A Brief Primer on the Foreign Account Tax Compliance Act (“FATCA”)

James Wall

F o r e i g n A c c o u n t T a x C o m p l i a n c e A c t ( “ F A T C A ” )

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FATCA was incorporated into the HIRE Act that became law on March 18, 2010 (IRC sections 1471 through 1474).

The goal of FATCA is to require non-U.S. financial institutions (broadly defined) and certain non-U.S. entities owned by U.S. persons to provide information to the IRS identifying U.S. persons invested in non-U.S. bank and financial accounts.

Requires U.S. withholding agents to perform enhanced due diligence on foreign accounts and perform withholding and reporting in addition to their current regulatory obligations under Chapter 3. Non-compliant withholding agents take secondary liability for the 30% FATCA charge.

Requires non-financial foreign entities (NFFEs) to report substantial U.S. owners or certify no U.S. ownership. Foreign payees who fail to provide the required information suffer a 30% charge on their own cross-border payments.

F o r e i g n A c c o u n t T a x C o m p l i a n c e A c t ( “ F A T C A ” ) ( C o n t ’ d )

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FATCA withholding: Generally, 30% withholding required on certain payments made to nonparticipating foreign financial institutions (“FFIs”) and certain non-financial foreign entities (“NFFEs”). Under FATCA, to avoid being withheld upon, FFIs may register with the IRS and agree to report to the IRS certain information about their U.S. accounts, including accounts of certain foreign entities with substantial U.S. owners. Alternately, FFIs resident in countries which have signed Model 1 IGAs with the U.S. may report this information directly to local tax authorities and do not need to enter into an agreement with the IRS. These FFIs must still register and obtain a GIIN, however.

Withholdable payments are generally FDAP income. Will also include proceeds from sale of property that generates interest or dividends.

Withholding will generally not be required on payments to participating FFIs who enter into agreements with the IRS to report information about accounts held by US persons. NFFEs who report certain information about substantial US owners will also be exempt from the withholding requirement.

Under the IGA framework, many FFIs may report to local tax authorities who will pass the information along to the IRS, rather than reporting directly.

F A T C A I m p l e m e n t a ti o n O v e r v i e w

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The IRS announced in Notice 2014-33 that 2014 and 2015 will be considered transition years for IRS enforcement of due diligence, reporting, and withholding requirements.

During the transition period, the IRS will consider the extent to which an entity has made a good faith effort to comply with FATCA requirements. Entities which make a good faith effort to comply will be afforded transition relief during this period.

The IRS also announced in this notice that it intends to further amend the regulations to provide that obligations held by entities and opened, executed, or issued before January 1, 2015 will be considered pre-existing obligations under the regulation grandfather rules.

F A T C A I m p l e m e n t a ti o n O v e r v i e w

New Final, Temporary, and Proposed Regulations released February 20, 2014 making substantive changes to Final Regulations and providing guidance on integration of FATCA with Chapter 3 and Chapter 61 withholding and information reporting.

IRS Notice 2013-43 Released July 12, 2013, pushes implementation timelines back a further six months.

Most Final Forms have been released, but instructions are still pending for Form W-8BEN-E.

Registration portal is now available at: https://sa2.www4.irs.gov/fatca-rup/. Registration should be completed by May 5,

2014 to ensure inclusion on the first list.

It is anticipated that the first list of participating FFIs will be released June 2, 2014.

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R e v i s e d F A T C A I m p l e m e n t a ti o n T i m e l i n e s

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Date Action

January 1, 2013 FATCA effective date

January 17, 2013 Final FATCA regulations released

May 5, 2014 Last day to register for inclusion in June 2, 2014 IRS list of participating FFIs and registered deemed compliant FFIs.

June 30, 2014 Earliest effective date of an FFI agreement

July 1, 2014 Withholding agents must begin withholding on US source FDAP income for new accounts and non-participating FFIs. Transition relief is available provided entities demonstrate a good faith effort to comply.

December 31, 2014 begin withholding on preexisting entity account holders that are undocumented prima facie FFIs. Transition relief is available provided entities demonstrate a good faith effort to comply.

January 1, 2015 Begin FATCA withholding on undocumented individual preexisting high value accounts. Transition relief is available provided entities demonstrate a good faith effort to comply.

March 15, 2015 Participating FFIs required to file information reports on U.S. accounts for calendar year 2014. Transition relief is available provided entities demonstrate a good faith effort to comply.

January 1, 2016 Begin withholding on remaining undocumented preexisting accounts. Transition period ends.

January 1, 2017 Withholding on gross proceeds and foreign pass-through accounts expected to begin.

F o r m s a n d R e g i s t r a ti o n

Registration portal is open, FFIs must register by May 5, 2014 to be included in the first list, to be released June 2, 2014.

Final Form W-8IMY released May 1, 2014. Instructions are still pending.

Final Form W-8EXP released April 1, 2014, instructions were released May 5, 2014.

Final Form W-8BEN-E released effective Feb. 1, 2014, instructions are still pending

Final Form 1042-S released Mar. 5, 2014

Final FATCA report Form 8966 released Mar. 5, 2014, instructions are still pending

Final 2014 Form 1042 released Mar. 4, 2014

Revised Form W-8BEN released Mar. 3, 2014

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C u r r e n t F o c u s A r e a s

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Classify legal entities within the Expanded Affiliated Group (Model 1 IGA FFI, Model 2 IGA FFI, non-IGA FFI, NFFE, etc.)

Analyze the impact of FATCA on your company

Amend current onboarding, withholding and reporting processes to comply with FATCA

Register FFIs with the IRS by May 5, 2014

W h o S h o u l d P r e p a r e F o r F A T C A C o m p l i a n c e ?

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US Withholding Agents

US Financial Institutions (USFIs)

Foreign Financial Institutions (FFIs)

Non Financial Foreign Entities (NFFEs)

US Individuals

US person that has control, receipt, custody disposal or payment of any withholdable payment

US entity that accepts deposits, hold financial assets for the account of others as a substantial part of its business, or engages (or holds itself out as being engaged) primarily in the business of investing or trading securities, commodities, partnerships, or any interests in such position

Non-US entity that accepts deposits, hold financial assets for the account of others as a substantial part of its business, or engages (or holds itself out as being engaged) primarily in the business of investing or trading securities, commodities, partnerships, or any interests in such position

Includes any foreign entity that is not FFI or is not one of the following specifically EXCEPTED entities: Any publicly traded corporation and its corporate affiliates (more than 50% of vote and value)

Any entity organized under the laws of a possession of the US Any foreign government, or any wholly owned agency thereof Any international organization or any wholly owned agency or instrumentality of such Any foreign central bank (unless acting as intermediary for clients) Any other class of persons identified by the secretary as posing a low risk of tax evasion

US citizens, US residents (e.g., green cardholder) and non-resident aliens who meet the substantial presence test

J u r i s d i c ti o n s W i t h M o d e l 1 O r 2 I G A s I n F o r c e

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Model 1 IGA Date Model 2 IGA Date

Australia 04.28.14 Austria 04.29.14Belgium 04.23.14 Bermuda 12.19.13Canada 02.05.14 Chile 03.05.14Cayman Islands 11.29.13 Japan 06.11.13Costa Rica 11.26.13 Switzerland 02.14.13

Denmark 11.15.12Estonia 04.11.14Finland 03.05.14France 11.14.13Germany 05.31.13Guernsey 12.13.13Hungary 02.04.14Ireland 12.21.12Isle of Man 12.13.13Italy 01.10.14Jamaica 05.02.14Jersey 12.13.13Luxembourg 03.28.14Malta 12.16.13Mauritius 12.27.13Mexico 11.19.12Netherlands 12.18.13Norway 04.15.13Spain 05.14.13U.K. 09.12.12

NOTE: More than 45 other countries are actively negotiating IGAs.

I s s u e s F o r U S W i t h h o l d i n g A g e n t s

FATCA for U.S. Withholding Agents

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I s s u e s f o r U S W i t h h o l d i n g A g e n t s

• Is the payment a “withholdable payment”?• Is the Item FDAP?• Is the item US source?• Is the payment grandfathered?

• Is the payee an FFI and, if so, Participating? Non-participating? Deemed compliant? Excepted? IGA partner resident?

• Is the payee an NFFE and, if so, is it Excepted? Active? Passive?• Are the payees exempt beneficial owners?• What type of documentation is required?

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W h a t N e e d s t o b e D o n e ?

• U.S. withholding agents will not be able to eliminate withholding unless:

• Obtain updated Form W-8 and • Corroborate that G.I.I.N. is correct on I.R.S. webpage • To ensure inclusion on the June 2014 IRS FFI List, an FFI will

need to finalize its registration by May 5, 2014. FFIs may also register on paper (i.e., by filing Form 8957), but slower processing times make this a poor choice. – Extra 6 months to register for FFIs subject to Model 1 IGAs – Will need to file Form 1042-S, Foreign Person’s Income subject to

withholding

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W h a t N e e d s T o B e D o n e ?

– Final instructions for 2014 form published May 6, 2014.– Must file electronically

• Report Payments subject to chapter 3 & chapter 4 withholding & tax withheld

• “Applicable exemption” if no FATCA withholding • Recipient’s foreign taxpayer identification number & date of

birth Optional until 2017, when must report one of these two items

• Due date March 15, 2015 • For payments to passive NFFE’s, also file Form 8966 if there are

any substantial US owners of the NFFE

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A c ti o n F o r P a y m e n t s t o F o r e i g n E n ti ti e s

• Action required: Must get a new Form W-8 BEN-E • Observations:

–Much more complex (8 pages) than existing one page form –Existing Form W-8BEN is replaced by two forms: Form W-8 BEN for

individuals –Form W-8 BEN-E for entities

• Question: If do not get the form (or the form is not complete), is there any way to not withhold? –Recommendation: Withhold unless get fully completed form If you do

not withhold then you may be personally liable for tax –Exception for pre-existing accounts of a Prima Facie FFI: Only need to

get a GIIN by January 1, 2015.

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A c ti o n f o r P a y m e n t s t o F o r e i g n E n ti ti e s

• Alternate Forms that may be needed: – Form W-8IMY (Intermediary) Applies to an entity that is a

QI, foreign partnership, foreign grantor trust or foreign simple trust

– In many cases, attached to this form must be forms from each of the partners, beneficiaries or grantor

‒ Form W-8ECI (effectively connected income) ‒ Form W-8EXP (foreign governments, tax exempt

organizations)

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W - 8 B E N - E

• Chapter 3 Status: Part I, line 4, asks for the Chapter 3 status of the Owner (11 situations) –Chapter 4 Status: Part I, line 5, is a list of possible items to be checked –31 possible classifications Need to determine: Whether you have all

pertinent information AND –Whether you have to withhold since answer depends upon which box is

checked

• Withholding agents will likely have to help their clients by taking on the role of being a tax advisor (even though they may not be able to provide specific tax advice).

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W i t h h o l d a b l e P a y m e n t s

• US source FDAP (dividends, interest, royalties, etc.), and

• Gross proceeds from sale, exchange, disposition, and redemption of assets giving rise to US source interest or dividends (after 12/31/16).

• FDAP:‒ Same definition as under Section 1441. Includes OID paid on redemption as well as gross up

payments by withholding agents out of the withholding agent’s own funds.

‒ Corporate distributions may be both FDAP and gross proceeds from the disposition or redemption of assets giving rise to US source dividends.

• Excludes amounts of interest accrued on the date of a sale of an interest bearing debt obligation if the sale occurs between two interest payment dates as well as gains from the sale of property.

• US Source:‒ Follows definitions in Sections 861-865. Interest paid by foreign branches of domestic

corporations and partnerships is treated as US source FDAP.18

W i t h h o l d a b l e P a y m e n t s

• Chapter 3 exceptions are unavailable for Chapter 4 purposes• For example, bank interest and portfolio interest are generally not subject

to withholding under Chapter 3, but are withholdable payments for FATCA purposes.

• Exceptions:Interest or OID paid on short term obligations

Effective Connected IncomeNon-Financial payments for:

ServicesUse of PropertyOffice/equipment leasesSoftware licensesAwards, prizes, etc.Interest on AP from the acquisition of goods and services

• Gross proceeds from the sale of property producing excludable US source FDAP that met one of the above exceptions will also be excluded.

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G r a n d f a t h e r e d O b l i g a ti o n s

• All obligations outstanding on July 1, 2014 (Note that the IRS intends to amend the regulations to extend this definition to obligations held by entities (as opposed to individuals) and outstanding before December 31, 2014).

• Payments made by secured party with respect to collateral securing grandfathered obligations (even if collateral not itself a grandfathered obligation)

• If secure both grandfathered and non-grandfathered obligations, must allocate by value

• No equity instruments or instruments lacking stated expiration or term • Non-debt obligation outstanding – date that legally binding agreement is executed

Line of credit, revolving credit facility for fixed term qualifies as of issue date if all material terms fixed (including maturity date)

• Life insurance contract payable no later than upon death • Premium payments on insurance or annuity contract that is a grandfathered

obligation are grandfathered

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G r a n d f a t h e r e d O b l i g a ti o n s

• All such obligations that may give rise to withholdable payments under Sec. 871(m) (dividend equivalent payments), or foreign passthru payments, outstanding prior to six months after such regulations are published

• Exception for material modification • Withholding agent may rely on statement of issuer as to

whether grandfathered • Withholding agent to treat modification as material only if

actual knowledge, i.e., if it receives a disclosure statement from issuer

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G r a n d f a t h e r e d O b l i g a ti o n s

Non-Financial Entities: Overview

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N o n - F i n a n c i a l E n ti t y F A T C A C o m p l i a n c e

• Entities which are not considered a Foreign Financial Institution (“NFE”) will have the following compliance obligations under FATCA:

• NFEs should identify any withholdable payments made by all companies in the group and identify to whom such payments are made.

• Withholdable payments generally include U.S. source compensation, interest, dividends, rents, royalties, or proceeds from the sale of property giving rise to dividends or interest.

• Note that the regulations provide that if a withholding agent is unable to determine the source of a payment at the time of payment, the payment must be treated as U.S. source.

• Note further that payments typically free from 1441 withholding (e.g. portfolio interest) are treated as withholdable payments for FATCA purposes.

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N o n - F i n a n c i a l E n ti t y F A T C A C o m p l i a n c e

• The identity and FATCA status of payees should be ascertained by collecting Forms W-9 (for U.S. payees) or the appropriate W-8 Form (for non-U.S. payees).

• W-8BEN—this form should be collected from non-U.S. individuals

• W-8EXP—this form should be collected from non-U.S. tax exempt payees

• W-8BEN-E—this form should be collected from non-U.S. entities who are beneficial owners of the payments

• W-8IMY—this form should be collected from non-U.S. passthrough entities (i.e. partnerships) and intermediaries.

• U.S. partnerships should collect documentation (Forms W-8 or W-9) from all partners.

• These requirements are no different from current requirements under existing U.S. withholding rules.

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N o n - F i n a n c i a l E n ti t y F A T C A C o m p l i a n c e

• NFEs should also determine the FATCA status of all entities in the group and prepare the appropriate W-9 or W-8 series form for such entities. These forms should be provided to counterparties who make withholdable payments to the group.

• All withholdable payments made to the group should be identified to ensure correct forms have been provided to all payors.

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N o n - F i n a n c i a l E n ti t y F A T C A C o m p l i a n c e

Foreign Financial Institutions: Overview

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W h a t i s a n F F I ?

Foreign Financial Institutions (“FFIs”) are broadly defined: Depository Institutions (Banks) Custodial Institutions (Mutual Funds) Specified Insurance Companies that have cash value products

or annuities Investment Entities (Hedge Funds or PE funds) Holding Companies Treasury Centers

By definition, investment funds organized outside the U.S. will be FFIs.

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E x e m p t F F I s

FATCA regulations exempt many categories of FFIs from the requirement to register and report, such as:

Most governmental entities Most non-profit organizations Certain small, local financial institutions Certain retirement entities

Unless otherwise exempt, FFIs that do not both register and agree to report face a 30% withholding tax on certain U.S.-source payments made to them.

NOTE: For withholdable payments made prior to January 1,2015, verification of a GIIN is not required with respect to payees that are reporting Model I FFIs. => Reporting Model I FFIs will have additional time beyond July 1, 2014 to register and obtain a GIIN to ensure that they are included on the IRS FFI list before January 2, 2015. Despite the additional time provided for Model 1 FFIs to register, it may be a good idea to register by the initial May 5 deadline to ensure withholding agents do not erroneously withhold on payments.

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F F I A g r e e m e n t & R e g i s t r a ti o n

FFIs that enter into an agreement with the IRS to report annually on their account holders may be required to withhold 30% on certain payments to foreign payees if such payees do not comply with FATCA.

FFIs are required to report annually: US accounts maintained by U.S. individuals, U.S. entities or foreign entities with

U.S. substantial owners Payments made to NPFFIs

FFIs are required to register on the IRS portal in order to obtain a Global Intermediary Identification Number (GIIN)

FFI are required to appoint a Responsible Officer that will certify FFIs compliance with the obligations under the agreement.

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C o m p l i a n c e R o a d m a p

Identify all FFIs and NFFEs in the extended group

Determine whether any of the FFIs are in an IGA jurisdiction

Gather required information

Register all FFIs for whom registration will be required

Complete new W-8 forms for all foreign entities and provide to U.S. payors or other withholding agents

Comply with terms of FFI agreement30

Q u e s ti o n s a b o u t F A T C A ?

Feel free to reach out to us:

Bradley Mainguybradley.mainguy@cohnreznick.com646-448-5449

Christina Leechristina.lee@cohnreznick.com646-254-7450

James Walljames.wall@cohnreznick.com646-254-7460

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