The Influence of U.S. Regulatory Changes on International Tax Practices - BNY Mellon

Information Classification: Confidential

CHANGES IN US TAX LAWS AND THE INFLUENCE THIS HAS HAD ON INTERNATIONAL TAX PRACTICES

Presented by Lorraine White.

Head of EMEA Custody Tax

and US Tax Services

19th November 2014

2 Information Classification: Confidential

Agenda

1.Tax Evolution – Taxation without borders

2.FATCA and where are we now?

3.Global FATCA - The latest updates from the OECD and the EU

4.Base Erosion and Profit Shifting – the link


Taxation Without Borders

• Fiscal pressures

• Governments need to raise revenue

• Pursuit of individual and corporate taxation

• Use of legal instruments was not enough

• Treaty access

• Perception of treaty abuse

• Financial transaction tax

• Political will?

• Increased government to government co-operation

• Mutual Assistance

• Fiscal Intermediaries

• The role of financial institutions

But one border remains – Treaty Access!!!!


201720162015201420132012

Unprecedented Tax Changes within Financial Services

Fundamental Tax developments in Financial Services: Investor Tax Reporting, FATCA, European Financial Transaction Taxes, Automatic

Exchange of Tax Information, Tax Transparent Funds, European Savings Directive, Qualified Intermediary (QI) regimes, Common

Reporting Standards, Cost Basis reporting, Capital Gains Tax developments, continuous increase on Tax Documentation, etc.

G20 LEADERS SUMMIT AUSTRALIA 2014 - AGENDA FOR GROWTH AND RESILIENCE:

“delivering on the financial regulation reforms and modernizing the international tax system”

Italian

FTT

G8 support of

Automatic

Exchange of Tax

information

Italian

FTT

German ITR changesUK

TTF

EU FTT – commitment

from 10 of 11

participating member

states to implement EU

FTT

UK Reporting

Overseas Territories

Argentinian

CGT

FATCA

Reporting

Pass Through

Payments / WHT

French

FTT

New Rules for

Denmark ITR rules

Austrian

ITR changes

UK ITR changes

Swiss ITR

changes

FATCA Registration

ECJ

Santander

Case

Columbian

CGT changes

Ireland rules

for ITR

Expected EUSD

expansion (to be

aligned with OECD

AEOI)Japan and Korean

WHT

Tax changes

OECD publishes

Common Reporting

Standard (CRS)

Implementation of the

OECD Model Treaty

for funds

US Cost Basis

reporting

OECD CRS start date

(merging of UK FATCA

with CRS)

BEPS action

points review

EU DAC incorporating

CRS

FATCA/UK FATCA

start date

Investor

Tax

French

FTT

Conclusion of

BEPS review


US FATCA Overview

• The (US) Foreign Account Tax Compliance Act (FATCA) aims to combat tax evasion by US residents using foreign accounts

• Requires Financial Institutions (FIs) outside the US to pass information about their US customers to the US tax authorities and includes

provisions on withholding taxes

• A model intergovernmental agreement (IGA) was developed in 2012 to enable FIs to comply with FATCA without breaching jurisdiction

data protection laws

• A number of countries have now signed IGAs with the US


Current Issues

• “Umbrella” funds with underlying sub-funds (e.g. Luxembourg SICAV)

• If sub-funds have segregated assets and liabilities (i.e. “ring fenced”), they may be considered a distinct/separate entity and B.O. from

a US tax perspective

Historically, most “ring-fenced” sub-funds provided a W-8BEN reflecting the name of the sub-fund in Line 1 (B.O.), with the name of

the umbrella fund on the reference line

• W-8BEN-E categories are governed by US tax law, while IGAs are governed by local law; in many countries the sub-funds have no

separate legal identity or independent status

There is uncertainty whether the umbrella or each underlying sub-fund(s) will need to obtain a GIIN

Many umbrella funds believe they are required to register at the umbrella level under their IGA (that umbrella will be assigned a

GIIN)

• As a result, there is an inconsistent approach in how W-8BEN-Es are being executed

The name reflected on Line 1 (umbrella or sub-fund) can create validation/mismatch issues; accounts are opened in the sub-fund

name and the GIIN is generally verified to the Line 1 name

• BNY Mellon raised a question to the IRS (via the AGC) to clarify whether a W-8BEN-E can be executed as either:

Line 1 reflecting sub-fund name (umbrella name added as reference) with GIIN of sub-fund, or

Line 1 reflecting umbrella fund name (sub-fund name added as reference) with GIIN of umbrella


Current Issues (Continued)

• Disregarded Entities (DREs)

• In general, if a DRE is in the100% owner’s country of residence they will utilise one GIIN

The IRS instructions for W-8BEN-E and W-8IMY indicate that specific FATCA information is only required for DREs outside the

parent’s country of residence (as it will be obtaining its own GIIN)

• However, DREs resident in Model 1 IGA jurisdictions will register as entities separate from its owner and will receive their own GIIN

As a result, there are DREs resident in the same country as their parent (e.g. Luxembourg and the Cayman Islands) that will have

their own specific FATCA classification and GIIN

The IRS Instructions for W-8BEN-E and W-8IMY do not take this scenario into account

• Due to the lack of clear guidance there is inconsistency in how W-8BEN-E and W-8IMY are completed by DREs in their 100% owner’s

country of residence that is a Model 1 IGA jurisdiction

It is unclear if the DRE is required to provide their GIIN and specific FATCA information (e.g. classification as a “Reporting Model 1

FFI”), and the owner only provides minimal information

• BNY Mellon is currently working with a Big 4 Accounting Firm to define the requirements and create a consistent policy for this scenario


Current Issues (Continued)

• Downloading Copies of W-series from Websites

• US withholding agents are under client pressure to download scanned copies of W-8s and W-9s from websites (either belonging to

clients or maintained by third-parties)

• BNY Mellon has heard from multiple sources that the IRS has strong concerns about this practice

• As a result, BNY Mellon has raised this question and issue to the IRS

The specific scenario requested to be reviewed was whether it is permissible to accept copies of wet-ink signature forms from the

client’s website (or third-party website) at the specific direction of a client

• Until the IRS provides definitive guidance and clarification, downloading copies of W-8s and W-9s for direct accounts from websites is

currently not permissible


Copies vs. Originals

• Effective 1st July 2014 : copies of Forms W-8 (*.pdf or fax) can be accepted

• However, an original is required in the following situation:

Retroactive affidavit is provided, and

It is being used to cover payments before 1st July 2014

• The reasoning behind this requirement is that the IRS Regulations permitting copies apply to payments made on or after 1st July 2014

• Summary of Rules:

Original required: retroactive affidavit prior to 1st July 2014

Copy (*.pdf or fax) acceptable: Signed after 1st July 2014 or retroactive affidavit effective after 1st July 2014


FATCA Evolution - Growth in the crackdown on tax evasion

Automatic exchange requirements have expanded rapidly and the Common Reporting Standard (CRS) is set to continue this growing trend

US FATCA UK FATCA OECD GLOBAL FATCA

• Annual reporting by non-US

Financial Institutions (FIs) on

accounts held by specified US

Persons

• First reporting 2015

The reportable account population

is expected to be small

• Annual reporting by UK FIs on CD

and Gibraltar accounts

• Annual reporting by CDOT*

Financial Institutions on UK

account holders


It is expected that the reportable

account population will increase

• Global initiative led by the OECD

member states and G20

governments to increase tax

transparency

• Annual reporting by FIs on

accounts resident in partner

jurisdictions


Significant increase in the number

of reportable accounts

Increased geographical impact brings many practical challenges

• Filing multiple information returns covering reportable accounts and managing multiple relationships with tax authorities

• Monitoring developments, local country guidance and legislation. Complying with data privacy laws

• Aligning reporting output with existing regimes. Do you develop tactical or strategic solutions

*Guernsey, Isle of Man, Jersey, Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Turks and Caicos Islands


What is AEOI and what are the benefits to governments

AUTOMATIC EXCHANGE OF INFORMATION INVOLVES THE SYSTEMATIC AND PERIODIC TRANSMISSION OF BULK TAX PAYER

INFORMATION BY THE SOURCE COUNTRY OF INCOME TO THE COUNTRY OF RESIDENCE OF THE TAXPAYER IT CAN:

• provide timely information on non-compliance where tax has been evaded on either an investment return or the underlying

capital.

• help detect cases of non tax compliance where tax authorities have not had any previous indication of non tax compliance

• increase voluntary compliance, encouraging taxpayers to report all relevant information

• It may also help with educating tax payers in their reporting obligations, increasing tax revenues and helping to ensure tax

payers pay their fair share of tax in the right place at the right time.

• Conceptually some countries may be able to integrate the information received automatically with their own systems –

leading to pre-filled tax returns.


Latest from the OECD - The Common Reporting Standard

Common Reporting Standard (CRS) is an OECD-lead initiative on the global automatic exchange (AEOI) of financial account information,

sometimes referred as “Global FATCA”. It is supported by the G8, G20 and the EU

• Published on 13th February 2014, and formally endorsed by the G20 leaders on 23rd February, the OECD’s model Competent Authority

Agreement (CAA) and Common Reporting Standard (CRS) is designed to be a standardised and cost effective model for the multi -

lateral exchange of tax payer information

• 21st July the OECD published commentaries on the CRS and CAA models

Commentaries are designed to assist both governments and business to implement the standard consistently

They provide detail on the practical implementation of the standard:

> Including detailed model agreements

> Standards for harmonised technology solutions

> and a format for the secure transmission of data

• On the 29th October a total of 51 countries and jurisdictions - known as the Early Adopters Group - have now committed to a common

implementation timetable which will see the first exchange of information in 2017 in respect of accounts open at the end of 2015 and new

accounts from 2016.

• A further 34 countries have committed to implement the new global standard by 2018.

Presenting the new standard, the OECD Secretary-General Angel Gurría said:

“This is a real game changer. Globalisation of the world’s financial system has made it increasingly simple for people to make, hold

and manage investments outside their country of residence. This new standard on automatic exchange of information will ramp up

international tax cooperation, putting governments back on a more even footing as they seek to protect the integrity of their tax

systems and fight tax evasion.”


The latest from the EU – Common Reporting Standards take 2

• On 3rd October 2014 EU Commission published its proposals to amend Directive 2011/16/EU as regards mandatory automatic exchange

of information in the field of taxation (DAC).

• Specifically Article 8 of Directive 2011/16/EU will be extended to include the same information covered by the OECD Model CAA and

CRS. The aim is to ensure that the expanded scope of automatic exchange of information within the EU is in line with international

developments.

• While it follows the CRS as much as possible some changes exist to take account of EU law. For example no deferment of gross

proceeds reporting.

• Political agreement on the draft amended Administrative Cooperation Directive, integrating the CRS into this Directive, was reached

during the ECOFIN of 14 October 2014, and will introduce the CRS reporting amongst all EU Member States as from 1 January 2016

(Austria may benefit from an extension of this deadline up to 1 January 2017)

• Member States will be required to implement rules to require their financial institutions to implement reporting and due diligence rules

which are fully consistent with those included in the CRS.

• It is therefore likely that the last reporting under the EU Savings Directive will be due in 2016 relating to calendar year 2015, since the

much broader CRS reporting will be due in 2017 regarding calendar year 2016.

• All EU Member States signed a multilateral agreement to implement the CRS on the 29th October


Latest from the OECD – Base Erosion and Profit Shifting

• At the request of the G20, the OECD developed an Action Plan to tackle base erosion and profit shifting (BEPS) in a comprehensive

manner.

• The BEPS Action Plan, which was published and endorsed by the G20 Finance leaders on 19 July 2013 and endorsed by the G20

Leaders at their meeting on 5-6 September 2013.

• The action plan provides for 15 actions to be undertaken in the context of the OECD/G20 BEPS Project, to which all non-OECD G20

countries (Argentina, Brazil, China, India, Indonesia, Russia, Saudi Arabia and South Africa) participate on an equal footing with OECD

countries.

• The timeline of the OECD/G20 BEPS Project is extremely ambitious.

• Initial output made in September 2014

• completion of the project anticipated by the end of 2015.

• The OECDs Base Erosion and Profit Shifting (BEPS) project is broadly focused on multi-nationals utilising tax planning strategies,

exploiting gaps and mismatches in overseas tax systems to mitigate their exposure to local corporation taxes.

• In the context of cross border portfolio investment it was not generally considered to be of potential impact but two of them, if included in

the OECD recommendations and implemented by governments, could have a bearing on the ability of cross border investors to access

treaty relief. These actions are:

Action 2 – Neutralise the effects of hybrid mismatches

Action 6 –Prevent treaty abuse

If these proposals were implemented collecting tax Treaty entitlements could be further hampered, as they move further away from the

streamlined tax relief at source system contained in the TRACE IP.


CRS overview

The CRS encompasses several key elements which form the legal basis for exchange between jurisdictions and as well as outlining the

requirements for Financial Institutions (FIs)

Model Competent Authority Agreement (CAA)

The Competent Authority Agreement (CAA) is a bilateral agreement where it is

intended that governments will conclude bilateral or multilateral agreements to

automatically exchange information (AEOI) and establishes a legal basis for

(AEOI) between tax authorities. It has no direct legal force and will therefore

need to be translated into local laws before it can be implemented.

Common Reporting Standard (CRS)

The Common Reporting Standard (CRS) outlines the information to be reported

by financial institutions and exchanged between residence jurisdictions, outlining:

• The scope of financial information to be reported

• The scope of accountholders subject to reporting

• The scope of financial institutions required to report

CRS Schema and User Guide

Provides a standardised approach for transmitting information electronically by

reporting FIs to Competent Authorities

CRS Commentary

These commentaries are designed to assist both governments and business to

implement the standard consistently. They provide additional detail on the

practical implementation of the standard including detailed model agreements,

standards for harmonised technology solutions and a format for the secure

transmission of data.

CRS


Signatories of a Multilateral Competent Authority Agreement 29th

October 2014

Over 60 jurisdictions have

committed to implementing the

CRS and of these 51 jurisdictions “

the so called Early Adopters

Group” have agreed to a common

implementation timetable.

• Albania *

• Austria *

• Belgium

• Croatia

• Cyprus

• Czech Republic

• Denmark

• Estonia

• Faroe Islands

• Finland

• France

• Germany

• Gibraltar

• Greece

• Hungary

• Iceland

• Ireland

• Italy

• Latvia

• Liechtenstein

• Lithuania

• Luxembourg

• Malta

• Netherlands

• Norway

• Poland

• Portugal

• Romania

• San Marino

• Slovakia

• Slovenia

• South Africa

• Spain

• Sweden

• UK Crown

Dependencies

• United Kingdom

EMEA

• Anguilla

• Argentina

• Aruba*

• Bermuda

• British Virgin

Islands

• Cayman Islands

• Colombia

• Curacao

• Mexico

• Montserrat

• Turks & Caicos

Islands

AMERICAS APAC

• Korea,

South

• Mauritius

* Signatory of the Multilateral CAA – First Information exchange September 2018

As of 29th October 2014


CRS Implementation Timing

Early adopters’ statement in March 2014 described the proposed timetable as “ambitious but realistic”, and reiterated that their aim is

“rapidly creating a truly global system of automatic information which leaves no hiding places for tax evasion”. Consistent with the G8 and

G20 statements, there is strong political motivation to abide by proposed dates

1st July 2014

UK and US

FATCA ‘Go Live’

20172015 20162014 2018

31st July 2014

Consultation –

HMRC publishes CRS

consultation document

July – October 2014

HMRC Consultation

– HMRC requests

comments from

industry on local

implementation

31st December 2015

Snapshot –

CRS “Pre-existing

Accounts” are those

in existence at this

date

1st January 2016

CRS ‘Go Live’ –

Enhanced on-boarding

required from this date

31st December 2016

Remediation –

Complete due

diligence for entity

accounts and certain

“high value” individual

“Pre-existing

Accounts”

31st December 2017

Remediation –

Complete due

diligence for all other

“Pre-existing

Accounts”

September 2017

Reporting –

First exchange of

information under CRS

27th October - EAG

signing ceremony

Jan 2015

UK Guidance

Expected Q1 2015 on

CRS implementation


Implications to AML/KYC - Is the CRS really a tax issue?

• CRS due diligence is closely aligned with AML/KYC procedures. It requires identification of reportable persons, their tax residency and

CRS category when on-boarding any new account. The expectation is that a customer self certification is collected at time of

commencement of a new customer relationship.

• There is an expectation that the self certification will be validated against the documentation collected as part of the AML/KYC

Procedures.

• Determining what is a new account - The UK IGA approach is that a pre-existing account holder of the same FI that opens a new

account is not treated as a new account. Local implementing rules will vary on this.

• A new account will generally not be consistent with the approach taken for AML/KYC purposes. For example for AML/KYC , once the

client has been appropriately documented at the initial account opening stage they can generally open new accounts or products without

further AML/KYC checks. This could potentially require FIs to obtain a self certification each time a new product or account is opened.

• This reasonableness test will require robust cross referencing process to AML/KYC

• There are limits on the reason to know test which refer back to current documentation held on file for AML/KYC purposes

• The CRS commentary notes that adopting countries may:

implement penalties for failure to provide a self certification

or make the provision of a self certification conditional at the point of account opening. This can cause particular concerns where

third parties are involved in any compliance process.

Tax and AML must be closely aligned - How will you manage compliance


Conclusions

• For the CRS the due diligence to determine customers under the requirements of US FATCA and the UK CDOT agreements (UK

FATCA) will need to be re-run against the requirements of the CRS.

• The CRS however does not include a ‘standard self certification form’ FATCA forms (W8/W9) are not able to capture the information

required under CRS there will be some added complexity as FATCA and CRS run in parallel.

• And finally the CAA and CRS set a minimum standard for information to be exchanged; governments may choose to exchange

information beyond this minimum.

• Need to shift focus from FATCA go-live requirements and look to assess the impact of CRS on existing implementation plans

• For BEPs feed into local lobbying groups make sure you contribute to consultations and consider impact to your business.

.

Registration Onboarding

Remediation

Agree and implement

reporting solution

Identify reportable

accounts

Submit annual

reportsFATCA

CRSImpact Assessment

Identify future proofing requirements Implementation

BEPSImpact Assessment

Implementation


Disclosures

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Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon also

operates in Europe through its subsidiary The Bank of New York Mellon SA/NV, Rue Montoyerstraat, 46, B-1000 Brussels, Belgium, a Belgian public limited liability

company, authorised and regulated as a credit institution by the National Bank of Belgium (NBB). Not all products and services are offered at all locations.

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The Influence of U.S. Regulatory Changes on International Tax Practices - BNY Mellon