1. Foreign Account Tax Compliance Act (FATCA) and IRS Notices and Proposed Treasury Regulations Relating to FATCA and US Treasury and IRS Reporting Compliance for US Taxpayers who own Foreign Entities

2. Agenda I. A Brief Overview of FATCA II. Prospects for FATCA
III. Industry Reaction
IV. FATCA and Trusts
Deemed Compliant FFIs
Selected Documentation Issues
VII. Tax Compliance for Foreign Entities with US Taxpayer Owners

3. FATCA As a Reporting Regime
FATCA stands for the “Foreign Account Tax Compliance Act” which was incorporated into the HIRE Act that became law on March 18, 2010.
The goal of FATCA is to require foreign financial institutions (“FFIs”) and non-financial foreign entities (“NFFEs”) to provide information to the IRS identifying U.S. persons invested in non-U.S. bank and securities accounts.
The policy of FATCA is to reduce U.S. tax evasion by improving the information available to the IRS about the offshore accounts of U.S. persons.
Treasury/IRS accordingly describe FATCA as a “reporting regime.”

4. FATCA’s Teeth = Withholding
FATCA’s lever to achieve this goal is a NEW 30% withholding tax levied on “withholdable payments” made to nonparticipating FFIs and NFFEs.
“Withholdable payments” include all U.S. source income (“FDAP”) and gross proceeds from the sale or disposition of any property of a type that can produce interest or dividends from U.S. sources.
Withholding may also apply to non-U.S. source payments because of the “passthru payment” concept.

5. FFIs Broad definition that includes any non-U.S. entity that:
Accepts deposits;
Holds financial assets for the account of others;
Engages primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such securities.
FFI Examples: non-U.S. banks, securities brokers and dealers, hedge funds, collective and family investment vehicles.
A Miami bank custodies the U.S. assets for a non-U.S. bank with solely non-U.S. customers – the non-U.S. bank is an FFI.
A Miami bank’s customer is a Panamanian personal investment corporation (“PIC”) holding solely passive assets – the PIC is an FFI.

6. “Good” FFIs How to be a “good” FFI not subject to 30%
FATCA withholding?
Belong to a class of institutions that Treasury/IRS designate as per se “good” and not subject to FATCA withholding.
Enter into an “FFI Agreement” with the IRS with the attendant obligations (“participating FFI”).
Comply with procedures to establish that the institution does not maintain “U.S. Accounts.”
Be exempted because another withholding agent has agreed to take on expanded documentation and due diligence requirements for underlying owners.

7. The FFI Agreement Route
A participating FFI must enter into an agreement with the IRS to do all of the following:
Identify its “U.S. Accounts” including all its worldwide affiliates;
Comply with due diligence criteria to ensure that it has really identified its U.S. Accounts;
Provide the IRS with an annual report with details about the U.S. Accounts that it has found;
Deduct and withhold 30% on withholdable payments made to “recalcitrant account holders” or non-participating (or “bad”) FFIs;
Provide any follow-up information requested by the IRS with respect to the U.S. Accounts; and
Request a waiver from any U.S. account holder if disclosure would otherwise be prohibited on the basis of non-U.S. law (e.g., privacy or bank secrecy laws), and close the account if the account holder refuses to cooperate.
The IRS can terminate the agreement if any of the above is not done.

8. NFFEs
Non-financial Foreign Entities (“NFFEs”) are non-U.S. entities that are not FFIs.
The goal of section 1472 is to find “substantial U.S. owners” of these entities.
“Substantial” means >10% U.S. owners of non-U.S. corporations or partnerships and >10% beneficiaries of non-U.S. trusts.
A U.S. grantor of a grantor trust is always considered a “substantial U.S. owner.”
Examples: non-U.S. corporations, partnerships.
A Miami bank’s customer is a closely-held Argentine manufacturing company – the company is an NFFE

9. “Good” NFFEs
How to be a “good” NFFE not subject to 30% FATCA withholding:
Belong to a class of NFFEs that Treasury/IRS designate as per se “good” and not subject to FATCA withholding (or “good” under the statute, e.g., publicly traded corporations);
Engage in an “active business;”
Certify to the withholding agent that the NFFE has no substantial U.S. owners; or
Provide the names, addresses, and U.S. taxpayer identification numbers (“TINs”) of substantial U.S. owners to the withholding agent to then be reported to the IRS.

10. The FATCA Notices Notice 2010-60 – Issued August 27, 2010.
Overall FATCA system architecture.
Grandfathering of certain obligations from FATCA withholding.
Documentation of accounts by FFIs, including transition “relief.”
Notice – Issued April 8, 2011.
Modified rules for documenting preexisting individual accounts.
Passthru payments.
Deemed compliant FFIs.
FFI annual reporting.
Expanded affiliated FFI group rules.
QI coordination.

11. Notice – Issued July 14, 2011
Primarily modifies original FATCA effective date of January 1, 2013.
FFI elections must be made in 2013 by June 30 to ensure that they are effective for that year.
New account opening procedures must be in place by July 1, 2013 (or effective date of FFI agreement if later).
Withholding on FDAP begins January 1, 2014.
Reporting of certain known U.S. persons begins Sept
Withholding on gross proceeds from the sale of securities giving rise to U.S. source interest and dividends begins January 1, 2015.
Passthru payment withholding may also begin January 1, 2015.

12. Treasury Statement Announcing Government to Government Agreements and New Proposed FATCA Treasury Regulations
Governments Reach Agreements.
The Treasury Department Feb. 8 said it had reached an agreement with the governments of France, Germany, Italy, Spain, and the United Kingdom for designing a framework to implement the information reporting and withholding provisions by foreign financial institutions under the Foreign Account Tax Compliance Act (FATCA). According to Treasury's news release, the governments expressed their “mutual intent to pursue a government-to-government framework for implementing FATCA—an important step toward addressing legal impediments to financial institutions' ability to comply with the regulations. Treasury has later announced that this agreement is the foundation for the US to enter into other agreements with other countries.
New FATCA Treasury Regulations.
The Internal Revenue Service and Treasury Department on Feb. 8 released the long-awaited proposed rules on the Foreign Account Tax Compliance Act (FATCA).  In proposed rules that appeared in the Feb. 9 Federal Register, IRS said the proposals reflect concerns that were raised when the agency asked for feedback. Among the areas where IRS has revised its previous notices on FATCA include expanding the scope of grandfathered obligations; transitional rules for affiliates with legal compliance prohibitions; additional categories of deemed compliant foreign financial institutions; and modification of due diligence requirements. The rules are a good response to the Industry’s complaints about FATCA administration; albeit lengthy and convoluted. Effective date is December 31, 2013.

13. The Prospects For FATCA
Is FATCA likely to be repealed?
U.S. domestic political considerations:
Anti-tax evasion as political calculus.
Concerns with effects on U.S. capital markets.
Concerns with proposed bank deposit interest rule.
Non-U.S. political considerations:
Concerns raised by non-U.S. governments.
Potential for retaliatory measures.
FATCA as a model.

14. What is the Industry Doing?
The Challenge of FATCA to the Industry:
Statute gives great discretion to Treasury/IRS to implement.
3 Notices issued to date.
Treasury Announcement stating Government to Government Agreements and Proposed Treasury Regulations announced by Government on February 8, 2012.
Notice extends various FATCA deadlines from those starting in 2013 to 2015 and potentially beyond. Regs extend dates even further.
Spectrum of Reponses:
Early adopters.
Extreme denial.
Balanced approach.

15. Highlights of Proposed FATCA Treasury Regulations
Some of the important highlights of the new proposed FATCA regulations include:
FATCA withholding tax obligations will first apply to certain payments made on or after January 1, Consistent with earlier IRS guidance, the proposed regulations delay withholding on gross proceeds until January 1, 2015.
Certain "grandfathered" obligations that are outstanding as of January 1, 2013, are exempt from withholding tax (this is more generous than the March 18, 2012, date specified in the statute). Because the terms "obligation" and "outstanding" are specifically defined terms in the regulations, a careful analysis of each obligation will be required to determine if the obligation qualifies for this favorable treatment. U.S. TP’s with obligations that don’t qualify have until 12/31/12 to modify.

16. Highlights of Proposed FATCA Treasury Regulations (Con’t)
The FFI agreements will provide for a gradual phase-in of reporting requirements. For reporting with respect to calendar years 2013 and 2014, participating FFIs are required to report only name, address, taxpayer identification number (TIN), account number and account balance with respect to U.S. accounts. For reporting with respect to calendar year 2015, participating FFIs are also required to report income. For reporting with respect to calendar year 2016 and thereafter, the regulations require full reporting, including reporting of gross proceeds.
Withholding on pass-thru payments will also be gradually phased in. The pass-thru payment regime requires withholding on two types of payments: withholdable payments and other payments to the extent attributable to a withholdable payment. Participating FFIs will be obligated to withhold on withholdable payments starting on January 1, For other pass-thru payments, however, the regulations postpone the withholding requirement until January 1, The U.S. Treasury also expressed willingness to further relax the pass-thru payment withholding obligations for jurisdictions that enter into agreements to facilitate FATCA implementation.

17. Highlights of Proposed FATCA Treasury Regulations (Con’t)
Certain affiliates in jurisdictions with legal prohibition for compliance with FATCA requirements may enjoy a short reprieve. With respect to those affiliates, the full implementation of reporting requirements is suspended until January 1, 2016, as long as they comply with FATCA's due diligence requirements and retain the collected information. Withholdable payments to these affiliates will still be subject to withholding, but the affiliates will not disqualify other participating FFI group members with which they are affiliated.
Due diligence procedures required under FFI agreements for identification of U.S. persons are modified to somewhat simplify the burden of compliance and allow greater reliance on existing anti-money laundering and know- your-customer procedures. In addition, due diligence is relaxed for certain pre-existing accounts, and detailed guidance is given on the precise scope of records required to be searched.

18. Highlights of Proposed FATCA Treasury Regulations (Con’t)
Additional categories of FFIs are defined as deemed-compliant FFIs that are not subject to withholding requirements. In particular, the U.S. Treasury expanded the category of "local banks" that are deemed-compliant FFIs. A bank that is organized in one EU country will not be penalized for providing account services to residents of other EU countries. Additionally, the regulations acknowledge that U.S. citizens who are residents in a foreign country have legitimate reasons to open bank accounts in a local bank, and such accounts should not jeopardize the deemed-compliant status of the bank.
The definition of "financial account" is narrowed to focus on traditional bank, brokerage, money market accounts and interests in investment vehicles. The regulations exclude certain debt or equity interests in FFIs that are not investment vehicles, certain retirement accounts, and certain accounts held by foreign governments, international organizations and retirement funds.

19. What Are Trusts For FATCA Purposes? FFIs or NFFEs?
Notice strongly suggests that non-U.S. trusts should be treated as FFIs under section 1471(d)(5)© (“engaged primarily in the business of investing, reinvesting or trading securities, etc.).
This may make sense for “business trusts” that are classified as corporations under section 7701.
However, many commentators have noted that fiduciary trusts, whether inter vivos or testamentary, are not “engaged in business” but simply preserve assets.
The approach also appears at odds with the “substantial U.S. owner” provisions that contemplate specific U.S. ownership thresholds for trusts as NFFEs.
May depend on the type of assets in trust. Securities may trigger FFI status, but (for example) real estate and artwork would not.

20. Why Does It Matter Whether Trusts are FFIs or NFFEs?
If trusts are NFFEs, then the trust must identify to a withholding agent ANY U.S. grantor AND any person who holds more than a 10% beneficial interest in the trust.
That is, the trust/NFFE would represent these facts to the withholding agent.
If trusts are FFIs, they must identify ANY U.S. grantor and any U.S. beneficiary, regardless of the size of the beneficial interest.
They do this by entering into an agreement with the IRS to perform FATCA reporting.

21. Other FATCA Trust Issues
How should mixed trust/company structures be treated?
For example, a Miami bank has a customer that is a company wholly owned by a non-U.S. trust.
Both entities would be treated as “FFIs” if the company is set up to hold passive trust assets.
If company has active business, it would be an exempted NFFE under Notice regardless of who owns it.
How should non-U.S. private foundations be characterized for FATCA?
No clear answer in either Notice or the statute but the trust as FFI analogy is troubling – unless Treasury/IRS rethink position and treat trusts as NFFEs

22. Other FATCA Trust Issues (Con’t)
How should trust companies be treated for FATCA?
Notice states that trust companies are FFIs because they “hold financial assets for the accounts of others.”

23. Other FATCA Trust Issues (Con’t)
How are beneficial interests in a trust to be determined?
No clear guidance – but strong likelihood that trustee would be assigned this task (some beneficiaries may not even be aware of their status).
Likewise, there is a good case for distinguishing between different forms of complex/discretionary trusts and grantor/simple trusts as to how beneficial interests should be determined.
Finally, it is difficult to see how one could determine interests that are not fixed (e.g., contingent, conditional, etc.).

24. Documentation Rules: Overview
First two Notices address how FFIs and USFIs must document their account holders.
The Notices distinguish between and provide specific rules for:
Existing accounts versus new accounts; and
Entity accounts versus individual accounts.
The Notices provide a series of transition rules and effective dates to perform various tasks (and each of these dates will need to be monitored and met). Treasury Regs clarify.
However, here is a clear cut example of how Treasury listened to the Industry’s concerns about documentation and the Regs allow for banks at least in part to rely on current AML and KYC procedures in effect to ferret out high risk accounts.

25. Documentation of Existing Individual Accounts
Notice proposes rules for documenting existing individual accounts that replace those suggested in Notice
Key change is the introduction of more rigorous requirements for private banks and less rigorous search and follow-up standards than those in the first Notice for other types of accounts. However, the Regs relaxed the due diligence requirements from the procedures set forth in the earlier notices.
“Private banking” is defined broadly to include any type of private banking or wealth management service offered for high net worth individuals.

26. Documentation of Private Banking Accounts
Regulations relaxed Reporting of Private Banking Accounts.
Under the Notices FFIs where required to: Search electronic AND paper files for following U.S. indicia – U.S. citizenship or permanent residence; U.S. birthplace; U.S. address; standing instructions to transfer to U.S. account or directions regularly received from U.S. address; “in care of” or hold mail as sole address (whether or not associated with U.S.); POA or signature authority granted to person with U.S. address. NOTE: Non-U.S. post office box addresses no longer indicia of U.S. status.
Under the Regs this requirement was changed and now any account stemming from private banking relationships are only required to be reported if the account is worth $1,000, or more.

27. Other Issues Administrative Issues:
What will the FFI agreement process look like even though Treasury Regulations clarify? Treasury should publish soon.
How will audit/verification for compliance with requirements be accomplished?
How will FFIs report U.S. account information to the IRS?

28. U.S. Treasury Reporting Requirements
Treasury form 3520 — Creation of or Transfer to Foreign Trusts.
Treasury form 3520A — Annual Returns for Foreign Trusts.
Treasury form 1040, Schedule B, part 3, to report Foreign Accounts and Trusts.
Treasury Form 56.
W8/W9 Treasury Reporting.
Form TD.F , Report of Foreign Bank and Financial Account.
Section 6048A statement & annual information return.
Form 8832 — Entity Classification Election.
Form 8858 — Information Return of U.S. Persons with Respect to Foreign Disregarded Entities.
Form 8865.
Form 8938 – Statement of Specified Foreign Financial Assets .

29. Form 8938 – Do I Have to File?
You are a specified individual. A specified individual is:
A U.S. citizen
A resident alien of the United States for any part of the tax year
A nonresident alien who makes an election to be treated as resident alien for purposes of filing a joint income tax return
A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico
AND
You have an interest in specified foreign financial assets required to be reported. A specified foreign financial asset is:
Any financial account maintained by a foreign financial institution
Other foreign financial assets held for investment that are not in an account maintained by a US or foreign financial institution
The aggregate value of your specified foreign financial assets is more than the reporting thresholds that applies to you:
Unmarried taxpayers living in the US
Married taxpayers filing a joint income tax return and living in the US
Married taxpayers filing separate income tax returns and living in the US

30. Other Offshore Structures and Reporting
Offshore mutual funds:
• Must report investment income.
• Treasury form 8621.
Closely held foreign corporations:
• Treasury form 5471.
Other required U.S. treasury tax returns.
Offshore life insurance products and annuities.

31. Severe Penalties for Non Compliance of Tax Reporting
U.S. citizens/residents must report their world wide income to the U.S. treasury.
Penalties for failure to file and report treasury forms and 3520A can range from a minimum $10,000 penalty up to 35% of the amount of assets contributed to the trust. IRC section 6677.
Penalties imposed on U.S. grantor for trustee non compliance. IRC section 6048A.
Criminal penalties.

32. Thank you!
Thank you!