David Weisner. Carolina Caballero. Today s Speakers. U.S. Tax Counsel for Asia Pacific. Citi

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4 Understanding FATCA David Weisner, U.S. Tax Counsel for Asia Pacific, Citi Carolina Caballero, Product Risk and Regulatory Strategy Manager, Clearing and FI Payments, Citi Treasury and Trade Solutions 3 Citi Transaction Banking Academy for Financial Institutions Professionals 18 March 2014

5 Today s Speakers David Weisner U.S. Tax Counsel for Asia Pacific Citi Carolina Caballero Product Risk and Regulatory Strategy, Clearing & FI Payments Citi Treasury and Trade Solutions 4

6 5 This presentation does not constitute tax advice. It is for information purposes only.

7 Table of Contents 1. Background on FATCA 2. Due Diligence Requirements 3. Impact on Transactional Documentation 4. Intergovernmental Agreements 5. Timelines /What to Do Next 6. Questions and Answers 6

8 1. Background on FATCA 7

9 What is FATCA? Foreign Account Tax Compliance Act or FATCA was signed into law on March 18, 2010 as a revenue raiser for the Hiring Incentives to Restore Employment Act or HIRE Revenue estimate $8.7 billion over 10 years Response to hearings conducted by the Senate Permanent Subcommittee on Investigations and findings of substantial offshore tax evasion Various effective dates. FATCA withholding on U.S. source income begins on July1, 2014 Objective is to combat offshore tax evasion by U.S. persons who invest: Directly through financial accounts maintained offshore; and/or Indirectly through ownership of foreign entities FATCA works by requiring foreign financial institutions ( FFIs ) and non-financial foreign entities ( NFFEs ) to provide this information FATCA s lever is a NEW 30% withholding tax levied on withholdable payments to non-participating FFIs and NFFEs 8

10 Withholding as an Enforcement Tool 30 Percent FATCA Withholding Imposed on withholdable payments, including: U.S. source income from securities Interest on bank deposit accounts maintained in the United States or in a foreign branch of a U.S. bank Gross proceeds from the sale/redemption of U.S. securities When made to FFIs or NFFEs unless: the FFI enters into an agreement with the IRS (a participating FFI) or can be classified as a deemed-compliant FFI given that it presents a low risk of being used for tax evasion the NFFE discloses the identity of its U.S. owners or certifies to non-us ownership to the withholding agent or can be classified as an exempt NFFE given that it presents a low risk of being used for tax evasion 9

11 Example: Impact if a Bank Does Not Comply with FATCA Interest Income $100 Malaysian Bank (FFI) Gross Sales Proceeds $2000 US Withholding tax $30 US Treasury Securities US Withholding tax $600 Malaysian Bank invests in US Treasury securities that generate US source interest income and eventually gross proceeds from sale If Bank does not comply with FATCA, a new 30% US withholding tax will apply to payments of interest income and gross sale proceeds 10

12 Example FATCA Impact on Interest Rate Swap Fixed Rate Floating Rate CCiti U.S. Cash Collateral Interest on collateral Cash Collateral or U.S. Treasuries Interest on collateral FFFI Fixed rate payment no FATCA withholding; non-u.s. source. Floating rate payment no FATCA withholding; made to a U.S. financial institution. Interest on collateral paid by FFI no FATCA withholding; made to a U.S. financial institution. Interest on collateral paid by Citi U.S. FATCA withholding on the gross amount (no netting) unless FFI is FATCA compliant; U.S. source. 11

13 Besides Withholding - Impact of Non Compliance By a FFIs Competitiveness Some PFFIs might close accounts held by non-participating FFIs and recalcitrant customers. This will adversely impact the FFI s business. Impact on Product offerings Some products of FFIs will have to be limited to only participating FFIs. Impact on financing for international business which would like to secure financing from FFIs in for example Malaysia, if any of these financing involve US source payment (i.e. borrower being US corporates, local branches of US corporates), those borrowers will shy away from non-participating FFIs in Malaysia as the borrower will have to withhold 30% tax on repayment of such financing facilities. Channelling business away from FFIs in light of the potential 30% tax withholding, some international financial institutions may begin to channel business away from a FFI particularly business involving US source payments. 12

14 What is an FFI? Any non-u.s. entity that falls into one of the following categories: Accepts deposits in the ordinary course of a banking or similar business (e.g., a bank,). Holds, as a substantial part of its business, financial assets for the benefit of others (e.g., a custodian, broker-dealers, trust companies, clearing organizations). Is an investment entity (e.g., hedge funds, private equity funds, special purpose investment vehicles (SPVs), investment managers). An insurance company that issues annuities or cash value insurance policies. 13

15 What is Expected of an FFI? To avoid 30 percent withholding under FATCA, a FFI must enter into agreement with IRS and meet the following obligations or be classified as deemed-compliant as it presents a low risk of tax evasion: Comply with verification and due diligence procedures to be prescribed by Treasury Obtain information necessary to determine if each account is a U.S. account File annual reports with the IRS on U.S. accounts Withhold and pay the IRS 30 percent of withholdable payments made to: Recalcitrant account holders, Non-compliant FFIs, and FFIs electing to be withheld upon Comply with IRS requests for additional information on U.S. accounts Obtain a waiver of foreign laws that would prevent disclosure (e.g., privacy or bank secrecy laws) or close any account failing to provide a required waiver. The IRS can terminate the FFI agreement for any performance failures. All FFIs in expanded affiliated group need to be compliant in order for any FFI in that expanded affiliated group to be compliant. 14

16 Non-Financial Foreign Entity ( NFFE ) Defined An NFFE that has one or more substantial U.S. owners (other than a specified U.S. persons owners) is considered a U.S. owned NFFE Substantial ownership generally means more than 10 percent of: Vote or value of a corporation s stock Profit or capital interest in a partnership Beneficial interest in a trust if any grantor is a non-exempt US person Example: A closely-held manufacturing company Certain types of NFFEs are not required to disclose their U.S. owners. These include: A corporation the stock of which is regularly traded on an established securities market and any of its affiliates Active entities (less than 50% of income or assets is passive) 15

17 IRS Portal Portal is open now. FFIs who register are considered Participating FFIs Once an FFI has registered, the IRS will approve its registration and issue a GIIN (Global Intermediary Identification Number) to each Participating FFI and registered deemed compliant FFI. Portal will be primary means for FFIs to interact with the IRS to complete and maintain their FATCA registrations, agreements and certifications. Portal will be used for registration, electronic communication between the IRS and FFIs and other registrants and other FATCA communications. A GIIN will be assigned and will be used as the ID number for satisfying the FFI s reporting obligations and identifying its status to a withholding agent. The IRS will electronically post the first IRS list of Participating FFIs and registered deemed compliant FFIs (including Model 1 FFIs) on June 2, 2014, and will update the list on a monthly basis. The last date by which an FFI can register with the IRS to ensure inclusion on June 2, 2014 list is April 25,

18 2. FATCA Due Diligence Requirements 17

19 How to Classify Accounts Under FATCA FIs need to determine whether to treat: An individual account holder as a U.S. person or a foreign person An entity account holder as: a U.S. person A foreign financial institution (FFI) An exempt foreign organization (e.g., a foreign government) or A non-financial foreign entity (NFFE) An FFI as: A participating FFI A deemed-compliant FFI or Non-participating FFI An NFFE as: An excepted NFFE or A passive NFFE (having a substantial US owner) Presents a new and completely different way to categorize client accounts and service providers A payor generally cannot treat an FFI as FATCA compliant unless it has received valid documentation prior to the time a U.S. source income payment is made 18

20 Definition of a US Person U.S. individual U.S. citizen (by birth or naturalization). A dual citizen where one country of citizenship is the U.S. Non-U.S. citizen that is a U.S. permanent resident (i.e. green card holder). Non-U.S. citizen with substantial presence in U.S. (greater than 183 days). 31 days during current calendar year, AND 183 days during 3-year period including current year and 2 prior years All of the days present during current calendar year. 1/3 days present during 1 year before current year. 1/6 days present during 2 years before current year. U.S. Partnership U.S. Corporation U.S. LLC U.S. Trust or Estate U.S. Government, State, District of Columbia (or any agency or instrumentality thereof) A foreign person is any person that is not a U.S. person 19.

21 FFI Agreements Requirements FFI Agreements are effective on or after 1 July 2014 PFFI must adopt written policies and procedures regarding due diligence processes PFFI must conduct periodic internal reviews of its compliance with these policies and procedures and its FATCA obligations Observation: US tax authorities will not require mandatory external audits of PFFIs Within 1 Year of FFI Agreement Complete review of all high-value accounts, including the relationship manager query Perform the requisite review and obtain documentation for all prima facie FFIs Form W-8IMY on file indicates entity is a QI or NQI Complete a responsible officer certification stating Review of all high-value individual accounts is complete There were no formal or informal procedures in place from 6 August 2011, on to assist account holders in avoidance of Chapter 4 provisions Within 2 Years of FFI Agreement Complete review of individual accounts not previously identified as US accounts and obtain necessary documentation Complete review of pre-existing entity accounts not previously identified as a prima facie FFIs Complete a responsible officer certification stating PFFI has completed the account identification procedures and documentation requirements for all financial accounts that are pre-existing obligations, or if not, that it treats the accounts in accordance with the requirements as outlined in the FFI Agreement 20

22 Summary of Due Diligence for Pre-existing Accounts at a PFFI Account Type Exempted Completed Within Two years of FFI Agreement Completed Within One year of FFI Agreement Individuals US$50,000 or Less US$50,000 1,000,000 High Value >US$1,000,000 Exempted Electronic Search for US Indicia Electronic Search for US Indicia Manual Search as Required Relationship Manager Query Entities US$250,000 or Less Exempted > US$250,000 Review AML / KYC documentation Document FATCA Status Prima Facie FFIs (must be completed within 6 months of FFI Agreement ) Review AML / KYC documentation Document FATCA Status 21

23 New Account Due Diligence The presumptions may be rebutted obtaining the documentation sufficient to determine the FATCA status of the payee or account holder. For New Accounts: - FFIs must obtain sufficient documentation to identify and classify the payee/account holder - Must use Form W-9 to document U.S. persons - For offshore obligations, FFIs can rely on documentary evidence or written statements to establish foreign status - If there are any U.S. indicia, additional documentation must be obtained to substantiate foreign status - PFFIs must obtain a waiver from U.S. persons in any jurisdiction where local law would prevent disclosure or reporting to IRS 22

24 Client Management Issues Prospecting Certain products and services may no longer be available. On-Boarding New clients must provide personal information beyond current requirements Account Management Changes to client data may trigger additional requests; clients may be wary of certain products, services or transactions. Reporting Clients must waive privacy rights and grant permission of information to reported Off-boarding- Recalcitrant accounts may require closure 23

25 3. Impact to Transactional Documentation 24

26 Impact Do You on Have Your a Relationship FFI In Your Organization? with Your Bank What Your Financial Institution Will Ask you Financial Institution will need to determine FATCA status for each entity. Establish FATCA status by providing appropriate documentation: U.S. Legal Entities Form W-9 Non-U.S. Legal Entities Form W-8 or self certification and documentary evidence Request for additional documentation if US indicia are present Failure to provide appropriate documentation will result in 30% FATCA withholding and reporting. Impact on Transactional Documentation 25

27 Impact Do You on Have ISDA a FFI In Your Organization? ISDA Master Agreement Gross Up Provision: 2(d) (i) Gross Up. All payments under this Agreement will be made without any deduction or withholding for or on account of any Tax unless such deduction or withholding is required by any applicable law, as modified by the practice of any relevant governmental revenue authority, then in effect. If a Party is so required to deduct or withhold, then that party ( X ) will: (4) If such Tax is an Indemnifiable Tax, pay to Y, in addition to the payment to which Y is otherwise entitled under this Agreement, such additional amount as is necessary to ensure that the net amount actually received by Y (free and clear of Indemnifiable Taxes, whether assessed against X or Y) will equal the full amount Y would have received had no such deduction or withholding been required. However, X will not be required to pay any additional amount to Y to the extent that it would not be required to be paid but for :-- (A) the failure by Y to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d); or (B) the failure of a representation made by Y pursuant to Section 3(f) to be accurate and true unless such failure would not have occurred but for (I) any action taken by a taxing authority, or brought in a court of competent jurisdiction, after a Transaction is entered into (regardless of whether such action is taken or brought with respect to a party to this Agreement) or (II) a Change in Tax Law. 26

28 Impact Do You on Have ISDA a FFI In Your Organization? ISDA FATCA Provision (August 15, 2012) Withholding Tax imposed on payments to non-us counterparties under the United States Foreign Account Tax Compliance Act. Tax as used in Part 2(a) of this Schedule (Payer Tax Representation) and Indemnifiable Tax as defined in Section 14 of this Agreement shall not include any U.S. federal withholding tax imposed or collected pursuant to Sections 1471 through 1474 of the U.S. Internal Revenue Code of 1986, as amended (the Code ), any current or future regulations or official interpretations thereof, any agreement entered into pursuant to Section 1471(b) of the Code, or any fiscal or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement entered into in connection with the implementation of such Sections of the Code (a "FATCA Withholding Tax"). For the avoidance of doubt, a FATCA Withholding Tax is a Tax the deduction or withholding of which is required by applicable law for the purposes of Section 2(d) of this Agreement. Existing Master Agreements can be amended to include the ISDA FATCA Provision by adherence to the ISDA 2012 FATCA Protocol 27

29 What Does the ISDA Protocol Do? The Schedule to the ISDA Master Agreement generally contains a representation by the payor that it is not required to withhold any tax. The ISDA Master Agreement requires gross-up for withholding tax, thus putting economic burden on payor. The Protocol excludes FATCA withholding from the payor s tax representation. The main purpose of the 2012 ISDA FATCA Protocol ( Protocol ) is to place the economic burden of FATCA withholding, if any, on the payee by providing that FATCA withholding is not subject to grossup. The rationale behind the Protocol is that withholding, if any, is within the control of the payee because the payee could have avoided withholding by being FATCA compliant. The ISDA Master Agreement allows a payor to withhold from a payment that is required by law. For the avoidance of doubt, the Protocol states that FATCA withholding tax is a Tax the deduction of which is required by law. The markets have taken the position that the economic burden of FATCA should be borne by the payee since whether FATCA withholding occurs is within the control of the payee. The Protocol represents the approach of the markets in cross-border transactions. 28

30 The Effect of Entering into the Protocol The Protocol incorporates the changes described above into existing and future contracts with all other parties that have also adhered to the Protocol without the need for bilateral agreements to each confirmation made under an ISDA Master Agreement. Thus the protocol is the most efficient means of addressing FATCA withholding Currently, there is no cut-off date for entering the Protocol. 29

31 Impact on Syndicated Loan when Agent is Not Compliant Malaysian Bank US Corporation Korean Bank UK Bank Borrower (US*) Interest, fees and principal payments subject to withholding at 30% Agent (NPFFI) Singapore Bank Lenders (PFFIs) 30

32 Impact Do You on Have Loan a Agreements FFI In Your Organization? Loan Provisions from Loan Market Association Definition of FATCA Provision requiring the Parties to provide information to the other Parties relating to its FATCA status Right to withhold on account of FATCA Carve-out from Gross-up Example: The Borrower shall not be required to make an increased payment to a Finance Party under paragraph (a) above for (i) a Tax Deduction imposed by reason of such Finance Party s failure to comply with any certification, identification, information, documentation or other reporting requirement if such compliance is required by law, regulation, administrative practice or an applicable treaty as a precondition to exemption from, or reduction in the rate of, deduction or withholding of any Tax Deduction, (ii) a Tax Deduction imposed by reason of such Finance Party s failure to comply with Clause 14.7 or (iii) any U.S. federal income withholding tax imposed under FATCA. 31

33 Impact Do You on Have Offering a FFI Memorandum In Your Organization? Funds likely will have to disclose their FATCA status FATCA language will be included in offering documentation. Below is an example: We intend to structure our investments so that we will not be required to withhold 30% FATCA withholding tax earlier than 2017 although no assurances can be given in this regard. Pursuant to the FFI Agreement we intend to enter into, beginning no earlier than 2017, we will be required to withhold 30% FATCA withholding tax on certain dividends that we pay to foreign financial institutions that have not entered into an FFI Agreement (including [Name of Depository]) if it does not enter into an FFI Agreement) or to Shareholders that do not verify their status under the FATCA rules, to the extent such dividends are foreign passthru payments. The application of FATCA to an investment in our Shares will depend on: whether the foreign financial institutions through which you hold our Shares, including [name of depository] and any broker, have entered an FFI Agreement, which is outside of our control; and whether you verify your status under the FATCA rules to us or to the foreign financial institution through which you hold our Shares. 32

34 4. Intergovernmental Agreements 33

35 FATCA Intergovernmental Agreements Local law conflicts were the immediate reason that Treasury developed the IGA framework. FFIs in some jurisdictions found that they were unable as a legal matter to report information required under FATCA to the IRS, and IGAs were intended to address that problem. Coordination of the IGAs with the FATCA regulations was necessary to avoid a situation in which one FFI that operated in multiple jurisdictions that included IGA signatories and non-iga countries had different documentation requirements for each. Announcement on February 8, 2012 by the United States and 5 European countries of their intent to work together to develop an intergovernmental approach to improving international tax compliance and implementing FATCA. The countries that have publicly announced their interest for Model 1 were Germany, France, Italy, Spain, the U.K. and Ireland. Willing countries would enter into a bilateral agreement with the United States under which the foreign country would become a FATCA Partner in exchange for certain concessions by the U.S. Model 1 bilateral agreement published in July 2012 and Model II published in November As of February 2014, twenty-two IGA Agreements have been executed UK, Denmark, Germany, Ireland, Italy, Japan, Mexico, Norway, Spain, Switzerland, Bermuda, Malta, Netherlands, Guernsey, the Isle of Man, Jersey, Cayman Islands, Costa Rica, France, Canada, Hungary and Mauritius. Several others have been initialed, meaning all terms have been agreed to, the IGA has just not yet been signed. Still waiting for Hong Kong, Singapore, China and Malaysia agreements. 34

36 Structure of IGAs Agreement on definitions and obligations US Treasury has published Model IGAs Annex 1 on due diligence obligations for identifying and reporting on US accounts and certain payments Annex II identifies types of institutions and accounts that are exempt from reporting requirements ( Nonreporting FIs ) Contains a country specific list of exempt beneficial owners (i.e., government and supranational organizations) deemed-compliant FFIs (Non-reporting FIs and Collective Investment Vehicles), and exempt products or accounts (are not financial accounts) 35

37 Local Legal Issues FATCA imposes obligations on FFIs that may be in conflict with the laws of the jurisdiction in which an FFI operates, including Privacy laws prohibiting the sharing of personal information on clients, including sharing with a foreign tax authority Access-to-banking laws that guarantee that an account must be opened or that accounts may not be closed unilaterally Laws prohibiting the withholding of taxes for a foreign government or withholding without clients consent The IGAs present an opportunity for a country to support its FFIs compliance with FATCA by Changing local laws to remove legal obstacles to FATCA compliance Accepting the U.S. offer in the IGAs to modify or eliminate certain FFIs obligations that would apply under the Final FATCA Regulations 36

38 Benefits /Purposes of IGA True government to government agreement whereby involvement of government at inception. More authority to negotiate. Sovereignty control over information being exchanged (Model 1) Demonstrate commitment by the government to tackle tax evasion which is a developing global trend Establish uniform reporting standards and an automatic information exchange Competitiveness neighbouring countries are exploring IGA Typically eliminate local legal obstacles to FATCA compliance (Model 1) Reciprocity Lifting costly compliance burden from local financial institutions Generally, eliminates or reduces U.S. regulatory requirements for an FFI to: Enter into an FFI agreement with the IRS Withhold on payments made to FIs located in any Partner Country Withhold on payments made to recalcitrant accounts or close the accounts Once a country enters into a IGA, all financial institutions in that country are regarded as participating. More time for financial institution to register and design compliance programme. 37

39 Overview of Model 1 Reporting 38

40 Information Reporting by FATCA Partner FIs Report U.S. account holders who are: Specified U.S. persons, Non-U.S. entities having at least 1 controlling person that is a specified U.S. person A specified U.S. person is generally means any U.S. person other than an exempt recipient (but includes a privately held corporation that is not a related entity) Reportable information Name, address and TIN of each specified U.S. person Name, address and TIN (if any) of a non-us entity with at controlling specified U.S. person Account number Account balance or value at year end or account closing date Total gross interest, dividends, other income, gross proceeds from sale or redemption of property paid or credited to the account Form 8966 will be used by FFIs in reporting on U.S. accounts FATCA Partners in Model 2 countries must report annually the aggregate information required respecting U.S. accounts that do not consent to reporting 39

41 5.Timelines / What To Do Next 40

42 Timelines Phased implementation starting in 2014, and ending no earlier than 2017 Some systems and procedures need to be ready on July 1, 2014 Major key dates: First Sign Up For FFI Agreements: portal open now-- FFI Agreements start taking effect on July 1, Initial List of FFIs: To be Published on June 2, New Accounts: July 1, 2014 Grandfathering: July 1, 2014 Withholding: Begins July 1, 2014 for U.S. source income paid to certain payees (new accounts and preexisting accounts of known recalcitrant account holders and non-participating FFIs ( NPFFI )) and then phases in for additional tiers of payees in 2015 and 2016 gross proceeds and foreign passthru payment withholding can begin in 2017 although the Regulations reserve on those rules for now. Reporting: U.S. account reporting begins March 31, 2015 for the 2014 year 41

43 Action Points What to Do Next Understand the Regulations and move towards to compliance Form a project team Engage outside advisors Scope Survey /Diagnostic Survey Impact Analysis /Gap Analysis Implementation Plan Work with Government by responding to any questionnaire or surveys on IGA/FATCA Industry groups to work on list on products and entities to be included in Annex II Identify the impact on your financial institution if your country is unable to enter into an IGA by July 1, 2014 Understand the intention of your counterparties whether they will continue doing business with limited financial institutions 42

44 6. Questions and Answers 43

45 Thank You 44

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