Foreign Account Tax Compliance Act (FATCA) Introduction As a global financial services organisation, it is necessary for Standard Bank to comply with the laws and regulations of many different authorities, including the United States (US) Foreign Account Tax Compliance Act (FATCA), which comes into effect on 1 July 2014. Standard Bank Group has committed its business lines, entities, and branches globally to become compliant with FATCA. The aim of FATCA is to ensure US taxpayers declare income received outside the US. To comply, financial institutions outside the US are required to implement robust procedures to identify customers who are US taxpayers and pass all relevant information about those customers and their investments to the tax authorities. Standard Bank s FATCA obligations We wish to advise all clients that we will be complying with the requirements of FATCA. Where an account has certain prescribed indicia of US status, such as a US mailing address, telephone number, or residency, Standard Bank must obtain documentation to confirm the status of the account holder as either US or non US. Individuals and entities that are identified as potentially being US residents may be contacted to provide both a self-certification and documentary evidence of country of residence to establish their FATCA status as US or non US. For further information on FATCA, kindly visit the website at www.irs.gov/fatca
Frequently Asked Questions about FATCA What is FATCA? The Foreign Account Tax Compliance Act (FATCA) is a new US tax law designed to prevent US taxpayers from avoiding tax by channelling US source income through non-us foreign financial institutions (FFIs) and off-shore investment vehicles so as to conceal their assets from the US Internal Revenue Service (IRS). The objective of FATCA is for the US Internal Revenue Service (IRS) to detect offshore tax evasion by US citizens or residents by requesting information about U.S. persons and imposing a withholding tax where the applicable documentation and reporting requirements are not met. Which Standard Bank customers does FATCA apply to? FATCA is broad in scope, being applicable not only to US individuals holding financial accounts at foreign financial institutions (FFIs), but also to companies, known as non-financial foreign entities (NFFEs), that have controlling persons who are US individuals i.e. those individuals who exercise ultimate control or ownership over an entity. What is withholding? Withholding refers to the 30% tax rate that will be imposed in certain circumstances by the IRS and deducted by US withholding agents from payments of US source income to undocumented US connected individuals and entities, as well as such payments to FFIs that do not comply with FATCA. What is US source income? US source FDAP income is defined as income deriving from sources within the US which are fixed, determinable, annual, or periodic income, and include any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income. Which Financial Institutions are affected by FATCA? Banks, custodians, broker dealers, transfer agents, insurance companies, investment entities, and funds, including unit trust funds, funds of funds, exchange-traded funds, private equity and venture capital funds, other managed funds, and hedge funds all qualify as FFIs under FATCA. If entities are not FFIs, then they must be Non-Financial Foreign Entities ( NFFEs ) and, depending upon the activity they undertake and the type of income they produce (active or passive), they may be classed as Active NFFEs or Passive NFFEs. Only Passive NFFEs have reporting obligations under FATCA (see below). Why would Standard Bank comply with FATCA? FFIs globally aim to comply with FATCA, despite it being a purely US regulation, for predominantly three reasons: to avoid having a 30% withholding tax, where applicable, imposed on US source income payments to their US financial account holders; to avoid the 30% withholding tax, where applicable, on all income and proceeds from their direct or indirect holdings in U.S. assets; to avoid local penalties applying where FFIs exist in jurisdictions which have signed model 1 intergovernmental agreements (IGAs) with the US. The US concept of withholding tax will not apply for the time being to FFIs in such jurisdictions (more below). What is a Model 1 Inter-Governmental Agreement? The IRS has entered into inter-governmental agreements ( IGAs ) with the tax authorities in a number of jurisdictions, for the mutual exchange of information in respect of the accounts held at financial institutions by their respective national client individuals and entities. This has been done to eliminate the constraints on such reporting which would otherwise apply under data protection laws, as local financial institutions report to their lead comptroller of taxes, who then reports that institution s clients to the US IRS. Standard Bank entities in South Africa, Mauritius, the United Kingdom, and Standard Bank Offshore will report under such Model 1 IGAs. Certain bank secrecy jurisdictions, such as Japan and Switzerland, have separately entered into a variation of the IGA, the Model 2 IGA, whereby FFIs in these countries will report directly to the US
IRS, but consent will need to be sought from customers at on-boarding to report this information to the IRS, as a prerequisite to opening such an account. What about Standard Bank entities not covered by an IGA? FFIs that are not incorporated in IGA jurisdictions will still be able to comply with FATCA by entering into an FFI Agreement with and reporting directly to the IRS. The majority of Standard Bank Rest of Africa entities will comply with FATCA via an FFI Agreement. What must Standard Bank do to comply? 1. Apply prescribed due diligence procedures to identify and classify the FATCA status of its individual and entity account holders as a US account, non-us account, recalcitrant account with US indicia or recalcitrant account that is a US Person (when the holder refuses to provide the required documentation), recalcitrant account without US indicia (applicable to certain high net worth individuals), or non-participating FFI. 2. Verify the FATCA status of US accounts by obtaining the necessary documentation. 3. Report annually: to the local tax authority under a Model 1 IGA; or directly to the IRS under an FFI Agreement. 4. FFI Agreement only, deduct and withhold the 30% tax: on payments to recalcitrant account holders (those who refuse to provide the required documentation); and on payments to non-participating FFIs; or provide the necessary information to the upstream withholding agent to perform the necessary withholding. 5. FFIs under an IGA are not required to withhold, nor should they experience withholding, provided that they comply with their local FATCA obligations 6. If foreign law prevents reporting of financial accounts, the FFI Agreement requires closing the account if a valid waiver of the law cannot be obtained from the account holder. What must Standard Bank report, and when? For 2014 FFIs must report in respect of US reportable and recalcitrant accounts (when the holder refuses to provide the required documentation): name, address, US TIN (where known), account number, and account balance. For 2015 reporting expands to include: income paid or earned during the year, gross proceeds for certain account types, and the name of each Non-Participating Financial Institution receiving payments and the total amounts paid (under an IGA) For 2016 reporting again expands to include: gross proceeds for all account types For 2017 reporting expands to include: passthru payments (this has yet to be defined by the IRS, but is likely to be calculated with respect to the FFIs US assets, and any other payment to the extent it is attributable to a withholdable payment). How does FATCA impact Standard Bank and its customers? In all jurisdictions, if Standard Bank remains compliant with its respective FATCA obligations, no withholding tax will apply on US source income payments on its financial accounts. In IGA Model 1 jurisdictions, withholding will not apply to US source income payments, though non-compliance and recalcitrance will be reported by the payer to the authorities. Neither is it a requirement to automatically exit recalcitrant accounts
in Model 1 jurisdictions (though firms may choose to). In Model 2 IGA jurisdictions, withholding will apply in the same way as for jurisdictions where FFI agreements apply (see below). In jurisdictions where Standard Bank Group FFIs have signed an FFI Agreement with the IRS such entities will need to: o report information necessary for withholding on recalcitrant accounts; and o ultimately close, transfer, or block such recalcitrant accounts. Does FATCA affect only customers who are US citizens? Unfortunately, no. In certain instances, where customers appear to be connected with the US, for example, by having a US residential address, postal address, or telephone number, FFIs will have to contact them to determine whether they are in fact a US Person or not. This will involve requesting the customer to provide the necessary documentation to confirm their FATCA status as US or non-us. Non US citizens may also be directly affected where an FFI is non-compliant with FATCA. Payers of US source income will withhold on all payments to that FFI s financial accounts and this will include both US and non-us persons. What is a Passive NFFE? It is not only individuals in their private capacity that are reportable by FFIs under FATCA. FFIs may report on entities as well, for example where they are non-participating FFIs who maintain financial accounts for US Persons or certain other entities called Passive NFFEs. The US controlling persons of passive non-financial foreign entities (NFFEs) include owners, directors, and signatories of such entities and are reportable via the FFI that maintains their financial accounts. Entities may be excluded from FATCA reporting. These include another NFFE the active NFFE and active NFFEs may include those entities whose stock is listed on a stock exchange and those that have less than 50% of their income or assets attributable to passive income. What are De Minimis Thresholds? The IRS has set minimum or de minimis thresholds in respect of which the aggregate balance of US financial accounts of an entity or individual that can be linked on a firm s systems by reference to common data elements becomes reportable under FATCA, absent any other exemption. Such aggregate balances or values above the following are reportable: $0 for new entity accounts; $250 000 for existing entity accounts; $50 000 for new and existing individual accounts; $250 00 for new and existing insurance and annuity contracts; and $1 000 000 for all previously exempt individual and entity accounts. What documents are required to determine FATCA status? Individuals and entities that are identified as potentially being US residents, and US Controlling Persons of entities identified as Passive NFFEs, will have to provide both a self-certification and documentary evidence of the country of residence or incorporation to establish their FATCA status as US or non US. Self-certification for individuals includes: Form W9 in the case of a US citizen or other US person; Form W8-BEN if not a US citizen or other US person; and Form W8-ECI claiming that income is effectively connected with the conduct of trade or business in the US. Self-certification for entities includes: Form W8-BEN-E; Form W8-ECI claiming that income is effectively connected with the conduct of trade or business in the US; and Form W8-EXP for entities that are exempt from FATCA withholding, such as foreign
governmental organisations and central banks. Documentary evidence includes: Certificate of residence; Official government issued document, such as an ID document; Third party credit report; Financial Statements; and Letter provided by a government agency. What is automatic exchange of information? The United States has entered into negotiations with more than 50 jurisdictions to enter into intergovernmental agreements (IGAs) for the bilateral exchange of information on these countries respective citizens and residents for tax purposes. It is anticipated that once the reporting framework is in place, such agreements would be extended by participating countries to one another. In future it is likely thus that it will not only be US citizens and residents for tax purposes that are reportable. FATCA is in fact the catalyst for such a larger initiative being drawn up by the OECD, called automatic exchange of information for tax purposes. There is already, for example, a similar initiative known as UK FATCA, to which the United Kingdom s Crown Dependencies and British Overseas Territories are subject. Which assets do US citizens and residents have to report to the IRS? Foreign depositary accounts; foreign custodial accounts; any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of an account or asset required to be reported on an income tax return; Foreign stock or securities held in a financial account at a foreign financial institution; Foreign stock or securities not held in a financial account; Foreign partnership interests; Foreign mutual funds; Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which they are the grantor; Foreign-issued life insurance or annuity contracts with a cash-value; Foreign hedge funds and foreign private equity funds.