FATCA Documentation and Due Diligence

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1 FATCA Documentation and Due Diligence Seminar on U.S. Taxation of International Banks Sponsored by the Institute of International Bankers June 19, 2012 E.A. (Lisa) Chippindale Karan Mosley Humberto Reboredo John Sweeney Danielle Nishida

2 Disclosures Internal Revenue Service Advisory: No position shown in this presentation should be attributed to the Internal Revenue Service. The positions and content shown in this slide deck have been prepared by private practitioners and the Internal Revenue Service expresses no view as to the correctness of any interpretation taken herein. Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS under Circular 230, we inform you that any U.S. federal tax advice contained in this presentation (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any matters addressed herein.

3 Top Documentation Issues Retail & Private Banking/Wealth Management System enhancements to perform due diligence and identification procedures New Account opening procedures and communication of relevant rules to staff Timing and costs to comply with the regulations Ability to close accounts Ability to ensure full FFI compliance by all branches/affiliates Renewal requirements for most documentation Review of pre-existing accounts including aggregation Number of entity categories, leading to client and employee confusion

4 Top Documentation Issues Capital Markets Renegotiations of Master Agreements to eliminate the gross up for FATCA tax Ability to share account holder documentation amongst legal entities/business lines Requirement to cross-document members of the PFFI s EAG Programming for tracking transactions by counterparty for grandfathered obligations; formerly grandfathered, but substantially modified, obligations; pre-existing obligation relief Foreign Passthru Payments uncertainty, complexity, asymmetry; document counterparties to wholly foreign transactions or might scope of foreign passthru payments or definition of financial account change?

5 Questions for IRS USFIs need to collect FATCA documents from account holders effective 1/1/2013, but FFIs will not yet have obtained PFFI status. What remedies are being considered to address this dilemma? Final regulations may result in significant changes that cannot be made until after USFIs and PFFIs have begun to comply with FATCA What sort of accommodations are being considered to allow FIs sufficient time to modify systems, procedures, training for such changes? Is there a need to cross-document members of the PFFI s EAG where intragroup accounts exist?

6 Key Decisions Capital Markets Decision re: timing for amending Master Agreements and other contracts Decisions re: language for ISDA Master Agreements adhere to future ISDA FATCA protocol and/or obtain further language in bilateral ISDA Master Agreements Decision whether to build withholding systems or refuse to transact with NPFFIs and nonwithholding PFFIs Bank policy re: dealing with counterparties to Master Agreements and other contracts that have not been amended

7 Questions for IRS The proposed regulations seem to allow for the possibility that the IRS will audit Chapter 4 compliance of PFFIs in certain instances. Is this correct? If so, is there a possibility that in the event a Chapter 4 audit is performed, it may also include or lead to a Chapter 3 reassessment beyond payments governed by a QI agreement? If so, would a PFFI that collects documentary evidence under Chapter 4 rather than Forms W- 8 fail to satisfy the Chapter 3 documentation standards?

8 Documenting Entity Accounts Dealing with the absence of the eyeball test Wait and see or begin to request Forms W-9 from exempt recipients? Approach to be taken by US branches Approach to be taken by USFIs Forms? Approach to be taken by PFFIs Forms or documentary evidence?

9 Documenting Individual Accounts New accounts Forms W-8 or documentary evidence? Different approaches depending on the business line? Pre-existing accounts Intention to use the presumption rule Plans re: timing of re-documenting, approach to re-documenting

10 Questions for IRS How much reliance can be put on the draft Forms W-8 should FIs start amending client onboarding systems based on the fields in such forms? Many comment letters object to the need to renew documentary evidence. Is this requirement under re-consideration?

11 Document Management Pre-existing accounts Process for tracking the review of files Plans for managing change in circumstances and tracking grace periods (e.g., 2 years for start-up company to provide updated documentation) and expiry of presumption rules? Plans for managing expiration dates? Plans for verification processes add on to current employees workload or establish new verification group? Intended process for dealing with account holders that provide inaccurate or inadequate documents or that fail to understand Forms W-8 or W-9?

12 Questions?