Show Me The Money: Foreign Asset Reporting of Equity and Cash Incentive Awards SPEAKERS Valerie H. Diamond, Baker & McKenzie LLP, San Francisco, CA (US) Narendra Acharya, Baker & McKenzie LLP, Chicago, IL (US) Richard R. Reilly, Baker & McKenzie LLP, New York, NY (US)
Agenda: 1. Introduction 2. Country-specific examples, including US FATCA 3. Best practices for employee communications
What s Driving New Laws Requiring Foreign Asset Reporting? The Headlines! Examples of Wealthy Persons Hiding Assets Offshore and Not Paying Taxes on the Income Swiss bankers accused of conspiring with American clients to hide more than $420 million from the tax-collecting U.S. Internal Revenue Service were indicted. Bankrupt real estate mogul Hans Thulin had as much as $17 million sheltered offshore at a time when the Swedish government was pursuing him in court for millions of dollars in unpaid debts. Five directors of Banco Amambay, owned by Paraguay's leading candidate in this month's presidential election, Horacio Manuel Cartes, created a secret bank in the Cook Islands with no building and no staff. Crocodile Dundee star Paul Hogan is accusing his once-trusted tax adviser of absconding with $34 million he helped Hogan hide offshore in Switzerland. Baron Elie de Rothschild, the late guardian of the French banking dynasty, built an elaborate offshore empire in the Cook Islands involving at least 20 trusts and 10 holding companies, while managing to keep all assets and beneficiaries secret. One of the entities was named, appropriately, Anon Trust. Shares of an offshore company were held in trust for the daughters of one of Africa's most popular pastors, televangelist Rev. Chris Oyakhilome. Countries Need Additional Tax Revenues Offshore Assets Seen as Potential New Revenue Source
Argentina: In April 2012, General Resolution 3312, established significant reporting requirements for any Argentine party to a trust (settlor, beneficiary, trustee, and so on), regardless of whether the trust is established under the laws of Argentina
France: New foreign trust reporting requirements Review with the trustee whether the trustee is subject to reporting of the trust in France (i.e., annual reporting and reporting of any modification of the trusts including changes to the beneficiaries, assets of the trust, etc.); reporting includes details on beneficiaries, assets of the trusts, terms of the trust Failure to report could trigger a penalty equal to 5% of the assets of the trust Review whether exemption from reporting is available under French law and doctrine Shares held in offshore account (whether open or closed during year) must be declared on employee s annual tax return. Significant penalties if failure to report
India: Effective April 1, 2012, Indian residents must report all non-indian bank accounts and other offshore financial interests Reporting requirement applied beginning with the 2011/2012 Indian tax year (ending on March 31, 2012) Reporting is required regardless of amount Offshore financial interests undefined -- likely includes equity awards (vested/unvested)
Italy: Italian residents are required to report: (1) any transfers of cash or shares to or from Italy exceeding 10,000 (2) any foreign investments or investments held outside of Italy at the end of the calendar year, including vested stock options, exceeding 10,000 if such investments (cash or stock) may result in income taxable in Italy, and (3) the amount of the transfers made abroad or from abroad to Italy or vice versa which have had an impact during the calendar year on their foreign investments or investments held outside of Italy Under certain circumstances, Italian resident employees may be exempt from the above reporting if the transfer or investment is made through an authorized broker resident in Italy
Japan: New Employee Offshore Asset Reporting Report is due by March 15th for assets held during the prior calendar year Japanese residents must report offshore assets to extent exceed 50 million (approximately US$510,000/ 390,000)
Korea (Pending): Foreign Financial Account Report Rule Korean residents must declare all overseas financial accounts to the Korean tax authority and file a report if the value of such accounts exceeds KRW 1 billion (approximately US$900,000/ 700,000) Existing rule currently covers deposits, loans and savings accounts, and if the proposed rule is enacted, reporting would be required of all overseas financial assets (e.g., bonds, equity securities, beneficiary certificates, derivatives, depositary receipts, mutual funds and other similar foreign securities)
Spain: Reporting obligations for employees As of January 1, 2013, there are 3 reporting obligations for employees: 1. Dirección General de Comercio e Inversiones (DGCI) 2. Bank of Spain 3. Spanish tax authorities (tax form 720)
Spain: Reporting obligations for employees (cont d) DGCI: Any foreign shares acquired under any equity plan must be declared. If the broker/bank where the shares are deposited is in Spain, it will do the declaration. If not, the employee must do it After the initial declaration of the shares, the declaration must be filed annually, each January, while the shares are owned Any sale of shares also must be declared
Spain: Reporting obligations for employees (cont d) Bank of Spain: Employees must declare electronically any foreign securities accounts (including brokerage accounts held abroad), as well as the shares held in such accounts, if certain thresholds are exceeded Value of the transactions during the prior tax year or the balances in such accounts as of December 31 of the prior tax year: Less than 1 million: no obligation to declare unless specifically requested by the bank of Spain 1 million - 100 million: annual reporting 100 million - 300 million: quarterly reporting Over 300 million: monthly reporting
Spain: Reporting obligations for employees (cont d) Spanish tax authorities (tax form 720): Shares and bank accounts outside of Spain whose value as of December 31 exceeds (for each type of asset) 50,000 must be reported unless: Subsequent reporting is only required if the value of each class of asset increases over 20,000 Report due by March 31 of the following year Severe penalties (up to 5,000 per data or group of data not reported or incorrectly reported, with a minimum of 10,000) If the reporting obligations are not fulfilled, there are negative tax effects: Undeclared assets will be considered as a non-justified capital gain taxed at progressive tax rates (up to a 56%) deemed to be obtained in the last FY which has not exceeded the statute of limitations
United States: Two overlapping laws require US persons to report non- US assets Report of Foreign Bank and Financial Accounts (FBAR) under Bank Secrecy Act Foreign Account Tax Compliance ACT (FATCA) under Internal Revenue Code Some assets reported separately under both FBAR and FATCA Reports filed on different forms with different agencies at different times
United States: FBAR In effect since 1970 Largely ignored until new regulations issued in 2011 Report filed with US Treasury Department on Form TD F 90-22.1 June 30 due date; no extensions FBAR applies to US taxpayers who have: A financial interest in a non-us financial account Signature authority over a non-us financial account Accounts have balance in excess of $10,000 (approximately 7,600) at any time
United States: FBAR Financial Account Bank account Securities account Depositary account Certain cash value insurance and annuity policies Mutual fund Futures, options, commodities account FBAR Application to Stock and Other Compensation May apply to non-us brokerage accounts Non-US Plan administration/record keeping accounts?
United States: FATCA Individual US taxpayers must self-report to the IRS non-us assets that exceed certain limits on new Form 8938 Form 8938 attached to an individual s personal income tax return each year beginning with the 2011 tax year Due date for 2012 tax year was April 15, 2013, unless extended by taxpayer Significant penalties for non-compliance
FATCA Filing Thresholds
United States: Assets Required to be Reported Two types of non-us financial assets subject to FATCA reporting: 1. Any financial account maintained by a non-us financial institution 2. Non-US financial assets held outside of a US or non-us financial account
United States: Assets Required to be Reported (cont d) Equity awards made by non-us issuer not held in a financial account required to be reported: Stock issued by a non-us issuer Stock purchase rights Stock options and SAR s Restricted stock awards Restricted stock units Performance units and performance shares Capital or profits interest in a partnership Cash incentive compensation awards from non-us entity
United States: Assets Required to be Reported (cont d) Other non-us assets required to be reported: Non-US pension and deferred compensation Deferred bonus and incentive pay from non-us entity Interest in certain non-us trusts and estates Debt securities of a non-us issuer Non-US assets held by a disregarded entity Options or derivatives to acquire any of the above
United States: Assets Not Required to be Reported Non-US assets held in a US financial account e.g., Non-US stock held in US brokerage account Financial account of a US branch of a non-us bank or insurance company Financial account of a non-us subsidiary of a US financial institution An interest in a social security, social insurance, or similar non-us government program Most non-us severance pay Directly-held non-us real estate Directly-held non-us currency, commodities and precious metals, art, antiques, jewelry, automobiles, collectibles
Best Practices: Whose obligation it it? What role should employer/issuer take in assisting the employee to report? Does it make a difference if reporting applies to options/rights vs. shares? What role should the service provider/ administrator/trustee take? Is there a downside to informing employees?
Company Examples US participants EU participants Other participants US domiciled, private corporation No non-us shares; unlikely to have foreign assets/bank accounts EU (France, Italy, Spain) reporting Argentina, India, Israel, Korea, Japan reporting EU domiciled, private corporation FATCA & FBAR EU (France, Italy, Spain) reporting* Argentina, India, Israel, Korea, Japan reporting US domiciled, US public corporation No non-us shares; unlikely to have foreign assets/bank accounts EU (France, Italy, Spain) reporting Argentina, India, Israel, Korea, Japan reporting US domiciled, EU public corporation No non-us shares; may be subject to FBAR EU (France, Italy, Spain) reporting Argentina, India, Israel, Korea, Japan reporting EU domiciled, EU public corporation FATCA & FBAR EU (France, Italy, Spain) reporting* Argentina, India, Israel, Korea, Japan reporting EU domiciled, US public corporation FATCA & FBAR? * Unless domiciled in same EU jurisdiction. EU (France, Italy, Spain) reporting* Argentina, India, Israel, Korea, Japan reporting
Best Practices for Communications: Special Written Communication to Employees at Year End or on Grant of Awards Including Notification in Grant Agreement Including Disclosure in Prospectus Special Meetings or Webinars Access to Tax Advisor Tax Equalization/Mobility Counseling
Sample FATCA Notice: We wanted to alert you to new reporting obligations that may apply to you under IRS regulations that were recently adopted under the Foreign Account Tax Compliance Act ( FATCA ). US employees of Company X ( Company X ), as well as other Company X employees located outside of the US who are US taxpayers, who hold shares in Company X, options to purchase Company X shares or other equity awards (such as RSUs) covering Company X shares may be required to report their Company X equity holdings. Affected individuals are required to report the value of specified foreign financial assets (which include equity holdings relating to shares issued by a non-us issuer) on IRS Form 8938, with the individual s income tax return (Form 1040) (Form 8938 may be obtained at: http://www.irs.gov/pub/irspdf/f8938.pdf.) The following sets forth some basic information about these new filing requirements. These reporting obligations apply to the extent the aggregate value of these holdings (when aggregated with other specified foreign financial assets held by the employee) exceed certain thresholds. The threshold amounts of the value of the Company X equity holdings (and other foreign assets) that trigger the reporting obligations depend on the filing status of the individual (e.g., unmarried/married filing separately) and whether the individual is considered to reside in the US or outside of the US. The first Form 8938 needs to be included with the Form 1040 for 2011, which is required to be filed by April 16, 2012, unless an extension is obtained. The reporting requirements generally apply to US taxpayers who file a Form 1040. Shares issued by a non-us issuer that are held in a financial account maintained by a U.S. financial institution (such as a brokerage firm) are not subject to these reporting requirements. However, it is not clear under current guidance whether rights to acquire shares, such as options or RSUs (i.e., as opposed to the underlying shares), are eligible for this exception. The initial penalty for non-compliance is US$10,000. Failure to comply for more than 90 days after receiving notification from the IRS of the failure to comply will result in an additional penalty of US$10,000 for each 30-day period (or fraction thereof), with a maximum penalty of US$50,000.
Questions?
Valerie H. Diamond (415) 576-3086 Valerie.Diamond@bakermckenzie.com Narendra Acharya (312) 861-2840 Narendra.Acharya@bakermckenzie.com Richard R. Reilly (212) 626-4468 Richard.Reilly@bakermckenzie.com
Disclaimers This presentation was prepared for general information purposes for clients and friends of Baker & McKenzie LLP and should not be considered or relied on as legal advice or an opinion on specific facts. This presentation is not intended to create, and receipt of this presentation does not constitute, a lawyer-client relationship. IRS Circular 230 Disclosure: Pursuant to requirements related to practice before the Internal Revenue Service, any tax advice contained in this presentation (including any attachments) is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter, including, without limitation, any transaction or matter that is contained in this presentation.