Seminar Fatca update

Briefing on new proposed FATCA regulations Financial Services

15 March 2012

Briefing on new proposed

FATCA regulations

15 March 2012

Agenda

1) Welcome and introductory comments Koen Marsoul

2) The New proposed regulations of February 8, 2012: highlights and insights Koen Marsoul

► Overview and highlights of new proposed regulations

► Market Reaction

► Key changes

► Insights and implications

► What next?

3. The FATCA Challenge Sylvie Goethals

4. Wrap-up and question time Koen Marsoul and Sylvie Goethals

Welcome and introductory comments

by Koen Marsoul

15 March 2012

The New proposed regulations of February 8, 2012: highlights and insights

by Koen Marsoul

15 March 2012

Overview and highlights of new proposed regulations


FATCA regulations

15 March 2012

Overview of draft regulations

• Abolishment of concept of Private Banking • ―High value‖ individual account threshold increased to US$1m • de minimis thresholds for insurance contracts and entity accounts introduced: US$250k • Expanded scope of ―Deemed Compliant‖ Foreign Financial Institutions (FFI) • Introduction of ―Limited FFIs‖ to help with legal and data privacy barriers some FFIs face

in complying with FATCA • Deadlines unchanged for enhancements to new account onboarding processes and

systems • Reliance on existing KYC/AML processes and information for account due diligence and

new account on-boarding • Significant clarity on due diligence required for Non Financial Foreign Entities (NFFE) • Clarifies scope and responsibilities for US and foreign (Non-US) withholding agents • IRS reporting on ―Specified US Persons‖ in 2014 and 2015 focused on account holder

identification • Reporting on Specified US Persons in 2016 and 2017 phases-in income and gross

proceeds reporting • Phased withholding begins in 2014 for US sourced income and gross proceeds • Withholding on foreign passthru payments no earlier than 1 January 2017 • No obligation to check if account holders have a green card or dual nationality individuals • ―Grandfathered obligation‖ exception extended to 1 January 2013

Highlights

• Treasury also released a joint statement from the United States, France, Germany, Italy, Spain and the United Kingdom announcing an agreement to explore an intergovernmental approach to FATCA implementation

• Would allow FFIs in each ―FATCA partner‖ country to report required information to each country's tax authority, rather than to the IRS directly. Foreign tax authorities would, in turn, pass information to the IRS under the respective countries‘ Treaty Exchange Information Agreements

• Eliminates certain onerous aspects of FATCA, such as foreign passthru payment withholding, for FFIs in partner countries

Potential intergovernmental FATCA approach

Market Reaction


FATCA regulations

15 March 2012

Market reactions to draft regulations ► On 8 February the proposed regulations were published by the IRS

covering 388 pages, including a preamble of 93 pages. Do not

underestimate the time required for sign off from key stakeholders

Key changes

Section #

Section 1. General and overall scope


FATCA regulations

15 March 2012

1. General and overall scope Additional guidance has been provided on what constitutes a financial institution or financial account, but otherwise the

overall scope for banking and asset management is broadly speaking unchanged. Insurance companies have greater

clarity on which products are in and out of scope.

No. Category Guidance under the Notices Proposed Regulations Implications

1.1 FFI Agreements Each FFI that intends to become

a participating foreign financial

institution (PFFI) will be required

to execute an FFI Agreement

with the IRS. The exact terms

and language of the agreement

have not yet been released.

The Treasury and the IRS intend to

publish a draft model FFI Agreement

in early 2012 and a final model in

autumn 2012.

Despite the lack of a draft FFI

Agreement, the Proposed

Regulations set forth the general

requirements that will apply to an FFI

under the FFI Agreement. Especially

in light of the relative short comment

period for the Proposed Regulations,

FFIs should commence assessing

their capacity to comply with the

Agreement‘s requirements and, if

applicable, may want to consider

providing comments to the Treasury

and the IRS.

1.2 Joint statement A joint statement was made by the

UK, France, Germany, Italy, Spain

and the United States that they will

develop an intergovernmental

approach to FATCA in exchange for a

reciprocal agreement by the United

States. It is likely that if this approach

is pursued then other countries would

follow suit, both in the EU and

elsewhere.

While this approach may deal with

any potential conflicts between

FATCA and laws in FFI home states

and mitigate the more onerous

remove the worst aspects of FATCA,

in particular the passthru payment

regime, it appears that customer

identification and documentation

requirements will broadly remain the

same.


FATCA regulations

15 March 2012

1. General and overall scope The concept of deemed compliance has been expanded.


1.3 Deemed

Compliance

Certain FFIs may be deemed

compliant even though they do

not enter into an FFI Agreement,

provided certain conditions are

met. For example, a local FFI

with no operations or customer

solicitation outside of its home

country, which engages in

customer identification to ensure

there are no US (or certain other

types of) accounts, and which

agrees to transfer or close any

such account that it finds, may

qualify as a deemed-compliant

FFI if certain requirements are

satisfied.

The deemed compliance rules have

been expanded beyond earlier

guidance. Certain FFIs may be

treated as deemed-compliant without

having to register with the IRS, if they

satisfy certain conditions.

However, depending on the type of

FFI, geographical restrictions on the

location of business, restrictions on

permitted account holders, limitations

on the value of balance sheet assets,

etc., may apply in order to qualify for

deemed compliance status.

Deemed compliance status may

especially be of interest to certain

retirement funds, non-profit

organisations, and members of

groups with other members that are

participating FFIs. Because of the

restrictions in place, other types of

financial institutions such as banks

may find it difficult to avail

themselves of deemed-compliant

status.


FATCA regulations

15 March 2012

1. General and overall scope The Expanded Affiliated Group can contain a Non-participating FFI during two years. The concept of the Limited FFI does

involve being withheld upon.


1.4 Expanded

Affiliate Group

(EAG)

For groups of financial

institutions each member of the

‗expanded affiliate group‘ (EAG)

must be a PFFI or a deemed-

compliant FFI in order for any

group member to avoid

withholding under FATCA. An

EAG generally includes every

non-US financial institution that

is more than 50% owned by a

common parent. Each EAG

generally is required to

designate a lead FFI to act as a

central contact point with the

IRS for certain issues

concerning the members of the

group.

Members of an EAG generally must

be either a PFFI or a registered

deemed-compliant FFI. However,

certain branches and FFI affiliates that

are unable to comply with all the

requirements in the FFI Agreement

because of local law restrictions will

not necessarily ―taint‖ other members

of the EAG before 1 January 2016

During this ―grace period‖, such

branches and affiliates are generally

treated as non-participating FFIs and

are required to satisfy certain other

requirements.

The window allowed for bringing all

members of the EAG into compliance

should be welcome relief for certain

FFI groups. However, it is important

that the conditions are satisfied and

that alternative solutions are effected

before the end of the ―grace period‖.


FATCA regulations

15 March 2012

1. General and overall scope Insurance products remain in scope but de minimus rule for pre-existing contracts has been introduced. Changes to

previous deemed compliance rules for funds may not be satisfactory.


1.5 Product Scope

(Insurance)

There is some uncertainty

around the product scope for

insurance. Guidance suggests

that the insurance contracts with

a cash value or investment

component are within scope.

Insurance companies (and holding

companies of insurance companies)

generally are expressly included in

the definition of financial institutions.

Insurance contracts with a cash value

will be in scope subject to a $250,000

de minimis rule for pre-existing

contracts.

Insurance remains in scope for

FATCA despite many of the

representations made by global

insurance companies. The de

minimis rule for pre-existing

contracts will significantly reduce the

number of contracts which have to

be reviewed. However, changes for

new customers will remain a key

issue for securing FATCA

compliance.

1.6 Product Scope

(Asset

Management)

There is some uncertainty

around the product scope for

certain investment vehicles. The

IRS and the Treasury are

considering whether, for

example, exchange traded funds

may qualify as deemed-

compliant FFIs.

There is additional guidance on the

application of FATCA to funds and the

asset management industry. However

many of the technical issues raised by

asset managers in comments to

Treasury have not been addressed.

Additionally, the scope for deemed-

compliant status for investment funds

has been expanded but contains

some key restrictions.

Asset managers will need to assess

the impact across their fund range

and quickly determine where

uncertainties in the Proposed

Regulations still raise concerns and

consider highlighting these to the

IRS.


FATCA regulations

15 March 2012

1. General and overall scope Compliance self-certification required.


1.7 CCO The Chief Compliance Officer or

another equivalent-level officer

(responsible officer) of an FFI

will be required to certify to the

IRS to

(1) the timely completion of

various steps in the account

identification procedure as

prescribed in Notice 2011-34,

(2) the absence of any activity or

policy in place between the

publication date of Notice 2011-

34 and the effective date of the

FFI Agreement assisting or

encouraging circumvention of

US account identification

procedures and

(3) the existence of written

policies and procedures in place

as of the effective date of the

FFI Agreement prohibiting

employees from advising US

account holders on how to avoid

having their US accounts

identified..

The FFI Agreement will require the

PFFI to adopt written policies and

procedures on due diligence and to

conduct periodic reviews of its

compliance with these policies and

procedures.

In addition, a responsible officer must

also certify to the IRS that (1) the PFFI

has completed various stages in the

account review and identification

process at prescribed times and (2)

the PFFI did not have any formal or

informal practices in place from 6

August 2011 through the date of the

certification to assist account holders

in avoiding the FATCA rules.

For a registered deemed-compliant

FFI the Chief Compliance Officer (or

an individual of equivalent standing)

also has certification obligations

regarding the FFI‘s satisfaction of

relevant requirements.

Mechanisms and procedures need to

be established to allow and support

the officer sign-off and certification.

In large and diverse organisations

establishing and maintaining the

appropriate control mechanisms may

be burdensome.

The Treasury Department and the

IRS request comments regarding the

scope and content of such reviews

and the factual information and

representations FFIs should be

required to include as part of such

certifications


FATCA regulations

15 March 2012

1. General and overall scope External audits not routinely required. De minimis rule for individuals is largely unchanged. Aggregation rules have been

further detailed with new role for relationship manager. New de minimis rule for entities.


1.8 External audit The existence of a requirement

to have external audits

performed was unclear.

The FFI agreement will not require

that compliance be verified through

third-party audits on a predetermined

or random basis.

In case IRS has concerns about

compliance it may impose ,

enhanced compliance verification

requirements such as an external

audit .

It is being considered to coordinate

the audit requirements for QIs with

the verification procedures for PFFIs.

1.9 De minimis

Rule Accounts held by individuals

with a balance not exceeding

$50,000 may be treated as non-

US and therefore outside the

scope of the FATCA

documentation and reporting

requirements. For purposes of

determining the account

balance, an FFI is required to

treat as a single account all

accounts treated by the FFI (or

its affiliates) as commonly

owned under the FFI‘s

computerized recordkeeping

systems.

The de minimis rule for individual

accounts is largely unchanged.

Aggregation in applying the de

minimis threshold is only required

where the accounts are already linked

by the FFI‘s computerised systems or

for accounts that a relationship

manager has reason to know are

owned by the same person.

A new de minimis threshold of

$250,000 has been introduced in

respect of entity accounts.

Aggregation was the most significant

change (to Banks in particular) when

applying the de minimis rules. These

changes mean that FFIs will need to

revisit decisions made around

applying the de minimis thresholds

and should reduce the compliance

burden in retail banking in particular.

The de minimis rule may remove the

need to establish whether an entity is

excepted (for example as trading) or

establish the ownership for entities

and will be particularly beneficial to

commercial and SME relationships

meaning a significant reduction in

cost for those segments of the

business.


FATCA regulations

15 March 2012

1. General and overall scope


1.10 Private Banking There are heightened account

identification requirements on

FFIs with respect to accounts

classified as private banking

accounts. The definition is

based on a number of criteria

and potentially includes areas

not typically considered to be

within private banking. In

addition, Relationship Managers

are required to personally

perform identification

procedures on certain private

banking clients, and to create

and maintain lists of US, non-

US and recalcitrant accounts.

The additional private banking

requirements have been removed.

Instead there is an ‗enhanced review‘

for all preexisting individual accounts

with a balance or value exceeding

$1m.

This enhanced review involves an

inquiry into the knowledge of the

relationship manager and a review of

a defined list of documents—there is

no longer a requirement to review all

documents held by the FFI.

Whilst high value accounts remain a

focus of the Proposed Regulations,

the changes result in a better defined

framework for private banking

departments and wealth managers to

apply and should reduce the scale of

the task faced.

Relationship managers will still be

involved in this process and may

need to identify changes in

circumstances of an account.

Overall there remains a substantial

training and compliance burden of

private banks and on the relationship

managers.

1.11 Grandfathered

Obligations

Withholding under FATCA

generally is not required with

respect to obligations

outstanding on 18 March 2012.

Grandfathering has been extended to

cover obligations outstanding on 1

January 2013.

Extended grandfathering means that

more products are likely to be out of

scope. For example, a life insurance

contract that is payable upon the

earlier of reaching a stated age or

death is grandfathered if it is

outstanding on 1 January 2013.


FATCA regulations

15 March 2012

1. General and overall scope


1.12 Certain New

Provisions

New provisions have been introduced

to exclude certain retirement, pension

and other tax-favoured accounts from

the scope of FATCA provided they

meet specific criteria.

Debt and equity interests in financial

institutions other than investment

vehicles generally are not treated as

financial accounts unless the value of

the interests is determined primarily

by reference to assets that give rise to

withholdable payments.

The scope of products benefiting

from this rule will need to be

considered in each local market but

this should reduce the process and

system changes.

Section #

Section 2. New accounts


FATCA regulations

15 March 2012

2. New accounts

The most pressing deadline for FFIs is to have a FATCA compliant on-boarding process by 1st July 2013. Despite positive

commentary from Treasury accompanying their release on FFIs being able to rely extensively on existing customer intake

procedures, changes may be needed to FFIs’ processes.

No. Guidance under the Notices Proposed Regulations Implications

2.1 Obtain documentary evidence to

establish if a customer is a US or

non-US person.

Whilst the intent appears to be that FFIs

generally may rely on existing account-

opening procedures, the requirement to

obtain/review government-issued

identification for individuals generally has

remained.

The requirement to review and/or obtain

paper copies may create a significant

burden for those markets where paperless

AML/KYC checks are in place. This will

involve a material change to procedures

particularly for telephone and on-line

channels.

2.2 Review the customer file for US

indicia and if US indicia are identified

obtain the appropriate documentation

to establish status. US indicia include

US citizenship or permanent resident

status, a US birthplace, a US

residence or correspondence

address, standing instructions to

transfer funds to an account in the

US, an ―in care of‖ or ―hold mail‖

address that is the sole address for

the client, etc. Documentation

required to be furnished may include

one or more of the following: a US

tax certificate (Form W-9 or Form W-

8BEN), a non-US passport, written

explanation regarding renunciation of

or failure to acquire US citizenship,

etc.

Broadly, the scope of US indicia is

unchanged except that a US telephone

number has been added as one of the

possible US indicia.

―Care of‖ addresses outside of the US

remain one of the US indicia for new

accounts.

Critically, there is no positive duty on FFIs

to capture new information above what is

currently required by KYC/AML

requirements to positively rule out all US

indicia. Subject to the issue with

documentary evidence above, no additional

information gathering is mandated for

individuals.

Manual or automated processes will need

to be put in place to review information

captured during the on-boarding process

to check for US indicia.

New processes will need to be created for

accounts where US indicia are identified to

gather additional documentation.


FATCA regulations

15 March 2012

2. New accounts

Additional classifications for identification of Payees have been introduced and NFFE treatment has changed.

(Additionally changes to the proposed regulations have been announced)


2.3

Establish the status of each entity

account holder as a US entity, PFFI,

non-financial foreign entity (NFFE),

etc., and if necessary obtain

information on the ownership of an

entity account holder.

The Proposed Regulations contain very

specific details on the identification of

entities - with the documentation

requirements varying according to the entity

type and potential FATCA classification.

There is a significant amount of detail

contained in these rules, including

standards of knowledge and presumption

rules, indicating that new entity

identification may be a complex procedure

for FFIs to apply.

Many FFIs are already aware that the

entity analysis was complex. The

Proposed Regulations indicate that the

complexity remains but the end result

should be that FFIs would need to

ascertain the ownership makeup of fewer

entities.

Section #

Section 3. Pre-existing accounts


FATCA regulations

15 March 2012

3. Pre-existing accounts

Changes have been made to the process of reviewing pre-existing accounts– for example, the heightened review

procedures for private banking accounts have been replaced by an enhanced review requirement on high-value accounts

– but the overall framework is largely similar.


3.1 Perform a diligent (paper file) review

of records of pre-existing private

banking accounts and accounts with

a balance or value of $500k or more.

Enhanced review for pre-existing individual

accounts with a balance or value exceeding

$1m, as described in 1.9 above.

The higher threshold amount below which

electronic searching is permissible should

reduce the burden of many FFIs.

3.2 Search electronic records on pre-

existing accounts for US indicia

(subject to the de minimis exception

for individual accounts described

above). For accounts with US indicia,

obtain additional documentation to

establish account as US or non-US.

US indicia include US citizenship or

permanent resident status, a US

birthplace, a US residence or

correspondence address, standing

instructions to transfer funds to an

account in the US, an ―in care of‖ or

―hold mail‖ address that is the sole

address for the client, etc.

Documentation required to be

furnished may include one or more of

the following: a US tax certificate

(Form W-9 or Form W-8BEN), a non-

US passport, written explanation

regarding renunciation of or failure to

acquire US citizenship, etc.

The requirements to search for US indicia,

as well as what constitutes US indicia, are

largely unchanged, although a US

telephone number has been added as one

of the possible US indicia. In addition,

solely for purposes of electronic searches

on pre-existing individual accounts, an ―in

care of‖ address that is outside of the

United States by itself does not give rise to

US indicia.

The change of rules on ―care of‖

addresses, whilst appearing relatively

minor, should significantly reduce the

numbers of customers impacted by

FATCA with no connection to the US.

A challenge for FFIs will be to design an

appropriate search which correctly

identifies US telephone numbers and does

not pick up accounts in other countries

such as Canada.


FATCA regulations

15 March 2012

3. Pre-existing accounts

Insurance companies should benefit significantly from the new de minimis limit.


3.3 Establish the status of each entity

account holder as a US entity, PFFI,

NFFE, etc., and if necessary obtain

information on the ownership of an

entity account holder.

The Proposed Regulations contain very

specific details on the identification of

entities - with the documentation

requirements varying according to the entity

type and potential FATCA classification.

There is a significant amount of detail

contained in these rules, indicating that

review of pre-existing entity accounts may

be a complex procedure for FFIs to apply.

The end result should be fewer entities

which the FFI is required to look through to

identify US owners.

3.4 Annual retest of all pre-existing

individual accounts to determine if

the high-value threshold ($500,000),

which would trigger heightened

review procedures, is met (beginning

in the third year following the

effective date of the FFI Agreement).

Across-the-board annual retesting is not

required under the Proposed Regulations.

However, pre-existing accounts that were

out of scope under the de minimis rule lose

their status if the balance or value exceeds

$1m.

Whilst an ongoing monitoring process

needs to be put in place, the higher limits

will reduce the numbers of customers

breaching the $1m limit each year.

Section #

Section 4. Reporting


FATCA regulations

15 March 2012

4. Reporting

Under the Proposed Regulations, reporting requirements for PFFIs are phased in over several years.


4.1 Key Dates for PFFIs:

► First reporting to IRS by 30th

September 2014, if received a

W-9 by 30th June 2014

Key Dates for PFFIs:

First reporting by 30 September 2014 on

accounts treated as US accounts or as

recalcitrant accounts as of 30 June 2014.

Thereafter, annual reporting on accounts

generally due by 31 March of each year.

4.2 Annual reporting requirements on all

US accounts:

► Name, address and Taxpayer

Identification Number of

account holder

► Name, address and Taxpayer

Identification Number of certain

US owners of certain entity

account holders

► Account number

► Account balance

► Certain other information on

certain payments into and out

of the account (gross amount

of dividends, interest and other

income paid or credited to the

account, etc.)

The information required to be reported is

largely unchanged. Special reporting rules

phasing in the amount of information

required) apply to the 2013, 2014 and 2015

tax years. Account balances and payments

may be reported either in US dollars or in

the currency in which the amount is

denominated. Conversion to US dollars is

to be applied using the spot rate on the last

day of the year (or, for the balance of an

account that was closed during the year,

the date of closure).

The phased reporting period is likely to be

welcome by FFIs. However in developing

the solution design the full reporting

requirements will need to be considered.


FATCA regulations

15 March 2012

4. Reporting

A new requirement to report certain payments made to non-participating FFIs for 2015 and 2016 has been introduced.


4.3 Annual reporting of the number and

aggregate value of financial accounts

held by recalcitrant account holders,

non-participating FFIs, and

recalcitrant account holders with US

indicia

The aggregate reporting requirements

applicable to recalcitrant accounts are

generally unchanged, although a new

requirement to report on the number and

aggregate value of dormant accounts has

been added.

Whilst not an immediate priority for

implementation FFIs FATCA solution will

need to consider recalcitrant and dormant

account reporting.

4.4 New Requirement A PFFI is required to report the aggregate

amount of certain payments made to each

non-participating FFI for each of 2015 and

2016. Such reportable payments include

non-US source dividends and interest.

Those FFIs who expect to hold accounts

of non-participating FFIs will need to build

reporting requirements into the final

FATCA solution

Section #

Section 5. Withholding


FATCA regulations

15 March 2012

5. Withholding

The rules on withholding on payments other than foreign passthru payments are generally unchanged.


5.1 A withholding tax of 30% is imposed

on certain US-source income, e.g.,

dividend, interest (FDAP payments),

and on gross proceeds on the sale of

assets generating US-source interest

or dividends, paid to non-

participating FFIs or to recalcitrant

account holders.

The definition of withholdable payments is

generally unchanged. However, some

important carveouts have been introduced;

for example, interest on certain short-term

obligations and "ordinary course" payments

for wages, office and equipment leases,

software licenses, etc., are not withholdable

payments

The carveouts from the definition of

withholdable payments should reduce the

burden of compliance, and the likelihood

of being withheld upon, for many

institutions.

5.2 Withholding is to be implemented in

phases:

► withholding on US-source

FDAP payments commences

on 1 January 2014;

► withholding on gross sales

proceeds and withholding

under the ―passthru payment‖

rules described below

commence on 1 January 2015.

Withholding on foreign passthru payments

is further delayed and will not apply until

2017 at the earliest.

For those PFFIs impacted developing a

withholding solution for US-source FDAP

needs to be built into FATCA

implementation plans. However for PFFIs

that are not directly making US sourced

FDAP payments to account holders,

developing a withholding capability may

not be an immediate priority (except, for

example, if the PFFI is a QI with primary

withholding responsibility).


FATCA regulations

15 March 2012

5. Withholding

There is no further clarification in the Proposed Regulations with respect to foreign passthru payments.


5.3 Key Dates:

► Withholding on gross sales

proceeds and withholding

under the ―passthru payment‖

rules described below

commence on 1 January 2015

Withholding on foreign passthru payments

is further delayed and will not apply until

2017 at the earliest.

See below

5.4 In addition to the US-source income

and gross proceeds mentioned

above, a PFFI is also required to

withhold on certain non-US source

payments made to non-participating

FFIs or to recalcitrant account

holders to the extent of the ‗passthru

payment percentage‘ (PTP%) of the

applicable paying or issuing FFI.

Each FFI is required to calculate and

publish its PTP% on a quarterly

basis.

An FFI‘s PTP% is determined by

dividing the sum of its US assets

over its total assets held on each of

the last four quarterly testing dates.

There is no further clarification in the

Proposed Regulations. The IRS has

indicated that further guidance would be

issued on a later date.

Developing a solution to foreign passthru

withholding and calculation of PTP%

should be de-prioritized until greater clarity

is available.

However, the industry should engage with

the IRS to develop a workable solution.


FATCA regulations

15 March 2012

FATCA – Proposed Regulations Modified Implementation Timeline

03

Registration with the IRS (1)

Extended period for full EAG compliance (2)

New accounts (3)

Preexisting individual accountsHigh-value accounts > USD 1 million (4)

Remaining accounts ≤ USD 1 million (5)

Preexisting entity accounts

Accounts of prima facie FFIs (4)

Remaining accounts (5)

Withholding on US-source FDAP paymentsWithholding on gross proceedsWithholding on foreign passthru payments

Reporting of U.S. accountsidentifying info (7) + account balance+ income paid or credited to account

+ gross proceedsAggregated reporting of recalcitrants (8)

Reporting of payments made to NPFFIs (9)

20162012 2013 2014 2015

Client identification and account classification

Registration (FFI agreement)

Reporting (6)

Withholding

Effective Date

30.09.2014

2017

31.03.2015

31.03.201631.03.2017

(1) The online process for registering an FFI as a PFFI or a Deemed Compliant FFI will be open no later than January 1, 2013. The effective date of the FFI agreement will be July 1, 2013 or later.(2) Certain ―limited branches‖ and ―limited FFIs‖ that are unable to be fully compliant as a result of local law restrictions may remain non-participating until December 31, 2015 without tainting the other members of the EAG

group, although they may be subject to withholding.

(3) Accounts opened on or after the effective date of the FFI agreement.(4) Within one year of the effective date of the FFI agreement—earliest effective date is July 1, 2013.

(5) Within two years of the effective date of the FFI agreement—earliest effective date is July 1, 2013.(6) This slide does not address reporting requirements of withholding agents that are not FFIs.

(7) Name, address, TIN and account number either (i) of the account holder that is a specified U.S. person or (ii) of the U.S. owned foreign entity (TIN if available) and of each substantial U.S. owner of such entity.

(8) Separate reporting of recalcitrants with U.S. indicia and of dormant accounts (each on an aggregated basis) required.(9) Payments of ―foreign reportable amounts‖ (including non-U.S. source FDAP payments) to NPFFIs made in 2015 and 2016 required to be reported.

On-boarding process for new accounts must be operational by

the effective date of FFI Agreement

(1st July 2013 at the earliest)

Identification of pre-existing US accounts should start by 1st July 2013

Identification procedures should be completed within 2 years of

the effective date of the FFI

Agreement for remaining pre-existing entity and individual

accounts

Identification procedures should be completed within 1 year of the effective date of FFI Agreement for pre-existing

accounts of ―prima facie FFIs‖ and for pre-existing high-value (> $1m) individual

accounts

First reporting for the 2013

calendar year

due by 30 September 2014

on accounts treated as US accounts or as

recalcitrant accounts as of

30 June 2014

Thereafter, annual reporting

on accounts

generally due by 31 March of

each year

Withholding on US-source FDAP payments commences on 1 January 2014

Withholding on foreign passthru

payments is

further delayed and will not

apply until 2017 at the earliest

Insights and implications


FATCA regulations

15 March 2012

Proposed regulations introduce new concepts and new timelines

Participation

► The IRS has published 380+ pages of proposed regulations. Within these,

steps have been made to reduce the implementation effort

► The Lead FFI will remain responsible for the coordination of the application

process for the entire Expanded Affiliated Group

► A new class of ―Limited FFIs‖ has been introduced to allow the transition of

members of an EAG that have laws prohibiting the tax withholding or

reporting required under FATCA. These limited FFIs are provided additional

time to (fully) implement FATCA (max 2 years)

► Introduction of an additional ―joint statement‖, separate from the proposed

regulations, entailing that an agreement is made between local tax

authorities and the U.S., replacing the need for FFIs in the respective

―partner‖ countries to sign an agreement with the IRS

Preliminary conclusion: the FFI will face less legal barriers but will be confronted

with a ‗two tier‘ FATCA (partner countries versus non-partner countries)


FATCA regulations

15 March 2012


Identification

► For new accounts the identification procedures and necessary

documentation are aligned with local AML/KYC legislation

► Threshold for manual reviews increased from $500K to $1,000K for pre-

existing individual accounts

► Threshold for pre-existing entity accounts, of $250K has been introduced

► The special rules in the Notices for so-called "private banking accounts―

are eliminated

► Relationship manager involved in the aggregation of accounts.

► New complex regulations on the identification of payees are introduced

Preliminary conclusion: the FFI will face less stringent rules in identification, but will

be confronted with additional requirements on payee identification


FATCA regulations

15 March 2012


Transition rules for affiliated groups / reporting

► The limited FFI status prevents a non-participating FFI or branch that

is subject to foreign laws that prohibit FATCA compliance from

disqualifying an otherwise participating FFI group during a transition

period. The transition period will end January 1, 2016 and these limited FFIs

or branches will be subject to withholding upon receipt of withholdable

payments.

► The proposed regulations extend the transition period on the scope of

information reporting by FFIs as follows:

► 2014 and 2015: FFIs must begin reporting name, address, TIN and account

balance of U.S. accounts

► 2016: FFIs must begin reporting income associated with U.S. accounts

► 2017: FFIs must begin reporting gross proceeds from securities transactions

Preliminary conclusion: the FFI will face less legal barriers in reporting and is

allowed more time to meet the reporting requirements


FATCA regulations

15 March 2012


Withholding

► Scope of withholding per 1 January 2014 is limited to NPFFIs and

withholdable payments to recalcitrant account holders

► Full withholding will not start before January 1, 2017

► Passthru payments concept will not be introduced earlier than 1 January

2017. The definition of passthru payments has been delayed.

► Many additional regulations (~100 pages) have been published for

withholding. Market induced changes are expected for the final regulations

in the summer of 2012.

Preliminary conclusion: FFIs can await the summer regulations to identify the

activities that are needed to sustain its decision to avoid withholding. This allows for

full focus on identification and reporting first.


FATCA regulations

15 March 2012

De minimis rule The proposed FATCA regulation provides thresholds (de minimis rule) on the balance or value of

accounts to limit efforts of FFI’s in identification of their preexisting accounts

Preexisting individuals accounts

► FFI is allowed to treat preexisting

individuals depository accounts

previously documented as U.S.

accounts with a balance or value of $50K

or less as Non U.S. accounts

► FFI is allowed to treat any preexisting other

individuals financial accounts with a

balance or value of $50K or less as Non

U.S. accounts

► FFI is allowed to treat preexisting cash

value insurance or annuity contracts

with a balance or value of $250K or less as

Non U.S. accounts

Preexisting entity accounts

► FFI is allowed to treat any preexisting

entity financial accounts with a balance

or value of $250K or less as Non U.S.

accounts


FATCA regulations

15 March 2012

High value accounts and aggregation rules The proposed FATCA regulation provides thresholds (de minimis rule) on the balance or value of

accounts to limit efforts of FFI’s in identification of their preexisting accounts

High value account - preexisting individual accounts that have a balance or value that exceeds

$1,000K at the end of the calendar year preceding the effective date of the participating FFI‘s

agreement with the IRS, or at the end of any subsequent calendar year

High-value account subject to the additional enhanced review requirements that include

► relationship manager inquiry (if there is such a manager in an FFI) and

► a review of the current customer master file and other documents (e.g. account opening contract,

documentation for purposes of AML due diligence, any power of attorney) that are associated with

the account and were obtained by the participating FFI within the last five years

Aggregation of accounts (applicable to de minimis rule and High value accounts)

► For purposes of applying de minimis rule and identification of High value accounts FFI should

aggregate value of accounts held by an individual and maintained by the FFI, or members of its

expanded affiliated group.

► However aggregation is required only to the extent that the FFI‘s computerized systems link the

accounts by reference to a data element such as client number or taxpayer identification number.

► FFI is also required to aggregate all accounts of a High value account holder that a relationship

manager has the ability to aggregate

Section #

Section 1. Banking specific implications


FATCA regulations

15 March 2012

Insights and implications of the draft regulations

Topic Obligations Implications

4. New

individual

customers

► Reliance on existing KYC/AML

processes, but…

► Response required if US indicia arise

during due diligence processes

► Unclear status of e-KYC: need to see

―documentary evidence‖

► Exceptions process needed if US indicia

identified through existing KYC/AML

3. Pre-

existing

individual

customers

(<$1m)

► $50k de minimis remains, raised to

$250k for cash value insurance and

annuity contracts

► Indicia searches modified

► Account aggregation rules clarified

► All customers will need to be classified

► Identification of customer data

► Management of search output to provide

evidence of customer status

2. Diligent

review

threshold

changes

► Applies to accounts >$1m

► Electronic review required plus ―paper

search‖ of documents

► Relationship Manager to act on

knowledge of change of circumstances

► Reduced number of customers to review

► Must be completed within 1 year

► Defined set of documents to review

► Procedures required to track change of

circumstance

1. Private

Banking

► Private banking concept removed and

replaced with >$1m threshold

► Removes all individual relationship-

managed business below $1m from

diligent review


FATCA regulations

15 March 2012



8. Reporting

Extension of timelines:

► Initial US accounts reporting for 2013 &

2014

► Income reporting starts 2015

► Gross proceeds reporting starts in 2016

► Data must be collected about the year

prior to reporting

► Design options for timing of building

reporting capability vs. activation

7. Passthru &

Withholding

► Jan 1 2014 – FDAP

► Jan 1 2015 + gross proceeds

► Withholding not required on foreign

passthru payments until Jan 1, 2017

► ―foreign passthru payments‖ not defined

in regulations

6. New entity

customers

► Actively trading non-financial foreign

entities are exempt

► Passive NFFEs, e.g. investment entities

clarified as the major focus

► Documents required to define NFFE in

active trade or business

► Need to obtain certification from account

holder to establish US owners for

passive entities

5. Pre-

existing

entity

customers

► 12 months to review and document FFI

customers

► < $250k excluded

► Passive NFFEs key focus

► Identification of FFIs

► Identification of NFFE type

► 10% ownership threshold for passive

NFFEs


FATCA regulations

15 March 2012



10. FFI

Agreement

► Draft FFI agreement due early 2012

► FFI required to have written policies &

procedures

► Transitional arrangement possible for

some members of EAG

► Apply by 30 June 2013

► Periodic attestation by responsible

officer

► Mechanics of group or multiple

attestations / FFI agreements not

defined

11. Deemed

Compliance

► New categories of deemed compliant

FFIs (more may be added)

► Intent to focus FATCA on global

investment community rather than truly

local entities

► Restrictions on definitions may reduce

usefulness of status

9. Joint

Statement

► Simplified compliance for FFIs in partner

countries

► Reporting to local tax authorities instead

of direct to IRS

► No withholding within partner countries

► Timing uncertain – domestic legislation

to be enacted

► Information still required

► Potential for additional partner countries

Section #

Section 2. Insurance specific implications


FATCA regulations

15 March 2012

Proposed Regulation Highlight for Insurers

Highlights for Insurers

► The increase in de minimis for contracts with a value in excess of $250,000 is

good news for all insurers.

► Confirmation that insurance contacts which do not have a cash surrender or

termination value are out of scope is also welcome.

► Retirement exemptions broadened

► ―Care of‖ address indicia for existing accounts has been modified.

► Grandfathering is now extended to contacts outstanding on 1 January 2013 AND

where the contract is payable on the earlier of a stated age or death.

► Detailed review threshold has been increased to greater than $1m.

► Private banking proposal have dropped (but some concepts move to detailed

review).

Some of the less welcome changes are

► No de minimis exclusion for new contracts

► Annuities generally included

► Complex rules for retirement saving and annuities


FATCA regulations

15 March 2012

Retirement plans – deemed compliance and exempt beneficial owners Deemed compliance conditions include:

► The fund is organized for the provision of pension benefits in its country of

organization,

► Contributions must come from the employer, employee or the government and be

restricted by reference to earned income and must be tax advantaged in some

way.

► No one beneficiary can be interested in more than 5% of the assets of the

pension plan.

There are different requirements for small retirement plans with less than 20

members.

Exempt beneficial owner conditions include that the entity must be:

► the beneficial owner of payments made to it,

► established in a country with which the US has an income tax treaty in force,

► generally exempt from income taxation in its country of establishment and

► entitled to treaty benefits under the applicable US treaty.

Entities wholly owned by exempt beneficial owners are themselves exempt.


FATCA regulations

15 March 2012

Impact on insurance product range

Products Cash

value?

FATCA

impact Remarks

Single and regular premium

offshore investment products Yes

Offshore bonds are likely to require significant focus in

meeting FATCA requirements and this is expected to

be a key area for your FATCA programme

Single and regular premium UK

investment products Yes

Bonds and investment products are likely to require

significant focus in meeting FATCA requirements and

this is expected to be a key area for your FATCA

programme

Individual pensions Yes

Under current drafting these are in-scope unless they

qualify for an exemption under the definition of

retirement plan (refer to slide 6 and appendix)

Corporate pensions Yes

Under current drafting these are in-scope unless they

qualify as deemed compliant or for an exemption(refer

to slide 6 and appendix)

Protection business (e.g. Critical

illness, long term care, term

assurance)

No No cash value and current drafting implies out of

scope

Pension annuities No Under current drafting these are in-scope even if they

have no cash value.

Individual Savings Accounts (ISA) Yes Would be covered by an exemption except the

exemption demands contributions from earned income Key

No im

pact anticip

ate

d

Som

e im

pact anticip

ate

d

Hig

h im

pact anticip

ate

d


FATCA regulations

15 March 2012

Retirement product overview

Retirement Funds

(e.g. Trusts)

Contract Based Pensions

(e.g. Individual Pension)

Deemed Compliant Exempt Fund

• Other retirement funds

may be considered

―exempt beneficial owner‖

posing a low risk of tax

evasion

• A retirement fund will be

considered an exempt

beneficial owner of a

payment if it meets one of

two retirements detailed

on slide 19

Self certify deemed compliance if

certain conditions are met including:

• Organisation under law of country

in which established or operate;

• Contributions only from

employee, employer, government

by reference to earned income;

• No beneficiary has right to 5% or

more of the assets; and

• Income tax deferral on

contributions

Special requirements are in place

for small funds

•The retirement fund exemption is not applicable to

contract based pensions however it could qualify as a

retirement account which provides a separate exemption

•The requirements for a contract based pension to be an

exempt account are as follows. It is important to note that

in the UK, no contract based pension will be an exempt

account due to annual contributions being limited to

$50,000 or less

Pension Savings Products

Section #

Section 3. AM specific implications


FATCA regulations

15 March 2012

The key challenges for the funds industry Asset managers

Most asset managers operate within a complex

network of relationships with their distributors

and service providers. They will have to:

• Determine direct impacts to their operating

model and initiate plans accordingly

• Consider the degree of their dependency to

third parties to achieve FATCA compliance

• Manage their reputational risk, by working

closely with their distributors to ascertain their

intentions for becoming compliant with FATCA

• Identify a Responsible Officer to certify their

status

Administrators

Service providers will have to address their own

FATCA impacts and consider how they can

support their fund clients in achieving FATCA

compliance

• Assess the services clients require and

determine the business case – onboarding,

investor identification, reporting, PPP

calculation and withholding

• Determine their own impacts and obligations

and initiate plans accordingly

• Align their own Group requirements to their

client requirements and address areas of

conflict


FATCA regulations

15 March 2012

What are the specific FATCA challenges

Topic Proposed regulations Challenges & implications

1. Deemed

Compliance

• Intent to focus FATCA on

global investment

community rather than truly

local entities

• May help reduce most

significant FATCA issue –

withholding

• Operational complexity in:

• Meeting requirements

• Determining status

• Operational obligations

• Funds – QCIVs, restricted

funds

• Banks/distributors – Local

FFIs, local banks

• Restrictive conditions – significant impact likely in

order to achieve deemed compliant status in

many cases

• Additional complexity for onboarding and existing

customer analysis – many categories

• Potential significant legal work to update

distributor agreements, prospectus etc

• May require redemptions of US investors,

recalcitrants

• Saves you reporting and withholding


FATCA regulations

15 March 2012

What are the specific FATCA challenges 2. EAG & FFI Agreements

• Significant number of potential entity

classifications within an EAG

• Still uncertainty in regards how FFI

agreements will work – particularly for

funds

• Organizations will need to determine their

framework to enable responsible officer

certification

• How will this work for funds and

administrators?

FFI

(Foreign Financial

Institution)

(p121, 293-296)

NFFE

(Non-Financial

Foreign Entity)

(p124)

Non-Participating

FFI

(p122)

Deemed Compliant

FFI

(p298)

Registered

Deemed Compliant

FFI

(RDCFFI)

(p298)

Certified Deemed

Compliant FFI

(p306)

Owner

Documented

(p311)

Local FFI

(p298)

Non-reporting member of

PFFI Group (p301)

Qualified collective

investment vehicles (p302)

Restricted Funds (p302)

Non registering local bank

(p307)

Retirement Fund

(p308)

Non-profit organisations

(p310)

FFI with only low value

accounts (p311)Passive NFFE

(p124)

Territory FI

(p128)

Excepted NFFE

(p328)

Active NFFE

(p331)

Publically traded

(p328)

Certain territory

entities

(p331)

US

(p126)

Non-US

Excepted FFI

(p121, 295-8)

(Note: treated as

excepted NFFE)

EAG Entities

(p271)

Participating FFI

(p122)

Participating FFI

(with transitional

arrangement)

(p226)

(status to be

resolved

by end

of 2015)

Classification group

FATCA classification type

Time-limited status

Key

Potential end status

Limited FFI (with

transitional

agreement)

(p276)

Limited

Branch

(p272)

Unlikely to apply within EAG

Unlikely to be in EAG but

funds managed by the group

may be)

Unlikely to qualify under

current proposed regs: all

entities in the EAG must be

local banks in the same

country

Unlikely to be in EAG unless

the retirement fund of a

business within EAG.

Note: other excepted NFFEs exist – eg foreign

governments, retirement funds etc

Note: this chart refers to the Legal Entities of an EAG. It does not include such excepted entities as governmental agencies or central banks which are subject to an

exclusion from the definition of FFI or NFFE under the statute

Most of the non-FI

businesses will fall here,

including insurance

companies without “financial

accounts” - ie issuing only

protection policies.

Must have no shareholders

with a proprietary or

beneficial interest in its

income or assets

Rules include limits of not

more than $50m assets in

entire EAG


FATCA regulations

15 March 2012



3. Joint

Statement

• Simplified compliance for

FFIs in partner countries

• Reporting to local tax

authorities instead of direct

to IRS

• No withholding within

partner countries

• Huge uncertainty – how do you plan?

• Timing uncertain and time required for domestic

legislation to be enacted

• Countries involved?

• Specific requirements?

• Reaction from US financial institutions?

4. New

individual &

entity

customers

• Reliance on existing

KYC/AML processes, but…

• Response required if US

indicia arises during due

diligence processes

• Actively trading non-

financial foreign entities are

exempt

• Passive NFFEs, e.g.

investment entities clarified

as the major focus

• Unclear status of e-KYC: need to see

―documentary evidence‖

• Exceptions process needed if US indicia identified

through existing KYC/AML

• Need to obtain certification from account holder to

establish US owners for passive entities

• Some exempt entities – how do you confirm status

– actively trading NFFEs, Charities, Retirement

funds


FATCA regulations

15 March 2012



6. Liability

Issues

• Withholding agents/ PFFIs

who fail to withhold despite

knowing or having reason

to know that a claim of US

status is unreliable or

incorrect will be liable for

the tax plus interest.

• The use of third parties to fulfil FATCA

compliance (eg, administrators) will not relieve a

withholding agent/ PFFI for compliance failures

and under-withheld taxes.

5. Legal

conflicts

• Joint statement

• Transitional arrangement

for certain members of

EAG

• Still have the conflicts with local laws – unlikely

intergovernmental arrangements can be provided

with all countries globally eg Hong Kong,

Singapore

7. Timing &

plan

• Phased timeline

• The timeline for FATCA implementation is complex

with multiple deadlines

• Key dependencies to manage in delivering all

parts of FATCA compliance

Section #

Section 4. Joint Statement Insights


FATCA regulations

15 March 2012

Joint statement on intergovernmental approach to FATCA Sets out potential framework for intergovernmental approach to FATCA

Compliance

► The U.S. and ―FATCA partner‖ country would agree that FFIs in the FATCA

partner country could report information required under FATCA to the tax authority

of that country, rather than to IRS

► Under this intergovernmental agreement, FFIs in the FATCA partner country

would not need to enter into FFI agreements with IRS

► Would eliminate FATCA withholding on payments to FFIs in that country

► FFIs would not be required to terminate accounts if recalcitrant account

holders or impose passthru payment withholding

► The U.S. would commit to reciprocal treatment regarding reporting of information

on U.S. accounts of residents in the FATCA partner country


FATCA regulations

15 March 2012

First analysis of the impact of the joint statement

Although the joint statement offers some advantages it is unclear whether the obligations of FFIs will be

significantly lessened, the effort may remain substantially similar depending on the way the reciprocity

principle is going to be applied.

Reciprocal automatic information exchange

The statement acknowledges that some countries may have legal restrictions making compliance with

FATCA difficult. It further provides that the U.S. is willing to collect and exchange information on

accounts held in U.S. financial institutions by residents of EU countries.

In summary, the consequences of this joint statement between the IRS and their ‗FATCA partners‘ are

thought to be the following:

Reciprocal automatic information exchange

The statement acknowledges that some countries may have legal restrictions making compliance with

FATCA difficult. It further provides that the U.S. is willing to collect and exchange information on

accounts held in U.S. financial institutions by residents of EU countries.

In summary, the consequences of this joint statement between the IRS and their ‗FATCA partners‘ are

thought to be the following:

FFIs in the FATCA partner do not have to enter

into a separate FFI agreement with the IRS

FFIs in the FATCA partner can report to the local

authorities rather than directly to the IRS

No U.S. withholding on payments to FFIs

established in the FATCA partner

FATCA partner is not required to terminate the

account of a recalcitrant account holder;

FATCA partner is not required to impose

passthru payment withholding on payments to

recalcitrant account holders

Not required to impose passthru payment

withholding on payments to other FFIs organized

in the FATCA treaty partner or in another

jurisdiction with which the United States has a

FATCA implementation agreement.

1

2

3

4

5

6

Next Steps


FATCA regulations

15 March 2012

Priorities for the next few weeks…

Interpretation of

the draft

regulations

Engagement with

the IRS (optional)

Complete / validate

impact assessment

and plans

Initiate / continue

solution design

► Review, digest and interpret the draft FATCA regulations

► Review existing assumptions to confirm requirements and identify areas of remaining

uncertainty

► Develop high level design principles and agree strategic questions which need to be

resolved

► Communicate implications to your various stakeholders

► Build / update business requirements

► Identify points for submission to the IRS

► Engage with the IRS based on the interpretation of the regulations by 30 April 2012

► Initiate and complete business impact assessment…or,

► Assess implications and modify impact assessment work completed to date

► Confirm critical path and underlying design & implementation plans

► Confirm resource needs and project governance arrangements

► Re-visit cost assumptions / business case

► Initiate business and IT solutions design for ‗high certainty‘ areas

► Obtain sign-off to solution design and commence build…..test……implement

The FATCA Challenge

by Sylvie Goethals

15 March 2012

Uncomplicating the complexities of compliance


FATCA regulations

15 March 2012

The FATCA challenge

A tax legislation with

implications across different

functions of an FFI

Global compliance and local

delivery

Challenging time scale to

become compliant

FATCA, although a tax legislation, has huge operational implications and reporting obligations

which quickly translates to requiring changes in systems and processes in addition to policies

regarding products and customers.

FATCA brings into inter-play tax, risk, legal and compliance functions of an FFI together

FATCA is global in nature and all business units and functions (which are in scope of FATCA) are

required to comply with it.

In addition, each BU also needs to comply with the local rules and regulations (e.g. privacy and

data protection rules) adding another layer of complexity.

Non compliance by a single business unit/function will result in the whole FFI being deemed as

‗non-compliant‘.

The delivery of FATCA compliance needs to complete by 01 July 2013 for on-boarding

procedures or in 15 months.

Delivering a huge global programme within such a short timeline requires meticulous planning and

experienced people across tax, compliance and operations, and IT to ensure a fail-safe delivery in

the first instance.

Impact on customers - new

and existing

Unlike many other regulatory change, FATCA has direct impact on the customers, new and

existing, of an FFI.

impact on customers during account opening or data privacy for documentation or reporting will

need to be considered.

Challenge What does this mean to you?

Delivering FATCA compliance requires a global approach coupled with effective local delivery

Fatca project From Thought to Implementation


FATCA regulations

15 March 2012

What is our approach?

► ―shrink the problem, shrink the effort‖

1. Phase I: Current state analysis – Impact assessment

2. Phase II: Solution optimisation and efficient implementation

► Validate impact assessment – efficient and thorough review

► Overall solution design – effective global compliance

► Implementation – confidence in delivery

Based on a 2-phase method, we aim at ensuring compliance in the most

cost effective manner within the required timelines.


FATCA regulations

15 March 2012

FATCA solution overview – key components Where are we in the market cycle?

Planning for implementation Define and gain consensus around a road map for implementation of FATCA, including scope, budget,

high - level design approach and timeline

FATCA impact assessment High - level assessment of a business‘ current processes against FATCA requirements

Tax team

Support regulatory interpretation,

education, and lobbying advice

Provide continuing support and guidance to all workstreams and processes at all levels

Ernst & Young accompaniment to meetings with the

Treasury Department and IRS

Program Governance Assist in setting up and structuring the FATCA program office, defining governance and stakeholder management

Legal entity and business unit analysis Assessment of your legal entity structure and identification of where FATCA applies

(e.g., which are FFIs, where assets are being held)

Onboarding and

KYC processes Assessment of current onboarding (e.g., account opening) and KYC processes and documentation

Customer and

counterparty data Assessment of current customer data infrastructure, quality and

rationalization

Withholding and

reporting systems Identification of payment systems where information reporting will be required and withholding will apply

FATCA awareness Provide training and internal communication

Business model Evaluation of strategic options


FATCA regulations

15 March 2012

Our 2-phase methodology

Entity 1

Entity 2

Entity 3

Entity 4

Enterprise

scope

Apply

Filters

Business

priorities

Solution

design

Roadmap development

and implementation plans

Impact

assessment

High

impact

No

impact

Low

impact

Leg

al en

titi

es

Cu

sto

mers

Pro

cesses a

nd

syste

ms

Pro

du

cts

Target operating

model

+

gap analysis

Strategic decisions

Technology options

Phase I – Current state analysis Phase II – Solution Optimisation and Efficient implementation

► Remediated accounts

► New account opening

► Revised systems and

procedures

► Revised operating model

► Systemic monitoring

Roll out

WorkstreamPre-

project

start

Project weeks

1 2 3 4 5 6 7 8 9 10 11 12

PM

O a

nd

Tax 1. Project

management and

global governance

2. Tax team

Cu

rren

t sta

te a

naly

sis

(P

hase I)

―Sh

rink th

e p

roble

m‖

3. Legal entity and

business unit

analysis

4. Detailed impact

assessment

Fu

ture

sta

te a

naly

sis

(P

hase II

)

―Sh

rink th

e e

ffo

rt‖

5. FATCA strategic

options &

decisions

6. Target operating

model design

7. Planning for

implementation

8. FATCA knowledge

transfer – process

& tool transition

Gap assessment report

FATCA enterprise wide impact score card

FATCA Traceability Matrix

On-going global & local FATCA coordination, issue tracking, communications, & tools & deliverables templates

Liaise between EYFATCA team & Swiss Re business operations/technology teams, providing access to global tax resources & training as needed

Mobilization Program plan/PMO & work products template/kick off meetings

Classify legal entities

Obtain / reconcile list of legal entities

Document high level product flows & identify FATCA impacts

Identify, capture, and prioritize gaps

Utilize EY FATCA data classification tool to analyze customer data

Document detailed process & system transaction flows

Identify key data, process & systems gaps based on traceability matrix

Global governance structure

Filter EY detailed FATCA business requirements & data model for Swiss Re business Detailed transaction flows

Data classification tool results: Customer segmentation and data quality assessment

High level product flows

Preliminary view of FATCA impacts on Swiss Re BU & products

Legal entity classification

Define impact across legal entities, business lines & products

FATCA strategy: assumptions, design

principles & solutionsIdentify & evaluate potential FATCA solutions

Review & agree FATCA strategy & solutions

High-level operating model

Define Swiss Re specific business requirements to close identified gaps

Swiss Re specific business requirements

Develop FATCA Implementation Roadmap

Evaluate in-flight initiatives by business unit and region

FATCA roadmap

Document high level business case

Define Swiss Re process for on-going legal entity/customer account classification & change monitoring

Evaluate EY tool options

Provide EY tool training

Identify & prioritize remediation activities

Business case

Remediation plan

Governance structure

Define target operating model

Organization

Functional view

Technical architecture

FATCA classification process

Define preliminary FATCA strategic assumptions

FATCA strategic assumptions

Documentcommunication plan

Communication Plan

Update FATCA strategic assumptions

Enterprise

Scope

Apply

Filters

Business

priorities

Solution

design

Roadmap

& Implementation Plans

Swiss Re timeline 2011 2012 2013 2014

Swiss Re projects Q3 Q4 Q1 Q2 Q3 Q4

FATCA timeline

Phase 1 & 2

Swiss Re program

management

1. Central project

Design authority, program

management, legal, tax

and compliance

2. New customers

3. Existing customers

4. IRS reporting project

5. Withholding project

Manual or automated

mechanism to withhold on

recalcitrants

6. Passthru project

Calculation and

publication of passthru

percentage

7. Ongoing customer

communications

8. Ongoing IRS

engagement

FINAL REGULATIONS ANTICIPATED FFI AGREEMENTS EFFECTIVE & FATCA IMPLEMENTED

Phase 1 & 2

Phase 1 & 2 complete

Phase 2 FATCA program management Program close handover to BAU

Swiss Re FATCA design authority, IRS communication, requirements definition, third party/product strategy

Detailed design and third party negotiations complete

FATCA trainingRelationship, compliance and operations teams trained

FATCA educationProgram and project board/managers engaged and mobilized

Swiss Re FATCA legal and compliance – Certification, risk and internal audit updates, FFI agreements, procedures sign-off Swiss Re procedures FATCA compliant

Phase 2 kick-off

Phase 2 initiated

Calculation & publication detailed design Third parties engaged, passthru publication method and impact agreed

Build and test Passthru publication complete

ImplementBenefits

delivery

Requirements gathering Passthru requirements defined and validated against final regulation

Requirements gathering and detailed design IRS reporting requirements defined, validated against final regulation, third parties engaged and design complete

Build and test IRS reporting completeImplement and

trainBenefits delivery

Identify existing FFIs and confirm expected FATCA status All expected FFIs engaged and FATCA status agreed

Update records

Existing customer (FFI and investor) requirements gathering

Investor search requirements, expected FFIs and changes to T&Cs defined

Engage third parties in existing customer detailed design Third party capabilities, implementation and costs agreed

Build & test Changes to on-boarding procedures completeImplement Benefits delivery

New customer on-boarding requirements gathering

Changes to on-boarding defined and validated against final regulations

Detailed design and third party engagement Changes to on-boarding defined and validated against final regulations

Training On-boarding teams trained in new procedures, controls in place

On-boarding process operational

Finish identification of accounts with US indicia or >$500,000, review entity classification and document status

First IRS reporting likely

Withholding tax operational

Begin to identify US accounts

FATCA customer record fields implementedNew

custo

mer o

n-b

oard

ing a

nd

exis

ting c

usto

mer i

dentif

icatio

n

tasks to

be m

an

ag

ed

within

each

busin

ess

div

isio

n

Ongoing customer communications

Ongoing IRS engagement

PROPOSED REGULATIONS ANTICIPATED

Requirements gathering Withholding requirements defined and validated against final regulation

Withholding detailed designThird parties engaged, withholding method, costs and fund impact agreed

Strategic Assumptions Database

Global program set-up and governance

Ongoing tax advisory


FATCA regulations

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End-to-end implementation timeline

Phase 1 Impact Assessment

Phase 2

Validate, Designand

Build

Current tax law remediation

Tax advisory

Program and change management

Communication and change management

Impact assessment

Scope Gap analysis Plan

2011 20142012 2013 2015 2016

On-going global and local FATCA coordinationProject set-up

On-going tax advisory supportEngagement with the IRS

and treasury

Systems FATCA Compliance Readiness Management

Client

Identification

&

classification

Withholding

IRS reporting

Monitor and updateDocumentation Remediation

Global on-boarding program

Design Development Implementation Post

Recertification of pre-existing accounts

Electronic search on

US indicia

Solicit

documents

Certify FATCA

classification

IRS reporting


Withholdingsystem enhancement


2017

01/07/2013

01/07/2014Procedures completion pre-existing accounts of ―prima facie FFIs‖ & high value individual accounts:

01/07/2015Procedures completion for remaining pre-existing entity and individual accounts:

01/01/2014Start of withholding on withholdable payments:01/01/2017Start of withholding on withholdable payments:

30/09/2014 – 1st reporting on acc.

Treated as US acc. Or as recalcitrant

acc. As of 30/06/2014

Accelerate your solutions


FATCA regulations

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Phase I: Current state analysis and impact assessment

FATCA impact assessmentGranular assessment of a business‘ current processes against FATCA

requirements

Legal entity & business analysisAssessment of your legal structure and identification of where FATCA

applies

(e.g., which entities are FFIs, where US assets are held)

On-boarding &

KYC processes

Assessment of your

current on-boarding

(e.g., account opening)

and KYC processes and

documentation

Customer &

counterparty data

Assessment of current

customer data

inf rastructure, quality

and rationalisation

Payment,

withholding &

reporting systems

Identif ication of your

payment systems where

information reporting will

be required and

withholding will apply

No

impact

Low

impact

High

impact

Workstream

1. Project management

and global governance

2. Tax team

3. Legal entity analysis

4. FATCA compliance

monitoring & reporting

5. Questionnaire

facilitation

6. Qualitative assessment

of gaps

7. Planning for

implementation

Glo

ba

l g

ov

ern

an

ce

an

d

ma

na

ge

me

nt s

tru

ctu

re

Dia

gn

os

tic

Qu

es

tio

nn

air

e w

ork

str

ea

m


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FATCA impact assessment – key findings

► New accounts: The customer on-boarding processes will be required to change

to ensure that they are FATCA compliant. There will be significant challenges in

adapting the on-boarding process for documentary evidence and recording. For

the financial services industry in the UK, this has a significant impact with regards

to paperless processing.

► Pre-existing accounts: A large proportion of the effort identified relates to

designing and implementing processes to identify existing customers who trigger

U.S. Indicia and seek documentary evidence to establish their US or non US

status. Right search and customer contact strategies can reduce the likely

significant number of recalcitrant customers.

► Reporting: An effective reporting solution will be required to report account

details of US persons, their TIN number and balances to the IRS. Although the

first date of reporting is in September 30, 2014, reporting requirements need to be

built into the new customer processes.

► Withholding: Building a withholding capability is seen as a significant challenge.

Whilst some clients have some withholding processes in place, FATCA will

require calculating the ‗US source income‘ portion which is seen to be complex.


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FATCA impact assessment – lessons learnt

► It‘s not just about tax but also operating model changes and IT

solutions

► Do not underestimate the time required for sign off from key

stakeholders

► Governance is crucial and takes some time to set up

► Impact on customers and staff is a critical part of the assessment

► Systems do not generally store (or have the possibility to store) all the

necessary FATCA related data

► Lack of system synergies at group level, information tends to be

stored locally in various systems and formats which consequently

lead to retrieval issues


FATCA regulations

15 March 2012

Phase II: Solution optimisation and efficient implementation

BA

U t

ran

sit

ion

Phase II Solution Optimisation and Efficient implementation

b. Overall solution design

c. Implementation

New accounts

Pre-existing accounts

Reporting

Withholding

Detailed implementation plan (incl.

costing and resourcing)

Design high level business and

systems solutions

Pass thru payments

a. Validate impact assessment

Interpretation of proposed

regulations

Validating impact assessment

Efficiency Assurance – on-going activities: programme management, central coordination,education, communication, and liaison

IRS engagement

Development of route map

4 to 6 weeks 2 to 3 months

2 to 3 years

Build FATCA business requirements

Evaluate solution design options

Optimising solution (including local

and business amendments)

Evaluating compliance strategy

options

FATCA tools and enablers

Global program set-up and governance

Tax, legal and compliance


FATCA regulations

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DATA – a major FATCA challenge?

Customer analysis

► Co-ordination and volume of searches across divisions and jurisdictions.

► Ensuring robustness, consistency, audit ability and quality over individual searches.

► Accuracy of technical translation and implementation of search rules.

► Potential need for fuzzy or partial matching of free text customer data.

► Inefficient due diligence of unstructured or paper based data.

Data aspect Key FATCA data challenges

Data management

► Managing and aggregating large volumes of search outputs across the organisation.

► Process of consolidation and follow – up preparation of search outputs.

► Co-ordinating and managing the investigation and analysis of search outputs.

► Data governance will play a key role in maintaining FATCA compliant data.

Data quality

► Resolving conflicting FATCA classifications.

► De-duplication of customer search outputs.

► Identifying poor data quality hot spots that will drive process and system changes for new on boarding processes.

Data privacy

► Establishing a legitimate, lawful basis for end-to-end processing of personal data for FATCA (including notice to customers, terms and conditions, transfers outside EEA, etc.).

► Navigating and accommodating differences in data privacy legislation/regulation across Europe and globally.

► Implementing appropriate technical and organisational controls over personal data processed for FATCA

purposes.


FATCA regulations

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What are the key IT impacts for an Foreign Financial Institution?

Technology challenges:► FATCA may require multiple changes in

multiple systems in multiple locations to be completed by a set deadline.

► Each system may require different changes, use different technologies and

have different support.

► Potential impact on other systems that are not directly affected by FATCA but need to

be updated due to changes elsewhere.

► likely for new systems for reporting,

withholding and workflow to manage investigations into identified potential US

persons.

Cost impact:► The costs of IT change will be a substantial

component of the overall compliance costs

both in systems change and resource

costs.

► Mitigating the costs will be key explore opportunities to integrate FATCA into

existing IT projects and plans and reduce

system changes to a minimum.

Business modeland products

Sales and distribution models

New customers

Pre-existing customers

Reporting

Withholding andpayments

► IT will need to evidence that the systems will enable compliance.

► Identify systems architecture and core technologies.

► Identify variances in systems across different geographies, business units and divisions.

► Include system version numbers.

► Review KYC and documentation systems.

► Enhancements may be needed to CRM and risk systems.

► Workflow support for handling investigations.

► Search customer records electronically.

► Workflow for investigation of potential US persons.

► Enhance customer record systems.

► Identify accounts with US indicia.

► Sourcing of data for reports.

► Consolidation across FFIs.

► Production of reports.

► Distribution to IRS.

► Develop withholding capability.

► Develop pass-thru capability.

► Calculation of pass-thru percentage.

► Distribution of withheld funds to IRS.

ImpactsArea

Making compliance less disruptive and more efficient


FATCA regulations

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The next steps...

Interpretation of the proposed regulations

► Review and interpret the proposed FATCA regulations

► Review existing assumptions to confirm requirements and identify areas of

remaining uncertainty

► Develop high level design principles and agree strategic questions which

need to be resolved

► Communicate implications to your various stakeholders

► Build / update business requirements

Engagement with the IRS (optional)

► Identify points of concern for submission to the IRS

► Engage with the IRS based on the interpretation of the regulations by 30 April

2012


FATCA regulations

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The next steps... (2)

Complete / validate impact assessment and plans

► Review impact assessment with respective business units

► Conduct workshops with all business units to gather input and confirm

FATCA impacts

► Validate design principles and implementation plans

► Re-visit cost assumptions / business case

Initiate / continue solution design

► Initiate business and IT solutions design for ―high certainty‖ areas

► Obtain sign-off to solution design and commence build...test...implement

It’s critical to be compliant It’s essential to be cost effective


FATCA regulations

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Summary

► FATCA has an impact on all Banks, Brokers, Investment Funds, Hedge

Funds, Private Equity Funds and certain Insurance Companies.

► Even with the draft regulations, the complexity of the task at hand to become

compliant remains. Final regulations are expected by summer 2012.

► Complete and correct compliance with the new rules is a must.

► Non-compliance entails huge risks, e.g.:

► Financial impact due to the 30% WHT

► Reputational risks

► Inability to operate in the market

► EY‘s understanding combined with their hands on experience of global

FATCA projects, can help your organisation achieve FATCA compliance in a

cost effective manner.

Wrap-up and question time

by Koen Marsoul and Sylvie Goethals

15 March 2012


FATCA regulations

15 March 2012

Ernst & Young disclaimers

Circular 230 disclaimer

Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the

purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state

or local tax law provisions.

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

accounting advice.

Ernst & Young disclaimers

This presentation is intended to provide only a general outline of the subjects covered. It should neither

be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of

professional advice. Ernst & Young accepts no responsibility for any loss arising from any action taken or

not taken by anyone using this material.

This presentation is © 2011 Ernst & Young. 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. 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 expressly disclaims any liability in connection with use of this

presentation or its contents by any third party.


FATCA regulations

15 March 2012

Contact Details

Koen Marsoul

Partner

Ernst & Young Tax Consultants

De Kleetlaan 2

B – 1831 Diegem

Tel. : +32 2 774 99 54

[email protected]

Sylvie Goethals

Partner

Ernst & Young Reviseurs

d'Entreprises/Bedrijfsrevisoren

De Kleetlaan 2

B – 1831 Diegem

Tel. : +32 2 774 95 18

[email protected]


FATCA regulations

15 March 2012

Ernst & Young

Assurance | Tax | Transactions | Advisory 2012 Ernst & Young Transaction Advisory Services All rights reserved.

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Seminar Fatca update

Economy & Finance

Transcript of Seminar Fatca update