Presentation on theme: "Association of International Bank Auditors"— Presentation transcript:
1 Association of International Bank Auditors Foreign Account TaxCompliance Act (FATCA) WorkshopAssociation of International Bank AuditorsTechnical Overview – Jon Lakritz, PwCInternal Controls and Certification Considerations – Alan Pisano, PwCJune 14, 2012New York, New York
2 Agenda FATCA Technical Overview General Overview and Concepts Account Due DiligenceVerification by Responsible OfficerFATCA WithholdingFATCA ReportingMultilateral AgreementsTimeline of Important DatesForthcoming GuidanceGeneral Project ApproachInternal Controls and Certification Considerations
3 FATCA Technical Overview Planned for 1 hour – please advise if you need less or more
5 Congressional Action Tax Haven Banks and U.S. Tax Compliance - 2008 ISSUE: U.S. persons are using foreign entities to invest and avoid U.S. reporting and backup withholding. Certifying to be foreign persons Availing themselves of treaty benefits U.S. loses an estimated $100 billion in tax revenues annually due to offshore tax abuses. Financial institutions may be facilitating international tax evasionDom
6 Congressional Action Tax Haven Banks and U. S Congressional Action Tax Haven Banks and U.S. Tax Compliance – 2008 (Continued)Recommendations: Strengthen Reporting of Foreign Accounts Held by U.S. Persons. Strengthen 1099 Reporting Strengthen Audits Penalize Tax Haven Banks that Impede U.S. Tax Enforcement Attribute Presumption of Control to U.S. Taxpayers Using Tax Havens Allow More Time to Combat Offshore Tax Abuses Enact Stop Tax Haven Abuse ActDom
7 The Congressional Reaction- FATCA What?FATCA – Foreign Account Tax Compliance ActWhy?What is the intent?How?What are the consequences of being noncompliant?The purpose of FATCA is to “detect, deter and discourage offshore tax evasion” by US citizens or residents.Major functions impacted:Client on-boardingTax reportingTax withholdingGovernanceCreate greater transparency by strengthening information reporting and compliance with respect to US accounts.FATCA requires reporting to the IRS certain information on direct and indirect US account holders.FATCA imposes a 30 percent withholding tax on “withholdable” and “passthru” payments made to a recalcitrant account holder or a non-participating FFI.
8 Five concepts you need to know DateFive concepts you need to know1) A Foreign Financial Institution is any non-US entity that:Accepts deposits in the ordinary course of a banking or similar business;Holds as a substantial portion of its business financial assets for the account of others;Is engaged (or holding itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, notional principal contracts, insurance or annuity contracts, or any interest in any of the above; orIs an insurance company (or the holding company of an insurance company) that issues or is obligated to make payments with respect to a financial account.2) Financial account:Any depository account maintained by the financial institution,Any custodial account maintained by the financial institution,Any equity or debt interest in a financial institution that is an investment fund (other than those that are regularly traded on an established securities market), andAny cash value insurance contract and any annuity contract issued or maintained by the financial institution.8
9 Five concepts you need to know DateFive concepts you need to know3) US account – A financial account held by specified US persons or US owned foreign entities. 4) US owned foreign entity – Any non-financial foreign entity (“NFFE”) with one or more substantial US owners (a specified US person owning more than 10% of the stock of a corporation or capital or profits of a partnership). 5) Specified US person - Any US person other than : 1) publicly traded corporation, 2) affiliates of a publicly traded corporation, 3) exempt organization or IRA, 4) the United States, 5) US state, DC, or US possession, 6) any bank defined section 581, 7) REIT, 8) RIC or SEC registered company under Investment Company Act of 1940, 9) common trust fund, 10) exempt trust under section 664(c), 11) dealer registered under laws of US or US state, and 12) a broker as defined in 6045(c)9
10 Participating FFIs (“PFFI”) To avoid the 30% withholding an FFI generally must:Enter into an agreement with the IRS to comply with certain requirementsUnder the FFI agreement, a PFFI will be required to:Obtain information on all account holders to determine which accounts are US accountsComply with required due diligence/verification procedures and certify completion of such proceduresReport information on US accountsDeduct and withhold a 30% tax on any “passthru payment” to recalcitrant account holders and nonparticipating FFIsComply with IRS information requestsAttempt to obtain a waiver of applicable bank secrecy or other information disclosure limitations or close the US account (if necessary)
11 Deemed-Compliant FFIs The proposed regulations have few true carve outs from FATCA but there are two categories of entities with a potentially lighter compliance burden than participating FFIs.Registered Deemed-Compliant FFIsCertified Deemed-Compliant FFIsMust register with the IRS, agree to deemed-compliant criteria, and certify every 3 years to its compliance.Must certify to a withholding agent that it meets the requirements on a Form W-8 and provide any other required documentation.Local FFINonreporting member of participating FFI groupQualified collective investment vehicleRestricted fundNonregistering local bankRetirement fundsNon-profit organizationsFFIs with only low value accountsOwner documented FFI
13 Account due diligence rules to identify U. S Account due diligence rules to identify U.S. account holders – Individual AccountsPre-existing individual accounts (only applies to FFIs, not USFIs)$50,000 or less – Certain accounts are exempt from review$50,000 to $1,000,000 – Search electronically searchable account information for US indiciaMore than $1,000,000 (“high value accounts”)– Inquire into actual knowledge of relationship manager; if certain required fields are not electronically searchable, also search all other account information and documentationNew individual accounts (only applies to FFIs, not USFIs)Must collect documentation sufficient to establish account holder’s FATCA status (e.g., U.S. or non U.S.)Review all of the information provided at the opening of the account, including identifying information collected under AML/KYC rules for indiciaIf an indicator of U.S. ownership is found, obtain additional documentation or treat the account as held by a recalcitrant account holder
14 Account due diligence rules to identify U. S Account due diligence rules to identify U.S. account holders – Entity AccountsPre-existing entity accounts$250,000 or less – Excluded from review, until account balance exceeds $1,000,000Search existing information / documentation on file to determine an account holder’s FATCA status. Generally can rely on documentation and information collected as part of AML/KYC or existing account opening procedures. However, if existing information / documentation is not sufficient, must request additional documentation.Passive NFFEs – Must identify substantial U.S. ownersNew entity accountsUpon account opening, request and obtain withholding certificates, documentary evidence, and additional statements from entity account holders (e.g., letters of counsel, withholding statements, statements made in account opening documents, etc.)Must review all documentation collected upon account opening along with other information collected as part of AML/KYC to determine the account holder's status under FATCA (i.e. U.S. Entity, PFFI, NPFFI, Registered Deemed-Compliant FFI, Certified Deemed-Compliant FFI, Exempt Beneficial Owner, Passive NFFE, U.S. owned foreign entity, Excepted NFFE, etc)
15 U.S. IndiciaSearches for U.S. indicia are used to identify U.S. persons that own accountsAn account holder has indicia of U.S. status if he:Is a U.S. citizen or residentWas born in the U.S.Has a U.S. residence or mailing address;Has a U.S. telephone numberHas provided standing instructions to transfer funds to a U.S. based accountHas granted power of attorney over the account to a person with a U.S. addressHas a “care of” or hold mail address that is the sole address of account holder
17 Verification of Compliance Certifications required of a “responsible officer”:To the best of the responsible officer’s knowledge, from August 6, until the date of certification, no formal or informal practices or procedures were in place to assist account holders in the avoidance of FATCA;Within one year of the effective date of the FFI agreement, the responsible officer is required to certify to the IRS that the participating FFI has completed the review of all high value accounts; andWithin two years of the effective date of the FFI agreement, the responsible officer is required to certify to the IRS that the participating FFI has completed the review of all other accounts.
18 Verification of Compliance After initial certifications, the responsible officer of the participating FFI will also need to periodically certify to the IRS:Conducted periodic reviews of the FFI's compliance with due diligence, withholding and reporting obligations under the FFI agreement.The responsible officer may be required to provide certain factual information and to disclose material failures with respect to the participating FFI’s compliance with any of the requirements of the FFI agreement.
20 FATCA Withholding Transactions and payments subject to FATCA Withholdable PaymentsInterest and dividends paid on U.S. securities, and other US source incomeGross proceeds from sale of U.S. securities that generate interest or dividendsExcludes: certain short-term obligations, effectively connected income, ordinary course of business payments, grandfathered obligationsForeign Passthru PaymentsPayment by a participating FFI of a withholdable payment or other payment to the extent attributable to a withholdable payment.
22 Reporting Requirements 2014 and 2015(for calendar years and 2014)Limited reporting due30 September 2014 (for accounts on record as of 30 June 2014) and31 March 2015, respectively.Specified US personsNameAddressTINAccount numberAccount balanceNFFEs that are US-owned foreign entitiesAccount number of entityAccount number for each substantial US owner2016(for calendar year 2015)Reporting due 31 March 2016Above information plus US source FDAP income2017(for calendar year 2016)Full reporting due31 March 2017Above information plus gross proceedsAggregate reportingFFIs must report aggregate amounts paid in 2015 and 2016 to non-participating FFIsConcession for delay of withholding on foreign (non-US) passthru payments
24 Multilateral efforts The joint statement – an overview US government considering intergovernmental agreements (agreements with countries referred to as “FATCA Partners”) to:Avoid legal impediments to compliance, by not requiring a FFI established in the FATCA partner toTerminate the account of a recalcitrant account holder;Impose passthru payment withholding on payments to recalcitrant account holders;Impose passthru payment withholding on payments to other FFIs organized in the FATCA partner or in another jurisdiction with which the United States has a FATCA implementation agreement.The goal is to simplify implementation and reduce cost to the FFI.France, Germany, Spain, Italy and UK issued a joint statement with US.Press has reported that Ireland, Mexico, Luxembourg and others are interested.
26 Due diligence for new accounts FATCA timeline – for FFIs (for agreements effective July 1, 2013)FFI GovernanceDue diligence forpre-existingaccountsDue diligence for new accountsWithholdingReporting201220132014201520162017Jan – FFI can enter into FFI Agreement online (Note 1)Jul – Certify completion of review of pre-existing high value individual accounts(Note 2)Jul – Certify completion of account identification procedures and documentation requirements for all other pre-existing individual accountsJan – Two-year transition period ends for "Limited FFIs" and "Limited Branches"Jul – IRS encourages FFIs to sign up by July to ensure readiness by JanJul – Complete due diligence for any pre-existing account holder that is a prima facie FFIJul – Complete due diligence for all otherpre-existing accountsJul – Complete due diligence for high value accountsJul – New account opening procedures must be in place to identify US accounts and classify non-US entity accounts(Note 3)Jan –Cut-off date for grandfathered obligationsJan – FATCA withholding begins on US source FDAP incomeJan – FATCA withholding begins on gross proceedsJan – FATCA withholding expected to begin for foreign passthru paymentsSep – Begin limited reporting for US accounts and aggregate reporting for recalcitrant accounts (calendar year 2013) with respect to accounts identified as of June (Note 4)Mar – Form 1042 FATCA reporting beginsMar – Form 1042-S reporting (calendar year 2015) now includes gross proceeds; as well as foreign reportable amounts paid to NPFFIsMar – Form S reporting (calendar year 2016) expected to include foreign passthru paymentsMar – Begin Form 1042-S FATCA reporting (calendar year 2014) for US source FDAP incomeMar – Reporting on US accounts (calendar year 2015) required to include income associated with the US accountMar – Reporting for US accounts (calendar year 2016) required to include proceeds paid to US accountsIRS may make the online FFI registration system available before JanAs part of the first certification, FFI must certify that it did not have any procedures in place from August 6, 2011 that would assist account holders in the avoidance of FATCANew accounts are generally permitted a 90-day grace period before being treated as recalcitrantLimited reporting includes name, address, TIN, account number, and account balance of each specified US person who is an account holder. For account holders that are NFFEs that are US owned foreign entities, report name, address and TIN (if any) of such entity and each substantial US owner of such entity26
27 FATCA timeline – for US withholding agents (including USFIs) Due diligence forpre-existing and new entityAccounts (Notes 1 and 2)WithholdingReporting201220132014201520162017Jan – New account opening procedures must be in place to classify entity-owned accountsJan – Complete due diligence on pre-existing non-US entity accountsJan – Cut-off date for grandfathered obligationsJan – FATCA withholding begins on US source FDAP income, including payments to pre-existing entity accounts held by prima facie FFIs and documented NPFFIsJan – FATCA withholding begins on gross proceedsMar – Begin reporting on substantial US owners of US-owned foreign entities (calendar year 2013) (Note 3)Mar – Begin Form 1042 FATCA reportingMar – Form 1042-S reporting (calendar year 2015) now includes gross proceedsMar – Form 1042-S reporting (calendar year 2014) on US source FDAP incomeUS Withholding Agents only perform due diligence on entity clients, not on individualsThe due diligence process must be completed prior to making a withholdable paymentReporting requirements include name of the US owned foreign entity; and name, address and TIN of each substantial US owner27
29 Forthcoming guidance Draft / Final Forms W-8 and W-9 Draft Forms W-8BEN-E (entities) and W-8BEN (individuals) were released on June 6, 2012.Draft / Final Forms 1042 and 1042-SDraft / Final FFI AgreementDraft FFI agreement is expected to be released June 2012Final regulationsExpected Q3/Q4 of 2012Model intergovernmental agreements**The IRS is not obligated to adhere to this schedule, but they did announce their intention to issue guidance by these dates.
30 General Project Approach Planned for 1 hour – please advise if you need less or more
31 Phased Approach to FATCA Compliance Determine the population of legal entities to be assessedAnalyze FATCA relevant characteristics of the legal entitiesIdentify impacted entities and their classifications and FATCA obligationsReview other business processes , procedures, and relationships to assess significant business impacts as it relates to external stakeholders (e.g. Administrators, Custodians, Distributors, etc.)Identify critical options and strategies for implementationWhat can we do now vs. wait for further guidance / final regulations?Develop a high level roadmap to identify next steps, timelines, and milestones to be followed between now and July 1st 2013?Phase 1Current State Analysis and Impact AssessmentEntityClassificationBusiness Impact AnalysisFunctional Impact AnalysisInterview with key personnel across relevant internal functions (e.g., client on- boarding, AML/KYC, withholding, reporting, technology, etc.), to assess FATCA process, data, systems gapsProject Plan /Road MapPhase 2Future State and Roadmap DevelopmentSupport for critical project management activitiesProvide subject matter support and guidance for requirements and design activitiesProvide implementation support as needed for development of policies, procedures, and data and system enhancementsRecommendations on best practiceImplementation SupportPhase 3Implementation and RemediationProjectManagementCreate project governance structure (i.e., working group, etc.)Track and communicate progress, issues, and risksTim
32 Internal Controls and Certification Considerations Planned for 1 hour – please advise if you need less or more
33 What areas of the organization are impacted? DepartmentsTaxITLegal and ExecutivesRegulatory ComplianceAccountingCustomer relationsOperationsBusiness functionsProduct design, development, and implementationMarketing, sales, and distributionOn boarding, KYC/AML, and tax documentationAccount holder communicationsPayments and depositsTax withholdingTax reportingGovernanceThese functions may be performed by third parties and under FATCA management has a responsibility to perform the appropriate oversight
34 Developing a controls framework Key questions to considerHave you appointed who will be the certifying officer(s) under FATCA?In the case of an affiliated group with multiple FFIs, how will your organization ensure that each are in compliance as one FFI can affect all others?Have you developed a sub-certification process to enable disparate reporting units to provide assurance to the certifying officer?Where you have you assigned individuals to certify on behalf of the affected legal entities how have you ensured they have the appropriate insight into the related activities?Have you assessed the current controls design regarding withholding and reporting and/or re-designed controls to assist you in making your certification that you are in compliance with FATCA?Have you developed a plan to test those controls whether using internal or external resources?Where you have outsourced key FATCA-related functions to service providers, how are you ensuring that they have adequate controls in place and operating effectively to form a basis for your certification?
35 Verification of compliance IRS Certification for Registered FFIsStaged certifications of existing accountsOngoing annual certifications over compliance with due diligence, withholding and reporting obligations under the FFI AgreementOne-time certification asserting no practices exist to assist clients in evading identificationFlexibility in designating officials to certifyAppropriate functional responsibilities at high enough levelManagement required to “self-test” policies and procedures put in placeGeneral standards to be developed by IRS in pending draft FFI AgreementPotential option of obtaining third-party reviews
36 Verification of compliance Certification for FFIsAbility for IRS to request “additional information” (to be defined)Compliance subject to review by IRS or an external partyRobust policies and procedures should support certification process – beyond sub-certificationsCertification for deemed-compliant FFIsCertified deemed-compliant FFIs include local banks, certain retirement funds, certain non-profits and FFIs with only low-value accounts. Certification needs to be made to withholding agents onlyRegistered deemed-compliant FFIs include non-reporting members of FFI groups, Qualified Collective Investment Vehicles and restricted funds. Certification to IRS required every three years
37 Certification structure In order for an affiliated group to certify to the IRS that it is in compliance, the responsible officer of the lead FFI must obtain sub-certifications across the organization. Below is a sample certification structure.Responsible OfficerLegal Entity ASub-Certifying OfficerLegal Entity BSub-Certifying OfficerLegal Entity CSub-Certifying OfficerProcess LevelCertificationAccount Set-Up Certifying OfficerNon US Corporate Actions Certifying OfficerU.S Corporate Actions Certifying Officer
38 Who is responsible for all of this? FATCA requires certification of compliance by a “responsible officer”FATCA requires that a responsible officer must certify to the IRS regarding the organization’s compliance with FATCAShould be involved in the development of the company's FATCA compliance policies and proceduresShould ensure that appropriate evaluation of the effectiveness of controls is conducted and supports the certificationShould leverage the internal audit and sub-certification network to perform its responsibilitiesThe provisions of FATCA are closely linked to an organization's operations functionsCertifying officer must be in a position within the organization to be able to leverage resources across the organization
39 FATCA controls framework Control frameworkFATCA requirements should be mapped to processesIdentify or design key controls over these processesOperating effectiveness assessment over key controls should be performed on a periodic basisRisk and complexityFATCA is far reaching and complexMany different legal entities within an organization can be impactedOne noncompliant FFI impacts the compliance of all FFI’s in an affiliated groupData sources and processes can differ across products / geographyExpansion of IT applications subject to controls testingOutsourcing activities to third parties does not alleviate responsibilitiesCertifying officer maintains responsibility for overall certification
40 Characteristics of controls Controls established to address the risks of non-compliance following characteristics:Automated or manualPreventive or detectivePrimary or compensatingDesigned to meet the following objectivesCompletenessAccuracyValidityRestricted AccessWithin a controls framework, an appropriate balance of controls will be designed based on risks for non-compliance. Controls are then routinely assessed for effectiveness to enable management’s assertion of compliance.
41 FATCA controls framework Establish controls to address the key risks of non-compliance AreaControl ObjectivesLegal entity assessmentControls provide reasonable assurance that all legal entities are identified, assessed and classified for FATCA impact and approved by the appropriate personnel within the organization.Controls provide reasonable assurance that legal entity assessments are communicated to all relevant parties.Controls provide reasonable assurance that changes in legal entity listings and related classifications are appropriately updated in a timely manner and approved by the appropriate personnel.Controls provide reasonable assurance that all FFI agreements are appropriately executed, tracked and protected.Client account assessmentControls provide reasonable assurance that required data is obtained during the new individual account set up process. Appropriate client account due diligence procedures are performed on all applicable accounts and appropriate documentation is retained.Controls provide reasonable assurance that pre-existing accounts subject to FATCA requirements are identified completely and accuratelyControls provide reasonable assurance that changes to account information are captured and assessed for impact on classifications.Controls provide reasonable assurance that due diligence is performed appropriately for all accounts (new accounts, pre-existing accounts, changes in accounts) and accounts are appropriately classified.WithholdingControls provide reasonable assurance that tax withholding is performed completely and accurately for accounts impacted by FATCA requirementsReportingControls provide reasonable assurance that reporting to the Internal Revenue Service required by FATCA is complete and accurate and produced on a timely basis.
42 FATCA controls framework AreaControls ObjectiveCertification ProceduresControls provide reasonable assurance that FATCA processes and procedures are performed consistently across the organization to support applicable certifications to be made to the IRS and/or withholding agents.Technology – Change ManagementControls provide reasonable assurance that new developments and changes to existing systems are documented, tested, approved, and implemented by authorized personnel.Controls provide reasonable assurance that access to FATCA data is appropriately restricted to authorized personnel.
43 FATCA controls framework – example controls Sample controls to support “due diligence” Control pointsRelative Priority(High/Low)Control type (CAVR)Due diligence procedures are performed depending on the type and size of account. Policies and procedures are in place regarding the definition of an account, the types of accounts for which due diligence is required, and the dollar thresholds. Due diligence is performed for the accounts that meet this pre-defined criteria. Standardized checklists are used to faciliate the due diligence reviews.HighC,AAn indicia search is conducted across relevant client data repositories and reviewed. Where relevant indicia are identified, appropriate follow up is conducted and documented.AAging is performed to indicate the status of open information requests. Accounts with US indicia where additional information was requested (including any applicable waivers) that are aged above a specified threshold are reviewed. Accounts over a specified threshold are deemed recalcitrant accounts and classified as such in accordance with the FATCA criteria.Accounts and balances are reviewed periodically to ensure that an electronic or paper search was performed for all accounts depending on the account type.Customers have unique identification numbers that are used to aggregate accounts across the organization. These identification numbers are used in the creation of summary reports of customer balances that are used to determine account classifications.CClient systems use the FX spot rate as of the last day of the calendar year to convert foreign accounts to US dollars when classifying accounts.V
44 FATCA controls framework Below is a depiction where controls should be in place across your operational work flow. Note the points included are at a summary level and these may vary by entity.OPERATIONAL WORKFLOWExample Asset ManagementNew Accounts& UpdatesDerivativesFront officeEquitiesFront officeRatesFront OfficeCreditFront OfficeBanking/ DepositsFront OfficeLegal Entity InfoClient, Account & Counterparty ManagementAccount & Legal Entity InfoAccount activityNew Account Process5Reporting Portal9813, 1411Pre-existing Account analysis7Books & Records System(s)10FATCARegulatory reporting68Cost BasisMarginingPaymentsChp. 3 &4 WH129P&LClearing & SettlementCorp ActionsFATCAComputationsClientsFATCAClient reportingRemediationAccount Maintenance13, 14AccountInfoResultsIRSPPP reporting13, 144578FATCA Warehouse12TPA11Legal Entity Management3Doc MgmtReference DataFATCA RulesResultsPaymentsClientsFATCA IRS Deposits9Legal EntityClassificationFinance, Legal, TaxIRS Deposits4FinanceGeneral Ledger(s)Client & FI depositsFFI CertificationCalculate PPPFirm Management91213GovernanceFATCA Governance= Existing operational function/activity= New or modified function/activity due to FATCAKey showing existing, new and modified functions/activities
45 FATCA controls framework Controls provide reasonable assurance that all legal entities are identified, assessed and classified for FATCA impact and approved by the appropriate personnel within the organization.Controls provide reasonable assurance that legal entity assessments are communicated to all relevant parties.Controls provide reasonable assurance that changes in legal entity listings and related classifications are appropriately updated in a timely manner and approved by the appropriate personnel.Controls provide reasonable assurance that all FFI agreements are appropriately executed, tracked and protected.Controls provide reasonable assurance that required data is obtained during the new individual account set up process.Controls provide reasonable assurance that pre-existing accounts subject to FATCA requirements are identified completely and accurately.Controls provide reasonable assurance that changes to account information are captured and assessed for impact on classifications.
46 FATCA controls framework Controls provide reasonable assurance that due diligence is performed appropriately for all accounts (new accounts, pre-existing accounts, changes in accounts) and accounts are appropriately classified.Controls provide reasonable assurance that policies and procedures related to account maintenance and classification is communicated throughout the organization and to third party service providers.Controls provide reasonable assurance that tax withholding is performed completely and accurately for accounts impacted by FATCA requirements.Controls provide reasonable assurance that reporting to the Internal Revenue Service required by FATCA is complete and accurate and produced on a timely basis.Controls provide reasonable assurance that FATCA processes and procedures are performed consistently across the organization to support applicable certifications to be made to the IRS and/or withholding agents.Controls provide reasonable assurance that new developments and changes to existing systems are documented, tested, approved, and implemented by authorized personnel.Controls provide reasonable assurance that access to FATCA data is appropriately restricted to authorized personnel.