Foreign Account Tax Compliance Act FATCA Onboarding Requirements for Payees U.S. Financial Institutions

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1 Paris New York London Rome Milan Casablanca Dubai Amsterdam Brussels Hong Kong Singapore Foreign Account Tax Compliance Act FATCA Onboarding Requirements for Payees U.S. Financial Institutions June 13, 2014 Presented by Lauren L. Pickett Director of Anti-Money Laundering and U.S. Sanctions Sia Partners US

2 Background FATCA Requirements for Onboarding Payees July 1, 2014 Identify Payees Determine if Payee is an FFI or NFFE Determine Chapter 4/FACTA Status of Payee Obtain Required Documentation for Chapter 4/FATCA Status Payee Analysis Reference Matrix 2

3 1 section Background 3

4 Impact on U.S. financial Institutions FATCA Impacts all U.S. Financial Institutions ( USFIs ) that make payments to Foreign Entities Identify and classify all Foreign Entities Foreign Financial Institutions ( FFIs ) Nonfinancial Foreign Institutions ( NFFEs ) Obtain documentation to support the classification Withhold 30% Withholding Tax on certain payments to Noncompliant FFIs and NFFEs 4

5 What does this mean for U.S. Financial Institutions? FATCA Impacts Many Areas Onboarding Procedures need to be established to ensure that USFIs: Determine the FATCA status of all New ppayees Obtain the required documentation (e.g. Withholding Certificates) Withhold on Withholdable Payments to Noncompliant FFIs and NFFEs Existing Customers and Vendors: USFIs need to determine the FATCA status all Preexisting Payees, domestic and foreign, obtain supplementary documentation or information if necessary. Monitoring and Withholding: Monitoring the customer base and preparing a process for possible withholding on Nonparticipating Foreign Entities 5

6 2 section FATCA Requirements for Onboarding Payees July 30,

7 Onboarding Requirements for Payees Step 1: Identify Payee Account Holder, Customer, Vendor Step 2: Determine if Payee is an FFI or a NFFE Step 3: Determine FATCA/Chapter 4 Status of FFI Step 4: Obtain and Validate Required Documentation for FATCA Status 7

8 3 section Identify Payees 8

9 Identify Payee Account Holder, Customer, Vendor General Rule: The Payee is the person to whom a payment is made, whether or not that person is the Beneficial Owner Payee is the holder of the financial account. Exceptions Intermediaries/Agents: If the Payee/Account Holder is a Foreign Agent or Intermediary, treat the person on whose behalf the Agent/Intermediary collects the payment as the Payee, unless the Agent/Intermediary is a: Qualified Intermediary ( QI ) that assumed Primary withholding responsibility; 9

10 Identify Payee Account Holder, Customer, Vendor Exceptions Intermediaries/Agents: Generally, a Foreign Entity that is a Flow-Through Entity is a Payee with respect to a payment only if is: An FFI that is not a Participating FFI or Deemed-Compliant FFI, or Restricted Distributor receiving a payment of U.S. source FDAP income; An Excepted NFFE that is not acting as an agent or intermediary with respect to the payment; A WP or WT that is not acting as an agent or intermediary with respect to the payment; or Receiving income that is (or is deemed to be) effectively connected with the conduct of a trade or business in the United States 10

11 Identify Payee Account Holder, Customer, Vendor Exceptions: Intermediaries/Agents (con t) If the Payee is a U.S. Intermediary or an Agent of a Foreign Person Treat the Foreign Person as the Payee, unless the Intermediary is a U.S. Financial Institution 11

12 Identify Payee Account Holder, Customer, Vendor Exceptions: Other (con t) If the Payee is a Disregarded Entity (i.e., an Entity that is disregarded as separate from its single owner) Treat the Single Owner as the Payee A Payee is a US Person if it is a: U.S. Branch of a Participating FFI or Registered Deemed- Compliant FFI that elects to be treated as a U.S. person A Foreign Branch of a U.S. Bank, unless the Branch is a QI, (then the Branch is treated as an FFI) 12

13 4 section Determine if Payee is a Foreign Financial Institution or Nonfinancial Foreign Entity 13

14 Determine if Entity is a Foreign Financial Institution Foreign Financial Institution is any entity that is not a U.S. Person and is: Depository Institution - Accepts deposits in the ordinary course of a banking or similar business Custodian Institution - Holds, as a substantial portion of its business financial assets for the benefit of one or more other persons Investment Entity Primarily conducts as a business one or more of the following activities or operations for or on behalf of a payee The entity's gross income is primarily attributable to investing, reinvesting, or trading in financial assets and the entity is managed by another entity. 14

15 Determine if Entity is a Foreign Financial Institution Foreign Financial Institution (con t) Insurance Company or a Holding Company that is a member of an Expanded Affiliated Group that includes an insurance company, and the Insurance Company or Holding Company issues, or is obligated to make payments with respect to, a cash value insurance or annuity contract Holding Company or Treasury Center that is part of Expanded Affiliated Group that includes any of the entities listed above 15

16 Payee Analysis Determining whether a Payee is an FFI or NFFE for purposes of FATCA Is the Payee a Foreign Entity? No The payee is a US entity and will need to be associated with a Form W-9. Yes Yes Is the Payee a Depository institution? No Yes Is the Pyee a Custodial institution? No Yes Is the Payee an Insurance or Holding Company? No Yes Is the Payee an investment entity? No Payee is an FFI Yes Is the Payee part of an EAG that includes any of the entity types above? No The payee is an NFFE 16

17 5 section Determine FATCA/Chapter 4 Status of Payee 17

18 Determine FATCA/Chapter 4 Status of Payee All Entity Payees will have a Chapter 4/FATCA status Although U.S. Payees will will not be subject to FATCA Withholding, US Withholding Agents must still classify them and obtain documentation to support their status The FATCA status of the Payee will determine whether or not a Withholdable Payment is subject to Withholding Develop Decision Trees/Flowcharts to assist in classifying Payees 18

19 Determine FATCA/Chapter 4 Status of NFFEs Excepted NFFEs Active Publicly Traded Corporations Certain Affiliated Entities Related to a Publicly Traded Corporations Nonfinancial Group Entities Nonfinancial Startup Companies Nonfinancial Entities In Liquidation or Bankruptcy 501(c ) Entities Non-Profit Organizations Sponsored Direct Reporting Direct Reporting U.S. Withholding Agents is not required to withhold on a Withholdable Payment to an: Excepted NFFE listed above, and NFFE that is a QI, WP, or WT. Additionally, the term Excepted NFFE means, with respect to the payment, a Excepted NFFE that is a Beneficial Owner of the payment. 19

20 Determine if the NFFE is Passive Any NFFE that is not Active or Excepted is Passive A Passive NFFE must disclose its substantial (at or above 10%) U.S. owners or state that it has none or it will be subject to withholding. This information will be reported along with FATCA status on the new Forms W-8. A Passive NFFE may elect to disclose information about substantial U.S. owners directly to the IRS instead of to the withholding agent. In this case the entity would be considered an excepted Direct Reporting NFFE if it is disclosing for itself, or an excepted Sponsored Direct Reporting NFFE if another entity is disclosing on its behalf. 20

21 NFFE Decision Tree No Does the NFFE fall into any of the Excepted statuses? The NFFE is passive and will need to disclose its substantial U.S. owners or certify a lack thereof to avoid withholding. Yes Has the NFFE elected to be treated as a Direct Reporting or Sponsored Direct Reporting NFFE? Yes (direct reporting or sponsored direct reporting NFFE) No (passive NFFE) Can the appropriate Withholding Certificate or documentation be collected? No Yes Document attempts to collect documentation. The NFFE is classified and documented - no withholding will be required. 21

22 Determine FATCA Status of Foreign Financial Institutions Participating FFIs Model 2 FFI Registered Deemed-Compliant FFIs Model 1 FFI Restricted Funds Credit Card Issuers and Servicers Sponsored Investment Entities and Controlled Foreign Corporations Local FFIs Nonreporting Members of Participating FFI Groups Qualified Collective Investment Vehicles 22

23 Determine FATCA Status of Foreign Financial Institutions Certified Deemed-Compliant FFIs Nonreporting IGA FFIs Nonregistering Local Banks Limited Life Debt Investment Entities Investment Advisors and Investment Managers FFIs With Only Low-Value Accounts Sponsored, Closely Held Investment Vehicles Exempt Beneficial Owners Foreign Governments International Organizations Foreign Central Banks Governments of U.S. Territories Owner-Documented FFIs Restricted Distributors Nonparticipating FFIs 23

24 Model 1 FFIs FATCA Status Foreign Financial Institutions ("FFIs") Description/Requirements of FATCA Status FATCA Status Requirements to Document by Withholding Agent Model 1 FFIs (d)(4)(iv) Model 1 IGA means an agreement or arrangement between the United States or the Treasury Department and a foreign government to implement FATCA through reporting by financial institutions to such foreign government or agency thereof, followed by automatic exchange of the reported information with the IRS Model 1 may be Reciprocal or Nonreciprocal Reporting Model 1 FFI or branch of an FFI that is treated as a reporting financial institution under an applicable Model 1 IGA and that has registered with the IRS to obtain a GIIN Model 1 FFIs that comply with the terms of the applicable IGA will be treated as satisfying the FATCA due diligence and reporting requirements Model 1 FFI that has a branch outside of a Model 1 jurisdiction may enter into an FFI agreement with respect to such branch in order for the branch to be treated as a Participating FFI ("PFFI") FFIs subject to a Model 1 IGA generally will not be subject to withholding under FATCA on payments they receive or on payments they make to account holders Payments Made Prior to January 1, 2015 Withholding Agent may treatt the Paye as a reporting Model 1 FFI if it receives a Withholding Certificate from the Payee indicating that the Payee is a Reporting Model 1 FFI and the country in which the payee is a reporting Model 1 FFI, regardless of whether the certificate contains a GIIN for the payee Verification of a GIIN is not required with respect to payees that are reporting Model 1 FFIs Payments Made Prior to January 1, 2015 for Preexisting Obligation - Reliance on Pre-FATCA W-8 Withholding Agent may treat a payee as a Reporting Model 1 FFI if it obtains a pre-fatca Form W-8 from the payee, and the payee indicates (either orally or in writing) that it is a reporting Model 1 FFI and the country in which it is a reporting Model 1 FFI, regardless of whether the certificate contains a GIIN for the payee Verification of a GIIN is not required with respect to payees that are reporting Model 1 FFIs For Payments Made on or after January 1, 2015, That Do Not Constitute U.S. source Fixed, Determinable Periodic Withholding Agent may continue to treat a Payee as Reporting Model 1 FFI if the Payee provides the Withholding Agent with its GIIN, either orally or in writing, and the Withholding Agent verifies the GIIN 24

25 Excepted NFFEs FATCA Status Non-Financial Foreign Entities ("NFFEs") Publicly Traded Corporations (c)(1)(i) Description/Requirements of FATCA Status A Corporation the stock of which is regularly traded on one or more established securities markets for the calendar year. FATCA Status Requirements to Document by Withholding Agent Withholding Certificate that certifies that the payee is such an entity and provides the name of a securities exchange upon which the payee's stock is regularly traded. Nonfinancial Group Entities (e)(5)(i) Nonfinancial Start-Up Companies (e)(5)(ii) A Foreign Entity that is a member of a Nonfinancial Group if the entity that: Is not a depository institution or custodial institution (other than for members of its expanded affiliated group) Is a Holding company, treasury center, or captive finance company Does not hold itself out as (and was not formed in connection with or availed of by) an arrangement or investment vehicle that is a Private Equity Fund, Venture Capital Fund, Leveraged Buyout Fund, or any similar investment vehicle established with an investment strategy to acquire or fund companies and to treat the interests in those companies as capital assets held for investment purposes. An Expanded Affiliated Group is also and Nonfinancial Group if it has been in existence for less than three years and meets the income test in each of the preceding three years (excluding transactions between members of the Expanded Affiliated Group.) Withholding Certificate identifying the payee as such an Excepted Nonfinancial Group Entity. A Foreign Entity that is investing capital in assets with the intent to operate a new business or line of business other than that of a financial institution or Passive NFFE for a period of: 24 months from the initial organization of such entity Withholding Certificate that identifies in the case of an entity intending to operate a new business, the payee as a Start-Up Company that 24 months from the date of the board resolution (or its equivalent) approving the new intends to operate as other than a line of business, provided that such entity qualified as an Active NFFE for the 24 months financial institution and the Withholding preceding the date of such approval, In the case of an entity with the intent to operate a Certificate provides a formation date for new line of business the Payee that is less than 24 months Exception For Investment Funds prior to the date of the payment. An entity is Fot a Nonfinancial Start-Up Company if it functions (or holds itself out) as an Investment fund, such as a Private Equity Fund, Venture Capital Fund, Leveraged Buyout Fund, or any investment vehicle whose purpose is to acquire or fund companies and hold interests in those companies as capital assets for investment purposes. 25

26 6 section Obtain Required Documentation for FATCA/Chapter 4 Status of Payee 26

27 Determine FATCA/Chapter 4 Status of Payee General Documentation Requirements Documentation Requirements to Establish Payee s FATCA Status Required to obtain a valid Withholding Certificate from a Payee in order to treat the Payee as having a particular FATCA/Chapter 4 Status 27

28 Forms W-8 Determine FATCA/Chapter 4 Status of Payee W-8 Forms Obtain Form W-8BEN-E from a Non-U.S. Entity that is a Beneficial Owner (i.e. is acting for its own account). Obtain Form W-8ECI from a Non-U.S. person claiming that the U.S. source income is effectively connected with the conduct of a trade or business in the U.S. Obtain Form W-8EXP from a Non-U.S. person that is a Beneficial Owner and that is exempt from U.S. taxation under the Internal Revenue Code (e.g. International Organization, Foreign Government, or Tax-Exempt Organization.). Obtain Form W-8IMY and Withholding Statement (if applicable) from a Non-U.S. Person that acts as an Intermediary (e.g., QI, NQI) or an Agent on behalf of another person, or is a Flow Thru Entity (Partnership, Simple Trust, Grantor Trust). 28

29 Determine FATCA/Chapter 4 Status of Payee U.S. Persons U.S. Persons are not be subject to FATCA withholding; however, they still must be classified and documented. Must treat a payee that has provided a valid Form W-9 as a U.S. Person unless the Form W-9 contains a certification that the payee is other than a Specified U.S. person. 29

30 Determine FATCA/Chapter 4 Status of Payee U.S. Persons Identification of U.S. Persons Form W-9 Domestic Partnership Domestic Corporation Estate (other than a foreign estate) Trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust, and, (ii) one or more United States persons have the authority to control all substantial decisions of the trust.) A Foreign Branch of a U.S. person (other than a Branch that is treated as a QI) Foreign Insurance Company that has made an election under section 953(d), provided that either it is: Not a specified insurance company (as described in (e)(1)(iv)) and is not licensed to do business in any State, or Specified insurance company and is licensed to do business in any State 30

31 Determine FATCA/Chapter 4 Status of Payee Validation of Withholding Certificates Perform Due Diligence to Validate the Payee s Form W-9, Form W-8 Confirm that the documentation is complete Review the documentation against all other information pertaining to the account to make sure the tax claim is consistent with the other information Onboarding documentation Anti-Money Laundering/Know Your Customer Documentation 31

32 Determine FATCA/Chapter 4 Status of Payee Validation of Withholding Certificate Perform Due Diligence to Validate the Payee s Form W-9, Form W-8 A Payee is validly documented if it provides a valid Form W-9 or Form W-8 The Withholding Agent may rely upon claims made in the documentation, unless it knows or has reason to know that the documentation is incorrect or inconsistent The Payee is responsible for determining its own FATCA status. A Withholding Agent may advise the Payee on what the Payee s FATCA status is or should be 32

33 7 section Payee Analysis - Reference Matrix 33

34 Payee Analysis - Reference Matrix Depository Institution An entity is considered to be a depository institution if it accepts deposits or other similar investments of funds and regularly engages in one or more of the following activities Makes personal, mortgage, industrial, or other loans or provides other extensions of credit; Purchases, sells, discounts, or negotiates accounts receivable, installment obligations, notes, drafts, checks, bills of exchange, acceptances, or other evidences of indebtedness; Issues letters of credit and negotiates drafts drawn thereunder; Provides trust or fiduciary services; Finances foreign exchange transactions; or Enters into, purchases, or disposes of finance leases or leased assets. 34

35 Payee Analysis - Reference Matrix Custodial Institution An entity holds financial assets for the account of others as a substantial portion of its business if the entity's gross income attributable to holding financial assets and related financial services equals or exceeds 20 percent of the entity's gross income during the shorter of The three-year period ending on December 31 of the year preceding the year in which the determination is made; or The period during which the entity has been in existence before the determination is made. Special rule for start-up entities. An entity with no operating history as of the date of the determination is considered to hold financial assets for the account of others as a substantial portion of its business if the entity expects to meet the gross income threshold based on its anticipated functions, assets, and employees, with due consideration given to any purpose or functions for which the entity is licensed or regulated (including those of any predecessor). Income attributable to holding financial assets and related financial services is defined as custody, account maintenance, and transfer fees; commissions and fees earned from executing and pricing securities transactions; income earned from extending credit to payees with respect to financial assets held in custody (or acquired through such extension of credit); income earned on the bid-ask spread of financial assets; and fees for providing financial advice and for clearance and settlement services. 35

36 Payee Analysis - Reference Matrix Investment Entity Primarily conducts as a business one or more of the following activities or operations for or on behalf of a payee Trading in money market instruments (checks, bills, certificates of deposit, derivatives, etc.); foreign currency; foreign exchange, interest rate, and index instruments; transferable securities; or commodity futures; Individual orcollective portfolio management; or Otherwise investing, administering, or managing funds, money, or financial assets on behalf of other persons. The entity's gross income is primarily attributable to investing, reinvesting, or trading in financial assets and the entity is managed by another entity. The entity functions or holds itself out as a collective investment vehicle, mutual fund, exchange traded fund, private equity fund, hedge fund, venture capital fund, leveraged buyout fund, or any similar investment vehicle established with an investment strategy of investing, reinvesting, or trading in financial assets. 36

37 Payee Analysis - Reference Matrix Insurance / Holding Company Is an insurance company or a holding company that is a member of an expanded affiliated group that includes an insurance company, and the insurance company or holding company issues, OR Is obligated to make payments with respect to, a cash value insurance or annuity contract (specified insurance company); OR Entity s primary activity consists of holding (directly or indirectly) all or part of the outstanding stock of one or more members of its expanded affiliated group. 37

38 Payee Analysis - Reference Matrix Holding Company/Treasury Centers If it is part of an Expanded Affiliated Group that includes a Depository Institution, Custodial Institution, Insurance Company or Investment Entity or is formed in connection with a Collective Investment Vehicle of Fund established with an investment strategy of investing or trading in financial assets. This would include Private Equity Funds with nontraded debt, and equity interests that are issued by an intermediate company formed in connection with a fund. 38