ninth annual domestic tax conference - building a better...

Ninth AnnualDomestic Tax Conference8 May 2014 | Chicago

Information reportingand withholding

Impact of FATCA on USWA

IRS Circular 230 disclosure

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Disclaimer

Today’s presenters

John McMahon, moderatorTodd LarsenSaul Tilmann

Agenda

► FATCA introduction and fundamentals► Requirements of a US withholding agent (USWA)

as payor► Global legal entity classification► Recent changes to guidance► What companies should focus on now

What is FATCA?

► The Foreign Account Tax Compliance Act (FATCA), enacted inMarch 2010

► Generally effective on 1 July 2014, but with phased-in effective dates► Aimed at seeing that US persons with financial assets outside the US

are paying US tax on their worldwide income► Requires foreign financial institutions (FFIs) to disclose the identities

of US persons holding accounts with such institutions► Requires non-financial foreign entities (NFFE) to disclose the

identities of their substantial US owners► Requires a 30% withholding tax on any “withholdable payment” made

to an FFI or NFFE only if the requirements related to the identificationand reporting of US accounts or owners are not met

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FATCA’s impact

► Existing systems and processes are likely to have issues with the additional data elements,withholding calculations and reporting changes required under FATCA.

► Implementation of new systems and processes may be required to continuously trackdocumentation for payees that are FFIs and others.

► Compliance with FATCA’s due diligence, verification and annual reporting may result in conflictswith local privacy laws.

► Anti-money laundering/know-your-customer documentation must be reviewed.

► FATCA impacts different business lines and geographic areas in different ways, affecting eachlegal entity as both payor and payee.

► FATCA will impact business operating models such as vendor, customer and counterpartyonboarding, operations, and compliance.

► 30% withholding is imposed on all non-compliant organizations and account holders.► Non-compliance creates difficulty in doing business with compliant institutions.► Modifying systems and processes is costly.

Financialrisks

DetailsFATCA impact

Operationalchallenges

Globalcompliance

Technologyinvestments

FATCA vs other US tax information reportingregimes: chapters 3, 4 and 61

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Chapter 3(“section 1441”)

It requires withholding(generally at 30%) andreporting on certain US-source income paid toforeign persons (i.e.,section 1441). It alsoaddresses effectivelyconnected income offoreign partners andgains from real property.Purpose: collect tax onUS-source income offoreign persons.

Chapter 61(“Form 1099”)

Reporting on US andforeign-source income ispaid to US persons (i.e.,Form 1099 reporting).Backup withholding isapplicable only whereTIN/documentationrequirements are not met.

Purpose: enable IRS tomatch income paid withtax filings of USrecipients.

Chapter 4(“FATCA”)

FATCA (effective 1 July2014) calls for thecollection, validation andreporting of certaininformation anddocumentation to identifyoffshore investments ofUS persons.

Purpose: make sure USpersons pay tax onincome received throughoffshore investment.

Requirements of a USWA as payor

Process flow for USWAs taking intoaccount chapters 3, 4 and 61

► Step 1: Determine whether an amount to be paid is fixed,determinable, annual, periodical (FDAP) income or grossproceeds from the sale of US securities► If it is not, no documentation, withholding or reporting is required

► Step 2: If the income is FDAP (or gross proceeds from thesale of US securities), solicit a valid Form W-9 from the payeeor determine payee is an entity with foreign indicia► If the payee furnishes a Form W-9 and is not an exempt

recipient, report payment on a Form 1099► All payees without a Form W-9 should be backup withheld upon

unless it is an entity with foreign indicia► Step 3: If no Form W-9 received and there is foreign indicia,

determine and document source of income► If the income is foreign source, no withholding or reporting

is required

Process flow for USWAs taking into accountchapters 3, 4 and 61

► Step 4: If the income is US source, determine whether the payment isa “withholdable payment” for chapter 4 purposes► If the income is not a “withholdable payment” for chapter 4 purposes,

solicit a valid Form W-8 (no FATCA classification required) and applychapter 3► Impose 30% withholding (or reduced withholding rate if the payee furnishes a

valid treaty claim or 0% if the payee certifies that the income is effectivelyconnected with their conduct of a trade or business in the US)

► Report the income and any tax withheld on a Form 1042-S

Note: insurance premiums and gross proceeds on US securities aresubject to chapter 4 withholding, but not chapter 3 (gross proceedsbecome subject to chapter 4 withholding in 2017).

Process flow for USWAs taking into accountchapters 3, 4 and 61

► Step 5: If the payment is a “withholdable payment” for chapter 4purposes, determine whether the payee furnished valid chapter 4certifications with its Form W-8► If the payee has furnished valid chapter 4 certifications, apply chapter 3

(see step 4)► Step 6: If the payee has not furnished valid chapter 4 certifications,

withhold 30% under FATCA and report the income and tax withheld ona Form 1042-S

Note: FATCA withholdable payments and related withholding that areallocable to certain US owners of certain NFFEs and owner documentedFFIs must be reported on Forms 8966 along with relevant informationabout such US persons.

FATCA withholdable payments andexclusions

► The following are FDAP types included or excluded from FATCA(Chapter 4).► Note: All FDAP is subject to Chapter 3 and 61 unless specifically excluded

by related guidance.

Included► Bank and brokerage fees► Investment advisory fees► Custodial fees (e.g., fund manager fees)► Payments in connection with lending transactions► Forward, futures, option or notional principal contracts► Insurance premiums and annuities► Dividends on US securities► Interest (with certain exceptions)► OID (excluding short term)► Certain dividend equivalent payments► Financing leases

Excluded► Payments for tangible goods► Fees paid for non-financial services (e.g., fees paid to

an engineering consultant)► Software licenses► Rent for office space► Use of other property (e.g., royalty or intellectual

property)► Freight/transportation expenses► Interest on outstanding bills arising from services► Interest on deferred purchases (e.g., goods purchase

on credit)► Lease payments on equipment

Global legal entity classification

Global legal entity classification

► A multinational organization must classify its entities into threegeneral categories, as follows:► US entities/US withholding agents► FFIs► NFFEs

► A US entity must generally provide a Form W-9 to payors todocument itself as a US person.► In the absence of a Form W-9, complex presumption rules must

be applied to determine US vs. non-US status. In general,presumption rules cannot reduce withholding.

► An FFI must generally provide a Form W-8BEN-E with a USGlobal Intermediary Identification Number (GIIN).

► An NFFE must generally provide a Form W-8BEN-E and acertification with respect to substantial US owners.

Global legal entity classificationFFIs

► A financial institution for FATCA purposes is broadly defined andgenerally includes the following:► An entity that accepts deposits in the ordinary course of a banking or

similar business► An entity that holds, as a substantial portion of its business, financial

assets for the benefit of one or more other persons (custodial institution),Or

► An investment entity, which is generally defined as:► An entity that primarily conducts the business of trading in various financial

instruments, managing individual or collective portfolios or otherwise investing,administering or managing funds (defined broadly), money or financial assetson behalf of other persons

► An entity that functions as a fund (defined broadly) or for which gross income isprimarily attributable to investing, reinvesting or trading in financial assets

► Certain insurance companies, holding companies or treasury centers thatare members of an expanded affiliated group having specified attributes

Global legal entity classificationExclusions from FFI status

► Certain entities that may otherwise have to register as an FFI under FATCAmay be excluded from the relevant requirements if the entity is:► A retirement fund located in an intergovernmental agreement (IGA) country that is

listed in Annex II and qualifies as an exempt beneficial owner (i.e., a IGA FFI)► A pension or retirement fund that falls into one of six categories under FATCA

regulations, treated as exempt beneficial owners:► Treaty qualified retirement fund► Broad participation retirement fund► Narrow participation retirement fund► Fund formed pursuant to a plan similar to a US 401(a) plan► Investment vehicles exclusively for retirement funds► Pension fund of an exempted beneficial owner

► In general, an excepted non-financial group entity that is not otherwise an FFI, doesnot hold itself out as an investment vehicle and is a:► Non-financial holding company► Treasury center► Captive finance company

► An NFFE is defined as a non-US entity that is not a financialinstitution.

► A withholding agent is required to withhold 30% of any withholdablepayment made to a payee that is an NFFE unless:► The USWA has appropriate certifications regarding substantial US owners

of the NFFE, and the USWA reports to the IRS required information aboutany substantial US owners.

Or

► The NFFE is an “excepted” NFFE (certification generally required).For example:► A publicly traded entity (per FATCA definition) and its affiliates► An active NFFE

Global legal entity classificationNFFEs

Global legal entity classificationEffect of IGAs

► To effectively administer FATCA around the world, the US Treasury is enteringinto IGAs with various countries to enable local country administration andcertain changes to FATCA requirements that the US government deemsappropriate based on local country considerations.

► These can alter FATCA entity classifications within a local jurisdiction.For example:► The regulations provide that for entities resident in IGA countries, the IGA

definitions of FFI and NFFE control, and that the statutory and regulatory definitionsapply to entities that are resident in jurisdictions that do not enter into IGAs.

► IGAs of certain countries have their own list of excepted and deemedcompliant entity types based on the risk profiles of those entity types within therelevant country.

► IGAs also have specific guidance regarding documentation an FFI can collect todetermine the classification of a payee.

Many countries are in different stages of the IGA process. It is expected that 50+ countries will sign IGAs with the US.

IGAs (as of 3 April 2014)

**Non-Reciprocal Model IGA**The member States of the Organization of Eastern Caribbean States (OECS) are Antigua and Barbuda, Dominica, Grenada Montserrat, St. Kitts and Nevis, Saint Lucia, and

St. Vincent and the Grenadines.

Actually or presumed effective on July 1, 2014 Under consideration

► Bermuda (Mod. 2)*► Canada► Cayman Islands*► Chile (Mod. 2)*► Costa Rica► Denmark► Finland► France► Germany► Guernsey► Honduras► Hungary► Italy

► Ireland► Isle of Man► Japan (Mod. 2)*► Jersey► Luxembourg► Malta► Mauritius► Mexico► Netherlands► Norway► Spain► Switzerland (Mod. 2)*► United Kingdom

Agreed in substance► Austria (Mod. 2)*► Australia► Belgium► Brazil► British Virgin Islands► Croatia► Czech Republic► Estonia► Gibraltar► Jamaica► Kosovo► Latvia► Liechtenstein► Lithuania► New Zealand► Poland► Portugal► Qatar► Romania► Slovenia► South Africa► South Korea

► Argentina► Bahamas► Barbados► China► Colombia► Cyprus► Hong Kong► India► Israel► Lebanon

► Malaysia► Organization of Eastern

Caribbean States*► Panama► Philippines► Russia► Saint Maarten► Seychelles► Singapore► Slovak Republic► Sweden► Taiwan (Mod. 2)*► United Arab Emirates

Recent changes to guidance

Recent FATCA changes andconsiderations

► Direct reporting NFFEs (or their sponsors)► Need a GIIN

► Investment advisors and investment managers► Certified deemed-compliant FFIs

► GIIN validation and awaiting GIIN► Validate within 90 days of claim of status► No “catch up” withholding if GIIN doesn’t validate► But Chapter 3 withholding possibly still applicable

► New definition of an “expanded affiliated group”► Partnership: can lead a group if an election is made

Presumption rules in the absence ofdocumentation under conforming regs

► Individuals are generally presumed to be US persons► Certain exempt recipients receiving “withholdable payments” are presumed

foreign, regardless of whether foreign indicia exists (and thus are treated asnon-participating FFIs subject to FATCA withholding)► These are “the Bad 8” and comprise the following: corporations, foreign

governments, international organizations, foreign central banks of issue, financialinstitutions, nominees/custodians, brokers and swap dealers

► All other exempt recipients (i.e., “the Good 9”) are subject to indicia test► This does not apply if the payor “classified” the payee as a US exempt recipient

prior to 1 July 2014► This does not apply if the payment received is not a “withholdable payment” (e.g.,

non-financial services)► In all other cases, an entity is treated as U.S. unless it has certain foreign

indicia set forth in the regulations► These generally include: 1) All communications to a foreign address; 2) EIN

beginning with “98”; 3) “Per se” list of foreign corporations; 4) Payment is made withrespect to an offshore obligation; and 5) Foreign telephone number (for accountsopened on or after 1 July 2014)

Documentation

► Faxed or emailed Forms W-8s► Effective 1 July 2014, USWAs may rely on fax or pdf versions of valid

withholding certificates (Forms W-8/W-9).► This applies unless the USWA knows the sender transmitted the document

without the authority of the person who signed the form.► This is not applicable to FATCA, but a “correction” is expected.

► “Evergreen” Forms W-8► Valid Forms W-8 furnished after 30 June 2014 may be treated as

“evergreen” if:► There is no US indicia (individuals only).► The Form W-8 is completed in full, and no changes in circumstance have

occurred.► Documentary evidence is furnished with the Form W-8.

► Treaty claims cannot be “evergreen.”

Documentation

► When collecting new forms, temporary regulations requirecollection of revised versions of Forms W-8 and 8233 sixmonths after their issuance, unless the IRS providesotherwise► Does not apply to Form W-9

► Form W-9 (rev. August 2013)► “Exemption from FATCA reporting code (if any)” – applicable only

to offshore accounts► Additional jurat – “The FATCA (codes) entered on this form (if any)

indicating that I am exempt from FATCA reporting is correct”► Or on a substitute form, “The payee is exempt from FATCA reporting”

US indicia

► If a withholding agent “documented” the foreign status of apre-existing account holder prior to 1 July 2014, it maycontinue to rely on such documentation

► New indicia of US status► US phone numbers – nonresident aliens with only a US phone

number on file (i.e., no foreign phone number(s))► US place of birth

► For new accounts, if documentation indicates a person was born in theUS, proof that they renounced their citizenship is required

► For accounts opened prior to 1 July 2014, no requirement to look forplace of birth in records, but if reviewing documentation on file and USplace of birth is identified, proof of renounced citizenship is required

Curing US indicia

► Written explanation supporting an individual’s claim offoreign status may now be provided by a checklistfurnished to the nonresident alien (NRA) by thewithholding agent

► Specifics of written explanation in the regulations include:► Specific visa status (e.g., student, teacher or diplomatic status)► Detailed information demonstrating that the individual does not

meet the substantial presence test, for example, the number ofdays present in the US during the three-year period of the test

► Certification of status under a US tax treaty► Certification of a “closer connection” to another country

► Simple explanations regarding delayed mail or securityconcerns are no longer sufficient

Documentation “to do” reminder

► Forms W-8 remediation required (at a minimum) in2014 for:► Forms signed in 2010

► Expiration date previously extended from 30 June 2014, now moved to31 December 2014

► Forms signed in 2011► Expire 31 December 2014

► Prima facie FFIs► Presumed foreign persons

► Classify eyeball exempt recipients as such where properdocumentation is on file or the “eyeball test” applies

What companies should focus on now

What non-financial companies shouldfocus on now

Corporate footprint► Define and review organizational footprint► Review entities within the corporate footprint and identify each legal entity’s

FATCA classification (e.g., USWA, FFI, NFFE)► For each entity, identify documentation to be provided to a payorPayment streams► Identify business units making and processing payments and review

FATCA implications► Accounts payable, treasury, shareholder relations and any other function involved in

payment processing and determination of income (e.g., procurement, legal andbusiness units)

► Review impact on intercompany transactions as well as third-party paymentsCurrent IRW (information reporting and withholding) compliancecapabilities► Review current information reporting and withholding compliance► Identify process and procedure gaps that may delay or derail FATCA

compliance efforts

What financial companies should focuson now

► Focus on near-term 7/1 deliverables for onboarding new clients andfor applying those new Chapter 3 and 61 rules

► “Don't forget the other stuff”► Establish “buckets” of pre-existing account holders to establish new

withholding dates► Perform your own internal data mining to determine how and where to

look for US indicia and changes in circumstances► Establish strong governance around FATCA business decisions► Determine whether you have a testing plan in place► Establish contingency plans► Know procedures for W-8 validation

Questions?

Thankyou!

Ninth AnnualDomestic Tax Conference8 May 2014 | Chicago

ninth annual domestic tax conference - building a better...

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