Spotlight on the US Christopher Brown US Tax Desk, KPMG In the UK 24 June 2016
Agenda 1 2 3 4 5 6 7 8 FATCA: An overview Definition of FIs under FATCA FATCA reportable accounts and account holders Remediation Onboarding Reporting Withholding Federal excise tax developments 2
FATCA: An overview
Background to FATCA The Foreign Account Tax Compliance Act ( FATCA ) was enacted on 18 March 2010 1 2 The Law The Impacted The Penalty 3 FATCA introduces a regulatory compliance and reporting regime which compels certain foreign entities (including insurance companies) to identify and disclose US persons with offshore financial accounts FATCA impacts: US payors and withholding agents Foreign entities and FIs that receive US sourced payments or that are in countries that have an agreement to implement FATCA US persons with offshore assets and accounts FATCA imposes a 30% withholding tax on withholdable payments (and, in the future, passthru payments ) made to non-participating Foreign Financial Institutions ( NPFFIs ) and recalcitrant accountholders Withholdable payments are US sourced: Interest, dividends and similar income ( FDAP ) Insurance and reinsurance premiums* * Treas. Reg. Section 1.1473-1(a)(4)(iii) 4
The three FATCA Regimes FATCA Regulations Default rules for jurisdiction that has not entered into a Model 1 or Model 2 Intergovernmental Agreement ( IGA ), whether signed or in substance A US Withholding Agent ( USWA ) or any Foreign Financial Institution ( FFI ) that is not resident (or branch that is not located) in any country with which the US has entered into an IGA will be subject to the final US Treasury regulations which have been issued under FATCA ( FATCA Regulations ) FFIs will enter into agreements ( FFI Agreements ) with the Internal Revenue Services ( IRS ) to agree to perform due diligence, withholding and reporting Model 1 IGA Any FFI that is resident in a Model 1 IGA partner country will be governed by the terms of the Model 1 IGA in effect with that country and implementing laws, regulations and Guidance Notes adopted by that country Each Reporting Model 1 FI (as defined by its IGA) must comply with the registration requirements of the Model 1 IGA Model 2 IGA FFIs will be required to implement FATCA as prescribed by the FATCA Regulations, except to the extent expressly modified by the relevant IGA Each reporting model 2 FFI should also register with the IRS directly, and will be required to follow the terms of the FFI Agreement FFIs will seek consent from presumed US pre-existing account holders to supply information to the IRS Where consent is not granted, the FFI will provide aggregate information to the IRS with respect to non-consenting account holders The IRS may then make further information requests to the Model 2 IGA partner country s government based on the aggregate information For all new accounts, consent must be granted before an account can be opened For IGAs in effect see the US Treasury website: https://www.treasury.gov/resource-center/tax-policy/treaties/pages/fatca.aspx 5
Exchanging and reporting flows Common Reporting Standard Country B Account Country B Holder Account Country C Country Holder Account Other C Account Holder Countries Holder Account Holders U.S. Account Holder Insurance Co Country A U.S. U.S. Bank Account Holder U.S. Account Holder Country B Common Reporting Other Standard Countries Account Other Holders Countries Account Insurance Co Model 1 IGA reporting Model 1 IGA exchanges Leveraging on Model 1 IGA implementation to develop standardised automatic exchange in a multilateral context 6
Timeline and key milestones 1 July 2014 Treat accounts opened on or after this date as new accounts (for many jurisdictions this applies only for individuals) 22 December 2014 Last date for Model 1 IGA FIs to register with the IRS to ensure inclusion on initial FFI List of 2015 1 January 2015 Deadline for Reporting Model 1 IGA FI to provide upstream withholding agent with GIIN 30 June 2015 Complete due diligence for preexisting high value individual accounts 30 September 2015 Competent Authority must provide required information to the IRS for 2014 (FI reporting deadlines vary by country) 30 June 2016 Complete due diligence for preexisting lower-value accounts and pre-existing entity accounts 30 September 2016 Competent Authority must provide required information for the IRS for 2015 (FI reporting deadlines vary by country) Reporting of foreign reportable amounts to NPFFIs begins The close deadlines for entities to be compliant across both FATCA and the CRS are stretching organizational resources. The lack of clear guidance across many jurisdictions makes building systemic solutions to meet these deadlines a 30 September 2017 significant challenge Competent Authority must provide required information to the IRS for 2016 (FI reporting deadlines vary by country) 30 September 2018 Competent Authority must provide required information to the IRS for 2017 (FI reporting deadlines vary by country) 2014 2015 2016 2017 2018 29 October 2014 51 Countries sign on to the Multilateral Competent Authority Agreement, committing to implement the CRS 1 January 2016 CRS go-live date for early adopter countries Model 1 IGA CRS Wave 1 ( early adopter ) countries Source: KPMG International illustration 31 December 2016 Early adopter countries to complete due diligence for pre-existing high value accounts 1 January 2017 CRS go-live date for Wave 2 countries CRS Wave 2 countries September 2017 CRS exchange of information begins for early adopter countries (FI reporting deadlines vary by country) 30 December 2017 Early adopter countries to complete due diligence for preexisting lower-value accounts and pre-existing entity accounts The short timeline presents significant operational challenges to timely compliance. 31 December 2017 Wave 2 countries to complete due diligence for preexisting high value accounts September 2017 CRS exchange of information begins for Wave 2 countries (FI reporting deadlines vary by country) 31 December 2018 Wave 2 countries to complete due diligence for pre-existing lower-value accounts and preexisting entity accounts 7
Definition of FIs under FATCA
Definition of FIs under FATCA Definitions of FFIs and NFFEs under Intergovernmental Agreement ( IGAs ) (subject to local implementation rules): FFIs under FATCA Not FFIs under FATCA Insurance Companies Depository Institution Insurance Holding Companies Banks Specified Insurance Companies FFIs Custodial Institution Securities Brokers Asset Managers NFFEs (a) Funds Investment Entity Trustees Financial Holding Companies Private Equity Companies Note: (a) For entities that do not fall under the definitions of FFIs for FATCA purposes, they would generally be categorized as NFFEs. The entities may look further into the FATCA definitions to distinguish whether they are active or passive NFFEs 9
Definition of FIs under FATCA (cont.) Specified Insurance Company Any entity that is an insurance company that issues, or is obligated to make payments with respect to, a Cash Value Insurance Contract or Annuity Contract. Also includes the holding company of an insurance company Under the FATCA Regulations, reserving activities of an insurance company will not cause it to be a Depository Institution, Custodial Institution or Investment Entity Under the FATCA Regulations, an insurance company is an entity or arrangement (1) that is regulated as an insurance business under the laws, regulations, or practices of any jurisdiction in which the company does business, (2) for which greater than 50% of gross income in the immediately preceding calendar year is from insurance, reinsurance, and annuity contracts, or (3) for which the aggregate value of assets associated with insurance, reinsurance, and annuity contracts at any time during the preceding year is greater than 50% of total assets. The IGA does not define insurance company (terms not defined in the IGA should generally be defined according to the applicable laws of the relevant country) FATCA Regulations allow insurance companies to attain registered deemed compliant status as local FFIs if they do not have a place of business outside the local country. An insurance company having operations in another location could still be seen as a local FFI if such location (1) is not publicly advertised and (2) performs solely administrative support functions (back office functions) An insurance company that is not a financial institution is a non-financial foreign entity ( NFFE ) Depository Institution An institution that accepts deposits in the ordinary course of a banking or similar business Custodial Institution Investment Entity Any entity that holds financial assets for the account of others as a substantial portion of its business Substantial means that 20% or more of the entity s gross income is attributable to holding financial assets and related financial services during specified period of time Any entity that conducts as a business for or on behalf of a customer: trading in money market instruments, foreign currency, foreign exchange, interest rate and index instruments, and other specified financial products; managing investment portfolios; and investing, administering, or managing funds or money on behalf of other persons. Includes any entity that is managed by an Investment Entity 10
Section 953(d) Under the FATCA Regulations, a non-us company that makes an election under section 953(d) to be taxed as a US company should be treated as a foreign entity, unless the company is licensed to do business in a state of the US Under section 953(d) Under FATCA Reporting Non-US company to be taxed as a US company A section 953(d) company under conditions mentioned below, should be treated as a US person under FATCA Such company is subject to reporting requirements under section 6047(d) (e.g. reporting under Form 1099-R) Reportable information Under the FATCA Regulations and certain jurisdictions regulations (e.g. Cayman Islands FATCA Guidance Note and Bermuda FATCA FAQ), a section 953(d) company should be treated as a US person under FATCA if: 1. it is a specified insurance company and is licensed to do business in any State or 2. it is not a specified insurance company and is not licensed to do business in any State In this regard, for an insurance company that is a specified insurance company but is not licensed to do business in any State, it would be considered a foreign entity for FATCA purposes Sum of a life insurance contract s cash value or an annuity contract s account balance or value and any amount paid under the contract as a gross distribution 11
FATCA reportable accounts and account holders
Reportable accounts Cash Value Insurance and Annuity Contracts An insurance contract issued or maintained by an insurance company, a holding company of an insurance company, or a financial institution if the contract is a cash value insurance contract of an annuity contract Under the FATCA Regulations, a cash value insurance contract is an insurance contract (other than an indemnity reinsurance contract and certain term life contracts) that has an aggregate cash value greater than US$50,000 at any time during the calendar year. Cash value is the amount, unreduced by any charge or policy loan, that (1) is payable under the contract to any person upon surrender, termination, cancellation, or withdrawal or (2) any person can borrow under or with regard to the contract Cash value does not include death benefits, personal injury or sickness benefits, certain refunds of premium, certain policyholder dividends, and return of certain advance premiums or deposits In addition, under the FATCA Regulations, an annuity contract is (1) a contract under which the issuer agrees to make payments for a period of time determined in whole or in part by reference to the life expectancy of one or more individuals, or (2) a contract that is considered to be an annuity contract in accordance with the law, regulation, or practice of the jurisdiction in which the contract was issued, and under which the issuer agrees to make payments for a term of years Preexisting individual accounts that are cash value insurance contracts or annuity contracts are not included as reportable accounts for FATCA purposes if the law or regulations of the US or the local jurisdiction prevent the sale of such contracts to US residents Depository Accounts Any depository account maintained by an FI Under the FATCA Regulations, any amount held by an insurance company under a guaranteed investment contract or under a similar agreement to pay or credit interest thereon or to return the amount held is also considered a depository account for FATCA purposes 13
Reportable accounts (cont.) Custodial Accounts Any custodial account maintained by an FI Certain Debt and Equity Issued by FFIs Equity or debt interests (other than regularly traded interests) in investment entities, and certain enumerated categories of interests in holding companies, treasury centres and other financial institutions 14
Account holders The FATCA Regulations provide that each person who is entitled to access an insurance or annuity contract s value, i.e. through a loan, withdrawal, or surrender, or change a beneficiary under the contract, is an account holder If these rights are not available under the contract, then the named owner of the contract, as well as any person who is entitled to receive a future payment under the contract, are the account holders Upon payment, each person entitled to receive a payment is treated as an account holder for FATCA reporting purposes 15
Remediation
Steps to remediation 1 Step 1: Accounts that fall within the scope of FATCA 2 Step 2: Determination of account type Individual account Entity account 3 Step 3: Value or balance of the account, with applicable currency and aggregation requirements Lower value individual account High value individual account Account with no review required until crosses greater threshold 4 Step 3: Value or balance of the account, with applicable currency and aggregation requirements Specified US person Specified US person FFI NPFFI Active NFFE Passive NFFE with controlling US person 17
Lapse in period for remediation IGA Model 1 No documentation provided to refute US status within the time period allotted for documents to be provided, must treat client/customer as US reportable accounts High-value individuals one year to identify and document FATCA status (generally by 30 June 2015) Lower-value individuals two years to identify and document FATCA status (generally by 30 June 2016) For pre-existing client/customer that becomes a high-value individual, six-months from year of change to cure IGA Model 2 No documentation provided to refute US status within the time period allotted for documents to be provided, must treat client/customer as US reportable accounts Non-consenting US reportable accounts (i.e., Pre-existing account holders who are determined to be US (or have uncured US indicia), but have not consented to reporting) are treated as Recalcitrant Accounts for purpose of reporting and withholding High-value individuals one year to identify and document FATCA status (generally by 30 June 2015) Lower-value individuals two years to identify and document FATCA status (generally by 30 June 2016) For pre-existing client/customer that becomes a high-value individual, six-months from year of change to cure Note: If the number of Recalcitrant Account Holders does not decrease over a period of time, the PFFI could be viewed as defaulting on its FFI Agreement and lose its status as a PFFI 18
Alternative procedure IGA Netherlands Under Annex I Section VI.G of certain jurisdictions IGAs, an alternative procedure is provided that requires within one year of the IGA entering into force either documentation or closure of accounts opened after the Determination Date and before the IGA enters into force FFIs are required to close the undocumented accounts after one year from the date the IGA was in force Such accounts may also have to be reported It is necessary to check and confirm whether a particular jurisdiction has implemented such requirements locally The Netherlands IGA entered into force on 9 April 2015 as per the Treasury Website. The Netherlands IGA has not included the Section VI.G under Annex I to require closure of undocumented accounts within one year of the IGA entering into force. No specific guidance has been given on the current issue. FIs are advised to monitor the local implementation of FATCA in Netherlands United Kingdom The alternative procedure is not included in the UK IGA India The Indian FATCA guidance 5.9.3 and 5.9.5 stated that under the alternative procedures, undocumented accounts should be closed AND reported The deadline for closing and reporting these accounts will be 31 August 2016 Singapore The Singaporean tax authorities stated that under alternative procedures, undocumented accounts should be closed. The deadline for closing these accounts was 18 March 2016 Sweden The Swedish tax authorities stated that under alternative procedures, undocumented accounts should be closed. The deadline for closing these accounts was 31 March 2016 Other jurisdictions FIs are advised to monitor closely whether the jurisdictions that they have business operations in will implement the abovementioned rules locally in order to be compliant with FATCA 19
Onboarding
Due diligence for new accounts Account type New individual exemptions Initial due diligence requirements Carve out for de minimis accounts: Depository Accounts and Cash Value Insurance Contracts each with a balance or cash value less than or equal to US$50,000 Individual Entity New Individual accounts New entity accounts Obtain Self-Certification from account holder to determine status Typically, 90 days from the date of account opening to obtain Self-Certification, but can also be required before account can be opened Where a Pre-existing account holder opens a New Account with same FI there is potentially no requirement to re-document the account holder if: (i) appropriate due diligence requirements have already been carried out or in process; and (ii) the accounts are treated as linked for due diligence requirements and reporting. Aggregation rules would apply Make reasonable determination of the status of the account holder In nearly all cases, obtain Self-Certification from account holder to determine status New entity accounts have no threshold exemption, thus no need to apply aggregation rules or currency conversion rules 21
W-8BEN-E Form (April 2016) Selected Changes Part I Identification of Beneficial Owner Chapter 3 Status (Line 4): addition of box for International organisation Chapter 4 Status (Line 5): Account that is not a financial account: addition of status. A financial account does not include: - Certain savings and retirement accounts that are tax-favored - Certain term life insurance contracts - Certain annuity contracts Part III Claim of Tax Treaty Benefits In order to claim treaty benefits, an entity must satisfy three requirements - Be a resident of the treaty country and identify that country on Line 14a - Derive and beneficially own the item of income and indicate such by checking the box on Line 14b - Satisfy the LOB article of the treaty and indicate how it meets those requirements by checking the appropriate LOB box delineated under Line 14b Part XXIX Substantial US Owners of PNFFE If the NFFE is disclosing controlling US persons to a Model 1 FFI or a Reporting Model 2 FFI, it can provide that information in the lines provided for substantial US owners of a passive NFFE 22
Reporting
Reportable information IGA Model 1 Reporting Model 1 FFIs are required to report annually to their local tax authorities - The name, address, and US TIN of each specified US person that is an account holder of the account - The name, address, and US TIN (if any) of a non-us entity holder of a US reportable account, and each controlling person of the non-us entity that is a specified US person - The account number, the account balance or value (indicating currency), and information regarding payments made or credited to the account during each year. (i.e. UK Guidance Notes require reporting of the total amount of gross interest paid or credited to a depository account) In addition, a reporting Model 1 FFI must report its name and GIIN For each of 2015 and 2016, reporting Model 1 FFIs are required to report to their local tax authorities the name of each NPFFI to which they have made payments and the aggregate amount of such payments. Additional requirements apply with respect to a reporting Model 1 FFI that makes withholdable payments or acts as an intermediary with respect to payments FATCA Regulations and IGA Model 2 Reporting Model 2 FFIs and PFFIs generally are required to report annually to the IRS: - The name, address, TIN, account number, account balance or value of the account (indicating currency) the information on payment made with respect to the account for accounts held by Specified US Persons - The name, address, and US TIN (if any) of a non-us entity holder or a US reportable account, and each substantial US owner of the non-us entity - The account number, the account balance or value (indicating currency), and information regarding payments made or credited to the account during each year In addition, a reporting Model 1 FFI must report its name and GIIN For each of 2015 and 2016, reporting Model 1 FFIs are required to report the name and address of each NPFFI to which they have made non-us source payments and the aggregate amount of such payments 24
Withholding
Withholdable payment PFFI agrees to impose the 30% withholding to a NPFFI or a recalcitrant account holder on Any withholdable payment Withholdable Payment Any payment of interest, dividends, premiums, annuities, and other fixed or determinable annual or periodical gains, profits, and income ( FDAP income ), if such payment is from sources within the US Certain financial payments specifically included: Payments in connection with lending transactions, forwards, futures, options, swaps, insurance premiums, cash value insurance or annuity payments, dividends, interest, investment advisory fees, custodial fees, and bank or brokerage fees AND Any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the US that occur after 31 December 2016 Exception: Withholdable payment exclusions and Grandfathered obligations The FATCA Final Regulations reserve the right to impose FATCA withholding on foreign pass thru payment (from 1 January 2019 at the earliest) IGA largely removes the withholding obligation on income received by FATCA Partner FIs (except for foreign NPFFIs) 26
US Source premiums/annuities The source of insurance premiums/annuities is generally determined by the location of the insured risk Insurance premiums/annuities are subject to 30% US withholding tax (a) if: It is not effectively connected with a non-us insurer s US trade or business (if any) It is from issuing or reinsuring any insurance or annuity contract that insures against a US risk Is not subject to federal excise tax (there is exception that the 30% US withholding tax should not apply even if federal excise tax is not applicable e.g. tax treaty relief) Note: (a) Chapter 3 withholding could be reduced under tax treaty Insured party with US risks Premium Brokers Premium Non-US insurer If Necessary, Information Reporting + Tax Withheld US IRS 27
Grandfathered obligations Premiums paid on a grandfathered obligation are not withholding payments under FATCA. A grandfathered obligation is any obligation outstanding on 1 July 2014 Qualify as Obligations Cannot Qualify as Obligations Payments made on grandfathered obligations A contract that allows for substitution of a new individual as the insured individual or as the annuitant does not qualify for grandfather status Contracts under which the entire value is payable no later than upon the death of the insured Immediate annuities (both period certain and life contracts) are obligations that may be grandfathered Investment linked insurance contracts (i.e. separate account life products, are not eligible for grandfathered status) Investment linked annuity contracts, (i.e. separate account annuity products) are not eligible for grandfathered status The IGA adopts (incorporates by reference) exceptions to the definition of withholdable payments Deferred annuity contracts are not eligible for grandfathered status 28
FATCA withholding flow FATCA Regulations US Withholding Agent (a) Withholding Tax IRS Withholding Statement Payments after FATCA withholding Participating FFI Payments after FATCA withholding Recalcitrant Account Holders NPFFIs Note: (a) US Withholding Agent applies FATCA withholding unless PFFI is a Qualified Intermediary that has assumed primary Chapter 3 withholding responsibilities 29
FATCA withholding flow Model 1 IGA US Withholding Agent (a) Withholding Tax IRS Withholding Statement Payments after FATCA withholding Reporting Model 1 FFI Payments after FATCA withholding NPFFIs Note: (a) US Withholding Agent applies FATCA withholding unless Reporting Model 1 FFI is a Qualified Intermediary that has assumed primary Chapter 3 withholding responsibilities 30
FATCA withholding flow Model 2 IGA US Withholding Agent (a) Withholding Tax IRS Withholding Statement Payments after FATCA withholding Reporting Model 2 FFI (b) Payments after FATCA withholding Non-consenting individual account holders NPFFIs Note: (a) US Withholding Agent applies FATCA withholding unless Reporting Model 2 FFI is a Qualified Intermediary that has assumed primary Chapter 3 withholding responsibilities. (b) A Model 2 FFI will not be required to perform FATCA withholding if it has complied with the reporting requirements outlined in the respective Model 2 IGA and the local tax authority turns over the account information to the IRS upon request. 31
Federal Excise Tax Developments
Federal excise tax rules Application of Code 4371 The excise tax is a transaction tax and is payable by any person who makes, signs, issues, or sells any of the documents and instruments subject to the tax, or for those whose use or benefit the same are made, signed, issued or sold Liability arises when the insurance or indemnity bond premium is paid Code 4371(1) Imposes a 4% excise tax on the premiums paid to a foreign insurer on a policy of casualty insurance or an indemnity bond by either (i) a US corporation or (ii) a foreign corporation engaged in a trade or business in the US with respect to insurance or indemnity bond protecting against hazards, risks, losses or liabilities with the US Code 4371(2) Imposes a 1% excise tax on premium paid to a foreign insurer on a policy issued with respect to the life or hazards to the person of a citizen or resident of the US Code 4371(3) Imposes a 1% excise tax on reinsurance premium paid to a foreign insurer on a policy that insured against the risks as described in section 4371(1) or (2) The excise tax does not apply to the extent that the premium paid to the foreign insurer is effectively connected with the conduct of a US trade or business by the insurer (unless the premium is exempted from US tax pursuant to an income tax treaty) 33
Validus Reinsurance, Ltd. V. United States Appellate Decision Facts of the Case Validus was a Bermuda reinsurance company not engaged in a trade or business in the US Validus reinsured US risks written by a US Insurance Company Validus purchased retrocession policies from other insurers not engaged in a trade or business in the US. It received payments if it had to make a payment under the initial reinsurance policy Question Presented Whether the excise tax on reinsurance applied to wholly foreign retrocessions US Risks US Insurance Company Non-US Reinsurer Non-US Reinsurer US Non-US Reinsurance Retrocession (1% FET) 34
Validus Reinsurance, Ltd. versus US (cont.) Appellate Decision Rationale The judicial doctrine of the presumption against extraterritoriality which means the law only applies within the territorial jurisdiction of the United States unless contrary intent of Congress is clearly expressed The burden was on the IRS to establish that Congress intended to apply the insurance excise tax outside the United States The IRS failed to illustrate Congressional intent that the excise tax applied abroad The Court noted that if the tax did apply extraterritorially, the tax could compound into perpetuity with creation of every new reinsurance contract after the first-level reinsurance contract, despite the absence of a contractual or other legal relationship with any US entity Result The court held the excise tax on reinsurance did not apply to wholly foreign retrocessions It is held in Validus case that the federal excise tax ( FET ) does not apply to retrocessions between two foreign insurers, regardless of whether the underlying risks are US based. The IRS issued Rev. Rul. 2016-3 in December 2015, which revokes its prior position on cascading FET issues. These two developments seem to end the controversial cascading insurance FET as articulated by the IRS in Rev. Rul. 2008-15 Companies that have not submitted claims for refund of previously paid excise tax on a cascading basis should do so before the applicable statute of limitations expires 35
Treaty exemptions Policies issued by a foreign insurer that is a resident of a treaty country may be exempt from the FET. There are qualified exemption and unqualified exemption Qualified exemptions Unqualified exemptions Counties with current qualified treaty exemption with the US include Cypress, Finland, France, Germany, India, Ireland, Israel, Italy, Japan, Luxembourg, Mexico, Netherlands, Spain, Sweden, Switzerland and United Kingdom Counties with unqualified excise tax emption include United Kingdom (through 31 December 2003), Hungary, Romania and the Soviet countries of Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyz Republic, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan Qualified exemption requirements Compliance with the anti-conduit provision; and A valid closing agreement (or proof that the residency and Limitation on Benefits requirements are satisfied) Unqualified exemption requirements The foreign insurer or reinsurer is required to be a resident of the treaty country either during the last three months of the calendar year preceding the calendar year in which the taxable period occurs, or during the taxable period 36
Q&A
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