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Executive update from theLondon Market FATCAWorking GroupJuly 2013

Earlier this year, the US Treasury and Internal Revenue Service (IRS) confirmed that insurance and reinsurance premiums on US-source risks would be subject to withholding under the Foreign Account Tax Compliance Act (FATCA).

FATCA is a US law designed to prevent tax evasion by US taxpayers through the use of offshore accounts and companies. FATCA is generally focused on banks, custodians, trust companies, life insurance companies and asset management firms. Whilst its impact on these markets is widely known, the full extent of its effect on non-life (re)insurers and brokers is still being clarified by the IRS and US Treasury. However, it is certain that without action from the US Treasury, from 1 January 2014 any non-US (re)insurer or broker that cannot provide evidence of its FATCA status will be subject to a 30% withholding tax on premiums covering US risks, if these are paid via an intermediary.

Given the high proportion of premium in the London Market derived from US-source risks, the impact of a 30% tax on gross written premium would be significant for participants. Urgent action is necessary to minimise that impact. This executive update is designed to set out the key FATCA implications, assumptions and actions for the UK non-life market.

FATCA insurers and brokers for the London Market

Clarifying the challenges of FATCA for London Market non-life

2 FATCA insurers and brokers for the London Market

FATCA implications for non-life (re)insurance brokers and insurersFATCA will impact premium payments for US-source risks that are paid to an offshore (non-US) (re)insurer via an intermediary. Non-life insurance brokers and insurers will therefore all be impacted by FATCA from 1 January 2014, for their US source intermediated business.

These premium payments will be treated as withholdable fixed, determinable, annual, periodical payments (FDAP). As a result, the last US party in an offshore placement chain (for example the US surplus or excess lines broker) is likely to have to withhold 30% of the US source premium, unless it has obtained documentation that adequately demonstrates the FATCA status of their offshore broker counterpart and all of the insurers with whom the risk has been placed.

Whilst withholding has been delayed until 2017 for payments on certain offshore obligations, this specifically does not apply to premium payments made via intermediaries.

The practical impacts of FATCAThere is limited information available in the FATCA regulations about the impact on the non-life insurance sector and a lack of certainty over the specific requirements for US withholding agents. However, given the tight timelines, the industry is working together to determine the documentation, processes and activities that will allow brokers and carriers to comply. In furtherance of this, the London Market has established a FATCA Working Group, which is discussing these processes with US market broker and insurer associations and the US Treasury.

From the broad definition within the Act, it seems that five key business areas are most likely to be in scope for FATCA. These are US excess and surplus lines large risk business (for risks placed outside the US), MGA business (where insured outside of the US), all captive insurance (for premiums received in respect of US risks), reinsurance (treaty and facultative reinsurance that includes any US-source risk) and multi-national programmes (where they include US-source risks).

Specific FATCA actions are likely to be required by US surplus and excess lines brokers, offshore (re)insurance brokers and offshore (re)insurance companies including Lloyd’s syndicates.

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3FATCA insurers and brokers for the London Market

US surplus and excess lines brokers and MGA’s are expected to be the FATCA withholding agents. As the last US entity with custody of the money, they will need to obtain details of the FATCA status of the non-US insurance broker and all of the non-US insurance companies and branches/entities used for each placement, before premium is settled. If an insurer or broker involved in a placement is not able to demonstrate their FATCA status, the US surplus lines broker will be required to withhold 30% of the gross written premium for the entire placement. In practice it seems likely that the withholding agent will need to make the decision during the ‘quote to bind’ stage as to whether they have sufficient evidence to remove the need for withholding, or else place the business with other markets for which they do have such evidence. Withholding should be the last resort in these cases, but the risk to the London Market from lost business, is no less considerable.

US withholding agents are also expected to be required to report to the IRS (under Form 1042S) which premiums they have sent offshore, the recipients of those premiums and their FATCA status. It seems logical that they will need to rely heavily on their offshore counterparty brokers to help them fulfil this reporting requirement. Therefore whilst London Market brokers (being most likely classed as Non-Financial Foreign Entities, or NFFE’s) are unlikely to need to report to HMRC or the IRS for FATCA, they will almost certainly need to provide detailed reporting data to the US surplus and excess lines brokers from whom they source US business.

The nature and frequency of this reporting data is unclear and guidance is being sought from both US brokers and the IRS.

The non-US insurance broker is likely to be asked, by the US surplus lines broker, to provide evidence that US-source risk placed outside of the US is with insurers that are able to demonstrate their FATCA status. The broker must also be able to demonstrate its FATCA status. The process for providing evidence of FATCA status has not yet been confirmed, however, there is a market assumption that:

• Evidence of compliance will be a completed and signed IRS W-Series form, or substitute, for each entity or branch of the non-US insurance organisation. A Global Intermediary Identification Number (GIIN) is required for those entities that are Foreign Financial Institutions (FFIs).

• The non-US insurance broker will inform the US surplus lines broker that FATCA status has been received for each placement and may choose to hold a copy of these forms.

• The forms can be provided to the US surplus lines broker on request.

• The documentation requirement for Lloyd’s may differ as it is seeking a Closing Agreement from the IRS to deal with FATCA documentation requirements and reporting at a Market level rather than syndicate or member level. However, the basic approach to the handling and processing of the documentation is likely to be the same.

• A central repository of forms may be an appropriate solution.

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We expect this to be a one-off activity unless there is a change to specified circumstances, subject to confirmation by the IRS. The draft forms, which are still to be finalised by the IRS, can be downloaded from the IRS website.

Reinsurers and captives are expected to follow a similar process of providing evidence of FATCA status to their brokers. However, requirements for multi-national business have not yet been clarified. The Treasury and the IRS have been made aware by US brokers of the significant challenge this will present to the global non-life insurance market. It is not clear, however, what if any action the US authorities may take. Prudent organisations are working on the basis that the regulations will not be delayed or changed in scope and are planning accordingly.

Practical actions and timelinesWe have set out below a series of suggested actions for brokers and insurers to address the compliance challenges posed by FATCA.

As the W8 series is not yet final, the actions to complete them cannot yet be undertaken. We suggest that NFFEs plan to complete them as soon as the forms are final and the instructions issued.

Brokers should:

• Agree FATCA assumptions with US counterparties

• Agree documentation and reporting requirements with US counterparties

• Agree and prioritise business scope (for FATCA evidence requirements)

• Communicate with and engage colleagues, carriers and clients

• Determine any associated training needs for brokers, processing teams and finance departments

• Design and implement processes to receive, store and reference insurers’ FATCA status

• Perform own legal entity classification and produce own W-Series form

Every non-US insurance company (defined as a legal entity of a (re)insurer, a branch of a (re)insurer or an agency, pool or captive) should complete and sign a W-Series Form or substitute.

These should be provided to their brokers in H2 2013, as evidence of their FATCA status. We expect this to be a one off activity unless there is a change to specified circumstances, subject to confirmation by the IRS.

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Insurers should:

• Perform FATCA legal entity classification/impact assessment

• Conduct a class of business analysis to determine which of its business units, entities and branches are in scope for FATCA

• Complete W-Series forms for each in-scope entity and branch

• Provide a copy of the W-Series form to all placing brokers

• Update the form and provide a copy to the broker if circumstances change Lloyd’s will issue separate guidance by end of July on what Lloyd’s member should do in light of the outcome of the Closing Agreement discussions.


Therefore the assumed key deadlines for FATCA in 2013 are as follows:

• July to August — brokers should establish their FATCA programmes and processes.

• August to September — the W-Series Forms should be completed by insurers and brokers.

• 30 September — Insurers should provide their placing brokers with a completed IRS W-Series form for each in-scope entity and branch. Brokers should ensure they only place risk with insurers who have provided this form, and provide a copy of it for their US counterparties.

• October to December — brokers need to refine and embed FATCA processes.

The compliance deadline is:

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22 May 2013 15 July 2013 September 2013 1 January 2014


FATCA assumptionsFor clarity, we have set out below the key assumptions that are currently being shared by the London Market FATCA Working Group. These are:

Scope:

• US-source risks include US situs risks, lives of US citizens as well as risks that transit the US.

• US surplus and excess lines, MGAs, multinational, captives and reinsurance risks are in scope for FATCA.

• A non-US insurance company can include:

• A legal entity of a (re)insurer

• A branch of a (re)insurer

• Agencies

• Pools

• Captives

• MGAs

• A Lloyd’s syndicate

• A Lloyd’s member

Compliance for brokers: excess and surplus lines and other direct placements

• The US surplus lines broker will be expected to be the FATCA US withholding agent, as it will be the last US person with custody of the money.

• The US surplus lines broker will be required to obtain details of the FATCA status of the non-US insurance broker and non-US insurance companies used for each placement, before premium is settled.

• If an insurer or broker involved in a placement is not able to demonstrate their FATCA status, the US surplus lines broker will be required to withhold 30% of gross written premium or place the business with an alternate broker and/or insurer.


• The non-US insurance broker(s) should provide evidence to the US surplus lines broker that US-source risks placed non-US are with insurers that have demonstrated their FATCA status.

• The non-US insurance broker should evidence its own FATCA status.

• The non-US insurance broker will collate evidence of FATCA status and inform the US surplus lines broker that FATCA status has been received for each placement.

• The evidence received of FATCA status can be provided to the US surplus lines broker on request but may not be provided for each placement.

Compliance for insurance companies:

• Each non-US insurance company that is a NFFE will be required to complete and sign a W-Series form and provide these to their brokers in H2 2013, as a document of their FATCA status.

• FFIs should provide their GIIN.

• This is expected to be a one off activity unless there is a change in circumstances that alters the entity’s FATCA status.

Compliance for Reinsurers:

• Reinsurance (Fac and Treaty) is in scope for FATCA from 1 January 2014 if the premium is ceded via an intermediary.

• Each non-US reinsurance company that is a Non-Financial Foreign Entity (NFFE) will be required to complete and sign a W-Series Form and provide these to their reinsurance brokers in H2 2013, as a document of their FATCA status.

• FFIs should provide their GIIN.

Compliance for insurance companies and brokers:

• Multinational non-US brokers will want to receive evidence of the FATCA status of all offshore insurers (including fronting insurers) used in a multinational programme that includes US-source risk.

• The evidence of FATCA status will be a completed and signed IRS W-Series Form for each entity or branch of the offshore insurance companies (or GIIN for FFIs).

• UK brokers will not be required to report this information to the IRS, but may be required to report it to US withholding agents.

Compliance for all captives:

• Captive insurers will be required by their fronting broker and reinsurance broker to validate their FATCA status in the same way as an insurance company.


FATCA FAQ’s1. Does FATCA affect us?

Yes. Every participant in global financial services will be impacted by FATCA to a greater or lesser extent.

2. But what if we don’t have any US customers? Some of your non-US customers may have US source risk that they are placing with you (for example for multinational risks and risks that transit the US).

3. Does national legislation (for example data protection) mean we cannot comply? The G5 (UK, Germany, Spain, France, Italy) are fully supportive of the overall aims of FATCA and have, or are in the process of, removing all barriers to compliance.

4. Isn’t the date 1 January 2017? Strictly speaking FATCA applies to all FDAP from 1 January 2014 whether intermediated or not. Only in the case of intermediated business does withholding apply from 1 January 2014. In the case of non-intermediated business withholding applies from 1 January 2017.

5. Am I an FFI or an NFFE? An FFI is a foreign financial institution. An NFFE is a foreign entity that is not a financial institution. You are most likely to be an NFFE unless you issue life insurance or investment products.

6. Who does the US broker remitting the premium have to obtain FATCA status details from? A US withholding agent is potentially liable for tax, interest and penalties if they do not hold valid withholding documentation prior to making a payment. The withholding documentation should specify the FATCA status of each payee.

Furthermore there is an overarching obligation in the US regulations for the withholding agent to act in a reasonable manner and to apply a reasonable standard of knowledge in determining whether the documentation that they receive from payees is reliable or incorrect. Consequently, a US broker’s responsibilities are potentially very widely drawn.

7. Is sensitive or personal data required on the W8 form? How many entities are likely to complete W8 forms with sensitive data? The W8 is a longstanding US tax form. The additional information required post 1 January 2014 is concerned with FATCA status and is unlikely to be particularly sensitive in the majority of cases. However there is a new requirement to provide name, address and TIN of substantial US shareholders which is new and may have privacy issues.

8. WhenwillthefinalversionoftheW8formbeavailable? The IRS have indicated it will be available in summer 2013

9. Will we be provided with completion guidance for the W8 form? The IRS will be providing guidance.


10. In what circumstances do shareholder details need to be shown on the W8 form? The IRS guidance is expected to clarify this.

11. How long is the W8 form valid? Three years.

12. What triggers the need for an updated W8? Change of tax residence to the US and/or a change in FATCA status.

13. What obligations to verify the W8 form is correctly completed rest with: a) A US broker b) A non-US broker where US broker involved c) A non-US broker if no US broker involved? There are no specific checks to be performed however the recipient of the W8 form must act reasonably. So for instance if the person completing the W8 is known to be a listed entity and yet has not indicated this on the W8 then the recipient, acting reasonably, may query the form.

14. What obligations to report payments to IRS rest with a) A US broker b) A non-US broker where US broker involved c) A non-US broker if no US broker involved? US brokers are expected to use their existing 1042S reports for FATCA payments. Non-US brokers are expected only to have reporting obligations if exceptionally they are FFIs. Even then it is unclear how they would report insurance premiums under the terms of the UK IGA.

15. The Act captures any US source risk. Many multinationals have US exposures, but the business will be handled entirely outside the US e.g., German insured, German Broker, international carriers. How are such risks impacted? The IRS has been approached to explain how they anticipate such a scenario working.

16. How will this affect Lloyd’s syndicates? Lloyd’s is having discussions with US and UK taxation authorities at the present time to determine how FATCA will operate in this unique environment.

17. How is the impact on the UK non-life market dealt with in the HMRC UK-US FATCA Agreement? HMRC has issued recent guidance which clarities that brokers are unlikely to be FFIs.

18. What happens to the withheld premium? Is there a process for recovery of the amount withheld? It is expected that there will be a process to recover the amount withheld, particularly if it can be shown that the amount was withheld erroneously.


The FATCA London Market Working group is comprised of:David Hough CEO, LIIBA

Nick Gray Chairman of Lloyd’s LMA Tax Group

Philip Chaston Chairman of Americas Committee, IUA

Mark Edwards Head of Tax, Lloyd’s

Simon Burtwell Partner, EY LLP

Jeff Soar Partner, EY LLP

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