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FOREIGN ACCOUNT TAX COMPLIANCE ACT STEPS TO COMPLIANCE Santiago, Chile \ April 2014 The Science of Finance.

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Presentation on theme: "FOREIGN ACCOUNT TAX COMPLIANCE ACT STEPS TO COMPLIANCE Santiago, Chile \ April 2014 The Science of Finance."— Presentation transcript:

1 FOREIGN ACCOUNT TAX COMPLIANCE ACT STEPS TO COMPLIANCE Santiago, Chile \ April 2014 The Science of Finance

2 \ 2 FATCA – Steps to Compliance AGENDA:  Legislative Update  FATCA & Custodians  Steps to Compliance  Part I – Entity Analysis  IGA Models  Chilean IGA  Part II – Due Diligence  Classification & Validation  Document Collection  Steps to Compliance (contd.)  Part III – Registration  Part IV – Withholding & Reporting  Markit’s FATCA Service Bureau  Questions


4 \ 4 FATCA – Steps to Compliance   NO EXTENSION OF FATCA EFFECTIVE DATE: Treasury adamant that July 1 2014 FATCA effective date would not be changed.   ELUSIVE FINAL FORMS W-8: IRS has now released both Form W-8BEN and W-8BEN-E   FORM W-8BEN- E: There are changes between previous draft released and final version: Chapter 4 entity types list revised  Chapter 4 entity types list revised  No instructions released yet  No clarification to 6 month Sunset Rule – does the form become mandatory August 2014?  Form temporary? Presumes RDCFFI’s that are sponsored entities do not use their own GIINs – but that is only valid till December 31, 2015.  Old draft was 6 pages with 25 different sections – new form 8 pages with 30 different sections.

5 \ 5 FATCA – Steps to Compliance  HARMONIZATION REGULATIONS: IRS has released long awaited Harmonization Rules. They run 300+ pages. Not all "harmonizations" were to rules contained in FATCA given different policy goals of the three tax withholding regimes. (Chapter 3, Chapter 61 and Chapter 4).   NEW SET OF CHAPTER 4 REGULATIONS: IRS also issued a new set of FATCA regulations. These contain changes resulting from comments on previous Final Regulations from industry.   IGA SNAPSHOT: Chile, Finland (signed) and Luxembourg (final negotiations)***  REVENUE PROCEDURE 2014-10: Introduced final FFI Agreement in December 2013.  The most significant change is addition of 2 year transition period during which a Model 2 FFI may elect to apply FFI Agreement’s due diligence procedures instead of Annex I of FFI’s IGA.  The FFI Agreement was also made consistent with Model II IGA by putting the above election in the hands of the Model II FFI, rather than the Model II country.

6 \ 6 Apr 25 FFI Register to be on June 2 List Jul 1 FATCA due diligence & W/h begins for New Accounts Jun 2 First List of PFFIs published July 2 Second list of PFFIs published [monthly thereafter] Jun 30 High value account due diligence remediation deadline Dec 31 Sponsored Entities can no longer use SE GIIN. Must register themselves Jun 30 All remaining preexisting accounts due diligence completion deadline 2017 IGAs up for renegotiations Jan 1 W/h for gross proceeds and passthru payments FATCA – Timeline Key dates and milestones 2014 2015 2016 2017 Dec 31 Due Diligence deadline for Prima Facie FFIs

7 FATCA & CUSTODIANS The Science of Finance

8 \ 8   For Custodians globally, FATCA will require them as FFIs to report to the IRS (directly or through the local government), information on financial accounts held by US persons, or by foreign entities in which US persons hold a substantial ownership interest.  To comply with these reporting requirements, Custodians (as FFIs) will have to enter into agreements with IRS to become Participating FFIs (PFFIs) with certain obligations: Due diligence burden to identify and categorize account holders Report annually on its account holders who are US persons or foreign entities with substantial US ownership Withhold and pay to the IRS 30% of any US source income, as well as gross proceeds from sale of securities that generate US source income made to:  Non Participating FFIs  Individual account holders with un-”cured” US indicia***  Foreign entity account holders who fail to provide information on US substantial owners FATCA – Steps to Compliance

9 \ 9   Clients of custodians who are FFIs or NFFEs must have their own due diligence procedures to ensure they are FATCA compliant, including (but not limited to):  Scoping out their classification  Entering into Agreements with the IRS  Choosing appropriate officers to serve as Responsible Officers  Registering entities and obtaining the Global Intermediary Identification Number (GIIN).  In most cases, custodians cannot enter into FFI Agreements or register client entities with the IRS on behalf of their clients.  Clients must also note that Custodians may have no choice but to withhold and report should the clients not be FATCA compliant in time. FATCA – Steps to Compliance


11 \ 11   Step 1 to any compliance process is scoping and analysis of the entities.  Step 2 - Perform a structure analysis of Fund/ corporation/ partnership to determine whether entities (both affiliated or otherwise) are within or outside the scope of FATCA  Step 3 – Scope if Foreign Financial Institutions (FFI) vs. Non-Financial Foreign Entities (NFFEs).  Step 4 – Complete analysis on each of the entities within the scope of FATCA for FATCA sub-status  Step 5 – Determine whether:  The entities would be part of an Expanded Affiliated Group (EAG) OR  The entities will be part of a Sponsoring Entity (“SE”) group. FATCA – Steps to Compliance

12 \ 12   Step 6 – Determine domicile and the IGA Model jurisdiction in which the entity resides.  Determination of (1) presence of IGA Model Jurisdiction and (2) which IGA Model Jurisdiction [Model I or II] will dictate due diligence, documentation gathering, withholding and reporting obligations.  IGA Model I vs. Model II and Non-IGA Jurisdiction obligations: FATCA – Steps to Compliance IGA 1 IGA 2 No IGA Registration & GIIN Yes RO No FFI Agreement No Reporting Local Registration & GIIN Yes RO Yes FFI AgreementYes Reporting IRS Registration & GIIN Yes RO Yes FFI Agreement Yes Reporting IRS

13 \ 13 FATCA – Steps to Compliance   The Chilean IGA  Chile has signed an IGA Model II Agreement with the IRS. As such, this mandates Chilean FFIs to:  Register with the IRS through the FATCA portal by July 1, 2014*** AND  Comply with the requirements of an FFI Agreement with respect to due diligence, reporting and withholding  For financial accounts maintained by Chilean FFIs as of June 30, 2014 identified as US accounts, request US TIN and report to IRS if TIN not provided  Elect a Responsible Officer to certify to due diligence process and recertify periodically  Report aggregate information annually to the IRS on recalcitrant US & NPPFI accounts  Chilean retirement plans are considered DCFFIs or exempt beneficial owners  The IGA is reciprocal – Article 7 states that the US will “cooperate with Chile to respond to requests…to collect and exchange information on accounts held in U.S. financial institutions by residents of Chile.”


15 \ 15   Once all the entity analysis is complete, one can proceed to Due Diligence  Document Collection: FATCA requires an immense amount of tax and KYC documentation collection effort. Collection of such documents per entity and proper organization of such documents is essential not only for the due diligence steps, but also for future audit prospects  For FATCA, the following types of documents are most relevant:  Tax Documents: W-9, W-8(s)  Client Ownership Structure: Org. chart, structure classification, organization contact list.  Constitutional Documents: Article of Incorporation, Certificate of Formation, By-Laws, etc.  Compliance Certifications: AML & Compliance Policy Certification, Foreign Bank Certificate, Anti- Money Laundering Letter, Bank License etc. FATCA – Steps to Compliance

16 \ 16 FATCA – Steps to Compliance   Classification and Validation are the next steps.  Using the legal analyses and documents collected, an entity must decide on which of the entity FATCA classifications it falls under.  Each classifications is specific to entity type and greater care at this juncture would minimize action on Change of Circumstance in the future.  Once Classification is determined, tax status must be validated using tax documents and constitutional documents.  Entities may use services of third party vendor to ensure that the tax documentation validation process has been vetted and signed off by the IRS. This also reduces future questions on validity of the tax validation process.


18 \ 18 FATCA Steps to Compliance   The IRS Portal is the primary means for FFIs to interact with the IRS to complete and maintain their FATCA registrations, agreements and certifications. Portal is a paperless, secure & online.  Portal has been open & accessible to FFIs from August 19 2013  Model I or Model II FFIs required to register so long as jurisdiction is identified on a list published by IRS of IGA countries, even if ratification of such IGA in the jurisdiction is not complete by July 1, 2014  Once FFI has registered, IRS will issue a Global Intermediary Identification Number (“GIIN”) to each Participating FFI to be used as ID number for FFI’s reporting obligations and identifying its status.  IRS will electronically post first IRS list of PFFIs and registered deemed compliant FFI’s on June 2, 2014, and will update the list on a monthly basis  Last date by which a FFI can register to ensure inclusion on June 2014 FFI list is April 25, 2014 

19 \ 19 Registration Portal August 19, 2013, the IRS opened the FATCA Registration Portal (“Portal”), which allows FIs to register their FATCA status with the IRS. FI creates FATCA account online FI completes registration form FI signs and submits registration form FI receives approval 1234 Account creationRegistrationSubmissionApproval  The Portal permits a foreign financial institution (“FFI”), or U.S. financial institution (“USFI”) registering as a Lead FI or Sponsoring Entity, to create an account and receive a FATCA ID which it will use to log in, along with any FFIs in its expanded affiliated group (“EAG”).  The registration process is broken down into four distinct components:

20 \ 20 Registration Portal – FI Homepage After the FI has created an account, the FI Home Page provides a central location for accessing all relevant account information.

21 \ 21 Registration Form   The registration portion of the Portal mirrors the information required on Form 8957***and is split into four parts:  Part 1 – Basic identifying information about each FI including  Part 2 – Information on Expanded Affiliated Groups (EAG): The Lead FI will receive a FATCA ID and temporary access code for each Member FI, which the Member FI will then use to access Portal and register.  Part 3 – Renewal of agreements for QIs, WPs, or WTs An FI, including a foreign branch of a USFI, currently acting as a Qualified Intermediary (“QI’), Withholding Foreign Partnership (“WP”), or Withholding Foreign Trust (“WT”) can renew its agreement.  Part 4 – Signing and submission of registration The RO signs the registration by selecting a checkbox and typing his/her name, which certifies that the information contained in the registration is accurate to the best of the RO’s knowledge*** The RO then submits the registration, which cannot occur before January 1, 2014


23 \ 23 FATCA – Steps to Compliance  Withholding:   No withholding for FFIs resident in IGA jurisdictions except in cases of unresolved “significant” non-compliance  30% Withholding for recalcitrant accounts – including non-participating non-resident FFIs  Withholding for New Accounts starts July 1, 2014.  Withholding to be reported on form 1042-S beginning 2015.  Reporting:  IGA Model I – to local jurisdiction. Formatting to be decided by local tax jurisdictions.  IGA Model II and non- IGA jurisdiction – Form 8966 or information following its directive  Reporting will consist of information regarding:  Substantial US owners of passive NFFEs and owner documented FFIs  Certain information regarding US accounts  PFFIs expected to report on payments to US  Aggregate recalcitrant account information


25 \ 25 A comprehensive FATCA compliance solution for the fund industry Markit FATCA Service Bureau BackgroundFATCA was enacted as part of the Hiring Incentives to Restore Employment (“HIRE”) Act. It is a major addition to US withholding tax obligations for both US and non-US companies. The new rules affect both the financial industry and US operating companies. RequirementFATCA imposes a new 30 percent withholding penalty on certain US payments made to non-compliant funds. To avoid the penalty firms must identify their investors more thoroughly, even if they hold only non-US bank and securities accounts. Markit, CTI partnership Markit and Compliance Technologies International (CTI) have developed a comprehensive solution for all non-US domiciled funds and structured investment vehicles that need to comply with FATCA. SummaryFor the thousands of funds planning to register as a Foreign Financial Institution (FFI) under the requirements, Markit Counterparty Manager, FATCA Service Bureau (FSB) provides the highest level of domain expertise and operational efficiency in a low-cost solution.

26 \ 26 FATCA Service Bureau – Levels of Service Six Service Buckets: Start-to-finish FATCA compliance Classification Entity analysis and classification as per FATCA Validation Validation of Tax forms using supporting documentation for underlying investors Registration Registration of Entities to Obtain GIINs Withholding Calculation of withholding for recalcitrant accounts Reporting Preparation and submission of informational and withholding reporting Maintenance Renewal of GIINs, FFI Agreements Re-analysis of registration resulting from Change of Circumstance

27 \ 27 Contact Information Sulolit Mukherjee / Vice President, Global Tax Services +1 212 488 4289 (office)

28 Questions.

29 Thank you.

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