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FATCA in PakistanFATCA in Pakistan Key challenges and Implications

Ali Kazimi MENA FATCA Leader

© 2013 Deloitte LLP. Private and confidential

Financial Services Partner

What is FATCA?US governments response to combatting tax evasiong p g

• US persons evade their tax obligations by holding assets overseas in non‐US structures & products• US persons do not file or report their worldwide income with integrity

US government concern

• US persons do not file or report their worldwide income with integrity

N US fi i l i tit ti d i t d F i Fi i l I tit ti “FFI ” d t t

US government response• Non‐US financial institutions designated Foreign Financial Institutions, or “FFIs” need to enter into an agreement with the US Tax authorities and become participating FFIs

Foreign Financial Institutions

PlatformWealth manager Broker

Bank account

Trust/Custodian

Income and sales proceeds

• All participating FFIs need to report to the US Tax authorities: the balance the income and the

US assetsFund Insurance

productUS owner


• All participating FFIs need to report to the US Tax authorities: the balance, the income and the gross proceeds for all accounts held by US persons, on an annual basis

2

FATCA Overview in Pakistan Considerations and implications for Financial Institutionsp

FATCA in Pakistan

Compliance Non‐Compliance

Meet Compliance requirements

No additional work requirements

Meet Governance requirements

Reputational Damage

Register with IRS/ Under an IGA

Loss of Counterparty and FI relationships

S bj t t Withh ldi


Business As Usual* Subject to Withholding

tax at 30%

3

Non – Compliance Each non‐compliant FFI may have the following issues…..

Subject to withholding taxBeginning 1 July 2014 NPFFIs will be subject to withholding

Reputational damage

p y g

FFI credibility and reputation may be damaged by not tax at 30% on US sourced income , this will later extend to

gross proceeds and foreign passthru payments. complying with a globally applicable law .

Loss of customers Loss of counterparty relationships

Many banks and financial institutions will not deal with

non compliant entities in order to reduce their own

Customers may not want to deal with non‐compliant banks.

non‐compliant entities in order to reduce their own

reputational risk and withholding responsibilities.Customers will not want to be subject to 30% withholding tax due to the bank being non‐compliant.

© 2013 Deloitte LLP. Private and confidential4

Compliance Requirements Each compliant FFI will have to fulfil the following…..

Entity Classification

Th l ifi i f i i US N US

Individual Classification

The classification of individual accounts to be US, Non US

p g

The classification of entity customers into US, Non US,

Financial or Non‐Financialor Recalcitrant applying to both pre‐existing and new

accounts

Remediation

The transition/remediation work and further information

Reporting

The provision of information to the IRS under the FATCAand documentation requirements for pre‐existing

customers (obtaining withholding certifications or proof of

US/Foreign status).

The provision of information to the IRS under the FATCA

agreement for both pre‐existing and new accounts which

have been classified as US accounts.

Withholding

The requirement to withhold 30% of withholdable


The requirement to withhold 30% of withholdable

payments to recalcitrant account holders.

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FATCA requires significant process and system changesHowever the magnitude of the work required may vary depending on your

Existing AML/KYC Framework

g q y y p g yexisting AML/KYC framework

Existing customerNew customer

Existing AML/KYC Framework

remediationon‐boarding


Further considerations Based on our extensive experience of FATCA engagementsp g g

Challenge Consideration

Any process change is as good as its implementation

Ensure that the impacted stakeholders are held accountable

Process

Most banks have data quality and data

Systems/DataAs part of the FATCA remediation, consider

integrity challenges addressing these known data issues as well

A sudden wave ofone stop FATCA system solutions

Carefully assess solution capabilities and compatibilities before proceeding

Tactical changes versus strategic ones Consider potential future requirements from

Not just FATCA…


Tactical changes versus strategic ones other countries, not just the US

7

FATCA governanceEach compliant FFI will have to fulfil the following…..

FATCA requires a participating FFI to comply with verification procedures established by US Treasury to certify that the FFI has complied with the terms of the FFI agreement. Repetitive or systematic failures in the FFI’s compliance processes may result in enhanced review procedures including an external audit

p g

enhanced review procedures, including an external audit.

Policies and Procedures

Adopt written policies and procedures governing FATCA related requirements and conduct periodic reviews of compliance with the said policies and procedures and FATCA obligations generally

Responsible Officer/Internal Controls/Governance

Arrange for the Responsible Officer of the FFI to certify the participating FFI’s compliance with its FATCA obligations on aArrange for the Responsible Officer of the FFI to certify the participating FFI s compliance with its FATCA obligations on a periodic basis, report certain factual information and disclose material failures with any of the requirements of its FFI Agreement.

Legal RequirementsLegal Requirements

Have the legal ability to disclose information to the IRS and apply withholding


FATCA Registration Implications on the different types of registration p yp g

FATCA Compliance

Register with the IRSRegister with IRS and Govt under an IGA

Register on on‐line portal Model 2Model 1

Responsible officer required Responsible officer

requiredNo responsible officer

Meet withholding

Monitor further regulations for dates

Report to the IRS

N ithh ldi

Report to Pakistan government

N ithh ldi

grequirements


regulations for dates, processes and procedures

No withholding requirements

No withholding requirements

9

Inter‐Governmental AgreementsBetween Pakistan Government and the US (IRS)( )

Benefits to Banks/Financial Entities

• Local government provides a level of protection to the

Challenges for Banks/Financial Entities

• Uncertainty waiting for local governmentLocal government provides a level of protection to the financial industry from the US

• Assistance provided to the industry regarding specific concerns (e.g. Banking Secrecy)

Uncertainty waiting for local government

• FATCA requirement changes introduced by IGA

• Removal of withholding

• Potential for Financial entities to be exempted.

• Reduced exposure of local entities to direct US action (fines, reviews, audits).


FATCA Inter‐Governmental Agreements Current status of IGA’s

Model 1 IGA

United Kingdom

Model 2 IGA

Japan

Denmark

Mexico

Germany

Switzerland

Germany

Ireland

Norway

Spain


Inter‐Governmental Agreement – GCC region snapshotAs at October 2013

Country Regulator Banking Secrecy Discussions / Communications

C l B k f Hi h d f B ki S f ll • CBB issued a circular in September, announcing their intention to enterBahrain Central Bank of

Bahrain (CBB)High degree of Banking Secrecy for all banking customers

CBB issued a circular in September, announcing their intention to enter into a Model 1 IGA with the US

• CBB asked Bahrain institutions to provide update of their FATCA readiness

Qatar Qatar CentralBank

Regulated financial institutions mustprotect confidential information relating to their clients.

• QCB issued a circular in September, announcing their intention to enter into a Model 1 IGA with the US

• QBB asked Qatar institutions to provide update of their FATCA readiness.

U.A.E. Central Bank of the BUAE (CBUAE)

Bank secrecy is strictly enforced in the UAE, although customer consent may dis‐apply it.

• At a FATCA Seminar in March, the UAE Central Bank governor verbally announced the UAE government’s intention to enter into a Model 1 IGA with the US

• No further formal announcements have been made to date

A bank has a general duty of

Saudi Arabia

Saudi Arabia Monetary Agency

(SAMA)

g yconfidentiality towards a consumer except when disclosure is imposed by a relevant authority or with the written consent of the consumer.

• SAMA has instructed Saudi banks to undertake their respective FATCA compliance initiatives whilst SAMA assesses the possibilities of entering into an IGA with the US

CBO Committee reviews requests to

Oman Central Bank of Oman (CBO)

release confidential information and barring this , consent is always required from the account holder prior to divulging information to third parties.

• CBO issued a FATCA circular requesting financial institutions to assess the potential implications FATCA has on their respective operations

• No announcements in relation to an IGA have been made to date

Kuwait Central Bank of Affairs of the bank or its customers arespecifically protected under the Civil

• CBK has not issued any specific guidelines on FATCA• The Kuwait Bankers association has conducted internal FATCA discussions


Kuwait Kuwait (CBK) specifically protected under the Civiland Commercial Procedure Law.

• The Kuwait Bankers association has conducted internal FATCA discussions,however no announcement in relation to an IGA have been made to date

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Rest of the world … Some examples As at October 2013

Country Regulator Banking Secrecy Discussions / Communications

R l d fi i l i i i • The US Treasury reported on November 2012 that the US and India were

India Reserve Bank of India

Regulated financial institutions mustprotect confidential information relating to their clients.

The US Treasury reported on November 2012 that the US and India were working to explore options for intergovernmental engagement.

• No further public announcements and information has been provided in 2013

Malaysia

Bank Negara Malaysia – Bank secrecy is strictly enforced in

Malaysia although customer consent

• The US Treasury reported on November 2012 that the US and Malaysia were working to explore options for intergovernmental engagement. Malaysia Central Bank of

Malaysia

Malaysia, although customer consent may dis‐apply it. • No further public announcements and information has been provided in

2013

TaiwanCentral Bank of the Republic of China (Taiwan)

Banks are required to keep customer information confidential unless otherwise required by law.

• On April 2013, the Taiwanese Financial Supervisory Commission and Ministry of Finance jointly announced that both agencies and the US Treasury had reached a consensus to pursue an IGA to facilitate the i l t ti f FATCA( ) q y implementation of FATCA.

SlovakRepublic

Národná Banka Slovenska

A bank has a general duty to maintain a customers confidential information and protect it against disclosure except when it is imposed by a relevant authority or with the written consent of

• The US Treasury reported on November 2012 that the US and Slovak Republic were actively engaged in a dialogue towards concluding an IGA.

• No further public announcements and information has been provided in 2013authority or with the written consent of

the consumer.2013


Business as usual What happens next?pp

Business as usual

Continued governance

Formal RO verifications (3 yrs)

Ongoing monitoring and training

Meet reporting and withholding requirements


Information refresh

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Main Considerations Key Challenges & Implicationsy g p

Implementing FATCA in Pakistan

Key challenges Key implications

Population size Non implementationImplementation

Technical legislationReputationIT system challenges

IT t Loss of customers/business

Technical nature/knwoledge

Internal

IT systems

Language barrier / communication


WithholdingInternal

controls/Goverenancecommunication

Legal15

FATCA Challenges Common Misconceptions and pitfallsp p

Misconceptions

• All about withholding – withholding can be minimized and it is information that is key.• We have to do everything and we have no options – elections and delegation of responsibilities• Need to do everything now – have a plan and use the FATCA milestones• Local government/regulator will save us – time is an issue and major part of FATCA stays the sameg / g j p y

Difficulties

T t t f j i t t / t hi /t t• Treatment of joint accounts/partnerships/trusts• Use of de‐minimis and other limits• Reliance on documentation• Technical nature of regulations

Wh t i l d i FDAP S f i t ?• What is classed as income, FDAP, Source of income etc?


FATCA – Next steps Time is running outg

• Understand the importance of FATCA• Acquire senior management buy‐in on FATCA• Understand your business and group under FATCA• Organize internally to implement a large regulatory project:

o Resourceso Budgetso Time

• Become familiar with the FATCA regulations• Identify FATCA Gaps/changes• Mobilize the business• Implement FATCA in the business


Our Engagement teamF d idi l dd d i tFocused on providing value added input

Ali Kazimi – FATCA Leader and Financial Services Partner

Ali has over 20 years of financial services sector experience gained with leading financial institutions and professional advisory firms, including eight years as thefinancial institutions and professional advisory firms, including eight years as the Head of Taxation at Barclays Global Investors. He has more recently focused on advising on the implications of FATCA.

He works primarily with institutional investors, asset and wealth managers, investment brokerage and platforms, and investment services firms. Ali is a frequent speaker at conferences and has also written on wide range of topics including

• E‐mail: [email protected]• Tel: 00971 45064910

speaker at conferences and has also written on wide range of topics including Securities Lending, Sovereign Fund Investing, Pension & Asset Pooling, Multi‐Manager Investing, Custodial Structures, and Stamp & Transfer Taxes.

Mark Pegram – FATCA Co‐Lead Tax

Mark is a Deloitte FATCA co‐leader and has over 9 years tax experience, the last three years with Deloitte in Guernsey, the Isle of Man and now Dubai.

Earlier in his career Mark worked for the UK tax authority (HMRC) as an Inspector of Taxes, and provides an insight into the tax authorities perspective to our FATCA projects.

Over the years he has worked on a number of projects for financial institutions based

• E‐mail: [email protected]• Tel: 00971 45064902

Over the years he has worked on a number of projects for financial institutions based in Guernsey and the Isle of Man in respect of withholding taxes and reporting requirements.


Important NoticeThis document, which has been prepared by Deloitte LLP (“Deloitte”), has been prepared for the sole purpose of providing a presentation and overview of certain FATCA issues. The contents of thispresentations is for information only, should not be relied upon and does not constitute formal advice.

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