FATCA Issues for Derivatives and Capital Markets, …c.ymcdn.com/.../imported/2012.TaxSeminar.FATCACapitalMarkets.pdfFATCA Issues for Derivatives and Capital Markets, US Withholding

FATCA Issues for Derivatives and Capital Markets, US

Withholding Agents and US Branches of FFIs

Tom Prevost, Credit Suisse

Paul Epstein, Deloitte Tax LLP

Susan Grbic, WeiserMazars LLP

Mark Leeds, Greenberg Traurig

IIB’s Annual Tax Seminar

CUNY Graduate Center

June 20, 2012

November 2005 Presentation to Pegasus Corp. 2 GREENBERG TRAURIG, LLP | ATTORNEYS AT LAW | WWW.GTLAW.COM

FATCA Issues for Derivatives and

Capital Markets, US Withholding

Agents & US Branches of FFIs

June 20, 2012

9:00 to 10:00am

365 Fifth Avenue

Mark Leeds

Greenberg Traurig

(212) 801-6947

[email protected]

http://www.americanbar.org/aba.html



Mark Leeds ([email protected]; 212-801-

6947) is a shareholder with the law firm of

Greenberg Traurig. At Greenberg, Mark is a

member of the Tax and Capital Markets

practice groups. Mark’s professional practice

focuses on the tax consequences of a variety

of capital markets products and strategies,

including over-the-counter derivative

transactions, swaps, tax-exempt derivatives

and strategies for efficient utilization of tax

attributes, such as net operating losses. Mark

is also the editor-in-chief of Derivatives:

Financial Products Report, a Thomson/RIA

monthly publication. Prior to joining

Greenberg, Mark served as a Managing

Director at Deutsche Bank, general counsel of

a credit derivative company and, prior to that,

Mark was a partner at Deloitte & Touche where

he led the Capital Markets Tax Practice.

Mark Leeds

mailto:[email protected]


Topics to Be Addressed:

ISDA Master Agreements (Bilateral Trading &

Over-the-Counter (OTC) Transactions)

Payments made on collateral arrangements

supporting OTC Transactions





When will payments made on bilateral OTC derivatives be considered to

be US source?

1. Equity swaps referencing US stocks, to the extent treated as US-

source under Code § 871(m).

2. Other swaps should be sourced to the residence of the payee. Same

rule should apply to forward contracts and OTC options.

3. Securities lending transactions – Treasury Regulation § 1.861-3(a)(6)

treats substitute dividend payments, and Treasury Regulation § 1.861-

2(a)(7) treats substitute interest payments, as US-source if the loaned

security is a US stock or debt instrument.





ISDA (International Swap and Derivatives Association) Master Agreements

are frameworks that contain all generic provisions for two parties to

contract, but contain no provisions as to the actual transactions

themselves.

The actual transactions are documented on short form addendums to the

ISDA Master Agreements referred to as “Confirmations.” The

Confirmations incorporate the terms of the Master Agreement and

transaction-specific definitions (Equity derivatives, credit derivatives,

etc.)

The 2 versions of the ISDA Master Agreements both contain

“Indemnifiable tax” provisions. If a tax withheld meets this

definition, the payer must gross-up the payment so that the net after-

tax amount received is equal to what it would have been if the tax

had not been imposed.





ISDA has issued a preliminary response to the new FATCA rules: In the

view of ISDA, payers should not be required to gross-up payments for

FATCA taxes withheld:

“Withholding Tax imposed on payments to non-US counterparties under the

United States Foreign Account Tax Compliance Act. (a) For purposes of any

Payer Tax Representation, the words "any Tax from any payment" shall not

include any tax, however imposed, pursuant to Sections 1471 and 1472 of the

Internal Revenue Code of 1986, as amended (or the United States Treasury

regulations or other guidance issued or any agreements entered into

thereunder) ("FATCA Withholding Tax"); (b) for the avoidance of doubt the

parties agree that for purposes of Section 2(d) of this Agreement the

deduction or withholding of FATCA Withholding Tax is required by applicable

law; and (c) the definition of "Indemnifiable Tax" shall not include any FATCA

Withholding Tax.”





ISDA Protocol:

Unknown how widely it will be adopted

Not suitable when transacting with a rated vehicle that cannot

take tax risk

Bilateral renegotiation of ISDA Master Agreement (recommend

completing prior to January 1, 2013)

Cease entering into new trades after 12/31/2012 absent FATCA

protection

Insert FATCA language into trade confirms





The ISDA protocol does not address banks that are

resident in countries in which the United States has

entered into an “Intergovernmental Agreement.”

FFIs that are resident in countries that have entered into

an Intergovernmental Agreement likely will be withholding

pursuant to the laws of their country and not pursuant to

the US FATCA rules.

The current ISDA language does not carve-out local

withholding undertaken pursuant to the laws of a country

other than the US.





Collateral arrangements pose questions as to whether income earned is

subject to FATCA withholding:

If the collateral is cash, then look to the residence of the Payer

- If the collateral are securities, then in the absence of

rehypothecation, look at the source of income for the collateral

itself

- For rehypothecated securities, the answer is unclear

Delay FATCA withholding tax on collateral for three years by exchanging

USD and US assets posted as collateral for assets that do not generate US

source payments





When will parties not have to worry about withholding on collateral:

Grandfather relief? (No withholding is required on fixed term obligations

outstanding on Jan 1, 2013.) Does collateral have a fixed term? When CSAs

support multiple transactions, is the answer that it does not? Should one

look thru collateral arrangements to the underlying assets? Is grandfather

relief affected if the pledgee rehypothecates the assets?

Pre-existing obligation relief? Pre-2015 relief for payees that are not prima

facie FFIs. Obligation must have been outstanding on Jan 1, 2013. CSAs

could qualify as pre-existing obligations, but Master Agreements are unlikely

to qualify.

Short-term OID instruments are not subject to FATCA withholding.

Substitute non-US assets for US assets posted as collateral.

No exceptions for bank or portfolio interest.





Commentators have recommended a variety of solutions, including:

• Exclude accounts that hold collateral from the definition of “financial accounts”

(RBM CM)

• Move the grandfathering date to 7/1/2014 or later, particularly with regard to

passthru payments IIB/EBF)

• Grandfather ISDA transactions under pre-2013 Master Agreements that do not

extend past 2016 (SIFMA)

• Redefine “material modification” (BBA)

• Adjust rules for pre-existing obligations to enable this relief to be available for all

collateral (not just payments to non prima facie FFIs) (RBC CM)

• Issue guidance indicating there will be symmetry in the rules applicable to PFFIs

and USFIs with regard to the application of FATCA to derivatives payments (RBC

CM, IIAC)





Securitization and Fund

Documentation





• Generally, these entities will satisfy the definition of FFI and financial U.S. entity and

therefore be withholding agents for FATCA purposes

• Absent relief, these entities would be required to document account holders and

perform withholding and reporting

• Rated securitization vehicles typically cannot take tax risk for regulatory reasons

• Securitization vehicles typically lack the infrastructure to perform the necessary

withholding and reporting and existing vehicles will lack the ability and authority in

most instances to demand documentation; the cost of creating such infrastructure

would potentially render these vehicles unattractive from a pricing perspective

• A number of comment letters have recommended creating a ‘deemed compliant’

category for securitization vehicles, with particular latitude recommended for existing

securitization vehicles (LSTA, RBC, SIFMA, IIB/EBF)

• What is the IRS’ current thinking on FATCA and these entities?





• Like securitization vehicles, funds typically lack the infrastructure and

a pricing model that would enable them to function as FATCA

withholding agents

• Funds should be able to agree to modify tax indemnity language

• Certain funds may qualify for an exemption from PFFI status:

• Registered Deemed Compliant—restricted funds

• Certified Deemed Compliant – retirement funds (2 types), non-

profit, low value accounts

• Exempt Beneficial Owner—fund wholly-owned by EBOs

• Is the IRS considering further exclusions for funds?





To ensure compliance with requirements

imposed by the IRS under Circular 230, we

inform you that any U.S. federal tax advice

contained in this presentation (including

any attachments) is not intended or written

to be used, and cannot be used, for the

purpose of (1) avoiding penalties under the

Internal Revenue Code or (2) promoting,

marketing or recommending to another

party any matters addressed herein.

Tax Advice Disclosure




FATCA Issues for Derivatives and Capital Markets, US Withholding Agents and US Branches of FFIs

Institute of International Bankers Seminar on U.S. Taxation of International

Banks - June 20, 2012

Paul Epstein – Director, WNT

Phone: 202-758-1390

Email: [email protected]

FATCA Compliance Timeline: Prop. Regulations

FATCA issues: Source & Characterization

• Withholdable Payment Treatment on U.S. Source Payments

• Foreign-to-Foreign Transactions may be U.S. Source

“withholdable” payments

− Stock Loans and Sale Repos of U.S. bonds and stocks

§§1.861-2, 1.861-3, 1.871-7(a)(6), 1.881-2(b)(2)

− Specified NPCs – Prop. & Temp. §1.871-16

− Equity Linked Instruments – Prop. Reg. §1.871-15

• Characterization of instruments can alter the source and cause

payments to become “withholdable” under FATCA

• Allocations of interest within a single enterprise to ECI

− Principal protected structured notes

Scope of Section 871(m): Dividend Equivalent Payments

• Applies only to U.S. Source Non-ECI Dividend Equivalent Payments

• Coordinates and applies to the following –

− Section 1058 Securities Loans

− Sale Repurchase Transactions

− Payments Identified as “Substantially Similar”

− Temporary Regulations continue application of 1997 final regulations

• Derivatives: Specified Notional Principal Contracts

− Newly defined by 871(m)

− Expanded and modified by Proposed Regulations

− Substantial Similar Payments – Equity Linked Instruments (Proposed Regulations)

Copyright © 2011 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited

Qualified securities non-ECI lender exemptions

Cayman

fund

UK Corp 3

QSL

UK Corp 2

QSL

U. S.

broker

dealer

1058 1058 1058

Form

W-9

W8-

IMY

W8

IMY

Short Sale

Proceeds

No W/H

Substitute payment:

• 1441: 0% Direct W/H

• 1441: 0% Credit

• FATCA-Withholdable Pmt

UK Corp 3: §881results

• QSL Exemption if

Offsetting Pmt made

Substitute payment:

• 1441: 0% Direct W/H

• 1441: 0% Credit

• FATCA-Withholdable Pmt

UK Corp 2 results

• QSL Exemption

If Offsetting Pmt

Substitute payment:

• 1441: 0% Direct

W/H

• 1441: 0% Credit

UK1 §881 results

• §881 Tax is self-

Assessed if no

offsetting Payment

is made Final Regs: 15% §881 Tax 15% §881 Tax No W/H Tax

Notice 2010-46: QSL exempt QSL exempt No W/H Tax

FATCA (cascading) 30%-noncompliant 30%-noncompliant None

Non-qualified securities lender in stock loan series

Cayman

fund

UK Corp 3

Non-QSL

UK Corp 2

QSL

Foreign Fund

Treaty Rate

15%

1058 1058 1058

W8-

IMY

W8-

IMY

W8-

BEN

Short sale

proceeds

No W/H

Substitute payment:

• 1441: 15% Direct W/H

• 1441: 0% Credit

UK Corp 3: §881results

• §881 Tax Satisfied by

Cayman Fund w/h

• W/H may not be credited

To anyone but UK Corp1

Substitute payment:

• 1441: 0% Direct W/H

• 1441:15% Credit

UK Corp 2 results

• QSL Exemption

If Offsetting Pmt

Substitute payment:

• 1441: 0% Direct W/H

• 1441: 15% Credit

U.S. broker dealer

• W/H on non-QSL may

Require indemnity/

gross up

Final Regs: 15% §881 Tax 15% §881 Tax 15% §881 Tax

Notice 2010-46: 15% §881non-QSL QSL exempt Foreign Fund

Cayman w/h Agent 15% credit forward 15% credit forward

FATCA 30% if noncompliant 30% if noncompliant 30% if noncompliant

15% additional w/h? No credit forward No credit forward

Specified NPC Treatment: Code v New Reg Comparison §871(m)(3)(A) – pre 1/1/13 new Temp

Reg. 1.871-16T(b)

Long Party Transfers security to short party in

connection with entering in NPC (“Cross-in”)

Short Party Transfers security to Long Party

in connection with terminating NPC (“Cross-

out”)

Underlying referenced security is not readily

tradable on established securities market

(quotable)

Underlying security is posted as collateral

with Long Counterparty

1.871-16(c) – post 12/31/12 payments

on specified NPCs

Long Party Transfers security “in the market” – (i.e. on day of NPC acquisition)

Long Party acquires security “in the market” on day of termination of NPC contract

Underlying referenced security is not regularly traded on established securities market (objective vol.)

Underlying security is posted as collateral (with 10% de minimis amount permitted – relaxes statute)

NPC term is less than 90 days

Long party controls short party hedge contractually or by conduct

NPC notional amount is significant percentage of float or trading vol.

Special dividend is announced before NPC is entered into

Retroactive SNPC Status-Withholdable Payments

§1.871-16(d): Specified Status

Arising During Contract Term

• Specified NPC status may arise

after periodic payments have been

made

• Retroactive dividend equivalent

status is imposed on all payments,

including prior payments

• Short party is a withholding agent

whether or not cash is available

• Long party is joint and severally

liable for the retroactive tax

• Retroactive disqualification may

occur solely due to specified status

on termination payment

Specified NPC status may arise

on any of

• Crossing-out of the market on

termination (§1.871-16(c)(1));

• Underlying security is more than

10% of the FMV of collateral

posted at any time during the

contract (§1.871-16(c)(3))

• The long party enters into a long

position at anytime within 90 days

of the contract (§1.871-16(c)(4))

• The long party controls the short

party’s hedge (§1.871-16(c)(5))

• NPC notional amount represents

5% of the public float of the

reference shares (§1.871-

16(c)(6)(i))

Specified NPC: FATCA Considerations

Component of NPC Income

Non-ECI Long Party – 15% Rate

Short Counterparty

Pmt #2: Long Counterparty

Pmt#2: Short Counterparty

Dividends on Referenced Equity

$100 ($100) $100 ($100)

Appreciation on Referenced Equity

$0 $0

LIBOR-based Financing Charge

$(50) $50 ($60) $60

Depreciation on Referenced Equity

$ (30) $30 ($50) $50

Totals

$ 20 Payment Received from

Short Party

($20) Payment Owed to Short Party

($10) Payment Owed to Short

Party

$10 Payment received from

Long Party

§871(m) SNPC Status on 2nd Pmt

Foreign Source non-ECI at Pmt

For. Source- No w/h at Pmt

Date

$30 Gross Basis Tax on 2nd Pmt

$30 w/h on 2nd Pmt Date

FATCA: Chapter 4

Foreign Source-Not Withholdable

No Chapter 4 Withholding

$60 Chapter 4 Tax until Refund

$60 Chapter 4 Withholding

FATCA Issues for Interest Allocation and Branch Interest

Foreign corp

(Bank or broker dealer)

U.S. trade or

business

Treasury

book

ECI Global

Dealing

Book

Cost of Carry

Interdesk

$60

U.S. broker

dealer

• Maintains Segregated Dealer Book of ECI and Matched

Funding all from foreign offices of FFIs

• Some 3rd Party Funding on book treated as U.S.

booked liabilities in §1.882-5 Allocation Formula

• Books Income, Gains and Losses in Foreign

Location/H.O.

• Performs Back-Office Functions

• Branch Performs Mktg/Trader Functions U.S. broker

dealer • Or, Broker/Dealer Contracts as Agent

with Discretionary Authority

Interest

Cost of Carry

3rd Party

Total

FATCA

Book Amt

$ 60

$ 90

$150

Scaledown

Disregard

$60 US

$60

§1.884-

4(b)(6) select

Excess Int

Disregard

$90 US

$90

$90 Pmt

Withholdable

Treaty-AOA

Not Interest

TP Attrib

TP Allocation

3rd Party Amt

in TP Alloc?

Global dealing equity swap profit split allocation

Foreign corp

(Bank or broker dealer)

U.S. trade or

business

Treasury

book

Global

dealer

book

Cost of

carry

$60

• Sales

• Marketing

• Pricing

• Brokering

• Risk Management

U.S. broker

dealer

• Acts as Principal Short Counterparty with Unrelated and

Related Long Parties

• Owns Stock Hedges

• Books Income, Gains and Losses in Foreign

Location/H.O.

• Performs Marketing/Trader Functions and Risk

Management Functions

• Performs Marketing/Trader Functions

• Acts as Agent w/Contractual Auth.

Character of

income

Gross amount-

total TPM % allocation

U.S. allocation

amount

Authority for

income source

Derivative MTM

income $150 50% $75

U.S. Source -

§863/865(j)(2)

Prop. Regs

Derivative FDAP

income $ 20 50%

$10

U.S. Source —

§863/865(j)(2)

Prop. Regs.

Bond/stock

hedges $ (30) 50% $(15)

U.S. Source-

§863/865(j)(2)

Prop. Regs

Hedges (FDAP

interest and

dividends)

$ 70 50% $ 35 Source by Statute:

§861/862

Totals $ 210 50% $105 Item Based

Sourcing

cost of carry $ (60) 50% $ (30) Treaty Only

Mgm’t profit $ 150 50% $ 75 Net Profit Pre-

Adjustment

Global dealing source of income in single enterprise — Profit split

Global dealing — Source of allocated income

Character of Allocable Income is determined under Host PE country principles

− OECD Attribution Report on Global Trading authorizes pro-rata treatment when profit

splits are used — See Part III, paragraph 263 (2008 Final Report)

Global Dealing Regs (1998) (Prop Regs §1.864-4(c)(2)(iv); §1.864-4(c)(3)(ii); §1.864-

4(c)(5)(vi); and

U.S. Asset Split-ECI Treatment in 1996 Prop Regs §1.884-1(d)(2)(vii)) and §1.884-

1(d)(2)(xi) Example 8.

− Source of income is not changed by the allocation unless U.S. statutory rule adopts trade

or business based sourcing

Total TPM% U.S. portion Source

Derivatives MTM 150 50% 75 U.S.— §863/865 Prop.

Derivatives FDAP 20 50% 10 U.S.— §863/988 Regs/871(m) Statute

Hedges MTM ( 30) 50% (15) U.S. — §863/865/

Hedges FDAP 70 50% 35 U.S. — §861/862 /871(m)— Statute

Gross profit

before funding 210 50% 105 §871(m): 2 U.S. source dividends

$35 Div. and SNPC of $10 tax net , $35 taxed at 15% and $35 SNPC FDAP Taxed at 15%-Article 10

FATCA: Two cascading div. equivalent payments: Prop. Reg. §1.871-16 (i.e. FATCA withholdable )

Other Potential U.S. Source Payments: Characterization Uncertain

• Fails Charges on non-U.S. Government Securities

− Residence/QBU based sourcing in §1.863-10 final regulations limited to U.S. Treasuries, FNMAs, Freddie Macs and FHLB issuances

− Issue: Source by analogy to these instruments or by analogy to interest?

• Certain Credit Default Swaps

− Prop. 1.446-3 regulations purport to provide NPC characterization and coordinate residence based sourcing

− But, compare preamble with “tie-breaker” for guarantees

− Are CDSs issued on originated single loans or loan basket originations financial guarantees?

• Exchange Traded Notes

− Rev. Rul. 2008-1: Debt Treatment for Currency Denominated Notes

− Non-Currency ETNs

− Equity Linked ETNs: Prop. Reg. §1.871-15 depending on whether Dividends are announced or agreed to before issuance date or dividends are estimated

Instrument provides or is per se treated as adjusting for the dividend value

• Credit Default Swaps - Compare Regulation Statements Preamble Section 2. Credit default swaps

In Notice 2004-52 (2004-2 CB 168), the Treasury Department and the IRS

described four possible characterizations of a credit default swap. See

§601.601(d)(2)(ii)(b). These proposed regulations resolve this uncertainty by

adding credit default swaps to the list of swaps categorized as notional principal

contracts governed by the rules of §1.446-3.

1.446-3(c)(1)(iii) Included contracts. Notional principal contracts governed by this

section include contracts commonly referred to as interest rate swaps, currency

swaps, basis swaps, interest rate caps, interest rate floors, commodity swaps,

equity swaps, equity index swaps, credit default swaps, weather-related swaps,

and similar agreements that satisfy the requirements of paragraph (c)(1)(i)…Notwithstanding

the rule under paragraph (c)(3) of this section—

(A) Special rule for credit default swaps. A credit default swap contract

that permits or requires the delivery of specified debt instruments in satisfaction

of one leg of the contract is a notional principal contract if it otherwise satisfies

the requirements of paragraph (c)(1)(i) of this section.

Proposed NPC Regulations - §1.446-3

Credit Default Swaps - Compare Regulation Statements

− 1.446-3(c)(1)(iv) Excluded contracts. A forward contract, an

option, and a guarantee are not notional principal contracts.

An instrument or contract that constitutes indebtedness

under general Federal income tax law is not a notional

principal contract. An option or forward contract that entitles

or obligates a person to enter into a notional principal

contract is not a notional principal contract, but payments

made under such an option or forward contract may be

governed by paragraph (g)(3) of this section.


Credit Default Swaps - Compare Regulation Statements (2) Specified index. A specified index may be either a specified financial

index or a specified non-financial index.

(i) Specified financial index. A specified financial index is—

(A) A fixed rate, price, or amount;

(B) A fixed rate, price, or amount applicable in one or more specified

periods followed by one or more different fixed rates, prices, or amounts

applicable in other periods;

(C) An index that is based on objective financial information (as defined in

paragraph (c)(4)(ii) of this section); and

(D) An interest rate index that is regularly used in normal lending

transactions between a party to the contract and unrelated persons.

(ii) Specified non-financial index. A specified non-financial index is any

objectively determinable information that—

(A) Is not within the control of any of the parties to the contract and is not

unique to one of the parties’ circumstances;

(B) Is not financial information; and

(C) Cannot be reasonably expected to front-load or back-load payments

accruing under the contract.


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Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its

network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a

detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see

www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services

may not be available to attest clients under the rules and regulations of public accounting.

Copyright © 2012 Deloitte Development LLC. All rights reserved.

Member of Deloitte Touche Tohmatsu Limited

http://www.deloitte.com/about

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Practical Issues

Handling Changes in Documentation due to

FATCA

Tom Prevost, Credit Suisse

Practical Issues – Handling Changes in Documentation

due to FATCA

FATCA is unlike many taxes in that the withholding is

generally triggered only by a “voluntary” decision of the Payee

to comply or not comply.

Although FATCA provides grandfathering for most financial

arrangements executed prior to 2013, it does not focus on

legal agreements that allow for new transactions to be

executed under existing documentation.

On the following slides is an approach on how to conduct a

proper review of legal agreements and potential mitigation

approaches.


due to FATCA

Step 1: Determine Scope

− What is the population of legal agreements outstanding

where a party could execute a new transaction in 2013

without signing a new agreement?

Examples:

– ISDA Masters

– Master Repo Agreements

– Securities Lending Masters


due to FATCA

Step 2: Review of Agreements

− Once the population is identified there are a number of key questions

that must be answered and documented:

What are the tax provisions in each of these agreements?

Do the agreements require a Payor to gross-up the Payee for taxes?

Are there termination rights in the agreement? – If yes, is it applicable

and at what cost?

Is there a Change in Law provision? If so, is it applicable?

After completing the exercise above, you now understand which

agreements need to be amended for FATCA, and what is the level of risk

of not amending each agreement, assuming the counterparties chooses to

be an NPFFI. However, now you must act on the information and likely

amend large amounts of documents.


due to FATCA

Step 3: Amendments of Agreements

− So how do you amend all the affected agreements?

Protocols – helpful for mass amendments, but still require bilateral consent

Bilateral negotiated amendments

− What is the right language for the amendment?

Narrow vs more open language

Cover IGAs or defer IGA discussion until more clarity?

− How do you manage the amendment process?

Dedicated FATCA team or normal negotiators for documents.

− How does FATCA affect your document templates going forward?

Standard FATCA provisions?

− Starting Jan 1, 2013, what procedures should you put in place to handle amendments of old grandfathered transactions that would subject them to FATCA?

Practical Issues – Client/Customer Data: Due Dilligence

FATCA is ultimately about client/customer information

Customer information is key in the due diligence, reporting and

withholding portions of FATCA

FFIs have many responsibilities with respect to customer

information in the due diligence process:

− Collect information from various internal and external sources

− Review and validate the information, including resolving any

conflicting information that may have been obtained in order to

validate the proper FATCA classification

− Document the steps taken in the review and store all the

underlying information for future audits and review

Practical Issues – Client/Customer Data: Due Diligence

Who are my clients?

− Do I have a client master database or is my information scattered?

− Is my information current/accurate?

Do I need to perform a data remediation project to even be ready to start due diligence?

− How do I reconcile multiple data sources to make sure that I don’t have a party double counted because the name is slightly different in 2 databases (i.e., ABC Corp. instead of ABC Corporation)

− As silly as it may sound, even if you have a client master database are you sure you have the proper clients in the database?

Client master databases were built to accommodate front office and AML requirements. No one ever classified clients through a US tax lens, which is what FATCA requires.

– Example: Your client master shows your client at “Blackrock” or “PIMCO”, but those are managers and not specific legal entities. How many funds are under that relationship? Is Blackrock acting as an agent with an undisclosed principal? One party in a system may mean hundreds of tax entities, each of which requires its own FATCA classification.

Practical Issues – Client/Customer Data: Due Diligence

How do I actually get to final FATCA classifications?

− Very few categories where you can get to final FATCA classification without an

additional document from the client:

Individuals without US indicia

Active NFFEs

− For everyone else you need something else

How do you put together the request to the client?

– New vs. Existing Clients

Who contacts the client?

Who validates the information?

– Some information is “technical tax”: W-8s

– Other information: incorporation documents, passport copies, charity

documents, lawyer letters, etc…

Practical Issues – Client/Customer Data: Reporting &

Withholding

How do I get information about US persons to the IRS?

− Transaction data and client data in different systems

− Pulling the proper data from the systems and aggregating by

legal entity for reporting

Front office systems not always legal entity focused

How do I withhold on NPFFIs and Recalcitrant Accounts?

− Do I build a withholding system or do withholding manually?

− Is waiting until withholding due too late in the process? Should I

try to stop transactions subject to withholding before they

happen?

Potential credit issues if withholding not subtracted from client

accounts.

Documents

FATCA Issues for Derivatives and Capital Markets, …c.ymcdn.com/.../imported/2012.TaxSeminar.FATCACapitalMarkets.pdfFATCA Issues for Derivatives and Capital Markets, US Withholding