A comparison of FATCA and the Common Reporting Standard

Transcription

1 A comparison of FATCA and the Common Reporting Standard March 9, 2016 Michael J. Bruno and Sean Tevel Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.

2 Agenda

3 Foreign Account Tax Compliance Act ( FATCA ) Global Automatic Exchange of Information ( AEOI ) and the Common Reporting Standard ( CRS ) FATCA v. AEOI (Similiarities and Differences) 3

4 FATCA

5 FATCA in a Nutshell Brief Background Enacted as part of the HIRE Act in 2010 Effective as of July 1, 2014 Goals Identifying unreported income of US persons Enlisting non-us financial institutions to report such US persons FATCA not aimed at revenue raising 5

6 FATCA in a Nutshell Targeted Structure 6

7 FATCA in a Nutshell Goal Information reporting of US persons investing through a foreign financial institution ( FFI ) or a non-financial foreign entity ( NFFE ) Stick 30% withholding tax on certain US source payments to an FFI that does not participate and NFFEs that do not comply Passthru Payment Withholding Action US withholding agents must collect documentation FFI: Enter into an agreement with the IRS NFFE: Provide documentation to avoid withholding Governments enter IGAs 7

8 FATCA in a Nutshell The Basics Payor FFI/NFFE 30% withholding tax on US source interest, dividends, rents, salaries, wages, gain from sale of assets generating such income e.g. stocks and bonds ( withholdable payment ) Withholdable payment to FFI or NFFE US source FDAP income July 1, 2014 Gross proceeds from sales (e.g., US stock and bond sales) July 1, 2019 Foreign source passthru payments July 1, 2019 (at earliest) Exceptions: (1) Grandfathered Obligations; (2) Non-financial Payments; and (3) Short-Term Debt Proceeds. 8

9 FATCA in a Nutshell The Basics Definition of FFI: US Treas. Regs.: An FFI is broadly defined, with five (5) general categories: (i) a depository institution; (ii) a custodial institution; (iii) an investment entity; (iv) a specified insurance company; or (v) a specified holding company or treasury center. IGA: Not as expansive, in that categories are defined to encompass only: (i) a custodial institution; (ii) depository institution; (iii) investment entity; and (iv) specified insurance company. 9

10 FATCA in a Nutshell The Basics Who is the Withholding Agent? ANYONE (and everyone) who has custody of a withholdable payment. US Co. Interest payment Paying Agent Trustee Bank Each step requires a FATCA compliance inquiry Foreign Corp. Holder of Debt 10

11 FATCA in a Nutshell The Basics» Withholding agent is required to withhold on a withholdable payment if the payment is made to an FFI or NFFE, unless an exception applies FFI exception: If an FFI enters into an agreement with the IRS to report on US account holders or meets one of the exceptions, then withholding may not apply. NFFE exception: If an NFFE provides the appropriate withholding certificate(s) and discloses substantial US owners, then withholding does not apply. 11

12 FATCA in a Nutshell The Basics» Withholding agent must determine: Who is the payee? Generally, person to whom payment is made; However, be careful US entity classification rules control. What is the payee s FATCA status? Can rely on withholding certificate, and IRS published list of compliant FFIs. Reliance on Withholding Certificates and Statements: Must obtain prior to payment; Be able to reasonably determine how much of the payment relates to the valid documentation; Must not know (or have reason to know) that any of the information, certifications, or statements are unreliable or incorrect. 12

13 FATCA in a Nutshell The Basics WITHHOLDING CERTIFICATES Form W-8BEN: Beneficial owner withholding certificate (individuals) Form W-8BEN-E: Beneficial owner withholding certificate (entities) Form W-8IMY: Withholding certificate of an intermediary, flow-through entity, or US branch Form W-8ECI: Certificate for effectively connected income Form W-8EXP: Certificate for exempt status 13

14 Reporting US Account Holders Model 1 IGAs vs. Model 2 IGAs Is there a withholdable payment in the structure or transaction? Who must report? What is a US Reportable Account? What information gets reported? What due diligence can US people expect to be required to US withholding agents? 14

15 Reporting Non-US Account Holders Automatic Exchange/ TIEA What is a typical Non-US Reportable Account? What information is reported? What types of accounts are not reported? What information is not reported? 15

16 CRS

17 Global AEOI Developments June summit of G8 leaders committed to AEOI. September G20 leaders endorsed the OECD's proposal for a global model of AEOI. February 13, OECD and G20 countries released a proposed global standard which would enable jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. July 21, OECD released the full version of the Standard for Automatic Exchange of Financial Information in Tax Matters ( The Standard ): including a model CAA, full CRS, and commentaries on both. October 29, jurisdictions signed a multilateral Competent Authority Agreement ( CAA ) to automatically exchange information, more than 45 of them by September More jurisidictions sign on / refinement of standards Commencement of country reviews by Global Forum / Data collection by Financial Institutions of 2017 committed jurisdictions 2017 Beginning of first exchanges under CRS / Global Forum Peer Reviews 17

18 Global AEOI Developments (continued) Currently over 60 jurisdictions committed to implement The Standard, including: Argentina, Australia, Belgium, Bulgaria, Canada, China, Colombia, Croatia, Cyprus, Czech Republic, Denmark, Estonia, the Faroe Islands, Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Italy, Israel, Japan, Korea, Latvia, Liechtenstein, Lithuania, Malaysia, Malta, Mauritius, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Saudi Arabia, Seychelles, Singapore, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland and the United Kingdom; the UK's Crown Dependencies of Isle of Man, Guernsey and Jersey; and the UK's Overseas Territories of Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat, and the Turks & Caicos Islands; the United States. Early adopters: over 45 jurisdictions; the first automatic information exchanges ambitiously planned for September

19 Global AEOI CRS Overview What information gets reported? Investment income (e.g., interest and dividends; income from certain insurance contracts) Account balances Sales proceeds from financial assets Whose information is reported? Individuals Entities Trusts & Foundations Look-through rules apply to passive entities Who reports? Banks Custodians Brokers Certain collective investment vehicles Certain insurance companies 19

20 Global AEOI the Standard (2014) The Standard (published by OECD) consists of four main parts: The Common Reporting Standard (CRS) contains the reporting and due diligence rules for financial accounts The Model Competent Authority Agreement (CAA) contains the rules on exchange of information Commentaries to the CRS and the CAA Annexes: including technical solutions, users guides, model questionnaires, etc. 20

21 FATCA Model of Information Exchange Non-US Customer US Customer US Bank 1 Non-US Bank US IRS 2 Model 1 Tax Authority 1. Model 2 IGA and no IGA 2. Model 1 IGA 21

22 OECD AEOI Model of Information Exchange Non-resident Customer Non-resident Customer Non-resident Customer Non-resident Customer Bank Bank Bank Bank US Malaysia Singapore UK Italy Germany France Spain Bank Bank Bank Bank Non-resident Customer Non-resident Customer Non-resident Customer Non-resident Customer 22

23 FATCA v. OECD AEOI FATCA AEOI Framework for exchange Unilateral or bilateral Multilateral Compliance key Reportable persons Pre-Existing Account Withholding tax on non-compliers or domestic enforcement for noncompliance in Model 1 jurisdictions US persons, including US citizens and US tax residents living overseas New Entity Accounts open as of 12/31/2014 (see Notice ) Domestic enforcement for noncompliance Non-residents of the jurisdiction (residence address test) Accounts open as of 12/31/2015 New Account Applicability of De Minimis Thresholds Availability of Sponsoring Entity Regime New Accounts opened from 1/1/2015 $50,000 for Individual and Depository Accounts $250,000 for Entity Accounts (not eligible if opened on or after 7/1/2014 and before 1/1/2015) Yes New Accounts opened from 1/1/2016 None (except $250,000 de minimis threshold for pre-existing entity accounts) None (currently) 23