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STEP Bermuda Conference FATCA Update: Analysis of Recent Guidance Will McCallum Director, Tax February 23, 2012.

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Presentation on theme: "STEP Bermuda Conference FATCA Update: Analysis of Recent Guidance Will McCallum Director, Tax February 23, 2012."— Presentation transcript:

1 STEP Bermuda Conference FATCA Update: Analysis of Recent Guidance Will McCallum Director, Tax February 23, 2012

2 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 1 Agenda Background Overview of FATCA Withholding Provisions Implications to Foreign Financial Institutions Implications to Non-Financial Foreign Entities FATCA Implementation Issues

3 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 2 Background U.S. Congress believes offshore tax evasion by U.S. persons equates to losses of nearly $100 billion annually Existing tax provisions (including QI regime) did not eliminate the potential for abuse FATCA was enacted in March 2010 to detect, deter, and discourage offshore tax evasion by U.S. persons  Statute provided the basic framework, left most of the administration and implementation of the new regime to Treasury and the IRS Treasury and the IRS released three rounds of preliminary guidance (Notice , Notice , Notice ) Treasury and the IRS released the long anticipated proposed regulations on February 8, 2012 (389 pages)

4 FATCA Overview

5 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 4 FATCA Overview A withholding agent must withhold 30% of any “withholdable payment” to a “foreign financial institution” (or “FFI”) unless:  FFI has entered into an “FFI Agreement” with the IRS to identify and report “U.S. accounts”, or  FFI is a “deemed-compliant FFI” and “U.S. accounts” reported to the IRS, or  FFI is an excepted payee A withholding agent is also required to withhold 30% of any “withholdable payment” to a “non-financial foreign entity” (or “NFFE”), unless:  The NFFE identifies its “substantial U.S. owners”, or  Payment is made to an “excepted NFFE”

6 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 5 Definition: Withholdable Payment Any payment of U.S. source fixed or determinable annual or periodical gains, profits, and income (e.g. dividend, interest, OID, rents etc.) Any gross proceeds from the sale or other disposition of property of a type which can produce U.S. source interest and dividends Exception for payments made under a “grandfathered obligation” or any proceeds from the disposition of such an obligation  Effective for obligations outstanding on January 1, 2013

7 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 6 Definition: Foreign Financial Institution (“FFI”) An FFI is defined as any foreign entity that meets at least one of the following: Accepts deposits in the ordinary course of a banking or similar business (including trust or fiduciary services), or Holds financial assets for the account of others, or Engages “primarily” in the business of investing, reinvesting, or trading in securities, partnership interests, commodities or any interest in such instruments, or  i.e. Gross income from such activities is >50% Is an insurance company that issues certain life insurance or annuity contracts

8 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 7 Definition: U.S. Account “Financial account” held by a U.S. person or “U.S. owned foreign entity”  Depository or custodial account maintained by an FFI  Equity or debt interest in an FFI (including a beneficial interest in a trust) “U.S. owned foreign entities” include foreign entities that have a “substantial U.S. owner”. A U.S. person is treated as a “substantial U.S. owner” of:  A foreign corporation or partnership, if it holds >10%  A foreign grantor trust, if it is treated as owning any portion of such trust  A foreign nongrantor trust, if it holds >10% of the beneficial interests Proposed regulations provide method of valuing beneficial interests in discretionary and non-discretionary trusts

9 FATCA Implications – Foreign Financial Institutions

10 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 9 Withholding Requirements – Payments to FFIs A withholding agent must withhold 30% on a withholdable payment unless the payment may be treated as made to a:  Participating FFI  Deemed-compliant FFI, including: Registered deemed-compliant FFI Certified deemed-compliant FFI Owner-documented FFI  Other excepted payee (e.g. exempt beneficial owner, territory financial institution etc.)

11 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 10 Definition: Participating FFI (“PFFI”) An FFI which has entered into an “FFI agreement” with the IRS which specifies its obligation to:  Adopt written due diligence procedures to identify U.S. accounts, recalcitrants, and nonparticipating FFIs  Conduct periodic reviews of compliance with due diligence procedures (no external audit) “Responsible officer” required to certify  Report annually for U.S. accounts and recalcitrants  Withhold tax with respect to passthru payments

12 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 11 Overview of Due Diligence Requirements Proposed regulations outline the due diligence procedures required for FFIs to identify U.S. accounts  Due diligence procedures focus on identifying actual knowledge of U.S. status or “indicia of U.S. status” which may require further action Different procedures for individual and entity accounts, and preexisting and new accounts Proposed regulations place more reliance on existing account opening procedures and AML/KYC rules FFIs that adhere to the due diligence guidelines are not held to a strict liability standard

13 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 12 Example – Preexisting Individual Accounts Accounts <$50K exempt from review at election of FFI Accounts >$50K but <$1M subject to review of electronically searchable data for indicia of U.S. status  Prior identification as U.S. person  U.S. place of birth  U.S. address (including “in-care-of” address)  U.S. telephone number  Standing instructions to transfer funds to U.S.  Power of attorney granted to U.S. person Accounts >$1M subject to electronic and non-electronic review and inquiry of relationship manager  Non-electronic review limited to current customer file

14 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 13 Owner Documented FFI New category of deemed-compliant FFI introduced in the proposed regulations Treated as a deemed-compliant FFI only with respect to a “designated withholding agent”  i.e. Withholding agent that agrees to undertake specific additional due diligence and reporting requirements In order to be treated as an owner-documented FFI, an entity must not:  Be treated as a bank, broker, or insurance company under the FATCA provisions  Maintain accounts for nonparticipating FFIs  Issue debt in excess of $50,000

15 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 14 Owner Documented FFI An owner-documented FFI must provide the following to the designated withholding agent:  Withholding certificate that identifies the FFI as an owner-documented FFI that is not acting as an intermediary  Annual “FFI owner reporting statement”, including prescribed information for every person that holds an interest in the FFI and their proportionate interest  Valid documentation (e.g. withholding certificate, W-9, etc.) in support of the status of every person that holds an interest in the FFI FFI may provide an auditor letter in lieu of the FFI owner reporting statement and documentation for each owner

16 FATCA Implications – Non Financial Foreign Entities

17 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 16 Withholding Requirements – Payments to NFFEs An NFFE is any foreign entity that is not an FFI Withholding agents are required to withhold 30% of any withholdable payment made to an NFFE unless:  Beneficial owner of such payment is the NFFE  NFFE has identified its “substantial U.S. owners” (if any)  Withholding agent reports U.S. owner information to the IRS Withholding is not required on a withholdable payment made to an “excepted NFFE”  Proposed regulations expanded and clarified the categories of excepted NFFEs

18 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 17 Definition: Substantial U.S. Owner A U.S. person is treated as a “substantial U.S. owner” of:  A foreign corporation, if it holds >10% of the stock  A foreign partnership, if it holds >10% of profits or capital interest  A foreign grantor trust, if it is treated as owning any portion of such trust  A foreign nongrantor trust, if it holds >10% of the beneficial interests Value of discretionary distributions received in prior year is >10% of total Present value of mandatory distributions (determined in accordance with IRS actuarial tables) is >10% of trust assets De-minimus exceptions apply

19 FATCA Implementation Issues

20 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 19 FATCA Implementation Issues – Business Assessment of costs of FATCA compliance and non-compliance, and who will bear costs Communications with upstream and downstream financial institutions  Confirm FATCA readiness and approach (e.g. if a trust’s investment custodian opts for nonparticipating FFI status, may need to exit the relationship)  Coordinate FATCA execution issues (e.g. owner-documented FFI status) External (client) education and communications Understanding legal or contractual constraints on reporting  Banking secrecy jurisdictional considerations

21 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 20 FATCA Implementation Issues – Operational Review of legal entities and products to determine potential FATCA impact Review of FFI agreement and documentation of written due diligence procedures Integration of FATCA due diligence procedures into existing work flows Training to ensure that all team members understand their FATCA roles and responsibilities Development of reporting and withholding capability

22 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International"), a Swiss entity. 21 FATCA Implementation Issues – Technical Determination of entity’s U.S. tax classification  Legal trust organized for business or collective investment purposes may not be treated as a “trust” for U.S. tax purposes  Trusts must be further classified as simple, complex, and grantor trusts to determine FATCA implications Determination of entity’s FATCA classification (i.e. FFI, NFFE (passive or active), deemed-compliant, etc.) Identification of withholdable payments, including passthru payment obligations Identification of account holder for FATCA purposes

23 Questions? Will McCallum Director, Tax

24 © 2012 KPMG, a Bermuda partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. *** ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. *** Any advice in this communication is limited to the conclusions specifically set forth herein and is based on the completeness and accuracy of the stated facts, assumptions and/or representations included. In rendering our advice, we may consider tax authorities that are subject to change, retroactively and/or prospectively, and any such changes could affect the validity of our advice. We will not update our advice for subsequent changes or modifications to the law and regulations, or to the judicial and administrative interpretations thereof.


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