The Foreign Account Tax Compliance Act (FATCA)

Introduction

SESSION 1

Training ProgrammeFATCA for LATAM Firms

23-24 February 2015 (Panama City), 25 -26 February 2015 (Santo Domingo)

Rodrigo ZepedaIndependent Consultant

Section 1: Historical Background and Context

Section 2: Key FATCA Aims and Objectives

Section 3: FATCA Milestones

Section 4: The Impact of FATCA

Section 5: The Three Pillars of FATCA (Classification, Reporting, Withholding)

Historical Background and ContextSE CT ION 1

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Historical Background and Context

The Qualified Intermediary (QI) System:

• Introduced by the United States (U.S.) Government in 2001 to combat (1) tax fraud by U.S. persons(especially non-U.S. residents); and (2) misuse of double tax treaties by “non-eligible non-U.S.persons”.

• The QI System regulates withholding of income taxes from payments of U.S. source income to non-U.S. persons.

• Chapter 3 (Withholding of tax on nonresident aliens and foreign corporations) of the U.S. InternalRevenue Service (IRS) Internal Revenue Code 1986 (as updated) (IRC) requires withholding on U.S.source Fixed or Determinable Annual or Periodic (FDAP) income.

• Chapter 3 is referred to as a “Cascade” system, where all entities in a chain which lie between a U.S.Withholding Agent (USWA) and the U.S. beneficial owner must provide documentation to the entityabove them with regard to U.S. source income.

18 March 2010:

• The Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) (§501(a)) addeda new Chapter 4 (Code sections 1471 to 1473) to the U.S. IRC (The Foreign Account TaxCompliance Act).

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Historical Background and Context (continued)

Legislative Activities:

• 8 February 2012 –U.S. Treasury and the IRS issue Proposed FATCA Regulations.

• 18 January 2013 – FATCA Final Regulations issued.

• 12 July 2013 – Notice 2013-43.

• 29 October 2013 – Notice 2013-69.

• 2 May 2014 – Notice 2014-33.

• 6 March 2014 – Revised Final and Temporary FATCA Regulations issued.

Context:

• FATCA heralds the beginning of new global Automatic Information Exchange (AIE) systems wheregovernments across the world will exchange tax information on individuals (e.g., OECD’s global‘Common Reporting Standard’ endorsed by the G20, EU amendment to ‘Directive 2011/16/EU’,and ‘Son of FATCA’Agreements).

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Key FATCA Aims and ObjectivesSE CT ION 2

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Key FATCA Aims and Objectives

To addressGlobal U.S.Tax Evasion (U.S.Treasury estimates $100 billion annual offshore losses):

• To combat tax evasion by U.S. persons holding investments in offshore accounts.

• To provide the U.S. IRS with more tools and information to detect U.S. tax evaders concealingassets either DIRECTLY (foreign accounts) or INDIRECTLY (offshore entities or vehicles).

• To impose (1) documentation (classification); (2) reporting; and (3) withholding requirementswith respect to certain payments made to certain foreign entities.

To Help Pay for theU.S. HIREAct (Hiring Incentives to Restore Employment):

• Estimated cost of U.S.$13 billion (2010 to 2019) by U.S. Joint Committee on Taxation (JCT).

International Data Exchange andGlobal Automatic Information Exchange:

• FFIs can register with the IRS and agree to report to the IRS certain information about theirU.S. accounts, including accounts of foreign entities with substantial U.S. owners.

• Will help to develop a global information exchange network (e.g., OECD CRS).

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FATCA MilestonesSE CT ION 3

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FATCA Milestones: Major Deadlines

93

DATE FATCA DEADLINES

1 January 2013: Effective date of FATCA legislation (applies to payments made to FFIs and NFFEs.

1 July 2014: FATCA withholding on U.S. source FDAP income (including interest and dividends) for non-compliant individuals and documented Non Participating FFIs.

1 January 2015: FATCA withholding for non-compliant entities.

1 January 2017: FATCA withholding on gross proceeds from the sale of property that can produce U.S.source dividends or interest .

1 January 2017: FATCA withholding on passthrough (“passthru”) payments.

15 March 2018: U.S. gross proceeds (year-end 2017) subject to withholding included on IRS Forms1042/1042-S by P-FFIs, USWAs, and WAs.

30 June 2018: P-FFIs commence 3 year FATCA compliance program (internal controls ) certification cycle.

FATCA Milestones: FATCA Timeline

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2010 2011 2012 2013 2014 2015 2016 2017

18 March 2010FACTA enacted.

August 2010IRS/Treasury Notice

(Guidance) issued.

April 2011IRS/Treasury Notice

(Guidance) issued.

14 July 2011IRS Notice 2011-53

(Guidance) issued (providing

transitional relief for

significant obligations under

FACTA).

31 December 2012FACTA effective.

1 January 2013Grandfathered Obligations

(Grandfathering rule) extended until this

date. IRS begins to accept applications

for FFI agreements.

17 January 2013Final FACTA

Regulation issued.

30 June 2013Deadline for FFIs to enter

into FFI Agreements in

order to ensure that it is

identified as a P-FFI when

FATCA withholding

begins.

New Account Opening

Procedures apply.

12 July 2013U.S. Treasury announces 6 month

extension to FACTA withholding

requirement starting on 1 July 2014.

1 January 2014FATCA withholding for

FDAP payments for NP-

FFIs and RAHs by FFIs.

Transition period begins

for Affiliates in Non-

Consenting

Jurisdictions.

1 July 2014Withholding by

U.S. Payors to

commence on

U.S. Source

payments made

to foreign (non-

U.S.) financial

institutions

unless such

institutions are

FATCA-

compliant.

30 June 2014Identifying pre-

existing Entity

account holders

that are prima

facie FFIs.

30 September 2014First Reporting Date for Accounts Open on 30 June 2014.

31 December 2014Identifying pre-existing High Value

Individuals accounts (> U.S.$1 million).

1 January 2015FATCA withholding for FDAP and Gross

Proceeds for NP-FFIs and RAHs by FFIs.

FATCA withholding for Passthru Payments

originally scheduled to commence.

15 March 20151st Reporting on Chapter 4

Reportable Payments begins

for WAs (Forms 1042, 1042-S).

31 December 2015Identifying remaining pre-

existing accounts (Entities

and Low Value).

15 March 20161st Reporting on Gross

Proceeds begins for WAs

Forms 1042, 1042-S).

31 March 20161st Reporting of FDAP and

Other Payments for NP-FFIs

and RAHs by FFIs.

1 January 2017Delayed implementation of withholding

on Gross Proceeds.

Delayed implementation of foreign

Passthru Payment withholding

obligation (no earlier than).

31 March 20172nd Reporting of FDAP and

Other Payments for NP-FFIs and

RAHs by FFIs.

The Impact of FATCASE CT ION 4

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The Impact of FATCA: Industries

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Commercial banks, retail banks, investment banks, banking-type

operations and subsidiaries

Mutual funds, hedge funds, private equity funds, non-U.S. retirement funds,

master funds, feeder funds

Investments in U.S. real estate made through U.S. and non-U.S. corporations,

U.S. Real Estate Investment Trusts (REITs), and loans by non-U.S. investors

Insurance companies (and holding companies) issuing (or liable under)

certain cash value insurance or annuity contracts, certain captive insurance

companies

Investment advisers, wealth managers,

brokers in financial instruments, registrar agents

Trusts, trust companies, private trust companies

Treasury centers, holding companies, captive finance companies, securitization

vehicles

Banking Industry

Funds Industry

Real Estate Industry

Insurance Industry

Professional Service Firms

Trusts

Other

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The Impact of FATCA: Institutions

IRS estimates number of FFIs affected by FATCA between 300,000 and 500,000.

High Risk Institutions: FFIs including:

• Depositary institutions (e.g., banks).

• Custodial institutions (e.g., mutual funds).

• Investment entities (e.g., hedge or private equity funds).

• Certain insurance companies (e.g., offering cash value products or annuities).

Low Risk Institutions: FATCA Exempt (registration and reporting) including:

• Government entities.

• Non-profit organisations.

• Small and local financial institutions.

• Certain retirement entities.

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The Impact of FATCA: Geographical

143

DBFS Ltd. (2015). GenMap, at: http://www.dbfs.co.uk/genmap/.

The Impact of FATCA: Financial

• FFIs (that are not exempt) must register and agree to report to the IRS or face a30% withholding tax on certain U.S. source payments made to them.

• JCT conservative projection of U.S.$8.7 billion over 10 years.*

• The ‘Crossbridge’ Consulting Firm estimates U.S.$150-200 million compliance costsfor medium-sized banks.

• Initial FATCA compliance costs forCanada’s 5 biggest banks were U.S.$693.5 million.**

• Small to medium-sized Financial Institutions likely to find FATCA compliance most difficult becausethey may not have existing compliance systems in place, or existing KYC/AML systems may beinadequate, and client due diligence remediation may be high.

Latest Figures for IRS Registered LATAM FFIs:

• 5082 (Brazil); 795 (Panama); 639 (Mexico); 381(Chile); 112 (Dominican Republic).

• LATAM institutions may potentially have high FATCA compliance costs (e.g., IT; staff; training;translation, remediation projects, adapting systems, FATCA identification and reporting software).

* JCT, (2010). "JCT Estimates Budget Effect of HIRE Act" JCX-5-10 (23 February), Doc 2010-3977, 2010 TNT 36-20.

** Trichur, R. (2014). “Canada Banks Tally Their Tax-Compliance Tab” (27 July), The Wall Street Journal.

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The Three Pillars of FATCA (Classification, Reporting, Withholding)SE CT ION 5

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The Three Pillars of FATCA

175

Classification

• Classification of Financial Institutions.

• Classification of Non-Financial Foreign Entities.

• Classification of Client Entities.

• Classification of Client U.S. Persons.

• Identification of FATCA Exemptions.

• Determination of Participating or Non-Participating status for Financial Institutions.

• Determination of the application of a Model 1 IGA, a Model 2 IGA, or an U.S. IRS FFI Agreement.

• Pre-Existing and New Account Due Diligence for Individuals and Entities.

Reporting

• Determination of reporting obligations under a Model 1 IGA, Model 2 IGA, or IRS FFI Agreement reporting framework.

• Determination of the FATCA reporting timeline relevant for Foreign Financial Institutions or Non-Financial Foreign Entities.

• Collecting Reportable Information on U.S. persons and financial accounts.

• Registering with the U.S. IRS.

• Reporting by Participating Foreign Financial Institutions on U.S. accounts.

• Reporting by Participating Foreign Financial Institutions on Recalcitrant Accounts.

Withholding

• Determination of who is subject to withholding.

• Determination of withholdable payments.

• Determination of gross proceeds.

• Determination of passthru payments.

• Determination of exceptions from FATCA withholding.

• Determination of grandfathered obligations.

• Determination of modified grandfathered obligations.

• Devising a withholding system to collect and remit withholding payments to the U.S. IRS.

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Presentation Information

DECLARATION OF CONFLICTING INTERESTSThe author declares that to the best of his knowledge he has no potential conflicts of interest with respect to the research orauthorship of this presentation.

ABOUT THE PRESENTERRodrigo Zepeda is an independent consultant who specialises in derivatives and financial services law, regulation, andcompliance. He holds a LLM Masters degree in International and Comparative Business Law, has been an Associate of theChartered Institute for Securities and Investment since 2004, and has passed the New York Bar Examination. He has alsopublished widely in leading industry journals such as the Capco Institute’s Journal of Financial Transformation, the Journal ofInternational Banking Law and Regulation, as well as e-books on derivatives law. Noted publications include “Optimizing RiskAllocation for CCPs under the European Market Infrastructure Regulation”; “The ISDA Master Agreement 2012: A MissedOpportunity”; “The ISDA Master Agreement: The Derivatives Risk Management Tool of the 21st Century?”; and “To EU, or not toEU: that is the AIFMD question”.

CONTACT DETAILSEmail: rodrigo@zepeda.co.ukLinkedIn: http://www.linkedin.com/in/rodrigozepedaMobile: UK + (0)7592457373

The Foreign Account Tax Compliance Act (FATCA)

Introduction

SESSION 1

Training ProgrammeFATCA for LATAM Firms

23-24 February 2015 (Panama City), 25 -26 February 2015 (Santo Domingo)

Rodrigo ZepedaIndependent Consultant