Foreign Account Tax Compliance Act (FATCA) Intergovernmental Agreement Model 1 Latest Updates and Requirements

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1 Foreign Account Tax Compliance Act (FATCA) Intergovernmental Agreement Model 1 Latest Updates and Requirements - Regulatory Timeline - Overview of Requirements - Registration Process Naidira Alemova-Goeres Partner, Deloitte Financial Advisory GmbH Bucharest, October 3, 2013

2 FATCA aims to identify from US persons trying to avoid US tax obligations by holding assets in non-us structures and products FATCA US Person $ What does FATCA involve? Foreign Financial Institutions (FFIs) are required to enter agreements with U.S. Treasury to identify and report U.S. accounts annually Non-Financial Foreign Entities (NFFEs) are required to report substantial U.S. owners or certify no U.S. ownership U.S. withholding agents and participating FFIs are required to withhold 30% of withholdable payments made to recalcitrant account holders or non-participating FFIs. IFA / wealth manager Bank account Fund Custodian $ US Assets Trust U.S. Withholding Broker Agents, FFIs and NFFEs Insurance product Income, sales proceeds and passthru payments Participating FFIs are required to select FFI Officers who certify that the FFI is in compliance with the obligations set forth under the agreement. Who must meet the FATCA requirements? Foreign Financial Institutions Non-Foreign Financial Entities and affiliates U.S. Withholding Agents Who are the targets? U.S. Individuals U.S. Entities ( including corporations, partnerships and trusts ) Non-U.S. Financial Entities with substantial U.S. ownership 1

3 Chronological Development On January 17, 2013, the U.S. Treasury Department ( Treasury ) and the Internal Revenue Service ( IRS ) issue final FATCA regulations ( Final Regulations ) Originally codified as part of the Hiring Incentives to Restore Employment Act of 2010, the Final Regulations complete a series of interim guidance issued by the Treasury and the IRS, including a series of IRS notices, the proposed regulations released on February 8, 2012, and Notice issued on October 24, Notice , issued by the IRS on July 12, 2013, provided new timelines for the implementation of the requirements: in accordance with the revised timelines, foreign financial institutions ( FFIs ) shall prepare for the first wave of compliance milestones starting July 1, The Final Regulations introduce the Global Intermediary Identification Number (GIIN) and place great emphasis on the relationship of the regulations with the two forms of intergovernmental agreements ( IGAs ): Model 1 and Model 2. In particular, the Final Regulations make clear that FFIs in Model 1 IGA jurisdictions will be governed by the laws enacted in their own countries while those in Model 2 IGA jurisdictions will follow the final regulations. The Final Regulations do leave open the opportunity for foreign governments to negotiate for the inclusion of terms that would allow entities within their jurisdiction to follow more beneficial requirements in the Final Regulations. The emphasis on IGAs may signify Treasury s realization that IGAs and not the Final Regulations may be the path forward to achieve FATCA s goal and establish a global information reporting framework. 2

4 Updated Timeline Summary: Final Regulations vs. Notice FATCA Compliance Action Items Old Date New Date Registration Portal Opening Date July 15, 2013 August 19, 2013 GIIN Registration Deadline for first 2014 list October 25, 2013 April 25, 2014 General Compliance First 2014 GIIN list December 2, 2013 June 2, 2014 Last date to register for GIIN before withholding begins 1 December 31, June 30, Effective date of FFI Agreement for registrations before December 31, withholding begins June 30, 2014 Transition Period for affiliated group rule January 1, 2016 No Change FFI begin new client account onboarding January 1, 2014 July 1, 2014 Cutoff date to determine preexisting account population December 31, 2013 June 30, 2014 New / Preexisting Accounts Initial account balance determination date for deminimis rules and high value account 3 rule December 31, 2013 FFI complete preexisting Prima Facie FFI accounts 2 June 30, 2014 FFI complete preexisting high value individual accounts FFI complete all other preexisting entity accounts FFI complete all other preexisting individual accounts December 31, 2014 December 31, 2015 December 31, 2015 June 30, 2014 December 31, 2014 June 30, 2015 June 30, 2016 June 30,

5 Updated Timeline Summary: Final Regulations vs. Notice (continued) FATCA Compliance Action Items Old Date New Date Reporting Calendar year(s) to report for U.S. Account reporting 2013 & (for U.S. account identified by December 31, 2014) Begin income withholding on U.S. source FDAP 4 income for Nonparticipating FFIs 5 January 1, 2014 July 1, 2014 Withholding Begin offshore U.S. source income payment withholding 2 January 1, 2017 No Change Begin gross proceeds withholding 2 January 1, 2017 No Change Begin foreign -passthru payments withholding 2 January 1, 2017 No Change 1 Verification of a GIIN is not required for a Model 1 FFI prior to January 1, Model 1 FFIs will be able to register and obtain a GIIN beginning on January 1, 2014 but will have additional time beyond July 1, 2014 to register and obtain a GIIN to be included in the FFI list before January 1, Not applicable to Model 1 FFIs. 3 Preexisting individual accounts with a balance or value that exceeds $1,000,000 as of December 31, Payments of U.S. source dividends, interest and other fixed or determinable annual or periodic income. 5 Applies to U.S. source income paid to Nonparticipating FFIs by reporting FATCA Partner Financial Institutions acting as a withholding Qualified Intermediary ( QI ), withholding foreign partnership or withholding foreign trust. Other reporting FATCA Financial Institutions must provide information necessary to allow an immediate payor to withhold. 4

6 IGA Model 1Customer Due Diligence: New Individual & Entity accounts Model 1 IGA Final Regulations Request self-certification from each Individual and Entity account holder to establish the account holder U.S. status Rely on documentation collected for KYC/AML purposes Confirm the reasonableness of the self certification based on the information collected for AML/KYC Apply standards of knowledge and reason to know principles based on U.S. indicia For identified U.S. persons, obtain a selfcertification that includes the account holder s U.S. TIN (which may be an IRS Form W-9 or other similar agreed form) For identified U.S. persons, obtain a valid waiver and account holder s U.S. TIN (which may be an IRS Form W-9 or other similar agreed form) 5

7 IGA Model 1 Customer Due Diligence: Preexisting Individual & Entity accounts Requirements consistent with the ones in Final Regulations Aggregate the value of accounts for individuals maintained by FFI or its affiliates if on shared recordkeeping system Determine FATCA taxonomy for non- U.S. entity accounts as FFIs or NFFEs Identify each account for individuals with indications of U.S. citizenship or residency Identify the recalcitrant accounts Establish a process for tracking and retaining correspondence with the account holder Maintain scanned documents associated with each account to support the decisions and information with each account Requirements for Entity Accounts Identify known U.S. Persons and accts with balances under $50,000 Identify High Value Accts over $1mln Requirements for Individual Accounts Search for accounts that have been documented as U.S. for other tax purposes. Can elect to eliminate depository accounts with a balance or value of less than $50,000 ($250,000 for a cash value insurance or annuity contract). Determine if account balance is above $1mln and perform required due diligence for U.S. indicia and solicit necessary documentation Understand the type of entity Identify entity accts under $250,000 Determine if entities are FFIs or NFFEs Identify the place the account holders were formed or incorporated Preexisting entity accounts with account balances of $250,000 or less are exempt from review until the account balance exceeds $1,000,000 Identify accts with U.S. indicia Determine status of account and obtain necessary documentation Determine Status of entity Determine if FFI is participating or deemed compliant. Determine if NFFEs are exempt or otherwise if they have any specified U.S. owners Analyze for Exceptions Review data collected to identify any exceptions Analyze for Exceptions Determine if an entity account holder was identified as an exception to FATCA reporting 6

8 U.S. Indicia and Required Documentation U.S. Indicia Documentation Required U.S. citizenship or lawful permanent resident 1. Obtain W-9 and valid and effective waiver for non-iga countries; 2. Self-certification that includes U.S. TIN for IGA Model 1 countries U.S. birth place 1. Obtain W-9 and vailid and effective waiver or W-8BEN for non-iga countries; 2. Self-certification for IGA Model 1; and 3. Non-U.S. passport or similar documentation establishing foreign citizenship; and 4. Written explanation regarding U.S. citizenship or a copy of the individual s Certificate of Loss of Nationality of the United States or Form I-407 U.S. address (residence, correspondence, or P.O. Box) 1. Obtain W-9 and vailid and effective waiver or W-8BEN for non-iga countries; 2. Self-certification for IGA Model 1; and 3. Non-U.S. passport or similar documentation establishing foreign citizenship U.S. Telephone Number 1. Obtain W-9 and vailid and effective waiver or W-8BEN for non-iga countries; 2. Self-certification for IGA Model 1; and 3. Non-U.S. passport or similar documentation establishing foreign citizenship Instructions to transfer funds to U.S. accounts or directions regularly received from a U.S. address Only address on file is in care of or hold mail or U.S. P.O. Box (excludes foreign PO Box as U.S. indicia) Power of Attorney or signatory authority granted to person with U.S. address 1. Request W-9 and vailid and effective waiver or W-8BEN for non-iga countries; 2. Self-certification for IGA Model 1; and 3. Documentary evidence establishing non-u.s. status 1. Request W-9 and vailid and effective waiver or W-8BEN for non-iga countries; 2. Self-certification for IGA Model 1; and 3. Documentary evidence establishing non-u.s. status 1. Request W-9 and vailid and effective waiver or W-8BENfor non-iga countries ; Self-certification for IGA Model 1; and 2. Documentary evidence establishing non-u.s. status 7

9 Comparison of IGA model agreements to final regulations Issue Model 1 Model 2 Final regulations FFI agreement Not required for resident FFIs. Resident FFIs must agree to comply with the requirements of an FFI Agreement. Article 2(a). Subject to specified exceptions, all FFIs must enter into an FFI Agreement to avoid withholding. Requirement to withhold, on payments to FFIs, see Reg (a). FFI Agreement described, Reg Amendment of agreement Intended prior to December 31, Article 10. Registration with IRS Required. See, e.g., HMRC Guidance Notes, Section 2.1. Expected to be the same as Model 1. Required. Article 2(1)(a). Unknown. Required. Reg (a). Enforcement of compliance Local/IRS. Article 5. Local/IRS. Article 4. Internal compliance program; certifications; IRS. Reg (f). Significant non-compliance Must be resolved within 18 months. Article 5(2)(b). Must be resolved within 12 months. Article 4(2). Rules provided to cure event of default. Reg (g). Deemed-compliant/exempt entities Annex I(VI)(B)(4), and Annex II (by mutual Agreement). Annex I(VI)(B)(4), and Annex II (by mutual Agreement). Reg (e)(5), -5(f), -6; Reg (c). Can resident FFIs be nonparticipating FFIs? Limited to cases of unresolved significant non-compliance. Article 5(2)(b). Limited to cases of unresolved significant non-compliance. Article 4(2). Yes 8

10 Comparison of IGA model agreements to final regulations Issue Model 1 Model 2 Final regulations Due diligence requirements Annex I Annex I Reg (c). Election to follow due diligence provisions of the regulations rather than Annex I Yes. Annex I(I)(C). Yes. Binding subject to material modification rule. Annex I(I)(C). N/A Permitted to open undocumented individual accounts No, except for de minimis accounts. Annex I(III)(B). No, except for de minimis accounts. Annex I(III)(B). Yes, but subject to a limited cure period. Reg (g)(ii). Permitted to open undocumented entity accounts No; however, self-certification may not be required. Annex I(V)(B), (C). No; however, self-certification may not be required. Annex I(V)(B), (C). Yes, but subject to a limited cure period. Reg (c)(3)(ii). Required closing of recalcitrant account holders No. Article 4(2). No. Article 4(2)(a). Yes, as specified. Reg (i). Required reduction. Reg (g)(1)(ii). Required to provide financial services to specified U.S. persons Limited to small financial institutions with a local client base. Annex II. Limited to small financial institutions with a local client base. Annex II. Limited to certain deemedcompliant FFIs. Reg (f)(1)(i)(A). 9

11 Comparison of IGA model agreements to final regulations Issue Model 1 Model 2 Final regulations Resolution of conflicts of law to permit reporting Yes Yes No Reporting of information to local authority or IRS Local Authority, Article 2. IRS, Article 2. IRS, Form 8966: U.S. accounts, Reg (d)(3)(vii); recalcitrant, Reg (d)(6)(v). Information reporting requirements Specified in agreement. Article 2. Based upon regulations. Article 2. Provided in Reg (d). Reporting of U.S. accounts Automatic for reportable U.S. accounts. Article 2(1). Consent to report required from each US Account. Article 2(1). Waiver required from each U.S. account, if reporting is prevented under foreign law. Reg (i)(2). Reporting of recalcitrant accountholders Automatic for reportable U.S. accounts. Article 2(1). Treated as U.S. accountholders, total number and value to be reported, and subject to group request by U.S. Article 2(2). Reg (d)(6). U.S. reciprocity Yes* Optional No * Reciprocal agreement only. 10

12 Expanded Affiliated Group IGA Application According to Final Regulations, a limited status for an FFI and branch will cease after December 31, It is important to note that Final Regulations make an exception to FFIs located in jurisdictions subject to Model 1 or 2 Intergovernmental Agreements ( IGA ). According to both Model 1 and 2 IGA, starting January 1, 2016, FFIs in IGA jurisdictions will remain in compliance with FATCA despite being affiliated with certain nonparticipating FFIs while, in non-iga jurisdictions, a participating FFI may be deemed to be out of compliance with its FFI Agreement if it is affiliated with an FFI whose limited FFI status has just expired. Both Model 1 and 2 IGAs have a clause Special Rules Regarding Related Entities and Branches that permits FATCA Partner Financial Institution to retain their FATCA status as long as they limited FFIs and branches as separate nonparticipating financial institution and identify them as such to withholding agents. 11

13 Key Features of the FATCA Registration Portal Link: 24-hour-a-day, seven-days-a-week accessibility Allows FFI users to establish an online account, including the ability to establish an access code and challenge questions Ensure security for all data provided on behalf of FFI Provides FFIs with tools to oversee member and/or branch information 12

14 FATCA Registration Portal Interface 13

15 Registration Timeline Date Action 19 August 2013 Registration portal opening (only trial access) 1 January 2014 Submission of registration requests possible 25 April 2014 GIIN registration deadline for first 2014 list 2 June 2014 First 2014 GIIN list 1 July 2014 Begin income withholding FFI begin new account onboarding 14

16 Purpose of FATCA Registration FFI (or a foreign branch) not covered by an IGA: to enter into an FFI Agreement (on line, by checking the box) to be treated as a participating FFI, or to agree to meet the requirements to be treated as a registered deemed compliant FFI, or to confirm that it will comply with the terms applicable to a Limited FFI or a Limited Branch and to obtain a Global Intermediary Identification Number (GIIN) Reporting FFI (or a foreign branch) under Model 2 IGA: to confirm that it will comply with the terms of an FFI Agreement, as modified by the applicable Model 2 IGA to authorize one or more PoCs to obtain a GIIN Reporting FFI (or a foreign branch) under Model 1 IGA: to authorize one or more Points of Contact (PoC) to obtain a GIIN 15

17 Global Intermediary Identification Number (GIIN) The GIINis proposed to be a unique alphanumeric sequence that provides the following benefits: Provides a new way to identify a financial institution, with a distinct format that was designed so as to not be confused with existing identification/reporting numbers currently in use; Allows for easy identification of a financial institution s type, and country of residence; Associates each entity with other affiliates/branches in the same member group; Allows a residence country to use a single identification number to identify all information associated with a financial institution. 16

18 GIIN Composition GIIN is issued to FIs, other than Limited FFIs or Limited Branches, after the FATCA registration is submitted and approved. GIINs are alphanumeric, comprised of 19 characters, and are in the following format: XXXXXX.XXXXX.XX.XXX: Character Representation Position Description FATCA ID 1-6 Randomly generated number by the system 7 Separator FFI type 8-12 Single, Lead, Member, or Sponsoring Entity 13 Separator Cathegory type Two-character abbreviation identifying either the FFI cathegory or Branch of the FFI 16 Separator Country identifier Standard country code of the FFI or Branch 17

19 Information requested by the FATCA Registration Portal 1. FFI type: Lead Member Sponsoring Single 2. Legal name 3. Country of tax residence 4. FATCA classification: Participating + Model 2 Registered deemed compliant + Model 1 other 5. Mailing address 6. QI, WP or WT indicator Including EIN 7. Foreign branches: U.S. branch including TIN Foreign branches 8. Responsible officer: Name Address Phone and 9. Points of contacts Up to 5 18

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