22

Coverage

FATCA Basics Policy and Purpose Banks Mexican view Specific patterns for wealth management

issues

33

FATCA Overview

FATCA (Foreign Account Tax Compliance Act) added a new chapter 4 to the Code and was enacted as part of the Hiring Incentives to Restore Employment (HIRE) Act in March 2010 Addresses US tax non-compliance by providing

transparency with respect to assets and investments held offshore

Intended to provide increased reporting, not collect tax, but the hammer is a new 30% withholding tax

Proposed Regulations released February 8, 2012

Local Law Conflicts

FATCA is a US centric law that imposes expansive obligations on certain foreign entities

A number of these US obligations may conflict with local law prohibitions with respect to privacy, disclosure, anti-discrimination and withholding foreigntaxes exposing the foreign entities to potential regulatory sanctions, civil lawsuits and possible criminal exposures

4

International Cooperation

Proposed intergovernmental approach to implement FATCA will be structured to avoid local law conflicts with FATCA

Countries involved: France, Germany, Italy, Spain, the UK and the US Paradigm for other countries

Quid pro quo. US exchange information with treaty partner Issue

US bank account final regulations Broader reporting of other types of income/proceeds

5

FATCA Implementation Agreement: Countries in Latin America/Caribbean

Problem: Lack of US Income Tax Treaties and Tax Information Exchange Agreements in force: Treaties: Barbados, Jamaica, Mexico, Venezuela,

and Trinidad & Tobago TIEAs: Antigua & Barbuda, Aruba, Bahamas,

Barbados, Bermuda, Cayman Islands, Costa Rica, Dominica, Dominican Republic, Grenada Honduras, Jamaica, Mexico, Panama, Peru, St. Lucia, and Trinidad & Tobago

6

FATCA Implementation Agreement: Countries in Latin America

Solution. Negotiation of additional US Income Tax Treaties and TIEAs Chile Treaty awaiting US Senate approval US discussions held with Argentina, Brazil, and

Colombia in the past TIEAs with Brazil and Colombia awaiting exchange of

notes

7

The Paradigm

8

FATCA wants to make sure that no US people are hiding behind a red entity

ForeignBank

USCorp FC3interest

royalties

dividends

FC FP

FC1FC2SHs

GP LP

accountholders interest

incomeallocation

Foreign Trust

interest

Sale ofUS Corp Stock

FATCA Overview

Who is impacted? All payors (including foreign payors) of withholdable payments

made to any foreign entities Withholding entities, regardless of whether they have US owners,

that have US source income or hold US stock or securities All foreign entities, regardless of whether they have US owners,

that have US source income or hold US stock or securities Two categories of foreign entities

Foreign Financial Institutions (FFI) Non-Financial Foreign Entities (NFFE)

Note that for withholding agents direct payments to individuals are not implicated

9

FATCA Overview

Imposes 30% withholding tax on withholdablepayments made to FFIs NFFEs

FFIs are FATCA compliant if They enter into an agreement with the IRS to disclose US

account holders and undertake certain withholding obligations (they are a participating FFI (PFFI), or

they are deemed compliant under the regulations NFFEs are FATCA compliant if they certify they have no

substantial US owners or they identify any such owners to the IRS

10

if they are not FATCA compliant

FATCA Overview What are withholdable payments?

A withholdable payment is any payment of a type ordinarily subject to withholding tax (e.g., FDAP), including interest, dividends, rents, premiums, annuities from sources within the United States

Also includes any gross proceeds from the sale of any property that could produce interest or dividends from sources within the United States

Normally such gains are not subject to US income or withholding tax in the case of a foreign seller not engaged in aUS business

Proposed regulations provide some significant exclusions for specific ordinary course payments

11

FATCA Overview

What are FFIs? A foreign entity that: (i) Accepts deposits in the ordinary course of a

banking or similar business such as retail banks; (ii) Is engaged in the business of holding financial

assets for the account of others such as investment banks; or

(iii) Is engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or derivatives in the above such as mutual funds, hedge funds, private equity funds, and securitization vehicles.

(iv) certain insurance companies PR 1.1471-5(e)(1) 12

Grandfathered Obligations

Payments made with respect to grandfathered obligations are not subject to FATCA withholding Obligation includes any legal agreement that

produces or could produce withholdablepayments other than any instrument treated as equity for US tax purposes or any legal agreement that lacks a definitive expiration or term

Outstanding on 1/1/13 and not materially modified thereafter

13

Payment by Payment US Withholding Agent

14

Is it a withholdable payment?1.1473-1

Is recipient a foreign entity?1.1473-1(e)

Is payment on grandfatheredobligation?1.1471-2(b)*

What documentationdoes agent need to not

withhold?1.1471-2; 1.1472-1

yes

no

no

no

yes

Stop

Stop

Stop

yes

*But reporting applies

US source FDAP/gross proceeds exceptions:

No documentation needed Short-term interest Ordinary course payments Fractional share payments Sale of property that can

produce short term interest, or ordinary course payment

Documentation required ECI (if no PE claim made) and

sale of instruments that produce ECI

Payment by Payment What Does it Mean to the Recipient?

Bank is FFI To avoid FATCA withholding

Enter an agreement with the IRS to comply with certain requirements Under the 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 or other FFIs that are not PFFIs, or deemed compliant FFIs, or exempt entities Comply with IRS information requests Attempt to obtain a waiver of applicable bank secrecy or other information disclosure

limitations or close the US account 15

ForeignBank

USCorp

interest

Accountholders

interest

Foreign Hedge Fund

FC is PFFI, no FATCA withholding on payments to it FC is not PFFI, 30% withholding starting 2014 on U.S. FDAP, 2015 on

gross proceeds If a PFFI, FC agrees it will W/H on passthru payments to investors that

are non-participating FFIs (NPFFI) recalcitrant account holders

16

FC foreign source

U.S. source

FC1NPFF

IFC2PFFI

FC3NPFF

I

SHs

SHs

?

Foreign Hedge Fund

To extent U.S. source payment to FC1 subject to FATCA W/H; payment to FC2 is okay, FC2 to FC3 subject to W/H

To extent U.S. source payment to subject to withholding U.S. source based on % of assets invested in U.S.

17

FC foreign source

U.S. source

FC1NPFF

IFC2PFFI

FC3NPFF

I

SHs

SHs

?

?

Deemed Compliant FFI

FFIs can avoid 30% withholding and the PFFI agreement if they are a deemed compliant FFI

Two types: Registered and Certified Registered deemed compliant FFIs are still required to

meet certain requirements including performing diligence to identify and eliminate US accounts and registering with IRS

Certified deemed compliant FFIs are required to certify status to the withholding agent

18

Registered Deemed Compliant FFI

FFI deemed compliant through intergovernmental agreement

Local FFI Doesnt apply to financial entities that are FFIs solely because

they are investment entities Non-reporting member of participating FFI group

Doesnt permit any US accounts

19

Registered Deemed Compliant FFI

Qualified collective investment vehicles Qualifies as FFI solely because it is an investment entity Must be regulated in its country of incorporation or

organization as an investment fund Holders of debt interests in excess of $50,000 or equity

must be PFFI registered deemed compliant FFI US person exempt beneficial owner

If part of an EAG, all members must be PFFI or registered deemed compliant FFI

20

Registered Deemed Compliant

Restricted Funds Solely investment entities Regulated as investment fund in country of incorporation Interests sold solely through distributors that are PFFIs, deemed

compliant FFIs, restricted distributions Every agreement with the funds distributors (other than those with

distributors that are themselves participating FFI) prohibit sales of fund to US persons, non-participating FFIs, or passive NFFEs with one or more substantial US owners (these are basically blocker entities);

The funds prospectus and all marketing materials must indicate that sales to US persons, passive NFFEs, and nonparticipating FFIs (other than shares which are both distributed by and held through a participating FFI) are prohibited;

Agree to certain reporting to IRS All members of EAG must be PFFI or registered deemed Compliant FFI

21

Obligations for a Registered Deemed Compliant FFI

As a registered deemed-compliant FFI, a fund will be required to- Have its chief compliance officer or an individual of equivalent standing

with the FFI certify to the IRS that all of the requirements for the deemed-compliant category claimed by the FFI have been satisfied as of the date the FFI registers as a deemed-compliant FFI;

Obtain from the IRS a confirmation of its registration as a deemed-compliant FFI and an FFI-EIN;

Agree that if it chooses to publish a passthru payment percentage, it will do so in accordance with the procedures;

Monitor compliance and renew its certification every three years; and Agree to notify the IRS if there is a change in circumstances which

would make the FFI ineligible for the deemed-compliant status for which it has registered.

22

Certified Deemed Compliant FFI

Non-registering local bank Retirement funds Non-profit organization Low value accounts (N/A to investment funds)

23

Timeline Withholding (inc. instruments outstanding as of 1/1/13)

1/1/14 withholding begins for: FDAP Passthru payments that are FDAP to recalcitrant account holders and non-participating

FFIs) 1/1/15 withholding begins for gross proceeds with respect to sales or dispositions made

on or after that date 1/1/17 withholding on passthru payments (other than withholdable payments) will not

begin earlier than this date Reporting

9/30/14 Report identifying information and account balance or value for US accounts and recalcitrant account holders begins

1/1/15 TIN Matching before reporting would not be required before this date 3/15/15 Annual reporting (Forms 1042 and 1042-S) for ch4 reportable amounts

begins Miscellaneous

1/1/14 Conforming changes to ch3 and ch61 anticipated to be made

24

FFI Agreement

Early 2012 Draft model agreement available Fall 2012 Final model agreement available 1/1/13 Online registration will be available no later than this

date 6/30/13 FFIs that have not completed the process by this

date risk not having their FFI-EIN in time to prevent withholding

1/1/16 Lose PFFI status if have limited branches (i.e.,

branches that aren't PFFIs or deemed compliant FFIs) Lose QI status if can't meet PFFI requirements

25

POLICY & PURPOSE

26

Banking Overview FFIs must conduct due diligence to determine their U.S.

account holders Notice 2010-60, modified by Notice 2011-34, created a

significant burden. The IRS responded by allowing FFIs to limit due

diligence to electronic records, unless the account has a balance or value in excess of $1M.

Preexisting accounts with values of less than $50K and insurance policies with values of $250K or less are excluded from due diligence.

Account balances not maintained in USD are valued at the spot rate in effect on the last day of the preceding year.

27

Banking Overview In some cases, FFIs may rely on their existing account

opening procedures for identifying U.S. accounts. With respect to owner-documented FFIs, they may use

an independent auditor's report, not more than one year old, to establish that their due diligence was sufficient.

FFIs that comply with the due diligence will not be strictly liable in the event that one or more accounts identified as a non-U.S. account turns out to be a U.S. account.

IRS intends to make modifications to the FDAP withholding regs under 1441 to conform to some of the due diligence standards set forth in the FATCA regulations.

28

Individual Accounts The prop. regs do not require FFIs to conduct due

diligence on preexisting offshore (i) accounts with value of $50K or less or (ii) insurance or annuity accounts with values of $250K or less.

FFIs with accounts with higher values but less than $1M may limit due diligence for U.S. indicia to electronic searches.

In determining balances, the FFI must aggregate all accounts, including jointly held accounts, held by the FFI and its affiliates.

If an indicia of U.S. ownership is found, the FFI must conduct additional due diligence.

29

Individual Accounts

The prop. regs repeals the rules for private banking accounts contained in Notice 2011-34 and combine this concept with "high value accounts."

FFIs holding accounts with values in excess of $1M must search both electronic and paper files for indicia of U.S. ownership and must make an inquiry of the relationship manager who maintains the account.

An exception is provided for accounts for which documentation was obtained for QI or withholding partnership (WP) purposes.

FFIs generally may rely upon their "know your customer" (KYC) and anti-money laundering (AML) procedures to determine if a new account is owned by a U.S. person.

30

Entity Accounts FFIs need not conduct due diligence on preexisting

entity accounts with balances of $250K or less (determined by aggregating all accounts held by the entity at the FFI and its affiliates) until the account balance exceeds $1M.

For other preexisting accounts, the FFI must document the account within one year for prima facie FFIs and for within to 2 years for all other entity accounts.

If the account balance is $1M or less, the FFI can rely on its records to determine whether a passive NFFE the entity has substantial U.S. owners.

31

NFFE Accounts

If the account balance is in excess of $1M, the FFI must make an independent search to determine if the NFFE has U.S. owners or obtain certification from the entity that it does not have substantial U.S. owners.

For remaining passive NFFEs opening accounts, the FFI must obtain certification regarding the substantial U.S. owners from the entity opening the account.

32

Definition of Financial Account FATCA reporting is primarily required with respect to

United States Accounts. A U.S. account is any financial account held by a U.S.

person or a U.S.-owned non-U.S. person. Accordingly, if an account falls outside of the definition of

a financial account, it is exempt from FATCA due diligence and reporting.

The definition of financial account has been narrowed in the prop. regs to focus on bank accounts and custodial accounts.

The proposed definition excludes most debt and equity securities issued by banks and brokerage firms.

33

Categories of Financial Accounts

Depository accounts in a financial institution. Custodial accounts. Non-publicly traded equity or debt in a financial

institution engaged in the business of investing or trading (e.g., a hedge funds).

Cash value insurance contracts.

34

Exclusions from Financial Accounts

Retirement and pension accounts. Tax-favored non-retirement savings accounts

established under non-U.S. law that limit annual contributions to $50,000 or less.

Accounts held by persons exempt from FATCA, including foreign governments.

35

MEXICAN EXPERIENCES

36

FATCA and Trusts

Trust In general, the term trust as used in the IRC refers to an

arrangement created either by a will or by an inter vivosdeclaration whereby trustees take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts

Generally speaking, an arrangement will be treated as a trust under the IRC if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business forprofit

37

FATCA and Trusts

Trust vs. business entity Reg. 301.7701-4; see Chilean investment laws

Current issues re: pension trusts classification Remainder of discussion assumes entity is a

trust, not a business entity

38

Base Line

Interest is US source and is withholdable payment, subject to 30% FATCA tax unless FT can provide appropriate documentation to show it is FATCA compliant

Is FT FFI or NFFE? If FFI needs FFI Agreement, unless deemed compliant Under the PFFI agreement, a PFFI will be required to:

Obtain information on all owners 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 or other FFIs that

are not PFFIs, deemed compliant FFIs or exempt entities Comply with IRS information requests Attempt to obtain a waiver of applicable bank secrecy or other information disclosure limitations or close the

US account. 39

USCorp

ComplexForeign

Trust

interest 10%

US Account Holder

Owner of equity in the trust. Owner is A person treated as an owner under 671-679 of the Code, or A person who holds a beneficial interest under PR 1.1473-

1(b)(3) Beneficial ownership of interest

Specified US person has Right to receive directly or indirectly (e.g. through a nominee) a

mandatory distributor or may receive, directly or indirectly, a discretionary distribution

Specified US person Includes individuals, non-publicly traded corporations, Doesnt include, among other things, 501(c) exempt

organizations, IRAs, common trust funds, trusts exempt 4947(a)(1)

40

Is the FT an FFI?

Is it primarily engaged in the business of investing, reinvesting or trading?

Is 50% or more of its gross income from such activities over past 3 years?

See ABA comments

41

Is the FT an FFI?

Can an FFI trust be deemed compliant? Possible status is an owner documented FFI Only with respect to accounts held with a US

financial institution or a participating FFI; direct US investments wont qualify

42

What if FT is not an FFI?

It is an NFFE Must provide withholding agent with statement that there are no

substantial US account holders, or provide identification of such persons

Substantial US owners PR 1.1473-1(b) Specified US person

Any US person other than: Publicly traded corporation and affiliates 501(a) exempt organization or IRA Governments Banks REIT/RIC Common Trust Fund Trust exempt from tax 4947(a)(1) Securities dealer/broker

43

What if FT is not an FFI?

Substantial US Owner Grantor Trust

Any specified US person treated as owner under the Code Non Grantor Trust

Any specified US person that holds, directly or indirectly more than 10% beneficial interest

Significant attribution rules US person has the right to receive directly or indirectly (through a

nominee) a mandatory distribution or may receive a discretionarydistribution from the trust

44

Determining 10% Beneficial Interest in a Foreign Trust

Mandatory beneficial interests. A specified US person has more than a 10% interest if the value of the persons interest exceeds 10% of the value of all the assets held by the trust

Mandatory and discretionary beneficial interests. A specified US person has a more than 10% interest in the trust if the valueexceeds either 10% of the value of all distributions made by the trust during the year or 10% of the value of all assets of the trust

Exception for substantial US Owner. Discretionary distributions. The value of the currency or other

property distributed to the specified US person during the calendar year must exceed $5,000

Mandatory distributions or mandatory/discretionary distributions. The value of such persons interest (determined under the valuation rules) exceeds $50,000

45

Valuation Rules

Discretionary distributions. The value of the specified US persons interest in the foreign trust is the FMV of the currency and other property distributed from the foreign trust to the specified US person during the prior calendar year

Mandatory distributions. The value of the specified US persons interest in the foreign trust is determined under Section 7520 of the Code. Section 7520 provides valuation tables for the valuation of noncommercial

(private) annuity, any interest for life or a term of years, or any remainder or reversionary interest. These interests are determined under tables prescribed by the IRS, by using an interest rate (rounded to the nearest 2/10 of 1%) equal to 120% of the federal midterm rate in effect under the Code for the month in which the valuation date falls

Mandatory and discretionary distributions. The sum of the value of all the currency or other property distributed from the trust at the discretion of the trustee during the prior calendar year to the specified US person as a beneficiary and the value of the specified US persons right as a beneficiary to receive mandatory distributions from the trust

46

Valuation

A, US citizen is a discretionary beneficiary of FTI and FT2. FT2s sole investment is a discretionary interest in FT1

In year 1

47 A, is a substantial US owner of FT2, but not FT1

FT1

FT2A

A Discretionary Beneficiary

$40,000

$120,000

total distribution $750,000

distributes $25,000

Trust as FFI?

FIC is itself an FFI. To avoid FATCA 30% withholding it must be a PFFI Must agree to withhold on pass through payments made to

NPFFI and recalcitrant owners FIC must therefore know status of its owners, including FT

FT in the business of investing 48

US

Foreign Investment Company

Foreign Trust

investments

distributions

interest

FATCA For Funds

Who is payee Is FP an FFI?

50% income test Assume it is an FFI

If FP is not a PFFI, full dividend subject to 30% FATCA49

USCorp

FP

FC2

FC1

dividend

FATCA For Funds

Who is payee Is FP an FFI?

50% income test Assume it is an FFI If FP is a PFFI and a withholding partnership (WP), US Corp doesnt have to

withhold, but FP has to apply FATCA withholding on its partners Trace US source income If FC1 or FC2 are FFI, they need to be PFFI or deemed compliant to avoid 30% FATCA

withholding 50

USCorp

FP

FC2

FC1

FATCA For Funds

Who is payee Is FP an FFI?

50% income test Assume it is an FFI If FP is a PFFI and not a WP, FP advises US Corp of any non-

FATCA compliant partners, and US Corp undertakes the FATCA withholding.

US Corp also handles the Chapter 3 withholding 51

USCorp

FP

FC2

FC1

dividend

Holding Companies

Is FC an FFI? 50% income test If not, it is non-financial foreign entity (NFFE) As an NFFE

US Corp withholds 30% FATCA unless NFFE provides documentation that it doesnt have any substantial US

owners or the NFFE has substantial US owners that are disclosed Unless exception applies 52

USCorp

FC

Shareholders

dividend

Holding Companies Non Financial holding company

53

If substantially all of the activities of FC are the ownership of stock of subsidiaries and no subsidiary is an FFI, FC not FFI

If FC is a non-financial holding company, it is also as excepted NFFE How does payor know status reliably associate with documentation

FC cannot hold itself out, or function as an investment fund, such as PE fund, VC fund or an investment vehicle whose purpose is to acquire or fund companies and then hold interests on those companies for investment purposes

USC

FC

SH

dividend

Is Holding Company a PE Fund?

54

Newco formed by PE funds for purpose of buying Target Does it matter whether exit is planned as a sale of Newco or Target?

Does borrowing activity mean that the test of substantially all of the activities are holding stock of subsidiaries is not meet?

PE1

PE2

PE3

Foreign Newco

Capital

Bank Debt Seller

Target

Target dividend

USC1 ROWUSC2

Holding Company and Trusts

55

Can FT be a non-financial holding company and therefore be exempt from FATCA?

Substantially all of the activities of FT must be holding stock of subsidiaries in businesses that are not themselves FFIs

Trust cannot hold itself out or function as an investment fund whose purpose is to acquire or fund companies and hold interests as capital assets for investment purposes

Can trust use this exception?

USOperating

Corporation

FT

dividendsSale ofStock

What if FT is an FFI and is a Simple or Grantor Trust?

If FT is not a withholding trust, it has to provide to W-8IMY and pool information on its beneficiaries that are NPFFI or recalcitrant account holders so withholding agent can decide how much FATCA tax to withhold

A withholding trust is a simple or grantor trust that has an agreement with the IRS that provides it will do US withholding

56

Trusts No Direct Investment

57

FB will be an FFI. To avoid 30% FATCA withholding it will be a PFFI. A portion of the income earned by FT will be US source, based on % of

assets FB holds in US FB will have to withhold on passthru payments made to NPFFIs and

recalcitrant account holders Thus FT will need to determine its status to document itself to FB, or FT

will be charged FATCA withholding tax

Foreign Bank

ComplexForeign

Trust

US source income

holds account

USMarkets

invests

Trusts No Direct Investment

58

FT caught in FATCA when US debt fund makes distribution to Foreign Fund of Funds II

Foreign Trust

ForeignFund of Funds I

ForeignFund of Funds II

USDebtFund

investsUS

Interest

USInterest

USInterest

Trust Companies

Are they FFIs? Do they need to be PFFIs? What is impact on others?

Each FFI that is a member of an extended affiliated group must be a PFFI or deemed compliant or no one in the EAG is FATCA compliant

Two year transition period until January 1, 2016 is provided

59

Trust Company an FFI?

20% or more of the gross income of FTC is attributable to the holding of financial assets and related financial services for preceding three years, then it is an FFI

60

Foreign Trust

ForeignTrust Company

Full service Trustee Asset

Management Custodian

Trust Company an FFI?

The custodian is an FFI. It must be a PFFI unless it is deemed compliant

Is the Trust Company an FFI? Who cares?61

Foreign Trust

ForeignTrust CompanyTrustee

ForeignTrust CompanyCustodian

US Corp

interest

Not custodian

Custodian

Custodian may be qualified intermediary, in which case it needs to know whether its account holders are FATCA compliant, as it will undertake FATCA withholding

If not a QI, Custodian will be required to provide withholding agent with information as to account holders that are non-participating FFIs or recalcitrant account holders

Either way, custodian will need information from Trust Company

62

Trust Company an FFI? (i) Accepts deposits in the ordinary course of a banking or similar

business, to include providing trust or fiduciary services. is not limited to banks as defined under the Code or whether entity is

subject to local regulation (ii) Holds, as a substantial portion of its business, financial assets

for the account of others A substantial portion is defined by reference to gross income; i.e., if the

gross income attributable to the holding of financial assets and related financial services equals or exceeds 20% of the entitys gross income during the shorter of the three-year period ending on December 31st of the year in which the determination is made or the period during which the entity is in existence

Is not limited as to whether entity is subject to local regulation If Trust company isnt a custodian, is it a (i) FFI? What is market expecting?

63

FIRPTA and FATCA

Is FC an FFI? What if it has no income?

If no income, does it matter? If it has income, can it be a holding company?

64

US Corp

FC

FP

Buys US Real Estate

THE END(Or The Beginning, Depending On

How You Look At It!)65