Fiduciary and Investment Risk Management Association 28 th National Risk Management Training Conference

Transcription

1 Fiduciary and Investment Risk Management Association 28 th National Risk Management Training Conference Foreign Account Tax Compliance Act: Considerations for Trusts April 30, 2014 Michael Shepard Principal Deloitte Transactions and Business Analytics LLP

2 DISCLAIMER This document contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this document. 1

3 Foreign Account Tax Compliance Act Overview

4 Foreign Account Tax Compliance Act Overview What is FATCA? The Foreign Account Tax Compliance Act (FATCA) was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act on March 18, FATCA creates a new information reporting and withholding regime for payments made to certain foreign financial institutions and other foreign entities. The FATCA rules generally become effective with respect to certain payments made on or after July 1,

5 Foreign Account Tax Compliance Act Overview What is the Intent of FATCA? FATCA is intended to increase transparency for the Internal Revenue Service (IRS) with respect to U.S. persons that may be investing and earning income through non-u.s. institutions. While the primary goal of FATCA is to gain information about U.S. persons, FATCA imposes tax withholding where the applicable documentation and reporting requirements are not met 4

6 Foreign Account Tax Compliance Act Overview Who does FATCA Impact? While FATCA affects U.S. withholding agents and U.S. multinational companies, its greatest impact will likely be to Foreign Financial Institutions (FFIs) What are the Withholding Requirements? In general, a withholding agent is required to withhold 30% on a withholdable payment made to a FFI or to a Non-Financial Foreign Entity (NFFE), unless the FFI or NFFE meets certain requirements. In addition, an FFI must withhold 30% on any pass through payment it makes to a recalcitrant account holder, as well as to payments it makes to another FFI unless that FFI meets certain requirements 5

7 Foreign Account Tax Compliance Act Overview Who Needs to Comply? U.S. Withholding Agents U.S. entity that has control, receipt, custody, disposal or makes a payment of any withholdable payment FFIs potential relevant categories Accepts deposits in the ordinary course of a banking or similar business (depository institution) Holds financial assets for the account of others as a substantial part of its business (custodial institution) Engages primarily in the business of investing or trading securities, commodities, partnerships or any interests in such positions, individual or collective portfolio management or otherwise invests, administers, or manages funds, money, or financial assets on behalf of other persons (investment entity) Primarily holds the shares of other related entities (holding company) 6

8 Foreign Account Tax Compliance Act Overview Who Needs to Comply? (Cont.) Specified U.S. persons U.S. citizens, U.S. residents (i.e., Green card holder), non-u.s. persons who meet the substantial presence test, U.S. partnerships, U.S. trusts, U.S. estates and U.S. corporations that are not publicly traded 7

9 Foreign Account Tax Compliance Act Overview Implications of Non-Compliance Financial, commercial and reputational risks May be forced to comply even where no U.S. source payments as many third parties will require FATCA compliance Uncertain degree of foreign government regulatory enforcement under the bilateral intergovernmental agreements (IGA) with IRS Non-Compliance is Not an Option Although FATCA is technically voluntary, institutions who ignore it may find themselves frozen out of the global financial market 8

10 Foreign Account Tax Compliance Act Overview The Cost of Getting Caught as a Taxpayer Filing Requirement Any taxpayer with an aggregate total of at least $50,000 in foreign assets has to follow this tax reporting measure. Failure to complete Form 8938 by the reporting deadline leads to a minimum $10,000 penalty, which may go as high as $50,000 over time. Further, all assets must be reported or a 40 percent understatement penalty will be issued In addition to civil penalties, there could be criminal penalties for willful violations as much as $250,000 for individuals and $500,000 for corporations FBAR Penalties Failure to file a FBAR comes with its own penalties in addition to those associated with Form Civil penalties can be up to $10,000 per non-willful violation. Willful violation penalties can exceed $100,000 or be equal to 50 percent of the account amount for each violation 9

11 Foreign Account Tax Compliance Act Overview What is an Intergovernmental Agreement ( IGA )? Under the Model IGA, FFIs in partner jurisdictions will report information on U.S. account holders to their national tax authorities, which in turn will provide this information into the U.S. under an automatic exchange of information IGAs provide reduced compliance burdens for FFIs in the partner country jurisdiction in exchange for instituting the FATCA requirements into local law or relaxing local laws that would preclude FATCA compliance 10

12 Foreign Account Tax Compliance Act Overview Status of the Intergovernmental Agreements (as of February 10, 2014) On March 5, 2014, Chile and Finland signed IGAs Source: 11

13 Foreign Account Tax Compliance Act Overview Characteristics of the Model I IGA Model I FIs will be required to register with the IRS but will not be required to enter into an FFI Agreement Further, Model I FIs will not report directly to the IRS pursuant to the standard FATCA regulations, but rather to the domestic tax authority, which will then pass on the information on an automatic basis to the IRS Model I FIs are relieved of the requirement to close accounts belonging to recalcitrant account holders. However, Model I FIs will report to the domestic tax authority the names of recalcitrant account holders and nonparticipating FFIs and the amounts of all payments made to them No payments to Model I FIs are subject to withholding Model I FIs are relieved of the responsibility to withhold 30% of certain U.S.-sourced payments to recalcitrant account holders. However, if the withholding implicates a nonparticipating FFI located outside an IGA partner country, the Model I FI must report the amount to an upstream withholding agent who will withhold on the payment (or assume withholding responsibility) 12

14 Foreign Account Tax Compliance Act Overview Characteristics of the Model II IGA Switzerland and the U.S. signed a Model II IGA on 14 February Under the Swiss IGA, Swiss Reporting Financial Institutions (SRFIs) enter into an FFI Agreement and report directly to the IRS pursuant to the standard FATCA regulations SRFIs are relieved of the requirement to close accounts belonging to recalcitrant account holders. However, for account holders (with U.S. indicia) and nonparticipating FFIs (NPFFIs) which do not consent to have their account information reported to the IRS (non-consenting accounts), the detailed account information must be transmitted to the Swiss tax authority, while aggregated information will be reported to the IRS, which may result in a group administrative request. Upon its receipt, the Swiss tax authority is allotted eight months to exchange this information with IRS 13

15 Foreign Account Tax Compliance Act Overview Characteristics of the Model II IGA (Cont.) No payments to SRFIs are subject to withholding SRFIs are relieved of the responsibility to withhold 30% of certain U.S.- sourced payments to non-consenting U.S. account holders Note: Should the suspension of the duty to withhold be revoked because the Swiss tax authority does not comply with the U.S. request within eight months, the cost of the withholding falls on the customer, not the financial institution However, amounts paid to NPFFIs not located in a country with an IGA will be subject to withholding 14

16 Foreign Account Tax Compliance Act Impacts to the Trust Industry

17 How Does FATCA Impact the Trust Industry? Trust Company s Legal Entities Location of entity determines set of governing rules Depending on governing rules and classification type, entity may need to register and possibly sign an FFI Agreement by 25 April 2014 FATCA requires classification of all legal entities, including trust companies, corporate directors and nominee shareholders Generally operations of trust companies and typical related entities qualify as FFIs 16

18 How Does FATCA Impact the Trust Industry? Clients: Trust or Fiduciary Structures Including Underlying Companies FATCA treats all trusts and other structures as entities regardless of legal form, and therefore requires all to be classified FATCA does not oblige trust companies to comply on behalf of the fiduciary structures they administer, but it is very likely part of the fiduciary duty Typically, structures holding financial assets will qualify as FFIs 17

19 How Does FATCA Impact the Trust Industry? Beneficiaries U.S. tax rules dictate the owner of the trust or other structure As part of the diligence obligations, the trust or other structure will identify its owner and U.S. persons will generally be reported 18

20 Foreign Account Tax Compliance Act Considerations

21 Considerations for use of AML/KYC Information Optional Considerations Example Identify substantial U.S. owners of certain Passive NFFEs Requires: Integrated systems between AML and Onboarding Consistent data quality Tracking of account balance information Mandatory Requirements Example Reason To Know: Determine if inconsistencies exist between KYC and Tax certification Requires: Closely linked processes and controls between onboarding, Tax and AML Documented Policies and Procedures Compliance monitoring Both optional and mandatory considerations should be addressed throughout your FATCA implementation 20

22 Asset Management Compliance Model Determine impact of KYC/FATCA mandatory and optional considerations through gap assessment between current capabilities under chapter 3 and the new chapter 4 requirements Map current AML/KYC fields that would need to be cross referenced for U.S. Indicia such as: Phone Number, Address, Place of Birth Tax forms and documentation on file providing residency and citizenship information Align solutions with impact, consider current and future state Govern centrally with common standards and guidelines and execute locally 21

23 Mandatory AML/KYC compliance considerations Ongoing FATCA Compliance 1 Communication Plan Website updates, internal educations and awareness, investor communications, and counterparty verifications Onboarding and Remediation Responsible Officer Framework Registration Strategy Service Provider Management Withholding & Reporting 7 Update fund documents (subscription, prospectus, and offering) Enhance KYC/AML procedures and systems (onboarding) Implement controls for incomplete and expired information Begin due diligence of pre-existing accounts Develop an oversight and responsible officer strategy that fits the segregated business lines and geographic regions, while inclusive of IGA requirements Engage resources to govern the compliance sub structure Implement solutions` Build data management solution Develop registration strategy and identify resources Document policies and process for classifying and implementing new entities or funds Supply registration information to counterparties to prevent withholding Modify Existing Operating Environment Outline support model and finalize zone of responsibility Discuss and finalize any impacts to commercial terms Manage service provider process and system changes Develop ongoing governance and service level metrics Assign scope of responsibilities, adopt common practices, and enhance capability to manage performance across regions/businesses, investment strategies and portfolio companies Define global withholding model and reporting framework once regulations are finalized (adaptable for IGAs) Draft business requirements for systematic and process updates Implement solutions 22

24 Illustrative FATCA Governance Roles 23

25 Illustrative FATCA Timeline Key Activities`` Role Description 1 Legal Considerations Support the assessment of legal considerations impacting compliance with FATCA. Frame and develop analysis, impact and go forward approach across legal considerations such as: Intergovernmental Approach Data Protection/storage and reuse of AML/KYC data 2 Tax SME Provide Tax Subject Matter support to provide refresh to the tools and education materials in alignment with the release of the final FATCA regulations. Provide guidance on Withholding and Reporting approach and planning considerations. Take part in enterprise solutioning providing support on FATCA remediation and implementation considerations. Develop tracking dashboard for key milestones. 3 Compliance Support approach and framework development to support monitoring of Blackstone compliance initiatives. Development of a FATCA control framework AML/KYC considerations Remediation strategy support 4 Entity Classification/FFI Framework Support entity classification initiatives including special purpose entities. Develop FFI Agreement framework to build off requirements support. 5 Initiative Support Provide overall management and coordination of activities of resources while supporting each stream with subject matter knowledge of FATCA and coordinating additional support from areas where needed. 6 Business Unit Liaison Liaise with Business Unit s to cross pollinate issue discovery and resolution and share best practices across Business Unit and to PMO. Work with the Business Unit Lead to identify specific enterprise FATCA compliance issues and coordinate resolution Track and report progress by Business Unit; provide recommendations for escalation 24

26 Foreign Account Tax Compliance Act Reporting

27 Foreign Account Tax Compliance Act Reporting Reporting will be phased in gradually between 2015 and Foreign Financial Institutions (FFIs) are required to report name, address, TIN, account number and account balance on U.S. accounts (U.S. Account Reporting), in line with IGA requirements If the FFIs agreement is effective on or before December 31, 2014, it is required to report U.S. accounts maintained during 2013 that are outstanding on December 31, 2013 An FFI can elect Form 1099 reporting Reporting is required to be filed electronically on March 31,

28 Foreign Account Tax Compliance Act Reporting Reporting will be phased in gradually between 2015 and FFIs are required to add income payments made in the prior year to its U.S. Account Reporting, again in line with IGA requirements FFI is required to complete Forms 1042-S allocating the income and withholding paid to its recalcitrant account holder pools Reporting is required regardless of whether the FFI made a payment of a chapter 4 reportable amount to each such account holder FFI must aggregate report on NPFFI accounts opened in 2015, as under IGA approach 27

29 Foreign Account Tax Compliance Act Reporting Reporting will be phased in gradually between 2015 and FFI are required to add gross proceed payments made in the prior year to its U.S. Account Reporting, aligning with IGA approach FFI is required to complete Forms 1042-S allocating the income and withholding paid to its recalcitrant account holder pools FFI must aggregate report on NPFFI payments made in 2016, as under IGA approach 28

30 Foreign Account Tax Compliance Act Reporting Highlights The FFI that maintains the account is generally responsible for reporting the account The final regulations add a rule to determine when the FFI is treated as maintaining an account FFIs will be issued a GIIN that will be used for FATCA reporting purposes The IRS currently contemplates that the GIIN will also be used by QIs, in lieu of the current QI EIN, for purposes of QI reporting, as well as for reporting to local Competent Authorities under an IGA model Reporting does not need to be performed in U.S. currency The character of payments may be determined under the same principles that the FFI uses to report information to the tax authorities in their own country The amount and character of items of income need not be determined in accordance with U.S. federal income tax principles In the UK, a consistent and verifiable approach must be adopted to valuation 29

31 Foreign Account Tax Compliance Act Reporting Form 8966 The IRS intends to release a new Form 8966, FATCA Report, that will be used by FFIs (including Qualified Intermediaries (QI), Withholding Foreign Partnerships (WP), and Withholding Foreign Trusts (WT)) and withholding agents to comply with their chapter 4 reporting obligations This new Form 8966 will set forth all the information that must be reported with respect to financial accounts Will be used to report Certain information regarding U.S. accounts Substantial U.S. owners of passive NFFEs and owner documented FFIs Aggregate recalcitrant account information Form 8966 will be filed electronically with the IRS on or before March 31 of each year reporting prior year information 30

32 Foreign Account Tax Compliance Act What is Coming Next?

33 Final FATCA Regulations Timeline 32 Highlights *Form 8966 **Form 1042-S

34 Foreign Account Tax Compliance Act More Coming Technical Corrections Amendments to Chapter 3 and Chapter 61 regulations to coordinate them with the FATCA requirements Additional FATCA Regulations addressing reserved issues FFI Agreements Forms W-8 s Form 8966 Additional IGAs 33

35 Foreign Account Tax Compliance Act Registration Process All FFIs will go through a paperless registration process using a secure online web portal from anywhere in the world FFIs will need to respond to 15 questions Form 8957 will be used in rare cases where FFI must register manually Upon registration participating and deemed compliant FFIs will be issued a Global Intermediary Identification Number (GIIN) This number will need to be verified annually Registered FFIs designated as leads of an expanded affiliated group will use the portal to manage the registration status of group members It is expected that the portal will also be used by Financial Institutions in IGA jurisdictions to obtain a GIIN reporting purposes Registering entities will also use the Portal to manage their information, and, as appropriate, agree to the terms of or make the representations required for their status and communicate with the IRS 34

36 Questions & Answers

37 Michael Shepard Principal Deloitte Transactions and Business Analytics LLP (215) About Deloitte As used in this document, Deloitte means Deloitte Transactions and Business Analytics LLP, an affiliate of Deloitte Financial Advisory Services LLP. Deloitte Transactions and Business Analytics LLP is not a certified public accounting firm. Please see for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

38 Appendix

39 IGA status Country Status 38 Bermuda (BM) British Virgin Islands (VG) Cayman (KY) Cyprus (CY) Guernsey (GG) Liechtenstein (LI) Luxembourg (LU) New Zealand (NZ) Panama (PA) Russia (RU) Seychelles (SC) Singapore (SG) Switzerland (CH) United Kingdom (UK) A Model II IGA was initialed The U.S. Treasury reported on 8 November 2012 that the U.S. and the British Virgin Islands were working to explore options for intergovernmental engagement. No further information is available A Model I IGA was initialed The U.S. Treasury announced on 8 November 2012 that the U.S. and Cyprus were actively engaged in a dialogue towards concluding an IGA. No further information is available The U.S. Treasury announced on 8 November 2012 that U.S. Treasury and Guernsey were in the process of finalizing an IGA and had hoped to conclude negotiations by the end of However, it appears no agreement has been finalized Model I IGA expected Model I IGA expected On 3 October 2013, New Zealand s Revenue Minister announced that New Zealand will negotiate an IGA with the United States No information publicly available The U.S. Treasury reported on 8 November 2012 that the U.S. and Russia were working to explore options for intergovernmental engagement No information publicly available The U.S. Treasury announced on 8 November 2012 that the U.S. and Singapore were actively engaged in a dialogue towards concluding an IGA. On 18 July 2013, the Singapore Ministry of Finance announced the opening of a consultation on proposed amendments to the draft Income Tax (Amendment) Bill 2013 that would change the information exchange regime and facilitate compliance with FATCA On 14 February 2013, Switzerland and the U.S. signed an IGA. On 7 June 2013, Switzerland and the United States signed a Memorandum of Understanding on interpretations regarding the IGA The U.S.-UK IGA closely follows the Model 1A Agreement issued in July 2012 by the U.S. Treasury and includes a reciprocal approach to the sharing of information between the two governments. On 7 August 2013, HM Treasury presented The International Tax Compliance (United States of America) Regulations 2013 to implement the U.S.-UK IGA to the UK House of Commons (with a 1 September 2013 effective date). HMRC has also issued a memorandum explaining the regulations and updated its Guidance Notes to implement the regulations Model I lga signed, initialed or likely Model II IGA signed, initialed or likely

40 Reduced compliance categories (1/2) Registered Deemed Compliant - Sponsored Entities & Certified Deemed Compliant Sponsored Closely Held Investment Vehicles Registered Deemed Compliant - Sponsored Entity Certified Deemed Compliant - Sponsored Closely Held Investment Vehicles Overview Registered Deemed Compliant Sponsored Investment Entity provides a reduced compliance path for funds, trusts or other fiduciary structures with a sponsoring entity willing to conduct all FATCA compliance activities on behalf as if the sponsored entity were a PFFI The sponsoring entity must be authorized to act on behalf of the sponsored FFI to fulfill the requirements of the FFI agreement (such as a fund manager, trustee, corporate director, or managing partner) (Regs *) Certified Deemed Compliant Sponsored Closely Held Investment Vehicles permits certain funds, trusts or other fiduciary structures with a sponsoring entity willing to conduct all FATCA compliance activities on their behalf as if the sponsored entity were a PFFI to avoid FATCA registration. The sponsoring entity must be a PFFI, Model I FI or U.S. FI and must agree to fulfill all due diligence, withholding, and reporting responsibilities that the FFI would have assumed if it were a participating FFI (such as a fund manager, trustee, corporate director, or managing partner) (Regs. 445*) Entity limitations Jurisdictional limitations Registration requirements Diligence requirements Reporting requirements Monitoring and renewal requirements Sponsored entity must qualify as an Investment Entity type FFI Sponsored entity may not be a QI, WP or WT. (Regs ) Applicable to all entities that meet criteria, regardless of jurisdiction Sponsoring entity must register the sponsored entity on its behalf as if it were a PFFI and must register itself with the IRS (or local tax authority) as a sponsoring entity (in addition to its own independent FFI registration) (Regs. 440) Full due diligence required as if the sponsored entity were a PFFI, but performed by the sponsoring entity (Regs. 441) Sponsoring entity must identify the sponsored FFI in all reporting completed on the sponsored entity s behalf (Regs. 441) The sponsoring entity must notify the IRS in the case of a change of circumstance relevant to FATCA Review of sponsored entities compliance and certification every three years (Regs. 442) Sponsored entity must be an FFI only because it qualifies under the Investment Entity definition Sponsored entity may not be a QI, WP or WT; Sponsored entity may not hold itself to outside investors; Sponsored entity may not have more than 20 individuals with a debt or equity interest in the entity (outside of interests held by PFFIs, Model I FIs, Registered Deemed Compliant FFIs or equity interest owned 100% by another sponsored FFI) (Regs ) Applicable to all entities that meet criteria, regardless of jurisdiction Sponsoring entity must register itself with the IRS as a sponsoring entity for the sponsored entity (in addition to its own independent FFI registration) (Regs ) Full due diligence required as if the sponsored entity were a PFFI, but performed by the sponsoring entity (Regs. 446) Sponsoring entity must identify the sponsored FFI in all reporting completed on the sponsored FFI s behalf (Regs. 446) Ongoing compliance for sponsored entity as if a PFFI (Regs. 446) 39 * As modified by the Technical Corrections of 10 September 2013

41 Reduced compliance categories (2/2) Owner-Documented FFIs (ODFFI) & Trustee-Documented Trusts 40 Overview Entity limitations Jurisdictional limitations Registration requirements Diligence requirements Reporting requirements Renewal and monitoring requirements Owner-Documented FFI (ODFFI) ODFFI status permits certain investment entities to avoid registration with the IRS if they can obtain consent from their designated withholding agents to fulfill due diligence and reporting requirements on their behalf The ODFFI must prepare an Owner Reporting Statement (see below) and submit it to any designated withholding agents (Regs ) ODFFI entity must be an FFI only because it qualifies under the Investment Entity definition It may not part of an Expanded Affiliated Group with a Depository Institution FFI, Custodial Institution FFI or a Specified Insurance Company under FATCA It must not maintain an account for a non-participating FFI It cannot act as an intermediary with respect to any payments on the account It must have obtained (or will obtain) consent from the entity s withholding agent to process an Owner Reporting Statement on behalf of the entity The withholding agent must be a PFFI, Model I FI or US entity (Regs ) Applicable to all entities that meet criteria, regardless of jurisdiction No registration requirements The ODFFI must prepare an Owner Reporting Statement identifying all the debt and equity interest owners of the entity and submit it to any designated withholding agents (Regs. 248) (or a substitute letter from a U.S.-licensed or U.S. located auditor/ lawyer containing certain specified representations concerning the entity s qualification for ODFFI status as well as a reporting statement and a Form W-9 for all specified U.S. Person debt and equity interest owners) (Regs ) The designated withholding agent must verify the accuracy of the contents against its existing records (Regs. 246) The designated withholding agent must report on behalf of the ODFFI any substantial U.S. owners or debt interest holders of the entity (Regs *) The Owner Reporting Statement generally expires approximately three years after it is submitted to the designated withholding agent The ODFFI must provide the designated withholding agent an updated Owner Reporting Statement in the case of a change of circumstance relevant to FATCA (Regs. 248) * As modified by the Technical Corrections of 10 September 2013 Trustee-Documented Trust Trustee-Documented Trust category permits trusts with a trustee willing to perform all FATCA compliance activities on its behalf to delegate its FATCA compliance activities to the trustee Trust is treated as a Certified Deemed Compliant Trustee must be a PFFI, Model I FI or U.S. financial institution. (May 28, 2013 Framework Models 1 and 2 IGA, Annex II, IV. A) Sponsored entity must be a trust established under the laws of the IGA Partner jurisdiction (May 28, 2013 Framework Models 1 and 2 IGA, Annex II, IV. A) Available to entities in most IGA jurisdictions (May be added to IGAs without this provision via mutual agreement with the U.S.) No registration requirement (but trustee subject to Agreement ) (May 28, 2013 Framework Models 1 and 2 IGA, Annex II, IV. A) Full due diligence required as if the trust were a were a PFFI, but performed by the trustee (May 28, 2013 Framework Models 1 and 2 IGA, Annex II, IV. A) Trustee must identify the trust in all reporting completed on the sponsored trust s behalf (May 28, 2013 Framework Models 1 and 2 IGA, Annex II, IV. A) Ongoing compliance for trust is part of Trustee s Agreement (May 28, 2013 Framework Models 1 and 2 IGA, Annex II, IV. A)