form that can be used for these purposes. In most cases this will mean that a Financial Institution will be required to obtain IRS form W-8 or W-9 to satisfy the relevant due diligence requirements.”9 Thus, as of now, financial institutions will need to utilize U.S. tax forms for pre-existing accounts that require self-certification.

The IRS has released updated, draft ver-sions of its Forms W-8. The draft version of the W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding (Enti-ties), is six pages long and contains 25 parts.10

a. Pre-Existing Individual Accounts

The self-certification required for pre-ex-isting accounts is different than the self-certification required for new accounts. For pre-existing individual accounts, a self-certification is required if after re-viewing the account holder, the finan-cial institution discovers that the account holder has certain U.S. indicia.11 Other in-formation from the account holder may also be necessary and is dependent on the U.S. indicia identified.

b. Pre-Existing Entity Accounts

According to the HMRC FATCA Guid-ance, there are three instances when a self-certification is necessary for pre-exist-ing entity accounts:

i. An entity account holder was identified as a Specified U.S. Person and the account holder disputes the categorization;

ii. An entity account holder was identified as a financial institution, but is not located in the United Kingdom or another partner jurisdiction; and

iii. An account holder was identified as a Passive NFFE with an aggregated balance or value in excess of $1 million.

The HMRC FATCA Guidance sets forth that in these instances the pre-existing entity account holder should provide a self-certification regarding its status and for Passive NFFEs the self-certification also needs to include whether the controlling person is a U.S. citizen or resident.12

2. Aggregation Required if Systems Link Even If Values Do Not

The HMRC FATCA Guidance outlines the re-quirements for aggregation, which, in gen-eral, states aggregation is required if the systems link the accounts by a specific data element. The HMRC FATCA Guidance makes an important clarification in that aggrega-tion of accounts is still required if the finan-

9 HMRC FATCA Guidance, p. 47.10 SeethedraftFormW-8BEN-E,CertificateofStatusofBeneficialOwnerforUnitedStatesTaxWithholding(Entities),availableat:http://www.irs.gov/pub/irs-utl/formw8benentityexeccirculation2.pdf.11 U.S.indiciaincludes:(1)identificationoftheaccountholderasaU.S.citizenorresident;(2)unambiguousindicationofaU.S.placeofbirth;(3)currentU.S.mailingorresidenceaddress(includingaU.S.postofficeboxorU.S.“in-care-of”

address);(4)CurrentU.S.telephonenumber;(5)StandinginstructionstotransferfundstoanaccountmaintainedintheUnitedStates;(6)CurrentlyeffectivepowerofattorneyorsignatoryauthoritygrantedtoapersonwithaU.S.address;or(7)An“in-care-of”or“holdmail”addressthatisthesoleaddresstheReportingUnitedKingdomFinancialInstitutionhasonfilefortheaccountholder.Inthecaseofapre-existingindividualaccountthatisaLowerValueAccount,an“in-care-of” address outside the U.S. shall not be treated as U.S. indicia. U.K. Signed IGA, Annex I, II.B.1.

12 HMRC FATCA Guidance, pp. 46–47.


cial institution systems link the accounts by a data element even if values are not currently summed.13 This could require some addition-al information technology build for financial institutions that link accounts by customer identification, but have not totaled the val-ues of accounts. It should also be noted that for individual accounts, relationship manag-ers, when present, are required to aggregate accounts based on their knowledge to de-termine if the account holder has a balance or value in excess of $1,000,000 (“High Value Account”) at the financial institution.

3. QI Exception: Rely on Previous Due Diligence

Financial institutions that previously entered into a qualified intermediary (“QI”) agree-ment with the IRS have already taken on some additional due diligence responsibili-ties. The U.K. Signed IGA was silent on wheth-er past due diligence in this context can be relied upon. The HMRC FATCA Guidance

takes a position similar to the FATCA Pro-posed Regulations and allows financial institu-tions to rely on the due diligence already per-formed with a relationship manager enquiry for High Value Accounts serving as an ad-ditional verification of appropriate account holder classification.14 The U.K. FATCA Draft Regulations also states that QIs do not need to conduct the electronic or paper search for U.S. indicia for individual accounts.15

C. ConfirmingtheReasonablenessofthe Self-Certification

Significant reliance will be placed on the self-certification provided by the account holder. The HMRC recognizes this and provided examples of how to check the reasonableness of the self-cer-tification. This is important because these checks will have to become business as usual by 1 Janu-ary 2014. The table below sets forth the examples provided by the HMRC:16

13 HMRC FATCA Guidance, pp.47–48.14 HMRC FATCA Guidance, pp. 58 and 62. 15 U.K. FATCA Draft Regulations, Section 9.6.16 HMRC FATCA Guidance pp. 43–45.

CONFIRMING THE REASONABLENESS OF SELF-CERTIFICATION

PROCESS CHECK REQUIRED

New application Other information in the account opening and other information the FI has on the individual.

1. New application from individual advised by Independent Financial Advisor (“IFA”) 2. IFA performs AML checks and provides certificate

Other information in the account opening. Where no other information exists, reasonableness can be based on account opening alone.

1. New application2. IFA obtains self-certification

IFA provides certification to FI confirming reasonableness of the self-certification.

1. New application2. FI conducts AML

Other information in the account opening. Where no other information exists, reasonableness can be based on account opening alone.


D. DefinitionofRelationshipManagerOne area that could continue to be a point of confusion will relate to the relationship manager and his/her role. According to the Summary of Responses, “… the HMRC feels that it would be difficult to set out a precise definition in its regu-lations and that it should be left to an institution to determine whether the relationship manager role exists within its organization and who is best placed to undertake the designated due dili-gence obligations.”17

The above makes it appear that it will be left en-tirely to the financial institution to determine who the relationship managers are for compliance purposes, but the HMRC takes a different position in the HMRC FATCA Guidance and provides the following definition:

a relationship manager is assumed to be any person who is an officer or other employee of the Financial Institu-tion who is assigned responsibility for specific account holders on an ongo-ing basis, who advises the account holders regarding their accounts and arranges for the overall provision of financial products, services and other related assistance.18

There is no definition for relationship manager in the U.K. FATCA Draft Regulations or the U.K. Signed IGA. This definition will lend some guid-ance to financial institutions as they determine which of their employees serve the function of relationship manager for FATCA compliance. The definition of relationship manager is important because the U.K. Signed IGA identifies very spe-cific responsibilities for the relationship manager. These responsibilities include:

1. For High Value Accounts, the relationship manager must state annually whether they know an account to be held by a Specified U.S. Person.19

2. For pre-existing accounts, the relationship manager must aggregate accounts the relationship manager knows are associated with one another to determine if the aggregate balance is in excess of $1,000,000.20

3. There must be policies and procedures in place that the relationship manager checks for change of circumstances for accounts, like new U.S. indicia (i.e. a change of an address to a U.S. address).21

Ironing out the definition to be used by the finan-cial institution is an important early step to move towards FATCA compliance.

17 Summary of Responses, p. 19.18 HMRC FATCA Guidance, p.64.19 U.K. Signed IGA. Annex I Section II.D.4.20 U.K. Signed IGA, Annex I, Section VI.C.3.21 U.K. Signed IGA. Annex I Section II.E.5.


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CONTACTS »

EllenZimiles Managing Director Head, Global Investigations & Compliance +1.212.554.2602 [email protected]

RichardKando Director, FATCA Task Force Leader Global Investigations & Compliance +1.212.554.2698 [email protected]

JeffreyLocke Director, FATCA Task Force Leader Global Investigations & Compliance +1.212.554.2694 [email protected]

SalvatoreLaScala Managing Director Global Investigations & Compliance +1.212.554.2611 [email protected]

Dr.RayNulty Managing Director Financial Services +44 (0) 788 750 3854/ +353 (0) 87 0541416 [email protected]

DavidBrown Director, Business Development Global Investigations & Compliance +1.416.777.2438 [email protected]

IV.CONCLUSIONThe U.K., with the release of three important docu-ments, the HMRC FATCA Guidance, the U.K. FATCA Draft Regulations and the Summary of Responses, provides guidance into how FATCA and the U.K. Signed IGA will be enacted into local law. Over the 100+ pages of reading many details are flushed out, but there are still many questions such as (1) how will the financial institution register and receive its FATCA identification number, (2) how should reporting infor-mation be formatted and (3) when will a self-certifi-cation alternative to IRS Form W-8 and W-9 be avail-able? Accordingly, the HMRC is accepting additional comments up to 13 February 2012.

Separate and apart from the U.K., the HMRC also of-fers some potential guidance to the future of FATCA and automatic tax information exchanges as it sug-gests that a financial institution may want to know the tax residence of its account holder – not merely the account holder’s U.S. or non-U.S. status. As questions remain relating to whether other countries will pass FATCA-like statutes, financial institutions will benefit from a flexible approach to FATCA implementation and keeping an eye on further developments around the globe.

FATCA Highlights Volume 7

Business

Transcript of FATCA Highlights Volume 7