Www.bermudacaptive.bmJUNE 2 - 4, 2014 An overview of FATCA and the implications for captives.
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Transcript of Www.bermudacaptive.bmJUNE 2 - 4, 2014 An overview of FATCA and the implications for captives.
An overview of FATCA and the implications for captives
Moderator:
•James Berry – Director, KPMG
Panelists:
•Beverley Todd – Executive Vice President, JLT Insurance Management (Bermuda) Ltd
•Richard E. Irvine – Managing Director, PwC
•Steven Rees Davies – Counsel, Appleby
Disclaimer
ANY TAX ADVICE IN THIS COMMUNICATION OR PANEL DISCUSSION IS NOT INTENDED OR WRITTEN BY THE PRESENTERS, PARTICIPANTS OR THEIR FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
The Road to FATCA
FATCA compliance is compelled by imposing a
withholding tax on withholdable payments
paid, directly or indirectly, to foreign financial
institutions (“FFIs”) and certain other foreign
entities that fail to comply with FATCA.
The Foreign Account Tax Compliance Act (“FATCA”) was enacted on March
18, 2010.
FATCA introduces a new regulatory
compliance and reporting regime which compels
certain foreign entities to disclose U.S. persons
with offshore “financial accounts”.
It is estimated that hundreds of billions of
dollars of offshore assets are owned by U.S.
persons and billions of dollars of taxes are evaded annually by
U.S. persons holding offshore accounts.
When voluntary compliance is augmented by third-party information
reporting, the IRS is able to verify
taxpayer compliance.
The U.S. federal income tax system relies on
voluntary compliance by taxpayers to self-report their worldwide income
and compute their income tax.
FATCA law, notices and regulations
HIRE Act signed into law by U.S. President Obama on March 18, 2010
Guidance notices
■ Notice 2010-60: preliminary guidance issued August 27, 2010
■ Notice 2011-34: additional guidance issued April 8, 2011
■ Notice 2011-53: more guidance issued July 14, 2011
Proposed Regulations: Issued February 8, 2012
Final Regulations: Issued January 17, 2013
Bermuda Model II IGA: December 2013
Temporary Regulations: Issued February 20, 2014
What is a Foreign Financial Institution?
An FFI is any non-US entity that does the following:
1. Accepts deposits in the ordinary course of business;
2. Holds financial assets for the benefit of others as a substantial portion of its business;
3. Is an investment entity;
4. Is a specified insurance company; or
5. Is an entity that is a holding company or treasury center.
To what payments does FATCA apply?
Payments subject to FATCA withholding
Generally, FATCA withholding applies to:
“Withholdable Payments”:
– Beginning July 1, 2014, U.S. source investment income (“FDAP” – interest, dividends, royalties, rents, etc.) and
– Beginning January 1, 2017, gross proceeds from the sale or exchange of U.S. assets that produce U.S. source interest and dividends.
– Withholdable payments do include insurance and reinsurance premiums.
Alternative regime to FATCA: Inter-Governmental Agreement (IGA)
• Governments support FATCA goals but legal impediments prevent compliance
• Alternative approach to FATCA created where countries (FATCA partners)
would enter into Intergovernmental Agreement (IGA)
• Alternative regime based on automatic exchange authorized in
existing bilateral tax treaties
• IGA Regime
Model 1 IGAs
– Any FFI that is resident in a Model 1 IGA Partner Country will be governed by the terms of the IGA in effect with that country and implementing laws and regulations adopted by that country.
Model 2 IGAs– FFIs will be required to implement FATCA as prescribed by the FATCA Regulations, except to
the extent expressly modified by the relevant IGA.– FFI will seek consent from account holders to supply information to the IRS.– Where consent is not granted, the FFI will provide aggregate information to the IRS with
respect to non-consenting investors.– The IRS may then make further information requests to the Model 2 IGA Partner Country’s
government based on the aggregate information.
Regulations vs. IGA requirements
FATCA regulations Model 1 IGA Model 2 IGA
PFFIRegistered
DCFFICertified
DCFFIEBO Reporting FI Reporting FI
Registration Yes Yes No No Yes* Yes
Self-certification (e.g., Form W-8 BEN-E or Form W9)
Yes Yes Yes Yes Yes Yes
New Account Due Diligence Yes DependsGenerally,
noNo
Yes (per IGA rules)
Yes(per IGA rules)
Preexisting Account Remediation
Yes DependsGenerally,
noNo
Yes(per IGA rules)
Yes(per IGA rules)
Withholding against NPFFIs, Recalcitrant Account Holders
Yes Depends No No Generally, No Generally, No
Reporting Yes Depends No NoYes
(locally)Yes
(to IRS)
Address Legal Impediments to Compliance (i.e., account closure, transfer or blockage)
Yes Depends No NoGenerally,
no
Yes(consent to report
per IGA rules)
Governance Yes Yes No NoYes
(if required locally)Yes
* Each Reporting FI that is tax resident in a Model 1 Partner Country must comply with the registration requirements of the relevant Model 1 IGA.
Non-Financial Foreign Entity
- A “Non-Financial Foreign Entity” (“NFFE”) is any foreign entity that is not a Financial Institution
- A NFFE is treated as a “Passive NFFE” unless:
- Less than 50 percent of the NFFE’s assets held during the preceding calendar year are assets that produce passive income
- The stock of the NFFE (or a Related Entity) is publicly traded
- NFFE is a holding company for subsidiaries engaged in businesses (other than the business of a Financial Institution), and the NFFE does not function as an investment fund
- The entity is an “Excepted NFFE” as described in U.S. Treasury Regulations
- The entity elects to be a Direct Reporting NFFE
Non-Financial Foreign Entity (cont’d)
- A Passive NFFE must provide documentation regarding its “Controlling Persons
” in order to avoid FATCA withholding on withholdable payments (including U.S.
insurance premiums)
- Account held by a Passive NFFE with U.S. Controlling Persons is treated
as a U.S. Account for FATCA purposes
- Treasury Department and the IRS have issued regulations to create new
FATCA classifications to facilitate FATCA administration for Passive NFFEs
- Direct Reporting NFFE – An NFFE that elects to register with the IRS,
obtain a GIIN, and (if necessary) report information regarding U.S.
Controlling Persons directly to the IRS
- Sponsored Direct Reporting NFFE – Sponsor agrees to undertake FATCA
administration on behalf of Direct Reporting NFFE
FATCA timeline – Foreign financial institutions
2013 2014 2015 2016 2017 2018
March 15, 2016
•Annual tax return reporting (Form 1042)
•Annual information reporting (Forms 042-S)
•Reporting of foreign reportable amounts to NPFFIs begins
March 31, 2016
Annual Form 8966 reporting
A
Spring 2014
April 25, 2014Last date to register with IRS to ensure inclusion on FFI List (safe harbor)
June 2, 2014FFI List published by IRS List
June 30, 2015
Deadline for FFIs to complete remediation on preexistinghigh-value accounts*
January 1, 2017•FATCA withholding begins on certain gross proceeds payments to noncompliant accounts
•FATCA withholding begins on foreign passthru payment (or 6 months after publication of regulations defining term, whichever is later)
•For qualified collective investment vehicles, date by which policies aim to redeem or immobilize Bearer Interests
December 31, 2014
Deadline for FFIs to complete remediation on preexisting entity accounts held by Prima Facie FFIs (begin withholding)*
JG
March 15, 2015
•Tax return reporting begins (Form 1042)
•Information return reporting begins (Forms 1042-S)
March 31, 2015
Form 8966 reporting for 2014 on Substantial U.S. Owners of Passive NFFEs & all U.S. owners of ODFFI accounts identified by December 31, 2014
N
July 12, 2013
Revised Model IGAs and accompanying annexes released
December 31, 2015
Final date for FFIs to qualify for Limited Branch & Limited FFI Status
March 15, 2017
•Annual tax return reporting (Form 1042)
•Annual information reporting (Forms 1042-S)
•Reporting of foreign reportable amounts to NPFFIs ends
March 31, 2017
Annual Form 8966 reporting
E
* These dates assume that the PFFI’s FFI agreement is approved by the IRS and effective on July 1, 2014
Summer/Fall 2013
IRS portal anticipated to open
C
December 31, 2016
Final Day of Transitional Rule treating U.S. source FDAP payment paid by non-intermediaries on offshore obligations as excluded from definition of “withholdable payment”
M
L
** Payments treated as dividend equivalents, under section 871(m), may be treated as Grandfathered up to 6 months after the publication of regulation implementing 871(m) Payments treated as foreign passthru payments may be treated as Grandfathered up to 6 months after the publication of implementing regulations
June 30, 2018Deadline for Responsible Officer to file certification for First Certification Period
June 30, 2016
Deadline for FFIs to complete remediation on preexisting accounts, other than Prima Facie FFIs and high-value accounts (begin withholding)*
B
D
F
H
I
August 31, 2016
Due date for Responsible Officer due diligence certifications (unless previously submitted)*
K
P
O