US FATCA, CRS and EUSD Insurance Considerations

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1 US FATCA, CRS and EUSD Insurance Considerations Prepared for Swiss-American Chamber of Commerce Tax Chapter Conference June 2014 Carl Emanuel Schillig

2 Objective and key features of US FATCA, OECD CRS and EUSD Objective Automatic Exchange of Information to address potential tax evasion through offshore financial accounts Annual, systematic transmission of financial account information - by financial institution to the source country of the account - which supplies information to the country of citizenship (US) or tax residence of the taxpayer Key Requirements Legal basis for the exchange of information Common standard on account types subject to review, account holders to be identified, due diligence identification, information to be exchanged and Compatible technical solutions 2

3 Overview US FATCA 1 Enacted into US law in March 2010, the Foreign Account Tax Compliance Act (FATCA) is designed to track US source income paid to non-us entities and credited to US owners of financial accounts held by non-us entities Effective July 1, 2014, compliance involves potential 30% withholding on US source payments and reporting obligations For US insurers, FATCA builds upon existing reporting rules For non-us insurers, FATCA is a new regime For insurers, FATCA primarily affects life business and requirements differ for US and non-us insurers Withholdable payments trigger obligations for insurers Receipt (or potential receipt) of certain US source income, plus having US customers/accounts trigger obligations for non-us Insurers 3

4 Overview US FATCA 2 Foreign Financial Institutions (FFIs) must identify and report accounts to US Internal Revenue Service (IRS) of: a US individual taxpayer (citizens and green card holders), certain US entities, and a passive/investment non-financial foreign entity substantially owned more than 10% by a US individual taxpayer FFIs, include non-us insurance companies that issue cash value life insurance or annuity contracts New Business - Identification procedures rely on US AML procedures plus additional tax self-certification Pre-existing Business - Identification requires checking historical electronic information and sometimes paper information depending on value of account Change of circumstances indicating a possible change of taxpayer status requires additional customer identification 4

5 Overview US FATCA 3 To overcome data privacy laws and ease implementation, a country can execute a Model 1 or 2 Inter-Governmental Agreement (IGA) with the US In a Model 1 IGA, an FFI reports to its local country tax administration, which reports information to the IRS and requires reciprocal reporting by US financial institutions. Presently, the US tax law does not permit detailed reciprocal reporting In a Model 2 IGA an FFI reports to the IRS, but no reciprocal reporting required by US financial intuitions In limited cases, US withholding tax may be assessed IRS recently released Notice permitting penalty relief during for good faith compliance and certain other more relaxed requirements 5

6 FATCA Details 1 FDAP and Withholdable Payments Fixed, Determinable, Annual, or Periodical (FDAP) income is broadly defined, which is: Fixed when paid and in amounts known ahead of time, Determinable whenever there is a basis for figuring the amount to be paid, Can be periodic if it is paid from time to time but need not be annual or regular, and Can be determinable or periodic, even if the length of time during which the payments are made is increased or decreased Examples include: Dividends, interest, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and the like

7 FACTA Details 2 US FDAP and Withholdable Payments Chapter 3 - US source FDAP withholding Applies to all US and non-us payers where payments made to non-us persons (individuals and entities) regardless of FATCA New Chapter 4 FATCA withholding Applies only to certain US source FDAP payments made by FFIs to non-us entities, which for insurers includes payments on cash value insurance contracts and annuities, insurance premiums and reinsurance premiums Except: US source reinsurance premiums paid by non-us insurers until January 1,

8 FACTA Details 3 Cash Value Insurance Contracts Cash Value Insurance Contract A cash value insurance contact is issued by an insurance company and has a cash value of more than $50,000 at any time during the calendar year Exclusions from Cash Value Cash value does not include amounts payable Solely by reason of death of an individual insured under a life insurance contract (e.g., term life). As a personal injury or sickness benefit As indemnification of an economic loss upon an insured event For other than life insurance, as a refund previously paid premium due to cancellation, termination, reduction in exposure or a correction of an error For other than life insurance, as a policyholder dividend (other than termination dividend) {special rules apply} As a return of an advance or deposit premium if the premium is payable at least annually and the advance or deposit does not exceed the amount of the next annual premium 8

9 FATCA Details 4 Due Diligence US Accounts FFIs may identify US accounts by calibrating due diligence requirements based on the value and risk profile of the account The final regulations reduce the burdens associated with identifying US accounts in the following ways: Accounts exempt from review: Preexisting accounts less than $250,000 New accounts below $50,000 Reduced diligence and documentation rules for lower value preexisting accounts (between $250,000 and $1 million) Reliance on self-certification

10 FATCA Details 5 Accounts Exempt from Review Term contracts, Non-life, and indemnity reinsurance All preexisting accounts held by individuals with a balance or value of $50,000 or less All pre-existing accounts with a cash value of $250,000 or less held by entitles and for preexisting accounts that are cash value insurance and annuity contracts Insurance contracts with a balance or value of $50,000 or less from treatment of financial accounts

11 Annex I Swiss IGA Accounts not required to be reported 11

12 EU legislation on Automatic Exchange of Information (AEI) AEI on savings income (EUSD) AEI on other income types (ACD) Current Savings Directive 2003/48/EC Revised Savings Directive (adopted March to be implemented as per ) 2008/0125 (CNS) Current Administrative Cooperation Directive 2011/16/EU Revised Administrative Cooperation Directive - Commission s proposal 2013/0188 (CNS) Since 1/7/2005 AEI on: Expands AEI to also cover : From 1/1/2015 AEI on: From 1/1/2015, AEI also on: Interest income Sales proceeds on debt claims Distributions of UCITS (undertakings for collective investments in transferable securities) that invest in debt claims Distributions of ALL investment funds that invest in debt claims Income from innovative financial instruments that are substantially similar to debt claims Income from life insurance products that are substantially similar to debt claims Income from employment Director s fee Pensions Life insurance products not covered by other EU laws on exchange of information Ownership of and income from immovable property Dividends Capital gains Any other income generated with respect to the assets held in a financial account Any amount with respect to which the financial institution is the obligor or debtor, including redemption payments Account balances if the information is available however most favoured nation clause applies (once FATCA is adopted) with no condition of availability for these items Items highlighted in bold correspond to items that are also covered by FATCA and OECD AEI 12

13 Revised EUSD Life insurance contracts in scope Benefits from a life insurance contracts are in scope, if i. the contract contains a guarantee of income return, or ii. the actual performance of the contract is at more than 40 % (25 % as from 2016) linked to interest whereas the excess of any repayment or partial repayment made by the life insurer before the maturity of the life insurance contract as well as the excess of any amount paid out of the life insurer over the sum the payments made to the life insurer under the same life insurance contract, shall be considered to be a benefit An amount paid solely in respect of death, disability or illness shall not be considered to be a benefit in scope Benefits shall be considered only to the extent that the contract was subscribed on or after 1 July

14 Revised EUSD Look through approach Issue: Individual could circumvent the Directive by using an interposed legal person (e.g. foundation) or arrangements (e.g. trust) situated in a non-eu country which does not ensure effective taxation Approach: Look-through approach based on `customer due diligence carried out for other purposes EU paying agents to use the information available under the AML (anti-money laundering) provisions about the actual beneficial owner(s), Indicative list of certain types of entities and arrangements (Annex I) established or managed in jurisdictions outside the EU which do not apply effective taxation 14

15 Revised EUSD State of Play The commission will aim to reach agreement by the of 2014 on updating of the existing Savings agreements with Switzerland (and Andorra, Liechtenstein, Monaco, San Marino), in line with development at EU and at international level Both the revised Savings Directive, through further discussion at Council level, and the revised Savings agreements will be aligned with the OECD Global Standard on automatic exchange of information which is expected to be adopted in mid