Foreign Account Tax Compliance Act (FATCA) Workshop

Association of International Bank Auditors

Technical Overview – Jon Lakritz, PwC

Internal Controls and Certification Considerations – Alan Pisano, PwC

June 14, 2012New York, New York

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Agenda

FATCA Technical Overview

1. General Overview and Concepts

2. Account Due Diligence

3. Verification by Responsible Officer

4. FATCA Withholding

5. FATCA Reporting

6. Multilateral Agreements

7. Timeline of Important Dates

8. Forthcoming Guidance

General Project Approach

Internal Controls and Certification Considerations

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FATCA Technical Overview

General Overview and Concepts

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Congressional ActionTax Haven Banks and U.S. Tax Compliance - 2008

ISSUE:

U.S. persons are using foreign entities to invest and avoid U.S. reporting and backup withholding.

•Certifying to be foreign persons

•Availing themselves of treaty benefits

•U.S. loses an estimated $100 billion in tax revenues annually due to offshore tax abuses.

•Financial institutions may be facilitating international tax evasion

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Congressional ActionTax Haven Banks and U.S. Tax Compliance – 2008 (Continued)

Recommendations:

•Strengthen Reporting of Foreign Accounts Held by U.S. Persons.

•Strengthen 1099 Reporting

•Strengthen Audits

•Penalize Tax Haven Banks that Impede U.S. Tax Enforcement

•Attribute Presumption of Control to U.S. Taxpayers Using Tax Havens

•Allow More Time to Combat Offshore Tax Abuses

•Enact Stop Tax Haven Abuse Act

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The Congressional Reaction- FATCA

What?FATCA – Foreign Account Tax Compliance Act

Why?What is the intent?

How?What are the consequences of being noncompliant?

The purpose of FATCA is to “detect, deter and discourage offshore tax evasion” by US citizens or residents.

Major functions impacted:

• Client on-boarding

• Tax reporting• Tax withholding• Governance

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Five concepts you need to know

1) A Foreign Financial Institution is any non-US entity that:

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

2. Holds as a substantial portion of its business financial assets for the account of others;

3. Is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, notional principal contracts, insurance or annuity contracts, or any interest in any of the above; or

4. Is an insurance company (or the holding company of an insurance company) that issues or is obligated to make payments with respect to a financial account.

2) Financial account:

1. Any depository account maintained by the financial institution,

2. Any custodial account maintained by the financial institution,

3. Any equity or debt interest in a financial institution that is an investment fund (other than those that are regularly traded on an established securities market), and

4. Any cash value insurance contract and any annuity contract issued or maintained by the financial institution.

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Five concepts you need to know

3) US account – A financial account held by specified US persons or US owned foreign entities.

4) US owned foreign entity – Any non-financial foreign entity (“NFFE”) with one or more substantial US owners (a specified US person owning more than 10% of the stock of a corporation or capital or profits of a partnership).

5) Specified US person - Any US person other than :

1) publicly traded corporation, 2) affiliates of a publicly traded corporation, 3) exempt organization or IRA, 4) the United States, 5) US state, DC, or US possession, 6) any bank defined section 581, 7) REIT, 8) RIC or SEC registered company under Investment Company Act of 1940, 9) common trust fund, 10) exempt trust under section 664(c), 11) dealer registered under laws of US or US state, and 12) a broker as defined in 6045(c)

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Participating FFIs (“PFFI”)

To avoid the 30% withholding an FFI generally must:

• Enter into an agreement with the IRS to comply with certain requirements

• Under the FFI agreement, a PFFI will be required to:

- Obtain information on all account holders to determine which accounts are US accounts

- Comply with required due diligence/verification procedures and certify completion of such procedures

- Report information on US accounts

- Deduct and withhold a 30% tax on any “passthru payment” to recalcitrant account holders and nonparticipating FFIs

- Comply with IRS information requests

- Attempt to obtain a waiver of applicable bank secrecy or other information disclosure limitations or close the US account (if necessary)

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Deemed-Compliant FFIs

• The proposed regulations have few true carve outs from FATCA but there are two categories of entities with a potentially lighter compliance burden than participating FFIs.

Registered Deemed-Compliant FFIs

Certified Deemed-Compliant FFIs

Must register with the IRS, agree to deemed-compliant criteria, and certify every 3 years to its compliance.

Must certify to a withholding agent that it meets the requirements on a Form W-8 and provide any other required documentation.

•Local FFI•Nonreporting member of participating FFI group•Qualified collective investment vehicle•Restricted fund

•Nonregistering local bank•Retirement funds•Non-profit organizations•FFIs with only low value accounts•Owner documented FFI

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Account Due Diligence

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Account due diligence rules to identify U.S. account holders – Individual Accounts

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Account due diligence rules to identify U.S. account holders – Entity Accounts

Pre-existing entity accounts

• $250,000 or less – Excluded from review, until account balance exceeds $1,000,000

• Search existing information / documentation on file to determine an account holder’s FATCA status. Generally can rely on documentation and information collected as part of AML/KYC or existing account opening procedures. However, if existing information / documentation is not sufficient, must request additional documentation.

• Passive NFFEs – Must identify substantial U.S. owners

New entity accounts

• Upon account opening, request and obtain withholding certificates, documentary evidence, and additional statements from entity account holders (e.g., letters of counsel, withholding statements, statements made in account opening documents, etc.)

• Must review all documentation collected upon account opening along with other information collected as part of AML/KYC to determine the account holder's status under FATCA (i.e. U.S. Entity, PFFI, NPFFI, Registered Deemed-Compliant FFI, Certified Deemed-Compliant FFI, Exempt Beneficial Owner, Passive NFFE, U.S. owned foreign entity, Excepted NFFE, etc)

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U.S. Indicia

Searches for U.S. indicia are used to identify U.S. persons that own accounts

An account holder has indicia of U.S. status if he:

1. Is a U.S. citizen or resident

2. Was born in the U.S.

3. Has a U.S. residence or mailing address;

4. Has a U.S. telephone number

5. Has provided standing instructions to transfer funds to a U.S. based account

6. Has granted power of attorney over the account to a person with a U.S. address

7. Has a “care of” or hold mail address that is the sole address of account holder

Verification by the Responsible Officer

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Verification of Compliance

Certifications required of a “responsible officer”:

1. To the best of the responsible officer’s knowledge, from August 6, 2011 until the date of certification, no formal or informal practices or procedures were in place to assist account holders in the avoidance of FATCA;

2. Within one year of the effective date of the FFI agreement, the responsible officer is required to certify to the IRS that the participating FFI has completed the review of all high value accounts; and

3. Within two years of the effective date of the FFI agreement, the responsible officer is required to certify to the IRS that the participating FFI has completed the review of all other accounts.

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Verification of Compliance

After initial certifications, the responsible officer of the participating FFI will also need to periodically certify to the IRS:

1. Conducted periodic reviews of the FFI's compliance with due diligence, withholding and reporting obligations under the FFI agreement.

2. The responsible officer may be required to provide certain factual information and to disclose material failures with respect to the participating FFI’s compliance with any of the requirements of the FFI agreement.

 

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FATCA Withholding

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FATCA WithholdingTransactions and payments subject to FATCA

FATCA Reporting

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Reporting Requirements

2014 and 2015(for calendar years

2013 and 2014)Limited reporting due 30 September 2014 (for accounts on record as of 30 June 2014) and 31 March 2015, respectively.

Specified US persons•Name•Address•TIN•Account number•Account balance

NFFEs that are US-owned foreign entities•Name•Address•TIN•Account number of entity•Account number for each substantial US owner

2016(for calendar year

2015)

Reporting due 31 March 2016

• Above information plus US source FDAP income

2017 (for calendar year

2016)Full reporting due 31 March 2017

• Above information plus gross proceeds

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Multilateral Agreements

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Multilateral effortsThe joint statement – an overview

• US government considering intergovernmental agreements (agreements with countries referred to as “FATCA Partners”) to:

- Avoid legal impediments to compliance, by not requiring a FFI established in the FATCA partner to

◦ Terminate the account of a recalcitrant account holder;

◦ Impose passthru payment withholding on payments to recalcitrant account holders;

◦ Impose passthru payment withholding on payments to other FFIs organized in the FATCA partner or in another jurisdiction with which the United States has a FATCA implementation agreement.

• The goal is to simplify implementation and reduce cost to the FFI.

• France, Germany, Spain, Italy and UK issued a joint statement with US.

• Press has reported that Ireland, Mexico, Luxembourg and others are interested.

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Timeline of Important Dates

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FFI Governanc

e

Due diligence

forpre-

existing accounts

Due diligence

fornew

accounts

Withholding

Reporting

(1) IRS may make the online FFI registration system available before Jan 1 2013(2) As part of the first certification, FFI must certify that it did not have any procedures in place from August 6, 2011 that would assist account holders in the

avoidance of FATCA(3) New accounts are generally permitted a 90-day grace period before being treated as recalcitrant(4) Limited reporting includes name, address, TIN, account number, and account balance of each specified US person who is an account holder. For account

holders that are NFFEs that are US owned foreign entities, report name, address and TIN (if any) of such entity and each substantial US owner of such entity

201720162015201420132012

Jan 1 2017 – FATCA withholding expected to begin for foreign passthru payments

Mar 15 2015 – Begin Form 1042-S FATCA reporting (calendar year 2014) for US source FDAP income

Jan 1 2014 – FATCA withholding begins on US source FDAP income

Mar 15 2016– Form 1042-S reporting (calendar year 2015) now includes gross proceeds; as well as foreign reportable amounts paid to NPFFIs

Jan 1 2013 – FFI can enter into FFI Agreement online (Note 1)

Jul 1 2014 – Certify completion of review of pre-existing high value individual accounts (Note 2)

Jul 1 2015 – Complete due diligence for all other pre-existing accountsJul 1 2014 –

Complete due diligence for high value accounts

Jul 1 2014 – Complete due diligence for any pre-existing account holder that is a prima facie FFI

Jan 1 2016 – Two-year transition period ends for "Limited FFIs" and "Limited Branches"

Jul 1 2015 – Certify completion of account identification procedures and documentation requirements for all other pre-existing individual accounts

Jan 1 2015 – FATCA withholding begins on gross proceeds

Jul 1 2013 – IRS encourages FFIs to sign up by July 1 2013 to ensure readiness by Jan 1 2014

Mar 31 2016 – Reporting on US accounts (calendar year 2015) required to include income associated with the US account

Mar 15 2017 – Form 1042-S reporting (calendar year 2016) expected to include foreign passthru payments

Mar 31 2017 – Reporting for US accounts (calendar year 2016) required to include proceeds paid to US accounts

Mar 15 2015 – Form 1042 FATCA reporting begins

FATCA timeline – for FFIs (for agreements effective July 1, 2013)

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FATCA timeline – for US withholding agents (including USFIs)

Due diligence forpre-existing and new entityAccounts (Notes 1 and 2)

Withholding

Reporting

(1) US Withholding Agents only perform due diligence on entity clients, not on individuals(2) The due diligence process must be completed prior to making a withholdable payment(3) Reporting requirements include name of the US owned foreign entity; and name, address and TIN of each substantial US owner

201720162015201420132012

Jan 1 2013 – New account opening procedures must be in place to classify entity-owned accounts

Jan 1 2015 – FATCA withholding begins on gross proceeds

Jan 1 2014 – FATCA withholding begins on US source FDAP income, including payments to pre-existing entity accounts held by prima facie FFIs and documented NPFFIs

Mar 15 2014 – Begin reporting on substantial US owners of US-owned foreign entities (calendar year 2013) (Note 3)

Mar 15 2015 – Form 1042-S reporting (calendar year 2014) on US source FDAP income

Mar 15 2016 – Form 1042-S reporting (calendar year 2015) now includes gross proceeds

Mar 15 2015 – Begin Form 1042 FATCA reporting

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Forthcoming Guidance

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Forthcoming guidance

• Draft / Final Forms W-8 and W-9

- Draft Forms W-8BEN-E (entities) and W-8BEN (individuals) were released on June 6, 2012.

• Draft / Final Forms 1042 and 1042-S

• Draft / Final FFI Agreement

- Draft FFI agreement is expected to be released June 2012

• Final regulations

- Expected Q3/Q4 of 2012

• Model intergovernmental agreements

**The IRS is not obligated to adhere to this schedule, but they did announce their intention to issue guidance by these dates.

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General Project Approach

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• Determine the population of legal entities to be assessed• Analyze FATCA relevant characteristics of the legal entities • Identify impacted entities and their classifications and FATCA obligations

• Review other business processes , procedures, and relationships to assess significant business impacts as it relates to external stakeholders (e.g. Administrators, Custodians, Distributors, etc.)

• Identify critical options and strategies for implementation• What can we do now vs. wait for further guidance / final regulations?• Develop a high level roadmap to identify next steps, timelines, and

milestones to be followed between now and July 1st 2013?

Phase 1Current State Analysis and Impact Assessment

Entity Classification

Business Impact Analysis

Functional Impact Analysis

• Interview with key personnel across relevant internal functions (e.g., client on-boarding, AML/KYC, withholding, reporting, technology, etc.), to assess FATCA process, data, systems gaps

Project Plan / Road Map

Phase 2Future State and Roadmap Development

• Support for critical project management activities• Provide subject matter support and guidance for requirements and

design activities• Provide implementation support as needed for development of

policies, procedures, and data and system enhancements• Recommendations on best practice

Implementation Support

Phase 3Implementation and Remediation

Project Management

• Create project governance structure (i.e., working group, etc.)

• Track and communicate progress, issues, and risks

Phased Approach to FATCA Compliance

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Internal Controls and Certification Considerations

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What areas of the organization are impacted?

Departments

• Tax

• IT

• Legal and Executives

• Regulatory Compliance

• Accounting

• Customer relations

• Operations

Business functions

• Product design, development, and implementation

• Marketing, sales, and distribution

• On boarding, KYC/AML, and tax documentation

• Account holder communications

• Payments and deposits

• Tax withholding

• Tax reporting

• GovernanceThese functions may be performed by third parties and under FATCA management has a responsibility to perform the appropriate oversight

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Developing a controls framework

Key questions to consider

• Have you appointed who will be the certifying officer(s) under FATCA?

• In the case of an affiliated group with multiple FFIs, how will your organization ensure that each are in compliance as one FFI can affect all others?

• Have you developed a sub-certification process to enable disparate reporting units to provide assurance to the certifying officer?

• Where you have you assigned individuals to certify on behalf of the affected legal entities how have you ensured they have the appropriate insight into the related activities?

• Have you assessed the current controls design regarding withholding and reporting and/or re-designed controls to assist you in making your certification that you are in compliance with FATCA?

• Have you developed a plan to test those controls whether using internal or external resources?

• Where you have outsourced key FATCA-related functions to service providers, how are you ensuring that they have adequate controls in place and operating effectively to form a basis for your certification?

 

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Verification of compliance

IRS Certification for Registered FFIs

• Staged certifications of existing accounts

• Ongoing annual certifications over compliance with due diligence, withholding and reporting obligations under the FFI Agreement

• One-time certification asserting no practices exist to assist clients in evading identification

• Flexibility in designating officials to certify

• Appropriate functional responsibilities at high enough level

• Management required to “self-test” policies and procedures put in place

• General standards to be developed by IRS in pending draft FFI Agreement

- Potential option of obtaining third-party reviews

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Verification of compliance

Certification for FFIs

• Ability for IRS to request “additional information” (to be defined)

• Compliance subject to review by IRS or an external party

• Robust policies and procedures should support certification process – beyond sub-certifications

Certification for deemed-compliant FFIs

• Certified deemed-compliant FFIs include local banks, certain retirement funds, certain non-profits and FFIs with only low-value accounts. Certification needs to be made to withholding agents only

• Registered deemed-compliant FFIs include non-reporting members of FFI groups, Qualified Collective Investment Vehicles and restricted funds. Certification to IRS required every three years

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PwC

Process Level Certification

Certification structure

Legal Entity A Sub-Certifying Officer

Legal Entity B Sub-Certifying Officer

Legal Entity C Sub-Certifying Officer

Responsible Officer

Account Set-Up Certifying Officer

Non US Corporate Actions Certifying Officer

U.S Corporate Actions Certifying Officer

In order for an affiliated group to certify to the IRS that it is in compliance, the responsible officer of the lead FFI must obtain sub-certifications across the organization. Below is a sample certification structure.

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Who is responsible for all of this?

FATCA requires certification of compliance by a “responsible officer”

• FATCA requires that a responsible officer must certify to the IRS regarding the organization’s compliance with FATCA

• Should be involved in the development of the company's FATCA compliance policies and procedures

• Should ensure that appropriate evaluation of the effectiveness of controls is conducted and supports the certification

• Should leverage the internal audit and sub-certification network to perform its responsibilities

• The provisions of FATCA are closely linked to an organization's operations functions

• Certifying officer must be in a position within the organization to be able to leverage resources across the organization

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FATCA controls framework

Control framework

• FATCA requirements should be mapped to processes

• Identify or design key controls over these processes

• Operating effectiveness assessment over key controls should be performed on a periodic basis

Risk and complexity

• FATCA is far reaching and complex

• Many different legal entities within an organization can be impacted

- One noncompliant FFI impacts the compliance of all FFI’s in an affiliated group

• Data sources and processes can differ across products / geography

• Expansion of IT applications subject to controls testing

• Outsourcing activities to third parties does not alleviate responsibilities

- Certifying officer maintains responsibility for overall certification

 

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Characteristics of controls

Controls established to address the risks of non-compliance following characteristics:

• Automated or manual

• Preventive or detective

• Primary or compensating

• Designed to meet the following objectives

- Completeness

- Accuracy

- Validity

- Restricted Access

Within a controls framework, an appropriate balance of controls will be designed based on risks for non-compliance. Controls are then routinely assessed for effectiveness to enable management’s assertion of compliance.

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FATCA controls frameworkEstablish controls to address the key risks of non-compliance

Area Control Objectives

Legal entity assessment • Controls provide reasonable assurance that all legal entities are identified, assessed and classified for FATCA impact and approved by the appropriate personnel within the organization.

• Controls provide reasonable assurance that legal entity assessments are communicated to all relevant parties.

• Controls provide reasonable assurance that changes in legal entity listings and related classifications are appropriately updated in a timely manner and approved by the appropriate personnel.

• Controls provide reasonable assurance that all FFI agreements are appropriately executed, tracked and protected.

Client account assessment • Controls provide reasonable assurance that required data is obtained during the new individual account set up process. Appropriate client account due diligence procedures are performed on all applicable accounts and appropriate documentation is retained.

• Controls provide reasonable assurance that pre-existing accounts subject to FATCA requirements are identified completely and accurately

• Controls provide reasonable assurance that changes to account information are captured and assessed for impact on classifications.

• Controls provide reasonable assurance that due diligence is performed appropriately for all accounts (new accounts, pre-existing accounts, changes in accounts) and accounts are appropriately classified.

Withholding • Controls provide reasonable assurance that tax withholding is performed completely and accurately for accounts impacted by FATCA requirements

Reporting • Controls provide reasonable assurance that reporting to the Internal Revenue Service required by FATCA is complete and accurate and produced on a timely basis.

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FATCA controls framework

Area Controls Objective

Certification Procedures • Controls provide reasonable assurance that FATCA processes and procedures are performed consistently across the organization to support

applicable certifications to be made to the IRS and/or withholding agents.

Technology – Change Management • Controls provide reasonable assurance that new developments and changes to existing systems are documented, tested, approved, and implemented by authorized personnel.

• Controls provide reasonable assurance that access to FATCA data is appropriately restricted to authorized personnel.

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FATCA controls framework – example controlsSample controls to support “due diligence”

Control pointsRelative Priority

(High/Low)Control type

(CAVR)Due diligence procedures are performed depending on the type and size of account. Policies and procedures are in place regarding the definition of an account, the types of accounts for which due diligence is required, and the dollar thresholds. Due diligence is performed for the accounts that meet this pre-defined criteria. Standardized checklists are used to faciliate the due diligence reviews.

High C,A

An indicia search is conducted across relevant client data repositories and reviewed. Where relevant indicia are identified, appropriate follow up is conducted and documented.

High A

Aging is performed to indicate the status of open information requests. Accounts with US indicia where additional information was requested (including any applicable waivers) that are aged above a specified threshold are reviewed. Accounts over a specified threshold are deemed recalcitrant accounts and classified as such in accordance with the FATCA criteria.

High C,A

Accounts and balances are reviewed periodically to ensure that an electronic or paper search was performed for all accounts depending on the account type.

High C,A

Customers have unique identification numbers that are used to aggregate accounts across the organization. These identification numbers are used in the creation of summary reports of customer balances that are used to determine account classifications.

High C

Client systems use the FX spot rate as of the last day of the calendar year to convert foreign accounts to US dollars when classifying accounts.

High V

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PwC

TPA

Payments

Reporting Portal

OPERATIONAL WORKFLOW

Client, Account & Counterparty Management

Legal Entity Management

General Ledger(s)

FATCA Warehouse

FATCARegulatory reporting

FATCAClient reporting

PPP reporting

Books & Records System(s)

Derivatives

Front office

EquitiesFront office

RatesFront Office

CreditFront Office

Banking/ Deposits

Front Office

New Account Process

Account Maintenance

FFI Certification

Finance, Legal, Tax

Res

ults

Acc

ount

In

fo

Lega

l Ent

ity I

nfo

New

Acc

ount

s &

Upd

ates

FATCA IRS Deposits

Calculate PPP

IRS Deposits

Client & FI deposits

= Existing operational function/activity

= New or modified function/activity due to FATCA

Key showing existing, new and modified functions/activities

Legal EntityClassification

11

Acc

ount

& L

egal

Ent

ity I

nfo

Chp. 3 &4 WH

FATCAComputations

Cost Basis

P&L

Margining

Clearing & Settlement

Payments

Corp Actions

Doc MgmtFATCA Rules

Reference Data Results

IRS

Clients

Firm Manageme

nt

Clients

Finance

GovernanceFATCA Governance

Account activity

Remediation

Pre-existing Account analysis

Below is a depiction where controls should be in place across your operational work flow. Note the points included are at a summary level and these may vary by entity.

5

6

4 5

FATCA controls framework

11

12

13, 14

13, 14

13, 14

107

8

8

8

9

9

1 2

9

3

9

4

1 2

7

13

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FATCA controls framework

1. Controls provide reasonable assurance that all legal entities are identified, assessed and classified for FATCA impact and approved by the appropriate personnel within the organization.

2. Controls provide reasonable assurance that legal entity assessments are communicated to all relevant parties.

3. Controls provide reasonable assurance that changes in legal entity listings and related classifications are appropriately updated in a timely manner and approved by the appropriate personnel.

4. Controls provide reasonable assurance that all FFI agreements are appropriately executed, tracked and protected.

5. Controls provide reasonable assurance that required data is obtained during the new individual account set up process.

6. Controls provide reasonable assurance that pre-existing accounts subject to FATCA requirements are identified completely and accurately.

7. Controls provide reasonable assurance that changes to account information are captured and assessed for impact on classifications.

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FATCA controls framework

8. Controls provide reasonable assurance that due diligence is performed appropriately for all accounts (new accounts, pre-existing accounts, changes in accounts) and accounts are appropriately classified.

9. Controls provide reasonable assurance that policies and procedures related to account maintenance and classification is communicated throughout the organization and to third party service providers.

10. Controls provide reasonable assurance that tax withholding is performed completely and accurately for accounts impacted by FATCA requirements.

11. Controls provide reasonable assurance that reporting to the Internal Revenue Service required by FATCA is complete and accurate and produced on a timely basis.

12. Controls provide reasonable assurance that FATCA processes and procedures are performed consistently across the organization to support applicable certifications to be made to the IRS and/or withholding agents.

13. Controls provide reasonable assurance that new developments and changes to existing systems are documented, tested, approved, and implemented by authorized personnel.

14. Controls provide reasonable assurance that access to FATCA data is appropriately restricted to authorized personnel.

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