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London Hong Kong Greenwich New York Geneva Milan New Haven FATCA: Disclose, Withhold or Disinvest? Jay Krause 26 October 2010.

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Presentation on theme: "London Hong Kong Greenwich New York Geneva Milan New Haven FATCA: Disclose, Withhold or Disinvest? Jay Krause 26 October 2010."— Presentation transcript:

1 London Hong Kong Greenwich New York Geneva Milan New Haven FATCA: Disclose, Withhold or Disinvest? Jay Krause 26 October 2010

2 Program Selected highlights and client implications Special issues for trustees Comments and strategies Q&A Comments / questions forwarded to Treasury only if specifically requested

3 What is FATCA? All FFIs subject to 30% gross withholding on US investments Unless Enter into ‘FFI Agreement’ to Identify clients; and Withhold where relevant

4 The Road to FATCA LGT and UBS scandals The trouble with treaties and TIEAs OECD standards don’t address the problem I don’t know what I don’t know

5 FFI Obligations What must an FFI do? Identifying US clients and disclosing account details; Withholding on account holders refusing to be identified; Withholding on any FFI not entering adopting these procedures; Closing the account of anyone protected by banking secrecy laws who fails to waive the protections of such laws

6 Financial Institution Defined Accepts deposits in ordinary course of banking or similar business – 1471(d)(5)(A); Holds financial assets for the account of others as a substantial portion of its business – 1471(d)(5)(B); or Engaged primarily in the business of investing… – 1471(d)(5)(C)

7 ‘Financial Institutions’ Generally Affected Banks (whether commercial or savings), savings and loans, thrifts, credit unions, building societies, etc. Broker dealers, clearing organizations, custodians, employee benefit plans, trust companies, etc. Hedge and private equity funds, funds of funds, mutual funds, ETFs and all other collective investment and securitisation structures

8 Comments on Selected FFIs Funds Employee benefit plans Limited ‘same country’ exception Trust companies and individual trusts Life insurance companies

9 Identifying ‘Account Holders’ - Individuals Existing accounts v New accounts Pre-existing individual accounts Search electronic databases for indicia of US status Where US, must obtain W-9 Where US place of birth or mailing/residence address If claiming non-US status, W-8 plus non-US passport Other indicia only require W-8 Beware ‘care of’ and ‘PO Box’ addresses generally Transition to new account rules Five years generally Two years where account greater $1,000,000 New accounts Documentary evidence required

10 Identifying ‘Account Holders’ - Entities Entities Classify entity as FFI or NFFE Participating, non-participating, deemed compliant, excepted, recalcitrant or other… Identify each individual with an ‘interest’; and Obtain documentation applicable to new individual account holders New accounts must refer to all information collected regardless of whether electronically searchable…

11 Frequent Reactions But we don’t have US clients… We’ll stop taking on US clients…. Do you have US investments? All that matters!!!

12 Frequent Reactions But we don’t have US clients… We’ll stop taking on US clients…. Do you have US investments? All that matters!!!

13 Client’s Perspective Implications for all US taxpayers not fully tax and reporting compliant Am I US? Citizen; Green card holder; or Resident Worldwide tax and reporting Regardless of residence Credits generally available for taxes paid, but must be claimed!

14 Client’s Perspective - Expatriation Expatriation? Citizens Green card holders Exit tax regime from mid 2008 Deemed sale of assets Tax on deemed gains in excess of $600,000 Additional implications Exceptions Dual citizens from birth Age 18 1/2

15 Client’s Perspective – Expatriation What if not fully tax and reporting compliant? Expatriation exit tax regime applies unless Can certify full compliance for last five years Voluntary disclosure

16 Client’s Perspective – Voluntary Disclosure Special disclosure program expired 15 October 2009, BUT Long standing IRS voluntary disclosure policy See IRM — Voluntary Disclosure Practice No criminal prosecution Must come to IRS before they come to you Several options for proceeding – ‘Quiet’ v ‘Noisy’ Most recent UBS client sentence 50% account value, plus tax interest and other penalties One year jail followed by house arrest

17 London Hong Kong Greenwich New York Geneva Milan New Haven Implications of the New HIRE Act Rules: The Trustee View Jay Rubinstein, Withers LLP, Geneva 26 September, 2010

18 Overview Recent History of Foreign Trust US Tax Concerns Is a Trust an FFI? NFFE? Disclosure and Identification Rules as to beneficiaries and settlors Additional Hire Act rules implicating trusts

19 Recent History of Trustee US Tax Concerns Distinctions between “foreign trust” vs “US trust” and “grantor trust” vs. “non-grantor trust” Application of QI rules beginning in early 2000’s Proper trustee and beneficiary disclosures on Trust distributions Holding companies Foreign bank accounts Now FATCA

20 Trust As NFFE – US Persons with a ‘Substantial Interest’ (10% Interest?) Beneficiaries or settlor? Foreign grantor trust – settlor 1473(2)(A)(iii)(I) Trust revocable or or distributions limited to settlor / spouse during settlor’s lifetime Slightly different rules for certain pre Sept 19, 1995 trusts Foreign non-grantor trust – beneficiaries 1473(2)(A)(iii)(II)

21 Trust as NFFE - Beneficiaries of Discretionary Trusts as ‘Account Holders’ Who is a beneficiary: Letter of wishes? Will new IRC section 679 provisions apply? Potential beneficiary attribution regimes: Maximum exercise of discretion Pattern of distributions Trust terms Other?

22 Identifying Trust ‘Account Holders’ Where to begin? Notice requires Identify each individual with an ‘interest’; and Obtain documentation applicable to new individual account holders New accounts Must refer to all information collected Regardless of whether electronically searchable Notice section III.B.3.b.

23 But is a Trust / Trust Company An FFI? FATCA - Financial Institution Defined Accepts deposits in ordinary course of banking or similar business – 1471(d)(5)(A); Holds financial assets for the account of others as a substantial portion of its business – 1471(d)(5)(B); or Engaged primarily in the business of investing – 1471(d)(5)(C)

24 ‘Financial Institutions’ Generally Affected – AND NOTICE POTENTIALLY AFFECTING TRUSTS Banks (whether commercial or savings), savings and loans, thrifts, credit unions, building societies, etc. Broker dealers, clearing organizations, custodians, employee benefit plans, etc. [ TRUST COMPANIES? (PTC’s??) ] Hedge and private equity funds, funds of funds, mutual funds, ETFs and all other collective investment and securitisation structures [ INDIVIDUAL TRUSTS ?? ]

25 Trusts and Trust Companies Trust companies Treated as entity holding assets for the benefit of others Notice section II.A.2. Trusts ‘Small family trust’ listed as an example of an FFI FFI status supposedly arising under Section 1471(d)(5)(C) which requires that the entity be primarily in the business of investing Notice section II.B.3.

26 Trusts as FFIs? Primarily in the business of investing? Existing US classification rules indicate otherwise Regulation section Ordinary trusts arrangement to protect property for beneficiaries Business trusts Investment trusts generally classified as a ‘business entity’ for US purposes

27 Trusts as FFIs (con’t) Trusts as FFIs effectively contradicts other FATCA provisions Section 1473(2)(A)(iii)(II) and 1473(2)(B) Substantial US account holder exists where > 10% of trust attributed to US person; but Where FFI is primarily in business of investing, substantial US ownership exists if anything attributed to a US person If all trusts are treated as FFIs, then 10% test can never apply to trusts not withstanding express language that it does apply to trusts

28 OTHER HIRE ACT RULES- Reporting of Specified Foreign Financial Assets In addition to current FBAR reporting Reporting of “specified foreign financial assets” that exceed $50,000 (aggregate) Any financial account maintained by a foreign financial institution; Any of the following assets not maintained in a foreign financial account: non-US stock; any interest in a non-US entity; any financial instrument or contract with a non-US counter-party

29 Reporting of Specified Foreign Financial Assets Applies to US individuals; IRS has authority to extend to US entities May apply without regard to whether that individual owns more than 50% interest in trust owning such foreign accounts or assets Reporting on US income tax return (IRS Form 1040) Failure to report subject to penalty of $10,000; additional penalties up to $50,000 could apply

30 Passive Foreign Investment Company Reporting Definition of Passive Foreign Investment Company (PFIC) 75% of gross income is passive income or 50% average passive assets Old rule (IRS Form 8621) Upon distributions; upon disposition; upon making an election New rule annual reporting obligation regardless of whether any taxable event has taken place during the year

31 Uncompensated Use of Trust Property Deemed distribution of income or gains Only for uncompensated use of trust property Only if used by US person beneficiary Only for foreign (non-US) trusts Amount of distribution equal to the FMV use of property; Taxable if trust generates income or gains Interest charges if there is accumulated income or gains In all events, reporting of distribution Information statement from trustee to meet US reporting obligations

32 Uncompensated Use of Trust Property Impacts any foreign trust that holds property used by a US person Real property, art, jewelry, automobiles, yachts and airplanes. Exception where beneficiary pays FMV for use of property within a “reasonable period of time” Rent payment can give rise to passive income subject to 30% withholding

33 Uncompensated Use of Trust Property— Planning Options Segregate the use property in a separate “dry” foreign trust Domesticate the use property to a US trust (watch for carrying out income) Sell property to a grantor trust (watch for gain recognition)

34 London Hong Kong Greenwich New York Geneva Milan New Haven Responses to the New Hire Act Rules: Comments and possible strategies Richard Cassell, Withers LLP London 26 October 2010

35 IRS Notice 2010 – 60 These are only proposals and are open for comment IRS specifically is looking for comments as to impact on trusts and practical trust issues We are assembling comments from interested parties In order to be effective the comments must be specific and targeted. There is no point in requesting blanket exemptions or grandfathering

36 Surprises in the Notice Every trust is an FFI – not the trustee, but the trust, but not undefined “small family trusts” Does offer opportunity for a trust to elect to participate separately from trustee but of limited practical use Multiplicity of reporting, for example, for private trust companies with professional service provider, but confusion about responsibility (custodian? Paying agent? FFI?) Concept of US financial institution – treated like a participating FFI but not defined – does it include US partnerships and US trusts? As a result of all trusts being FFIs this ignored Section 1472 definitions of US owners and 10% restriction

37 Comments IRS will be deluged with pointless information (like the FBAR reports) as a result of including every non-US trust in the world as an FFI. Should only trustees be FFIs not trusts? Should the definition of “small family trust” be expanded? How big is small? What is a family? Will the disclosures be limited to the last participating FFI in the chain or will intermediate participating FFIs be required to maintain parallel disclosure? What about potential inconsistencies in disclosure? Will certification by a participating FFI provide effective disclosure exemptions? Should there be any separate category for charities? How do you value a US beneficiary’s discretionary trust balance?

38 Strategies Segregate trusts between those with US and non-US investments. Those with only non-US investments can be non-participating FFIs. Generally strategy must be to manage the disclosure. We expect clients will generally need a participating FFI – it must be preferable to control the disclosure in the FFI A strategy to limit disclosure to third parties may be to use a US partnership to segregate all US investments and to manage the disclosure – a strategy that could exploit the exemption for family offices that we expect under Dodd-Frank regulations Eliminate US beneficiaries who are not intended actually to benefit from discretionary trusts

39 Client reactions Anticipate disclosure or divest from US but a strategy to avoid all US investments seems very restrictive If the clients are non-compliant the voluntary disclosure program is still open for business and this is the opportunity to become compliant We anticipate that some compliant clients may use this as the opportunity to look at expatriation –covered expatriate limit is currently $2m


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