Foreign Account Tax Compliance Act (FATCA)

Procedurally, the regulations are issued in proposed form and subject to comment prior to finalization.
The U.S. Treasury Department has requested comments by April 30, 2012; a public hearing will be held
at the Internal Revenue Service on May 15, 2012. Thus, there is continuing opportunity for interested
parties to comment.

Background: FATCA’s ultimate goal

FATCA was enacted in 2010 as the legislative response to high-profile U.S. tax evasion cases, at a time when the G-20 countries were continuing to pressure offshore financial centers and tax havens to end bank secrecy and become more transparent. FATCA requires foreign (i.e., non-U.S.) financial institutions (FFIs) and non-U.S. non-financial entities (NFFEs) to identify and disclose their direct and indirect U.S. financial account holders or become subject to a new 30 percent U.S. withholding tax on “withholdable
payments” – U.S. source income and gross proceeds (not gains) from the sale of equity or debt instruments of U.S. issuers.

The ultimate goal of FATCA is for the United States to obtain information with respect to the investment activities of certain U.S. taxpayers – not to collect the new 30 percent withholding tax. FATCA extends the third-party information reporting regime that is currently imposed on third-party U.S. payers to FFIs that maintain U.S. financial accounts and on certain NFFEs that present a high risk of U.S. tax avoidance. The rationale, as expressed in the Preamble to the Proposed Regulations, for the expansion of the third party reporting regime to offshore accounts is that in today’s globalized economy, FFIs (and certain NFFEs) are generally in the best position to identify and report with respect to their U.S. account holders or members. This rationale does not explain how non-U.S. reporting entities are to rationalize local law conflicts with FATCA reporting and U.S. withholding obligations.

Grandfathered obligations time period extended

The Proposed Regulations extend the grandfathering date for obligations from March 18, 2012 to January 1, 2013. The Proposed Regulations exclude from the definition of withholdable payment and pass thru payment any payment under an obligation outstanding on January 1, 2013 and any gross proceeds from the disposition of such an obligation. The new effective date of grandfathered obligations was inserted to facilitate implementation of FATCA withholding by withholding agents and FFIs. Note that the exclusion from FATCA withholding does not negate information reporting by FFIs under the phased in reporting rules.

The term “obligation” for purposes of the grandfathering provision means any legal agreement that produces or could produce withholdable payments other than any instrument treated as equity for U.S. tax purposes or any legal agreement that lacks a definitive expiration term. Thus, in order to be grandfathered, the obligation must be outstanding on January 1, 2013 and not materially modified thereafter. In that regard, “revolvers” entered into prior to the new effective date are covered, provided that on the agreement’s issue date the agreement fixes the material terms (including a stated maturity
date) under which the credit will be provided.

Withholding transitional rules

January 1, 2014. Withholding on FDAP income payments. This withholding obligation encompasses not only U.S. withholding agents but also FFIs, who will be required to withhold on passthru payments that are withholdable payments.

January 1, 2015. Withholding on gross proceed payments. “Gross proceed payments” are any gross proceeds (not gains) from the sale or other disposition of any property of a type which can produce interest or dividends from U.S. sources (e.g., from the sale of disposition of U.S. stocks or securities or the repayment of principal on a debt).

January 1, 2017. Withholding on foreign passthru payments. The Proposed Regulations reserve on the definition of a foreign passthru payment; the term essentially refers to a payment that would be foreign source under U.S. source of income rules but attributable to a withholdable payment. Participating FFIs will be required to report annually on the aggregate amount of foreign passthru payments to each nonparticipating FFI for the 2015 and 2016 calendar years.

Due diligence on existing accounts relaxed

Overview. The Proposed Regulations modify and relax the due diligence requirements with respect to the identification of pre-existing U.S. accounts by establishing a higher dollar threshold, allowing FFIs to rely primarily on electronic reviews of preexisting accounts and limiting the scope for manual review, particularly of individual accounts.

For pre-existing entity accounts, the due diligence procedures focus on passive investment entities with significant account balances, permit substantial reliance on documentation previously collected during account opening procedures and raise the threshold for further investigation into potential U.S. ownership. The modifications were made to reduce the administrative burden on FFIs and better focus on circumstances that present higher risks of tax evasion. Significantly, FFIs that adhere to the diligence.

Pre-existing individual accounts

· Accounts (both deposit and other accounts) with a balance or value that does not exceed U.S.$50,000 are exempt from review, unless the FFI elects otherwise.

· Certain cash value insurance and annuity contracts held by individual account holders that are Pre-existing accounts with a value or balance of U.S. $250,000 or less are exempt from review, unless the FFI elects otherwise. Accounts with a balance or value over U.S.$50,000 (U.S.$250,000 for a cash value insurance or annuity contract) but no more than U.S. $1 million are subject only to review of electronically searchable data for indicia of U.S. status. · U.S. indicia include: (i) identification of an account holder as a U.S. person; (ii) a U.S. place of birth; (iii) a U.S. address; (iv) a U.S. telephone number (a new requirement from prior Notices); (v) standing instructions to transfer funds to an account maintained in the United States; (vi) a power of attorney or signatory authority granted to a person with a U.S. address; or (vii) an “in-care-of” or “hold mail” address that is the sole address the FFI has identified for the account holder. No further search of records or contact with the account holder is required unless U.S. indicia are found through the electronic search. The U.S.$1 million threshold replaces the U.S.$500,000 threshold and, significantly, the private banking test proposed in the prior Notices.

FFIs no longer will be required to distinguish between private banking accounts and other accounts. Accounts with a balance of more than U.S.$1 million are subject to review of electronic and non-electronic files for U.S. indicia, including an inquiry of the actual knowledge of any relationship manager associated with the account. The review of non-electronic files is limited to the current customer files and certain other documents, and is required only to the extent that the electronically searchable files do not contain sufficient information about the account holder.

Preexisting entity accounts

· Preexisting entity accounts with account balances of U.S.$250,000 or less are exempt from review until the account balance exceeds U.S.$1 million.

· For remaining preexisting entity accounts, FFIs can generally rely on AML/KYC records and other existing account information to determine whether the entity is an FFI, a U.S. person, excepted from the requirement to document its substantial U.S. owners (i.e., because entity is engaged in a nonfinancial trade or business), or a “passive investment entity” (i.e., a “passive NFFE”). A passive NFFE is an NFFE that is not an “excepted” NFFE;e.g., a publicly traded entity or affiliate, an exempt beneficial owner, or an active NFFE (i.e., less than 50 percent of its gross income or assets for the preceding calendar year are passive).

· Where a passive NFFE has an account balance of U.S.$1 million or less, an FFI may generally rely on information collected for AML/KYC due diligence purposes to identify substantial U.S. owners.

· Where a passive NFFE has an account balance in excess of U.S.$1 million, the FFI must obtain information regarding all substantial U.S. owners or a certification that the entity does not have substantial U.S. owners.

Reporting rules phased in

To facilitate the implementation of FATCA, the Proposed Regulations phase in the reporting rules for U.S. accounts and accounts held by recalcitrant account holders. Additionally, the Proposed Regulations allow FFIs to elect to report financial information either in the currency in which the account is maintained or in U.S. dollars.

Reporting during 2014-2015:

For calendar years 2013 and 2014, participating FFIs are required to report only name, address, taxpayer identification number and account number.

· For calendar year 2013, FFIs must report by September 30, 2014 those accounts identified as U.S. accounts or held by recalcitrant account holders as of June 30, 2014.

· For calendar year 2014, FFIs must report by September 30, 2015.

Reporting during 2016:

For calendar year 2015, participating FFIs are required to report income associated with U.S. accounts, in addition to the aforementioned information.

· Commencing in 2015, FFI reporting is generally required to be made by March 31st of each year.

Reporting during 2017 and thereafter:

For calendar year 2016, full reporting, including gross proceeds from broker transactions, will be required.

FFI agreement and other forms

 The Proposed Regulations state that the IRS will make available an online process for registering FFIs as Participating FFIs or Deemed-Compliant FFIs no later than January 1, 2013. The online process will allow each FFI to: (i) register for participating, “limited”4, or Registered Deemed-Compliant FFI status; (ii) enter into an FFI Agreement; (iii) complete a required certification; and (iv) obtain an FFI-EIN, if applicable.
In addition, the IRS will modify the qualified intermediary (QI) agreement, the foreign withholding partnership and foreign withholding trust agreement to incorporate FATCA. Further, the IRS will also have to amend other forms, including the W-8 forms, Form 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) and Form 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding). These modifications are anticipated to be done within the next few months

FFI registration process. Special online registration procedures must be followed by FFIs that are members of an FFI Group. Each member of an FFI Group must designate a “Lead FFI” to initiate and manage the online registration process for the FFI Group. The Lead FFI that assumes this role must enter the system to register itself and, as part of that process, identify each FFI that is a member of the FFI Group that will register for participating, limited, or Registered Deemed-Compliant FFI status. An FFI, subject to the transitional rule for FFI affiliates with legal prohibitions on compliance with FATCA, will not be permitted to become a participating FFI unless every FFI that is a member of the FFI Group is either a participating FFI or a Deemed-Compliant FFI.