C1 -- Pflieger, Sawyer, Jenson

Information Reporting Bank & Capital Markets Tax Institute

November 2012

Debbie Pflieger, Doug Sawyer and David Jensen

Information Reporting

Page 2

Disclaimer

Ernst & Young refers to the global organization of member firms of Ernst & Young

Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-

serving member firm of Ernst & Young Global Limited located in the US.

This presentation is ©2012 Ernst & Young LLP. All rights reserved. No part of this

document may be reproduced, transmitted or otherwise distributed in any form or by

any means, electronic or mechanical, including by photocopying, facsimile

transmission, recording, rekeying or using any information storage and retrieval

system, without written permission from Ernst & Young LLP. Any reproduction,

transmission or distribution of this form or any of the material herein is prohibited and

is in violation of US and international law. Ernst & Young and its member firms

expressly disclaim any liability in connection with use of this presentation or its

contents by any third party.

The views expressed by panelists in this webcast are not necessarily those of

Ernst & Young LLP.


Page 3

Circular 230 disclaimer

Any US tax advice contained herein was not intended or written to be

used, and cannot be used, for the purpose of avoiding penalties that may

be imposed under the Internal Revenue Code or applicable state or local

tax law provisions.

These slides are for educational purposes only and are not intended, and

should not be relied upon, as accounting advice.


Page 4

Agenda

► IRS’s renewed focus on §1441

► FATCA

► Basis reporting

► Reporting bank deposit interest to NRAs

► Awards


Page 5

NRA/1441: The provisions haven’t changed, but . . .

► There has been an uptick in the number of §1441 audits and exam

agents are being more aggressive

► Information Reporting & Withholding (IR&W) is embedded in the

internal revenue manual

► IRS has established and is training a dedicated team of auditors

► Because of increased focus and exposure internal and external

auditors are active in assessing compliance


Page 6

IRS examination developments

► Clearing away the “underbrush” will free up exam resources to focus on “more

important” compliance matters

► Titles used on capacity line

► Forms W-8 provided by fax, copy, pdf, etc.

► Chief Counsel Advice dated 8 August 2012

► Explanation of US addresses – third party addresses

► Minor errors on the form – failure to tick a box

► “Cure issue” – late Forms W-8

► Current self-certification via retroactive affidavit is too easy

► At some point self-certification alone will not be sufficient

► Withholding agents will be required to obtain additional evidence to support Form

W-8 after a certain period of time

► The IRS wants curing to be “painful” to withholding agents so they will

initially comply


Page 7

IRS examination developments (cont.)

► Examination Field Directive in development

► Will instruct agents to require additional documentation to validate late

Forms W-8 after a specified timeframe

► Extrapolation of “cure” may be limited

► When curing a sample of accounts or a sample of vendor payments,

curing may no longer be extrapolated to the entire population, as it has been

in the past

► Result: significantly larger exposure

► Additional exam resources dedicated to assist on audits for both financial

services and multinational companies

► 50 new IRS auditors hired to focus exclusively on §1441 examinations


Page 8

Agenda

► IRS’ renewed focus on §1441

► FATCA

► Basis reporting


► Awards


Page 9

Introduction

► The Foreign Account Tax Compliance Act (FATCA) provisions enacted in 2010

include expansive new withholding and information reporting rules

► Aimed at ensuring that US persons with financial assets outside the US are

paying US tax

► FATCA rules categorize foreign entities as either foreign financial institutions

(FFIs) or non-financial foreign entities (NFFEs)

► Withholdable payments made to FFIs are subject to 30% withholding unless

the FFI assumes substantial information reporting and withholding

responsibilities under an FFI agreement, or an exception applies

► Withholdable payments made to NFFEs are subject to 30% withholding

unless NFFE identifies its substantial US owners, or an exception applies

► Generally effective for payments made after 31 December 2012

► Proposed regulations issued 8 February 2012


Page 10

Fundamental requirements

► For FATCA purposes, a US withholding agent (formerly known as a US

financial institution) must:

► Examine its nonresident alien entity account holders and counterparties and classify

them as financial institutions or NFFEs

► For account holders who are FFIs, confirm they have become “participating FFIs”

► For account holders who are NFFEs, obtain either certifications identifying “substantial

US owners” or certifications that they do not have substantial US owners

► Withhold 30% on US source income paid to a non-participating FFI

or non-certifying NFFE

► Report information to the IRS about any substantial US owners of NFFE

account holders

► For FATCA purposes, in addition to the items listed above, an FFI must:

► Enter into an agreement with the IRS to become a participating FFI (PFFI)

► Examine its individual customers to determine whether they are US

or non-US persons


Page 11

FATCA compliance steps

► US withholding agent: FATCA compliance requires steps 1, 3, 4 and 5

(PFFI compliance requires steps 1 through 5)

► Enter into FFI agreement with IRS

► Responsible Officer pre-existing investor certifications required

2. Enter FFI Agreement

► Collect “new” Forms W-8 and validate against other account

information, to determine whether accounts are properly

documented

► Review anti-money laundering and know-your-customer (AML/KYC)

and other account documentation and information for US

indicia/ownership, and if US indicial is found, request documentation

to confirm non-US status

► Classify customers and other payees for FATCA purposes

1. New customer onboarding for accounts opened after

31 December 2013 for a USFI or PFFI

► Review AML/KYC and other account

information for US indicia/ownership

► If US indicia is found, request

documentation to confirm non-US status

► Solicit “new” Forms W-8 by 30 June 2014

to document prima facie FFIs and by 31

December 2015 for all others

3. Pre-existing account due diligence

► On 1 January 2014, begin withholding on

US source FDAP paid to “new” accounts of

a NPFFI or an undocumented NFFE

► On 1 January 2016, begin withholding on

US source FDAP and on 1 January 2017

begin withholding on gross proceeds paid to

any account of an actual or presumed non-

participating FFI

5. Withholding

► Annual reporting requirements on

specified US persons

4. Reporting


Page 12

Definition of a financial institution

► An entity is a financial institution if it:

► Accepts deposits in the ordinary course of a banking or similar business

► Holds financial assets for the account of others as a substantial portion

of its business

► Is engaged primarily in the business (interpreted broadly) of investing,

reinvesting, or trading in securities, partnership interests or commodities

► Apparently includes family trusts and personal holding companies


Page 13

Non-financial foreign entities (NFFE)

► An NFFE is defined as a non-US entity that is not a financial institution

► A withholding agent is required to withhold 30% of any withholdable payment

made to a payee that is an NFFE unless each of the following applies:

► The beneficial owner of such payment is the NFFE or any other NFFE

► The withholding agent can treat the beneficial owner of the payment as an

NFFE that does not have any substantial US owners, or as an NFFE that

has identified its substantial US owners and

► The withholding agent reports the required information relating to any

substantial US owners of the beneficial owner of such payment


Page 14

USWA new customer onboarding for accounts opened after 31 December 2013

► Review AML/KYC and other account information for US indicia/ownership

► Cure US indicia as permitted

► Confirm US ownership certifications are consistent

► Collect “new” Forms W-8 and validate against other account information to

determine whether accounts are properly documented

► Classify new account holders for FATCA purposes

► Build ability to identify and react to “change in circumstances”


Page 15

Participating FFI documentation

► Treat a payee as a participating FFI (PFFI) only if

► It has furnished a valid “new” Form W-8 identifying the payee as a PFFI and

► The Form W-8 contains an FFI-EIN that is verified against the published IRS

PFFI list, or

► If USWA has an “old” Form W-8 the payee may provide their FFI-EIN either

orally or in writing. USWA must verify the FFI-EIN against the IRS’ list

► If a “new” Form W-8 identifies the payee as a PFFI, but

► Does not provide the payee’s FFI-EIN

► If the FFI-EIN is not provided within 90 days, then USWA must treat payee as a

NPFFI on the 91st day, or

► Provides an FFI-EIN that does not appear on the current published IRS PFFI

list within 90 calendar days after the date that the claim is made, then USWA

must treat the payee as a non-participating FFI (NPFFI) on the 91st day


Page 16

Pre-existing accounts

► Identify prima facie FFIs

► If the payee is a prima facie FFI, treat the payee as a NPFFI beginning on

1 July 2014 unless or until they furnish documentation sufficient to establish

they are either a participating FFI or an NFFE

► Document other pre-existing accounts by 31 December 2015

► Complete review of all account documentation on file

► Review all account information to identify US indicia or substantial US

owners and obtain cure documentation when required

► A withholding agent may treat a payment as made to a passive NFFE if it has

a valid “new” Form W-8 that identifies the payee as a passive NFFE

► Prior to 1 January 2017, treat a payment as made to a passive NFFE if the

withholding agent:

► Has a valid “existing” Form W-8 identifying the payee as a foreign person,

either a SIC code for the payee that unambiguously indicates that the payee

is not a financial institution, or documentary evidence, and the required

owner certification


Page 17

Withholding

► US withholding agents must withhold on:

► US source Fixed, Determinable, Annual or Periodical (FDAP) paid after 31

December 2013 to new accounts held by actual or presumed NPFFIs

► “Presumed NPFFIs” include NFFEs that have not provided appropriate FATCA

certifications

► US FDAP paid after 30 June 2014 to pre-existing accounts held by

undocumented “prima facie” FFIs

► Payees that can be identified as a QI or NQI in electronically searchable

information, or

► For accounts maintained in the US, a payee that is presumed or documented as

a foreign entity for Chapter 3 or 61 purposes, and the withholding agent’s

electronically searchable information contains a NAICS or SIC code indicating

that payee is a financial institution

► US source FDAP paid after 31 December 2015 to all other undocumented

preexisting account holders

► Gross proceeds from a sale or disposition occurring after 31 December 2016


Page 18

Reporting for substantial US owners

► NFFE has substantial US owners

► A withholding agent that receives information about any substantial US

owners of an NFFE that is not an excepted NFFE, must report the following

to the IRS on or before 15 March of the calendar year following the year in

which the withholdable payment was made:

► Name of the NFFE that is owned by a substantial US owner

► Name of each such owner

► Each such owner’s TIN

► The mailing address for each such owner and

► Any other information as required by the designated form and its accompanying

instructions


Page 19

Foreign Financial Institutions (FFIs)

► To avoid 30% withholding on payments it will receive, an FFI must enter into

an agreement with the IRS to become a PFFI

► The agreement requires the PFFI to:

► Deduct and withhold 30% on certain payments to any recalcitrant individual account

holder or NPFFI and on payments that an upstream PFFI can elect to be withheld

upon;

► Obtain information on individual and legal entity account holders to determine whether

their account is a US, recalcitrant individual, NPFFI, PFFI, NFFE, etc.;

► Obtain a waiver of any applicable bank secrecy or other information disclosure

limitations from the US account holder or close the US account;

► Adopt written policies and procedures governing its due diligence procedures for

identifying and documenting account holders and its withholding and reporting

requirements. A responsible officer will periodically certify to the IRS that the PFFI is

compliant with these requirements;

► Report information on certain US accounts and recalcitrant account holders and as

otherwise required; and

► Comply with IRS requests for additional information


Page 20

General rules

► Electronic FFI Agreement submission begins 1 January 2013 for FFI

Agreement (FFIA) with effective date of 1 January 2014 if entered into prior to

1 January 2014

► New documentation procedures for begin 1 January 2014 or later FFIA

effective date

► New Forms W-9 to identity specified US persons

► New Forms W-8 to accommodate FATCA payee types

► Transition rules for reliance on “old” Forms W-8

► Documentary evidence allowed for offshore accounts

► 90 day grace period to document new individual accounts

► Required to review all documentation collected with respect to account opening or

maintaining an account of an individual, including for AML/KYC purposes, for US

indicia

► Indicia of US status includes: a US place of birth, a US telephone number, Power of

Attorney (POA) or signatory authority granted to a person with a US address, and

standing instructions to transfer funds to an account in the US


Page 21

Documentation rules for entity accounts

► New accounts: Documentation requirements begin for new entity accounts on

1 January 2014 or later effective date of the FFIA

► Requires the receipt of documentation (e.g., a US tax form or, in some instances,

documentary evidence)

► There does not appear to be any grace period for obtaining FATCA documentation

from new entity accounts

► Preexisting accounts: A PFFI must perform the required identification

procedures and obtain documentation:

► Within six months of the FFIA effective date for any account holder that is a prima

facie FFI, and

► Within two years of the FFIA effective date for all other entity accounts

► Unless elect otherwise - not required to document, withhold or report offshore

accounts not previously documented with a Form W-9 from a specified US person that

have a balance/value of $250K or less on the FFIA effective date until balance/value

exceeds $1M at a subsequent calendar year end, then have 90 days to document


Page 22

Documentation rules for individual accounts

► New accounts: Accounts opened on 1 January 2014 or later FFIA effective

date

► PFFI must collect a Form W-9 or W-8 (or documentary evidence for an offshore

account in lieu of a W-8)

► PFFI must review the information/documentation provided at account opening for US

indicia, including for AML/KYC purposes, and if found, obtain additional cure

documentation or treat the account as held by a recalcitrant account holder

► Pre-existing accounts: Accounts opened prior to the FFIA effective date

► Accounts with a balance or value of $50K or less are exempt from review

► Accounts that are “offshore obligations” with a balance or value between $50K - $1M

are subject to review of electronically searchable data for indicia of US status

► “High value” accounts with a balance or value exceeding $1M are subject to electronic

review, “paper search” of current customer files, and an inquiry into the actual

knowledge of any relationship manager associated with the account

► Due diligence on “high value” accounts must be completed within 1 year of FFIA

effective date, within 2 years for all other accounts


Page 23

Withholding

► A PFFI is required to deduct and withhold 30% on any withholdable payment

made to a recalcitrant individual account holder or a NPFFI :

► Undocumented new accounts:

► On 1 January 2014 for payments of FDAP

► On 1 January 2017 for payments of gross sales proceeds

► Undocumented preexisting accounts:

► On or after 1 July 2014 for payments of FDAP to undocumented prima facie FFIs

► On or after 1 January 2015 for payments of FDAP to high value individual accounts

► On or after 1 January 2016 on payments of FDAP to all other undocumented

preexisting accounts

► On or after 1 January 2017 on payments of gross sales proceeds

► Foreign passthru payments will become subject to withholding no earlier than

1 January 2017


Page 24

Intergovernmental agreements (IGAs)

► FFIs in many countries may not be able to comply with FATCA’s reporting, withholding and

account closure requirements due to local law regarding privacy/data protection and access

to banking

► The intergovernmental agreements recognize and attempt to resolve these issues

► Under an IGA, the FATCA partner agrees to:

► Pursue legislation to require FFIs to collect and report required information to FATCA partner

► Enable FFIs to identify US accounts using “necessary diligence”

► Automatically transfer to the US information reported by FFIs to the IRS

► Alternative IGA would provide that FFIs transfer US information directly to the IRS

► Under an IGA, the US agrees to:

► Not require FFIs to

► Located in the FATCA partner to enter into FFI agreements directly with the IRS (registration with the

IRS may still be required)

► Terminate accounts held by recalcitrant account holders

► Impose passthru withholding on payments to recalcitrants and FFIs in a FATCA partner country

► Allow FFIs in the partner country to report US information to the FATCA partner

► Alternative IGA would provide that FFIs transfer US information directly to the IRS

► Commit to reciprocity

► Alternative is non-reciprocal agreement


Page 25

Agenda


► FATCA

► Basis reporting


► Awards


Page 26

Background

► The Emergency Economic Stabilization Act of 2008 requires brokers to:

► Upon the sale of a “covered security” – report adjusted basis and whether

gain or loss is long term or short term, to the IRS and client on Form 1099-B

► Adjusted basis should take into account

► Accounting method to be applied

► Information received on transfer and issuer statements

► Wash sales

► Information from customers or third parties (at the broker’s option)

► “Covered securities” – include any “specified securities” that are acquired on or

after the applicable date

► Includes securities acquired through a transaction in an account, and

► Transferred from an account in which the security is covered and a proper “transfer

statement” has been received


Page 27

Three-year phase-in

► Rules will be implemented over a three-year period

► 1 January 2011: Sales of stock in a corporation (other than stock in a

regulated investment company (RIC) or stock acquired in connection with a

dividend reinvestment plan (DRP))

► 1 January 2012: Sales of stock in a RIC and stock acquired in connection

with a DRP

► 1 January 2014: Sales of notes, bonds, debentures, or other evidence of

indebtedness, commodities, contracts or derivatives with respect to

commodities, and options on securities


Page 28

Additional requirements

► Brokers must adjust basis and holding period for certain wash sales

► Basis and holding period adjustments are required for wash sale

transactions occurring in the same account with respect to identical

securities (i.e., same CUSIP number)

► Short sales reported in year short sale is closed

► “Transfer statements” – required to be provided by brokers who transfer

custody of specified securities in non-sale transactions

► “Issuer statements” – issuers must provide details on the quantitative impact of

organizational actions


Page 29

Process changes required

► Maintain, track and adjust client’s cost basis

► Allow for various tax lot accounting methods

► Account for wash sales

► Determine if gain or loss is long term or short term

► Report basis and holding period on Form 1099-B

► Modify Form 1099-B reporting logic on short sales

► Report in the year that the short sale is closed

► Report/receive basis and holding period information to/from other brokers upon

transfer of securities


Page 30

Cost basis – Phase 3 proposed regulations released

► Under the new cost basis reporting requirement, debt instruments and closing

transactions of options become reportable if acquired after 31 December 2013

► Debt instruments (excluding REMICs, MBSs and certain ABSs)

► Adjust basis for OID, acquisition premium, bond premium and principal pay downs

► Report accrued market discount

► Broker must assume taxpayer made or did not make certain elections with respect

to the instrument

► Options, including an option over a specified security

► Broker will adjust basis of acquired asset or proceeds from sale of asset if an option

is physically settled (no Form 1099-B issued)

► Broker must report effects on Form 1099-B if option lapses, expires, is canceled or

cash-settled


Page 31

Cost basis – Phase 3 (cont.)

► All existing rules that apply to equities (Phases 1 and 2) also apply to debt

instruments and options

► Basis to be computed under US tax principles

► Transfer statements

► Issuer statements (listed options – clearinghouse reports; OTC options –

writer reports)

► Changes affecting all securities subject to cost basis:

► Basis must be adjusted to reflect commissions and transfer taxes upon

acquisition

► Gross proceeds must be reduced by commissions and transfer taxes upon

disposition

► Delivering brokers must adjust for corporate actions processed on date

of transfer


Page 32

Issuer return for certain corporate actions

► When a corporate action affects adjusted basis, the corporation must prepare

an “issuer return”:

► Corporate actions include non-taxable mergers and spin-offs and

distributions in excess of earnings and profits (i.e., returns of capital)

► Statements must report the type and nature of the action

► Include date of the action or date against which shareholder ownership is measured

► Include quantitative effect on the basis resulting from the action

► Timing:

► File with IRS on or before 45th day following date of organizational action or,

if earlier, 15 January of following year

► Furnish payee statement on or before 15 January of following year

► Public website option for issuers to enter information on their primary

website in area designated for this purpose (with 45 day requirement)


Page 33

Form 8937, Report of Organizational Actions Affecting Basis of Securities

► Information required on Form 8937

► In addition to requiring identifying information for the issuer

(e.g., name, address, TIN), Form 8937 requires the issuer to:

► Describe the organizational action and, if applicable, the date of the action or the

date on which shareholders’ ownership is measured for the action

► Describe the quantitative effect of the action on the basis of the security in the

hands of a US taxpayer as an adjustment per share or as a percentage of old basis

► Describe the calculation of the change in basis and the data that supports the

calculation

► List the applicable Internal Revenue Code section(s) and subsection(s) upon which

the tax treatment is based

► Respond to the question, “Can any resulting loss be recognized?”


Page 34

Form 8937, Report of Organizational Actions Affecting Basis of Securities (cont.)

► Exempt recipients

► Section 6045B regulations provide an exception from return and information

statement requirements if the issuer reasonably determines that all the

holders of the security are exempt recipients

► While privately held corporations are not generally exempt from being

required to report under Section 6045B to their shareholders, a wholly

owned subsidiary would not be required to file or furnish issuer returns

► S corporations can satisfy the reporting requirement for any organizational

action affecting the basis of their stock if they report the effect of the action

on a timely filed and furnished Schedule

K-1 for each shareholder


Page 35

Form 8937, Report of Organizational Actions Affecting Basis of Securities (cont.)

► The requirement to file Form 8937 (or post on issuer website) applies to both

domestic and foreign issuers

► Issuers must file Form 8937 (or post on issuer website) only when an

organizational action affects the basis of all holders of a security or all holders

of a class of a security

► Distributions in excess of earnings and profits

► Issuers must file Form 8937 (or post on issuer website) only if the issuer

knows that the distribution will not be taxable as a dividend to its

shareholders

► Issuer should not report a distribution on Form 8937 if the distribution is

reportable as a dividend on Form 1099-DIV

► Regulated investment companies are only required to file and furnish

Forms 8937 (or post on issuer website) for organizational actions after

31 December 2011


Page 36

Agenda


► FATCA

► Basis reporting


► Awards


Page 37

Bank deposit interest paid to nonresident aliens (NRAs)

► Interest on bank deposits paid to NRAs

► Not subject to reporting on Forms 1042-S (except Canadian individuals and

US branches of foreign banks)

► So long as payee is either

► A properly documented NRA or

► A “presumed” NRA

► Unless

► For interest paid starting in 2013, the account holder is a resident of one of

79 listed countries with whom the US has entered into a formal exchange of

information reporting agreement

► Applicable countries are listed in Rev. Proc. 2012-24

► A bank can elect to report on all individual NRA account holders

► Reliance can be placed on the permanent address line disclosed on

Form W-8BEN

► Not subject to NRA withholding


Page 38

Agenda


► FATCA

► Basis reporting


► Awards


Page 39

Technical ground rules

► Section 6041: requires reporting of payments of $600 or more to nonexempt

recipients of rent, … compensations, … or other fixed or determinable gains,

profits and income

► Generally reportable on Form 1099-MISC

► Section 6049: requires reporting of payments of interest on deposits of $10 or

more to nonexempt recipients

► Generally reportable on Forms 1099-INT

► Interest – amounts paid for the use or forbearance of money


Page 40

Rebates and purchase price adjustments

► Rev. Rul. 79-96

► Automobile manufacturer rebates paid to retail customers should be treated

as a reduction in the cost of the automobile purchased, and not as an item of

gross income

► PLR 201027015

► Portion of credit card purchases taxpayers can receive from credit card

company as rebates

► Do not represent income to the credit card holder

► Amount card holder could have received constitutes a charitable contribution

► PLR 9746048

► Frequent flyer awards given to a purchaser of mutual fund shares by a

distributor as an inducement to the purchase of those shares

► Fair market value of the property is a rebate that adjusts the purchase price

of the property


Page 41

Deposit relationships

► Awards for deposit relationships

► Generally interest

► Reportable on a Form 1099-INT

► Rev. Proc. 2000-30

► “De minimis premium” paid to a depositor to open or add to an account will not be

required to be reported as interest, or reduce the basis in the account or be

included in income of depositor

► “De minimis premium” is a non-cash inducement

► Value of $10 or less for a deposit of less than $5000

► Value of $20 or less for a deposit of $5000 or more

► Use cost to the financial institution of the premium to determine whether dollar

limitation is met


Page 42

Awards for behavior

► Awards for behavior

► Generally miscellaneous income

► Reportable on a Form 1099-MISC subject to a $600 reporting threshold

► Examples:

► Open an account, arrange for direct deposit and use your debit card three times

► Miscellaneous awards to an NRA

► If they represent US source, subject to NRA withholding and reporting


Page 43

Rebates and purchase price adjustments

► Awards for using a debit/credit card to make a purchase

► Generally deemed to be purchase price adjustments

► Therefore, not subject to information reporting

► Beware awards for taking out a mortgage or refinancing

► Adjustment of fees, points, other amounts reportable on a HUD-1?

► Beware awards linked to brokerage accounts

► Adjustment to basis that must be taken into account for basis reporting?


Page 44

Penalties – sections 6721 and 6722

► Section 6721

► $100 for each failure to file a correct and/or timely return with the IRS

(if return due after 31 December 2010)

► Up to a maximum of $1,500,000 per year

► Section 6722

► $100 for each failure to furnish a correct and/or timely payee statement

(if return required to be furnished after 31 December 2010)

► Up to a maximum of $1,500,000 per year

► Intentional Disregard Penalties

► Greater of

► $250 per return/statement, or

► 20% of the understated amount (10% for gross proceeds)

► No maximums


Page 45

Establishing reasonable cause - section 6724

► To establish reasonable cause show:

► Significant mitigating factors (e.g., established history of compliance) OR

failure arose from events beyond the filer’s control

AND

► Payor acted in a responsible manner both before and after the error occurred

Documents

C1 -- Pflieger, Sawyer, Jenson