FATCA Feb 19 2013 Seminar Final · PwC (2) individual or collective portfolio management (3) investing, administering or managing money or financial assets on behalf of others Entities

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FATCA

A closer look at the finalregulations and the pathforward

19 February 2013

Circular 230: This document was not intended or written to be used, and it cannot be used,for the purpose of avoiding US Federal, state or local tax penalties that may be imposed onany taxpayer.

What we will be looking at …

• FATCA recap

• Significant highlights of the final regulations

• Key differences between the proposed and final regulations

• Potential impact of inter-governmental agreements (IGAs)

• What Hong Kong and Chinese financial institutions should do

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• What Hong Kong and Chinese financial institutions should donow

• Q&A

• Panel Discussion – the path to compliance

FATCA: A closer look at the regulations2

What is the Foreign Account TaxCompliance Act (FATCA)?

PwCFATCA: A closer look at the regulations

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What is FATCA and why is it important?

• A US tax law that aims to enhance the US Internal Revenue Service’s(IRS) ability to collect US tax imposed on income earned by USpersons through non-US investments

• Requires most foreign financial institutions (FFIs) to employenhanced due diligence procedures to identify US persons and todisclose specific information on their non-US investments to the IRS, or

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disclose specific information on their non-US investments to the IRS, orbe subject to stringent financial penalties

• Non-compliance carries a severe penalty of a 30% withholding tax

o Applied to certain US sourced payments received by an FFIstarting January 2014, and even more payments received from2017

o Even if the FFI believes it has no US customers

• Other financial institutions and counterparties may be more reluctantto conduct or continue business with non-compliant institutions


How does an FFI comply? - Sign an agreementwith the IRS...

• Perform enhanced due diligence procedures to identify existing USaccount holders, and non-US accounts that have substantial US owners

• Collect more information when opening new accounts if US indicia areidentified during on-boarding process for individual account holders, andmeet FATCA requirements for new accounts opened by entities


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• Report to the IRS identified US accounts and US-owned accounts, aswell as, in the aggregate, on account holders who do not provideinformation or are FFIs not complying with FATCA

• Withhold US tax on certain payments and pay over to the USgovernment on:

o Account holders who do not provide information

o FFIs that do not comply with FATCA

Significant highlights of the finalregulations


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What has changed in the final FATCA regulations?

• Most of the same fundamental FATCA responsibilities andrequirements from the proposed regs were adopted in the final regs

o Additional guidance tries to address stakeholder and industrycomments

o Provide many of the needed details and clarifications regardingcustomer on-boarding, due diligence, reporting and withholding

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customer on-boarding, due diligence, reporting and withholding

• FATCA timelines are generally the same as announced by the IRS inOctober 2012

• Sign up with the IRS by 25 October 2012 to get on the IRS December FFI list

• FFIs will need to implement a compliance and certification programme

• Regulations now more closely coordinated with IGA models


FATCA Compliance Timeline under final FATCAregulations

• Key illustrative dates:

15 July 2013 IRS FATCA registration portal available

25 October 2013 Last day to register for inclusion on the 2 Dec 2013 IRS list ofPFFIs and Registered DCFFIs

2 December 2013 First IRS list of PFFIs and Registered DCFFIs to be published

1 January 2014 New account identification procedures must be in placeto establish the FATCA status of new individual and entity

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to establish the FATCA status of new individual and entityaccounts . The earliest effective date of the FFI agreementwould be 31 December 2013.

1 January 2014 FATCA withholding commences on certainwithholdable payments (i.e. US source interest, USdividends, etc.)

30 June 2014 Need to certify due diligence is complete on pre-existing “primafacie FFI” accounts

31 December 2014 Need to certify due diligence is complete on pre-existing highvalue accounts

15 March 2015 Begin FATCA reporting of US source FDAP income thatwas paid for calendar year 2014

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FATCA Compliance Timeline under final FATCAregulations (Continued)

• Key illustrative dates:

31 March 2015 Begin limited FATCA reporting for calendar years 2013 &2014 for US accounts and aggregate FATCA reporting forrecalcitrant accounts

31 December 2015 Need to certify due diligence is complete on all pre-existingaccounts

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29 February 2016 Responsible officer must be able to certify completion ofidentification and review for all preexisting individual andentity accounts

15 March 2016 Reporting of foreign reportable amounts to NPFFIs begins

1 January 2017 Begin FATCA withholding on gross proceeds on the saleof US stock and US securities. Earliest date that FATCAwithholding may be required for "foreign passthrupayments", which will be the subject of future US guidance.”.

30 June 2017 First Certification of Compliance and Effective Controlsrequired

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Key differences between proposedand final regulations

1) Entities in scope


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How has the concept of FFI changed under thefinal regs?

Proposed regulations(4 types of institutions)

Final regulations(5 types of institutions)

Type of change

1. Depository institution 1. Depository institution Limited new exceptions

2. Custodial institution 2. Custodial institution Minor clarifications


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3. Insurance company 3. Insurance company Clearer definition

4. Entities that

invest/trade

4. Investment entities - entities

that trade, invest or manage

financial assets as a business

on or behalf of customers

Significant new

concepts

N/A 5. Certain holding companies

and treasury centers

New type of financial

institution

‘Depository institutions’

Definition

Accepts deposits in the ordinary courseof a banking or similar business

What’s new?

Limited new exceptions

Key takeaways

• lessors and lenders solely accepting

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• lessors and lenders solely acceptingdeposits as collateral are notconsidered to be in a banking orsimilar business

• charge and credit card services arenot considered a banking or similarbusiness


‘Insurance companies’

Definition

• is a company regulated as aninsurance company in its country ofoperation,

• has gross income arising frominsurance, reinsurance, and

What’s new?

Clearer definition

Key takeaways

• makes it easier to identify aninsurance company

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insurance, reinsurance, andannuity contracts that exceeds 50%of gross income, or

• has assets associated withinsurance, reinsurance, andannuity contracts that exceeds 50%of gross assets

insurance company

• single cash value contract cannotalone create an insurance companyFFI

• requirement that insurer be regulatedunder local law provides clarity, asopposed to a determination under UScriteria


‘Investment entities’

Definition

Entity primarily conducts as a businessone or more of the following activitiesor operations for or on behalf of acustomer:

(1) trading in certain financial assets

What’s new?

Significant new concepts andexpanded definition

Key takeaways

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(1) trading in certain financial assets

(2) individual or collective portfoliomanagement

(3) investing, administering ormanaging money or financialassets on behalf of others

Entities that hold themselves out ascollective investment vehicles, mutualfunds, private equity funds, etc.

Key takeaways

• fund managers become FFIs

• small non-professionally managedentities (e.g., family trusts, PICs,etc.) may get some relief


‘Holding companies’ and ‘treasury centres’

Definition

An entity that is a holding company ortreasury centre that:

1. is part of an expanded affiliategroup (EAG) that includes otherfinancial institutions, or

What’s new?

Expanded definition

Key takeaways

Holding companies and treasurycenters are FIs if:

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financial institutions, or

2. if formed in connection withinvestment vehicles such as privateequity funds, mutual funds, hedgefunds, etc.

centers are FIs if:

• the EAG includes a depositoryinstitution, custodial institution,insurance company or aninvestment entity, or

• the entity is formed or availed of byany fund or similar investmentvehicle


New FFI exclusion – Excepted inter-affiliate FFIs

Key takeaway

May reduce registrationrequirements in somecases

• Treated as excepted NFFE (not an FFI)

• Conditions:

- entity is a member of a PFFI group

- maintains no financial accounts outside EAG

- does not hold an account with or receive

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- does not hold an account with or receivepayments from any withholding agent outsideEAG

- does not make withholdable payments topersons outside EAG


Deemed-compliant FFIs

Certified deemed-compliant FFIs

Must certify to a withholding agent that itmeets the requirements on a Form W-8and provide any other requireddocumentation

Two categories of deemed-compliant categories do not need to sign an FFIagreement with the IRS, but still have some FATCA responsibilities:

Registered deemed-compliant FFIs

Must register with the IRS, agree todeemed-compliant criteria, and certifyevery 3 years to its compliance

• local FFI

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documentation

• non-registering local bank

• FFIs with only low value accounts

• limited life debt investment vehicle(pre-2017; for CLOs/CMOs)

• qualified credit card issuers

• sponsored closely held investmententity

• owner documented FFI


• local FFI

• non-reporting member ofParticipating FFI (PFFI) group

• qualified collective investment vehicle

• restricted fund

• sponsored investment entities

• sponsored controlled foreigncorporations (CFCs)

Retirement funds and non-profitorganizations are recategorized


2) Pre-existing accounts due diligence


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Pre-existing account due diligence

• New accounts of a customer that has a preexisting account can be treatedas a pre-existing account so long as they are treated as one obligation forpurposes of:

― AML due diligence

― aggregating balances and

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― aggregating balances and

― applying some other parts of FATCA due diligence

• Some liberalization of documentation to be collected after US indicia showup, can apply in some cases

19FATCA: A closer look at the regulations

Pre-existing account due diligenceIndividual accounts

Account threshold Due diligencerequirement

Ongoing monitoring

Accounts with aggregate balanceon effective date of the FFIagreement of US$50K or less(US$250K for cash valueinsurance and annuity contracts)

No review required Review required if aggregateaccount balance exceeds US$1M at any subsequentcalendar year end

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insurance and annuity contracts)

Accounts with aggregate balanceon effective date of the FFIagreement is in excess ofUS$50K (US$250K for cashvalue insurance and annuitycontracts) but not in excess of US$1M

Only electronic search forUS indicia required

Review must be completedby 31 December 2015

No additional review requireduntil there is a change incircumstances

Accounts with aggregate balanceon effective date of the FFIagreement in excess of US$1M

Enhanced review required




PFFI Pre-existing account due diligenceEntity accounts

Account threshold Due diligencerequirement

Ongoing monitoring

Accounts with aggregate balanceon the effective date of the FFIagreement of US$250K or less

No review required Review required if aggregateaccount balance exceeds US$1M at any subsequentcalendar year end

Accounts with aggregate balance Review must be completed No additional review required

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Accounts with aggregate balanceon the effective date of the FFIagreement in excess of US$250Kthat are Prima Facie FFIs

Review must be completedby 30 June 2014


Accounts with aggregate balanceon the effective date of the FFIagreement in excess of $250Kother than Prima Facie FFIs



Prima Facie FFIs (obvious FFIs) are entities identified as qualified intermediaries (QIs) ornonqualified intermediaries (NQIs), and entities that have certain industry codes on theFFI’s systems that indicate they are financial institutions.



3) New accounts


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Documentation

• Withholding certificates (Forms W-8, W-9)

- electronic receipt

- indefinite validity period

• Decreased supplementary documentation

• Documentary evidence

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• Documentary evidence

- provides flexibility on documents retained

• Third-party credit agency information



4) Withholding


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What is a withholdable payment?

Withholding on gross proceedson DVP/COD transactions

Final regulations defer withholding

The definition of a withholdable payment is largely consistent with theproposed regs

…But excludes the following frombeing a withholdable payment:

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Final regulations defer withholdingon gross proceeds until 2017, sobrokers need not be concerned withthe status of the payee in suchtransactions – at least until 2017


Offshore payments of US source fixed,determinable, annual, periodical (FDAP)income prior to 1 January 2017 withrespect to an offshore obligation

If the payor is not acting as anintermediary or a qualified securitieslender

Relief for certain grandfathered obligations

The final regulations provide:

• an extended cut-off date to 1 January 2014

• an exemption for a payment with respect to collateral posted to secure agrandfather obligation

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• obligations that give rise to withholdable payments under IRC section871(m) (dividend equivalent payments) or foreign passthru payments will begrandfathered if outstanding by the date that is 6 months after a specifieddate to be determined by future regulations



5) Reporting


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Form 8966 for FFIs

For accounts owned by aspecified US person

For accounts owned by USowned foreign entities

• name, address and TIN of eachspecified US person

• account number

• name, address and TIN of theentity

• account number

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• account number

• account balance or value

• payments of income and grossproceeds (if any)

• account number

• account balance or value

• payments of income and grossproceeds

• name, address, and TIN for:

― each substantial US owner of a US-owned foreign entity


Form 8966 for FFIs (cont’d)

Requirement to reportpayments is phased in

Rules for recalcitrant accounts

• first report due in 2015 withrespect to 2013 and 2014information

• income payments are not

• need to provide the aggregatenumber and aggregate balance ofrecalcitrant accounts that:

― are held by passive NFFEs


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• income payments are notreportable until 2016 for 2015

• gross proceeds are not reportableuntil 2017 for 2016

― are held by passive NFFEs

― are held by US persons

― are dormant accounts

― have US indicia (other than passive NFFEs, US persons,and dormant accounts)

― have no US indicia (other than dormant accounts)

FATCA also changes existing Form 1042-Sreporting

PFFIs and deemed-compliantFFIs (DCFFIs)

• supplements Form 8966 reporting

• used to report chapter 4 reportableamounts paid to recalcitrantaccounts and NPFFIs

Chapter 4 reportable amounts

• US source FDAP income paid onor after 1 January 2014, that isreportable on Form 1042-S underchapter 3, or otherwise subject towithholding under chapter 4

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accounts and NPFFIs

―reporting can be on a pooled or payee specific basis

―the reporting obligation can be passed up to another withholdingagent

• NPFFIs that act as intermediariescan issue Forms 1042-S to allocatethe tax withheld to the underlyingpayees

withholding under chapter 4

• gross proceeds and foreignpassthru payments that aresubject to withholding

• foreign reportable amounts paid toan NPFFI in calendar years 2015and 2016


Withholding agents must file a1042-S to report chapter 4 amountspaid to recipients


6) FFI compliance


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FFI registration portal

What is it used for?

• registration of participating FFIs,registered deemed-compliant FFIs(including FFIs covered under anIGA)

• responsible officer certifications

Key dates

No laterthan July15, 2013

Registration portal willbe available online

October 25, Last day to register on

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• responsible officer certifications

• enables FFIs to interact with IRS

October 25,2013

Last day to register onportal to be on first IRSlist of FFIs

December2, 2013

IRS will post the firstlist of FFIs and intendsto update the listmonthly


FFI compliance program requirements

The final regulations require an FFI to:

1. appoint a responsible officer

2. establish policies, procedures and processes sufficient to satisfy agreement

3. periodically review and certify as follows:

Type of certification One time or When is certification

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Type of certification One time orongoing?

When is certificationrequired?

Compliance and effectiveinternal controls

Ongoing,every 3 years

6 months after each 3-year review period

Due diligence on pre-existing accounts

One time 60 days after 2nd

anniversary

Not assisting accountholders in avoidance ofchapter 4

One time 60 days after 2nd

anniversary


Compliance and effective internal controlscertification

The responsible officer must certify that the FFI has completed thefollowing activities:

• established a FATCA compliance program that is in effect

• reviewed the compliance program against the requirements of the FFIagreement

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With respect to material failures the responsible officer mustcertify:

• that there were no material failures, or

• if there were material failures, appropriate actions were taken to remediateand prevent reoccurrence

If the responsible officer is unable to make a certification, it can make aqualified certification.


A material failure willconstitute an event ofdefault if it occurs inmore than limitedcircumstances or whenthe FFI has not

Material failures

• deliberate action by employee or agent to avoidrequirements of FFI agreement

• error attributable to failure of FFI to implementsufficient internal controls

• certain criminal or civil penalties imposed on anFFI by regulators in connection with failure to

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the FFI has notsubstantially compliedwith its FFI agreement

FFI by regulators in connection with failure toproperly identify account holders as part of itsanti-money laundering (AML) procedures

• establishment of a tax reserve or provisionrelated to lack of compliance with FFI agreement


Events of default

Failure to perform one or more of the following are examples ofevents of default:

• obtain reporting waiver when required

• significantly reduce over time account holders and payees that arerecalcitrant or nonparticipating FFIs

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• maintain compliance program

• take timely corrective actions to remedy material failures

• make required certifications

• cooperate with IRS on requests for additional information


“… to the best ofresponsible officer’sknowledge afterconducting a reasonableinquiry, that the PFFIdid not have any formal

Certification about policies not assisting accountholders in avoidance of chapter 4

Reasonable inquiry

• written inquiry such as e-mail requests torelevant lines of business

• requires response from relevant customer on-boarding and management personnel

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or informal practices orprocedures in place fromAugust 6, 2011 throughthe date of certificationto assist account holdersin the avoidance ofchapter 4.”

Bad practices

• suggesting account holders:

― split up accounts to avoid high-value

― close or transfer accounts to avoid reporting

― remove US indicia from records

• intentional failure to disclose US account

• manipulating account balances to avoiddetection


Potential impact of inter-governmental agreements (IGAs)


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Uncertainty remains where IGAs have not beenestablished

• US government is working with governments around the world toestablish a common approach to FATCA implementation (IGAs)

• Two approaches adopted so far – Model 1 and Model 2

• Model 1 generally relies on government-to-government exchangeof information to address concerns that foreign laws prohibit manyFFIs from reporting account holder information to IRS

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FFIs from reporting account holder information to IRS

• Model 2 provides an alternative solution to these restrictions, byproviding another framework to allow reporting directly to the USunder FATCA

• Both models provide applicable FFIs with some relief againstcertain aspects of the final regulations

• However the principles of FATCA remain and we do not anticipatethat any IGAs could materially reduce the burden of FATCA compliancefor Hong Kong or Chinese financial institutions


What Hong Kong and Chinesefinancial institutions should do now


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What Chinese and Hong Kong financialinstitutions should do now

• Understand the impact of the final regs on the FFI’s operations

• This will assist in determining changes that need to beimplemented into their compliance policies, procedures, systems andoperating models

• Time is of the essence with less than 11 months until the firstcompliance milestone

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compliance milestone

• Story is still unfolding especially with the level of cooperation andimplementation details from foreign governments that are expected toimplement IGAs. IGAs will impact the way that FFIs establish FATCAcompliant operating models

No pressure, but with 11 months to go …

Chinese and Hong Kong financial institutions need to:

Comprehend the final regulations and their impact

Unfolding developments – monitor them closely (i.e. IGAs)

Review and determine what gaps they have in their existing processes

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Review and determine what gaps they have in their existing processes

Execute efficiently and effectively a FATCA compliance program

http://www.pwchk.com/home/eng/fatca.html

This presentation has been prepared for general guidance on matters of interest only, anddoes not constitute professional advice. You should not act upon the information contained inthis publication without obtaining specific professional advice. No representation or warranty(express or implied) is given as to the accuracy or completeness of the information containedin this publication, and, to the extent permitted by law, PricewaterhouseCoopers Hong Kong itsmembers, employees and agents do not accept or assume any liability, responsibility or duty ofcare for any consequences of you or anyone else acting, or refraining to act, in reliance on theinformation contained in this publication or for any decision based on it.

© 2013 PricewaterhouseCoopers Hong Kong. All rights reserved. PwC refers to the HongKong member firm, and may sometimes refer to the PwC network. Each member firm is aseparate legal entity. Please see www.pwc.com/structure for further details.

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FATCA Feb 19 2013 Seminar Final · PwC (2) individual or collective portfolio management (3) investing, administering or managing money or financial assets on behalf of others Entities