FATCA: Understanding its impact and the path forward for nonfinancial multinational businesses April 2014

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Circular 230: This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding US Federal, state or local tax penalties that may be imposed on any taxpayer.

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Agenda

• Overview

• Comparison of information reporting provisions

• Legal entity classification

• Due diligence and documentation

• Reporting

• Withholding

• Next steps

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Overview

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Key takeaway points

• Information reporting impacts all withholding agents, in every industry.

• US information reporting obligations are driven by a payor's classification (US or non-US) and FATCA status, the documentation available on the payee and the type of payment made.

• Many nonfinancial corporations:

‒ Have entities in their worldwide network who will be subject to the purview of information reporting.

‒ Have operational areas that make or receive payments subject to information reporting and withholding.

Understanding the types of entities within your organization and the types of payments your organization is making and receiving

is critical.

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FATCA - An overview

The purpose of the Foreign Account Tax Compliance Act is to detect and discourage offshore tax evasion by US citizens or residents by identifying US persons who are either: • Directly investing outside the US; or • Indirectly earning income inside or outside the US through a non-US entity. What does it do? • Provides prescriptive rules around the process of documenting, reporting and

withholding on a payee. • Imposes a 30% withholding tax on any “withholdable payment” made to an

undocumented account holder/payee or a non-compliant foreign entity. • Provides a number of exceptions which increases complexity.

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The World pre and post July 1

Pre July 1, 2014 • Chapter 61 (Form 1099) and Section 3406 (backup withholding) are designed

to provide information to the IRS and US taxpayers. • Chapter 3 of the Code is designed to collect taxes at source. • Lack of compliance were the result of the

‒ Use of foreign entities to avoid US reporting and withholding and ‒ Lax due diligence by US and non-US entities.

Post June 30, 2014 • Chapters 3 and 61 and Section 3406 continue. • Chapter 4 operates to enforce the collection of US taxes. • Increased procedures around due diligence and documentations.

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Recent events

• Final Regulations for FATCA were released in January 2013

• Two additional sets of regulations were published on February 20, 2014 − Modifies the final FATCA regulations; and − “Harmonization” of the existing chapters 3 and 61 and Section 3406; with

the FATCA rules. − New Withholding Certificates and instructions continue to be provided by

the IRS.

• Still to come − New Withholding Certificates and instructions − Technical corrections to the February regulations − Local implementation guidance in various countries − Amended QI, WP and WT Agreements

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Comparison of information reporting provisions

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FATCA reporting and withholding builds on existing information reporting and withholding requirements

Confirm current processes are

compliant

Documentation processes &

systems

Reporting processes &

systems

Withholding processes &

systems

Identify payments – processes &

systems

Identify who made the payment –

processes & systems

1099 requirements

1042-S requirements

FATCA requirements

• The requirements for FATCA and existing requirements have significant overlap. For example, they share in common:

- Withholding certificates (W-9, W-8BEN, W-8EXP)

- Year-end reporting (1099, 1042-S)

- Many types of payments

• Therefore, any type of FATCA review should visit these fundamentals.

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Comparison of information reporting provisions Who is responsible

Chapter 61 Generally, 28% backup withholding is required

when:

• A person who is a payor;

• Makes a payment of an amount subject to 1099 reporting.

Chapter 3 Generally, 30%

withholding is required when:

• A person who is a withholding agent;

• Makes a payment to a non-US person;

• Of an amount subject to withholding (US source).

Chapter 4 Generally, 30%

withholding is required when:

• A person who is a withholding agent;

• Has control, receipt, custody of income;

• Makes a withholdable payment to a non-FATCA compliant person.

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Comparison of information reporting provisions Reporting

Chapter 61

• Form 1099-INT • Form 1099-OID • Form 1099-DIV • Form 1099-B • Form 1099-MISC • Form 945 • Among others

Chapter 3

• Form 1042 • Form 1042-S

Chapter 4 – FATCA

• Form 1042 • Form 1042-S • Form 8966

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Legal entity classification

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The six types of FFIs Type Description

1. Depository institution

• Accepts deposits in the ordinary course of a banking or similar business.

2. Custodial institution

• Holds financial assets for the account of others, as a substantial portion of its business.

3. Specified insurance company

• An insurance company, • Obligated to make payments on cash value insurance or annuity contracts.

4. Investment entities

• Conducts as a business one or more of the following activities for a customer:

1) trading in certain financial products 2) individual or collective portfolio management 3) investing, administering or managing money or financial assets

• Gross income is primarily attributable to investing, reinvesting, or trading in financial assets and is managed by another entity that is a depository institution, custodial institution, specific insurance company or investment manager.

• Holds itself out as a collective investment vehicle, mutual fund, private equity fund, etc.

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The six types of FFIs

Type Description 5. Holding

Company Primary activity consists of holding (directly or indirectly) the outstanding stock of one or more members of its Expanded Affiliated Group (EAG).

6. Treasury centers

The primary activity is to enter into investment, hedging, and financing transactions with or for the members of its EAG for purposes of: (i) Managing the risk of currency fluctuations with respect to property

that is held or to be held by the EAG (ii) Managing the risk of interest rate changes, price changes, or currency

fluctuations with respect to borrowings made or to be made by the EAG

(iii) Managing the risk of interest rate changes, price changes, or currency fluctuations with respect to assets or liabilities to be reflected in financial statements of the EAG

(iv) Managing the working capital of the EAG such as by pooling the cash balances of affiliates (including both positive and deficit cash balances) or by investing or trading in financial assets solely for the account and risk of such entity or any member of its expanded affiliated group; or

(v) Acting as a financing vehicle for the EAG.

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Expanded Affiliated Group (EAG)

• All members of an EAG need to be participating FFIs, deemed compliant, or exempt beneficial owners.

• A non-corporate entity may elect to be the common parent of an EAG. • Requirements for corporate entities to be included in the EAG

‒ Direct ownership by any member – more than 50% vote and value ‒ Previously, only ownership by a corporate member counted.

• Requirements for non-corporate entities to be included in the EAG ‒ Direct ownership by any member – more than 50% value (not vote) ‒ Previously, direct and indirect ownership counted.

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Other entities may be part of your EAG including joint ventures, securitization vehicles, and pension plans,

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Nonfinancial group test All three factors must be met for group to be nonfinancial

Test 1 : Looks at total passive income of the group (25% passive income test)

Test 2: Looks at the gross income of the FFIs in the group (5% test)

Test 3: Looks at the groups assets that produce or are held for the production of passive income

(25% passive asset test)

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This is not an average – each year stands alone!

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Why understanding your FATCA status is important: FFI registration

• The FATCA rules require most FFIs to register and/or enter into an agreement with the IRS.

• By registering, FFIs will receive a Global Intermediary Identification Number (GIIN) which evidences their compliance.

• The IRS has released the following information on the registration process:

‒ Registration will take place via the IRS FATCA Registration Portal.

‒ The IRS has stated that as long as FFIs are registered by May 5, 2014, the entity will have their GIIN prior to June 2, 2014.

‒ As long as entities have registered by June 2, 2014 they will receive their GIIN prior to the effective date of most of FATCA’s provisions (July 1, 2014).

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Due diligence and documentation

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Due diligence and documentation

The US information reporting regime is based on: • The character of the payment • The source of the income • The status of the payee.

Many payors lack the appropriate documentation to determine these items:

• The source of the income is US source • A complex set of presumption rules should apply to determine the status

of the payee • Together these rules will usually result in the application of withholding

and reporting. Collecting the appropriate documentation is the key to

successful compliance

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Due diligence and documentation Indefinite validity of W-8 forms now limited

• Certain withholding certificates obtained with documentary evidence can remain valid indefinitely or until there is a change in circumstances.

• Does not apply to the portion of the withholding certificate that pertains to a claim for treaty benefits under Chapter 3.

Transitional relief for expiring W-8 forms

• Withholding certificates and documentary evidence that would have expired on December 31, 2013 are now extended through December 31, 2014, unless a change in circumstance occurs before that date.

Faxed and e-mailed forms

• W-8 forms historically were valid only if an original form was collected (i.e., ink-on-paper).

• Taxpayers can now rely on W-8 forms that are transmitted electronically unless the withholding agent has actual knowledge that the person submitting the form is not authorized to do so.

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Due diligence and documentation

Foreign TINs to claim treaty benefits

• The requirement to obtain a US TIN has been replaced with a requirement to obtain either a US TIN or a non-US TIN issued by the beneficial owner’s country of residence.

• However, for entities in countries that do not issue a foreign TIN, a US TIN may still be required.

Treatment of US insurance brokers

• Withholding agents can treat a US insurance broker, rather than the underlying foreign insurer, as a payee when it is receiving insurance premiums on behalf of a foreign insurance company.

• Withholding agent cannot have a reason to know that the US insurance broker will not satisfy its withholding obligations under FATCA .

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Due diligence and documentation

Form W-8 obtained more than a year after payment

• A withholding agent may obtain a withholding certificate more than a year after the date of payment.

• Also requires that the withholding agent obtain certain types of documentary evidence in addition to an affidavit.

Pre-existing obligations owned by US persons - ‘Eyeball test’

• A withholding agent may treat a payee as a US exempt recipient if it is a pre-existing obligation, the withholding agent had previously classified the person as a US person and has a notation in its files that it previously viewed a Form W-9 (e.g., “eyeball test”). A file notation is not required for if the withholding agent is not a participating or registered deemed compliant FFI.

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Documentation New W-8s will be more complicated

Old W-8 for an entity New W-8 for an entity

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Updated presumption rules

Chapter 3 The coordination regulations modify

the presumption rules under chapter 3.

• Changes to the presumption rules under FATCA will generally apply for purposes of chapter 3.

• A withholding agent is required to have an EIN to presume effectively connected income is paid to a US branch of an FFI.

• An undocumented exempt recipient is presumed to be non-US if there are indicators of foreign status (including telephone number) – only for withholdable payments paid after June 30, 2014.

Chapter 61 The coordination regulations contain a

number of modifications to ensure consistent application of presumption rules between FATCA and chapter 61.

• Payments made on an offshore obligation to a payee that is an entity will be treated as made to a nonparticipating FFI presumed to be a foreign entity.

• Payments of bank deposit interest to a foreign intermediary or flow-through entity will now be treated as payments made to a nonparticipating FFI (rather than as payments made to a US non-exempt recipient).

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Chapter 61 Modified documentation requirements

The coordination regulations expand the circumstances under which documentary evidence can be relied upon to support a payee’s status.

• Documentary evidence is acceptable for payments made and received outside the US on offshore obligations.

• Acceptable to rely on documentary evidence without a definitive renewal period for payments made with respect to an offshore obligation.

• Payors can maintain a record of documentary evidence rather than retain the actual documentation.

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Reporting

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Reporting - What will it look like?

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Withholding

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Withholding – Who is withheld upon

Chapter 61 The backup withholding

rate is 28%

• On payments made to US non-exempt recipients who have not provided the appropriate documentation.

• Withholding is not required if a payee provides its TIN in the proper manner (i.e. Form W-9) prior to payment.

Chapter 3 The NRA withholding

rate is 30%

• On payments made to non-US persons.

• May be reduced based upon a provision of US tax code or tax treaty.

• Dependent on the withholding agent having valid documentation.

Chapter 4

FATCA withholding rate is 30%

• Applies to non

compliant US persons and non-US entities.

• Cannot be reduced by tax treaty.

• Applies to entities that fail to provide a valid GIIN or documentation to certify their compliant FATCA status.

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Next steps

1. Legal entity analysis – Inventory legal entities within the organization and determine the classification of each legal entity.

2. Foreign Retirement Fund analysis – Inventory foreign retirement fund plans to determine the FATCA classification of each plan.

3. Withholdable payment analysis – Conduct a payment processing review to identify corporate functions with the ability to make payments to assess documentation that will need to be collected to satisfy requirements.

4. Vendor analysis – Determine what types of entities are being paid and understand the types of documentation required.

5. Payee analysis – Understand types of payments received by foreign entities and inventory payors. Prepare the appropriate documentation to provide proactively to payors to avoid 30% FATCA withholding upon payments received.

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www.pwc.com/us/fatca This presentation has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2014 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the US member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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