U.S. Foreign Account Tax Compliance Act (FATCA): Compliance by Non-U.S. Retirement/ Deferred Compensation Programs August 2013 Summary The U.S. Foreign Account Tax Compliance Act (FATCA) was enacted in 2010 to combat federal income tax evasion by U.S. taxpayers through the use of accounts at foreign financial institutions. The intent of FATCA is to ensure that U.S. taxpayers report their non-u.s. financial accounts and related investment income/capital gains to the Internal Revenue Service (IRS), the U.S. federal tax authority. This tax law will have a significant impact on all multinational employers, inside and outside the financial sector. Each of their non-u.s. long-term benefit programs may be subject to FATCA. The law and applicable regulatory guidance (along with certain intergovernmental agreements) casts a very broad net that may require multinational companies to report information on their non-u.s. long-term employee benefit plans such as pension plans, deferred compensation arrangements, and non-u.s. stock programs, directly or indirectly to the IRS. If a program fails to comply with FATCA reporting (and is not the subject of an intergovernmental agreement or exempt under the FATCA rules), U.S. tax will be withheld at the rate of 30% on its U.S.-source income, including certain capital proceeds. This withholding tax is applicable, regardless of whether the benefit program actually covers any U.S. taxpayers. Multinationals will need to determine which of their plans is exempt from FATCA, and, in the absence of an exemption or other relief, identify the plans for which information must be reported. Multinational employers should consider taking the following actions to determine their compliance strategy for FATCA: Create/update an inventory of the design, financing, and administrative arrangements for their non-u.s. long-term benefit plans retirement, deferred compensation, non-u.s. stock, and other equity plans; Copyright 2013 Aon plc 1
Review each long-term employee benefit plan to determine the extent to which FATCA applies. Such a review should include the applicability of FATCA-based exemptions and the contents of tax treaties and intergovernmental agreements. Redesign plans if necessary; and Register benefit plans that are covered but not exempted using the IRS s web portal beginning August 19, 2013. FATCA The IRS has long collected information from U.S. financial institutions on the financial transactions of U.S. taxpayers. In addition, certain non-u.s. financial information historically has been available to the IRS through a network of international tax treaties and bilateral agreements that provide for the exchange of tax enforcement information. However, these international agreements have only yielded a fraction of the information sought by the IRS on the international financial assets and transactions of U.S. taxpayers. When fully implemented, FATCA will generally require foreign financial institutions to report information about U.S. accounts to the IRS or potentially be subject to a withholding tax on their income from U.S. sources. A U.S. account is a financial account held by or for a U.S. taxpayer, or by or for a foreign entity in which a U.S. taxpayer has a substantial ownership interest. A foreign financial institution (FFI) includes any non-u.s. financial account structure accounts held by banks, custodians, asset managers, investment funds, brokers, and insurers (including captives), pension programs, deferred compensation programs, non-u.s. employee/executive stock programs etc., unless the account or institution is specifically exempt from FATCA s scope. Certain FFIs are exempt from FATCA reporting because U.S. authorities consider them low risk from a tax evasion standpoint. FFIs that are not exempt (or otherwise excluded) and do not comply with the FATCA reporting requirements will be subject to a 30% withholding tax on potentially all their U.S.-source payments. The withholding tax requirements are scheduled to be phased in beginning on July 1, 2014. The FATCA rules are complex. Every employer that sponsors a non-u.s. retirement or deferred compensation program under which a U.S. taxpayer can receive benefits must be aware of the potential application of FATCA. The danger is that some benefit programs may be treated as non-exempt FFIs, which may have a significant impact on the program s U.S. tax reporting and withholding obligations. The first step in FATCA compliance for non-exempt FFIs is registration with the IRS (see below). Beginning in July 2014, FFIs are generally required to report the identity of each known U.S. accountholder and the balance or value of his/her accounts. Over the following years, additional reporting obligations are scheduled to be phased in, and, eventually, FATCA reporting is expected to include the income earned on the accounts plus the gross proceeds from broker transactions. Copyright 2013 Aon plc 2
Registration With the IRS FFIs that do not qualify for an exemption or exclusion from the FATCA reporting are required to register with the IRS and sign a participating FFI agreement. Registration must occur by April 25, 2014 in order for the FFI to be listed as compliant when the initial withholding obligations become effective (i.e., for payments made on or after July 1, 2014). Failure to register may result in the FFI being subject to a 30% U.S. withholding tax on U.S.-source payments. The IRS has established an online web portal (the FATCA Registration Portal) to enable FFIs to register with it. The portal is designed to provide information, along with a paperless registration process. The portal may be found by clicking on this link: http://www.irs.gov/businesses/corporations/foreign-account-tax-compliance-act- (FATCA) As a result, sponsors of non-u.s. retirement or deferred compensation (and other affected) programs must understand and examine their programs in order to determine whether they qualify for a FATCA exemption and, if not, whether they need to be registered with the IRS. In conducting this analysis, it will be important to review the FATCA exemptions and exclusions that may apply, as well as any applicable intergovernmental agreement(s). Each of these is briefly discussed below. Intergovernmental Agreements Special rules apply if a FATCA intergovernmental agreement (IGA) is signed between the United States and the country in which an FFI is established. In many cases, another country s laws may preclude a local FFI from reporting financial account information directly to the IRS. To address this issue, several countries have entered into bilateral discussions with the U.S. authorities to conclude an IGA that provides a workable and comprehensive approach to FATCA compliance on behalf of their FFIs. There are two model IGAs. Under a Model 1 IGA, the local FFIs identify and report information about U.S. accounts to their own government authorities that then pass this information on to the IRS. Under a Model 2 IGA, the local FFI is permitted to register with the IRS and identify and report information about U.S.-owned accounts directly to the IRS. Within both model IGAs, a separate section identified as Annex II provides for exemptions and exclusions from the FATCA reporting requirements for certain local FFI types or structures, including some that relate to retirement and deferred compensation programs. For example, the U.S. and U.K. authorities have entered into a Model 1 IGA (Agreement between the Government of the United States of America and the Government of the United Kingdom and Northern Ireland to Improve International Tax Compliance and Implement FATCA). Annex II of the agreement refers to specific types of U.K. retirement programs and savings vehicles that are exempt from the FATCA reporting requirements (specifically, they are exempt or deemed-compliant ). The agreement states that certain information about these plans and accounts will be exchanged between the U.S. and U.K. tax authorities. Consequently, there is no need for these U.K. retirement and deferred compensation programs to register with the IRS. Copyright 2013 Aon plc 3
To date, IGAs have been signed between the United States and each of the following countries: Denmark, Germany, Ireland, Japan, Mexico, Norway, Spain, Switzerland, and the United Kingdom. Employers with retirement and deferred compensation programs in these countries should refer to the local IGA to determine their respective program identification and reporting obligations. U.S. authorities indicate that negotiations are being held with as many as 70 additional countries to implement IGAs. Aon Hewitt is continuing to monitor these and other developments regarding the global implementation of FATCA. Specific Exemptions Available for Certain Retirement Programs In addition to the IGAs described above, the final FATCA regulations describe a number of specific exemptions available for a non-u.s. retirement program with respect to its FATCA status and reporting and withholding requirements. These retirement program exemptions are as follows: Retirement Fund Covered by a Tax Treaty: This exemption may apply if the United States has an income tax treaty in force with the country in which the retirement fund is located. For the exemption to apply, the retirement fund must meet the conditions that entitle it to the benefits of the treaty with respect to any amounts it derives from sources within the United States. Broad Participation Retirement Fund: This exemption arises if the fund is established to provide retirement and related benefits (e.g., disability and death benefits) to current or former employees and is regulated under the law of the country where it is located. There are a number of additional requirements (e.g., at least 50% of total contributions must come from sponsoring employers and no more than of 5% of the fund s assets may be attributable to any single beneficiary). Narrow Participation Retirement Fund: This exemption may apply if the fund is established to provide retirement and related benefits to fewer than 50 participants. There are a number of additional conditions, including contribution limits. Also, individuals who are not residents of the country where the fund is established or operates cannot be entitled to more than 20% of the fund s assets. Retirement Fund Similar to a U.S. Qualified Plan: This exemption applies if the fund meets the requirements of Internal Revenue Code section 401(a), except the plan is not funded by a trust that is created or organized in the United States. Investment Vehicle Exclusively for Retirement Funds: This exemption applies if the fund is established exclusively to earn income for other exempt retirement funds and accounts. Retirement Fund for Employees of Governmental and Other Exempt Entities: This exemption applies if the fund is established to provide retirement and related benefits for the employees of a foreign government (or political subdivision), an international organization (or wholly owned agency), a foreign central bank, the government of a U.S. territory, or a related organization. Tax-Favored Retirement Account Subject to Contribution Limits and Other Restrictions: This exemption applies if the account is registered or regulated under the law of the country where the account is established or operates as a tax-favored personal retirement account or part of a retirement or pension plan. Annual information reporting to the relevant tax authorities must be required for the account. There are a number of additional conditions, including limits on contributions and restrictions on the right to make withdrawals for the exemption to apply. Copyright 2013 Aon plc 4
Next Steps Companies that sponsor non-u.s. retirement, deferred compensation, and other FATCA-relevant programs must evaluate their exposure under FATCA and develop an effective response strategy, which may take several months to implement. Plan trustees and custodians, as well as the investment vehicles involved in holding and managing the assets for these plans, also will need information and instructions in order to meet FATCA requirements. Some clarifications are still pending, such as the content of pending IGAs. Nonetheless, now is an excellent time to create and/or update a global database of non-u.s. retirement, deferred compensation, stock programs, and other FATCA-relevant benefit and compensation programs in preparation for FATCA s compliance planning and final implementation. Among the key actions that multinational employers should consider are the following: Develop a detailed inventory of benefit programs worldwide with potential FATCA exposure; Evaluate each program with respect to the FATCA requirements; Review the status of relevant signed (and planned) IGAs; Determine if a FATCA exemption is available and prepare any necessary documentation to confirm the application of the exemption; For non-exempt FFIs, determine an appropriate FATCA compliance strategy, which may involve restructuring or redesigning plans in some cases; and Work with partner FFIs (e.g., plan trustees and/or custodians) to assure the FATCA requirements are met for each affected program. * * * Aon Hewitt s international and legal consultants are available to assist multinational clients with planning their FATCA strategy for benefits and compensation and in implementing the new FATCA reporting requirements. Please contact your consultant for additional information and planning advice. Copyright 2013 Aon plc 5
About Aon Hewitt Aon Hewitt is the global leader in human resource solutions. The company partners with organizations to solve their most complex benefits, talent, and related financial challenges, and improve business performance. Aon Hewitt designs, implements, communicates, and administers a wide range of human capital, retirement, investment management, health care, compensation, and talent management strategies. With more than 29,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients and their employees. For more information on Aon Hewitt, please visit www.aonhewitt.com. Copyright 2013 Aon plc This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Hewitt's preliminary analysis of publicly available information. The content of this document is made available on an as is basis, without warranty of any kind. Aon Hewitt disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Hewitt reserves all rights to the content of this document. Copyright 2013 Aon plc 6