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Foreign Account Tax Compliance Act (FATCA) 2

Overview Foreign Account Tax Compliance Act (FATCA) is the law Signed by President Obama on March 18, 2010 Proposed Regulations issued on February 8, 2012 (published on February 15, 2012) Final Regulations issued on January 17, 2013 (officially published January 28, 2013) Corrections to Final Regulations published on September 10, 2013, on March 6, 2014 and June 30, 2014 Bilateral Intergovernmental Agreements can modify outcomes under the Final Regulations New withholding tax and information reporting system for payments made to “foreign financial institutions” (FFIs) Similar system of withholding tax and information reporting for payments made to “non- financial foreign entities” (NFFEs) Designed to reduce the incidence of improper tax avoidance by US investors through the use of offshore accounts and non-US investments FATCA targets financial institutions serving US investors rather than the US investor itself Goal: increased information reporting and transparency Enforcement mechanism: 30% withholding tax imposed on US payments to certain non-compliant non-US persons 3

FATCA In a Nutshell Any “withholdable payment” made to a non-US entity is potentially subject to FATCA withholding – Withholdable payment means (i) any payment of US source FDAP income (i.e., interest, dividends, rents, premiums, annuities, etc.) and (ii) any gross proceeds from the sale or other disposition (occurring after 12/31/18) of any property of a type which can produce interest or dividends that are US source FDAP income Withholding on US source FDAP income: 7/1/2014 Withholding on gross proceeds: 1/1/2019 US payors – Step 1: Identify the “payee” – Step 2: Report the payment to the IRS under prescribed rules – Step 3: Withhold tax if payment is made to (i) a payee that is a “nonparticipating” FFI, or (ii) a recalcitrant holder (i.e., an individual or passive NFFE that has not provided sufficient information to the payor) Foreign payors – Participating FFIs will have their own withholding and reporting requirements (discussed in more detail below) – A participating FFI is an FFI that enters into an agreement with the IRS (FFI Agreement) to report on their account holders and to withhold on payments, if necessary – An NFFE is a foreign entity that is not a financial institution (and generally will not have withholding obligations) 4

Alternative Regime: Intergovernmental Agreements (IGAs) In February 2012, US, France, Germany, Italy, Spain, UK issued a joint statement in support of the underlying goals of FATCA but recognized legal impediments to compliance US is open to an intergovernmental approach to implementing FATCA and reportedly is in discussions with over 50 countries regarding such an intergovernmental approach To date, 3 different approaches – Model I with / without reciprocity ( FFIs report information on US accounts to the tax administration of the “ FATCA partner” country, which would then automatically exchange that information with the IRS; the reciprocal Model I IGA would require both the United States and its FATCA partner to exchange relevant information on foreign-owned accounts, and the nonreciprocal Model I IGA would only require the FATCA partner to report US-owned financial accounts to the IRS) – Model II (direct reporting of information on US accounts by FFIs, supplemented by the exchange of information upon request) 5

Coordination of Chapters 3, 4, 61 and Section 3406 On March 6, 2014, the IRS published its “coordination” regulations, which attempted to coordinate chapters 3, 4, 61 and section 3406 and synchronize with IGAs This was accomplished by updating chapters 3, 61 and section 3406 to incorporate FATCA – For example, FATCA rules have been imported into the chapter 3 regulations so the rules are the same for chapters 3 and 4: (1) presumption rules; (2) document maintenance (including by electronic means); (3) substitute form standards; (4) coordinated account systems; and (5) mergers and bulk transfers Similarly, on June 27, 2014, the QI Agreement was updated to incorporate FATCA (Rev. Proc ) The updated QI Agreement coordinates account documentation, withholding, and reporting requirements under QI with those under FATCA – Updated version of QI Agreement is supposed to be published before end of

Section 871(m) 7

Background Section 871(m) passed as part of the “HIRE” Act on March 18, 2010 Concern over dividend “washing” 8 US Corp Non-US Person Stock withholding tax on dividend US Corp US Person Stock no withholding tax on dividend Non-US Person Swap no withholding tax on swap payment

Section 871(m) Legislative fix – treat “dividend equivalents” as US-source dividend 9 US Corp Non-US Person Stock withholding tax on dividend US Corp US Person Stock no withholding tax on dividend Non-US Person Swap withholding tax on dividend equivalent payment

Implementation from 2012 – 2014 Proposed regulations issued in various forms in 2012 and 2013 Expanded section 871(m) to cover additional financial instruments Included unadministrable factors to determine whether instruments were picked up (e.g., “7 sins” in first set of proposed regulations, delta of 0.7 in second set of proposed regulations without guidance of when to test) – “Delta” is the relationship of the change in fair market value of the instrument to the fair market value of referenced security 10

Current Regulations Updated regulations published in September 2015 Maintains delta analysis to determine whether payments on instruments will be treated as dividend equivalents – Raised threshold from 0.7 to 0.8 – Delta measured at issuance of transaction Instruments issued in 2015 – Notional principal contracts (“NPCs”) issued in 2015 remain subject only to the four‐factor statutory test: (1) cross‐in, (2) cross‐out, (3) illiquid securities, and (4) the short party posting the underlying as collateral to the long party – Equity linked instruments (“ELIs”) issued in 2015 not be subject to 871(m) 11

Current Regulations (cont.) Instruments issued in 2016 – Instruments issued in 2016 that are not SNPCs pursuant to the four‐factor test would only be subject to withholding with respect to payments made in 2018 and after – This provision applies to both SNPCs and ELIs Instruments issued in 2017 – Instruments issued in 2017 would be subject to the regulations immediately and would not have the benefit of the 2018 date 12

Inversions 13

Inversions and Perceived Tax Benefits Multinational corporate groups may achieve significant tax benefits by having a foreign parent instead of a US parent (see section 7874 legislative history): – Non-US income of foreign subsidiaries not subject to US tax under anti- deferral regimes such as Subpart F and PFIC rules – Non-US income of foreign subsidiaries not subject to US tax upon remittance of earnings – Opportunity to reduce US taxable income through deductible payments by US subsidiary to foreign (subject to limitations such as sections 163(j), 267, 482, etc.) Foreign Parent US Group Foreign Subs (non-CFCs) dividends Deductible payments (e.g., interest, royalties) 14

Brief History of Inversions These transactions could potentially trigger: – Shareholder-level tax on any built-in gain in the US parent stock, but in many cases there was no such gain, or the US parent had mostly foreign or tax-exempt shareholders (and, in any case, the long-term benefits may outweigh this one- time “toll charge”) – Corporate level tax on any transfer of properties by the US group to the new foreign parent, but this could be reduced by NOLs or other tax attributes Congress determined that the aforementioned was not a sufficient backstop against inversions In 2004 Congress enacted the “American Jobs Creation Act” that added section 7874 to combat the perceived abuse of corporate inversions 15

Section 7874 Anti-Inversion Rules Section 7874 applies if pursuant to a plan: – A foreign acquiring corporation (“FAC”) directly or indirectly acquires substantially all of the properties held directly or indirectly by a domestic corporation or substantially all of the properties constituting a trade or business of a domestic partnership (the “Assets Acquisition Test”); – After the acquisition, the former shareholders or partners of the acquired domestic entity hold at least 60% [or 80%] of the stock (by vote or value) of the FAC by reason of having held stock or a partnership interest in the domestic entity (the “Ownership Test”); and – The expanded affiliated group (“EAG”) which includes the FAC does not have substantial business activities in the foreign country in which the FAC is organized, when compared to the total business activities of the group (the “Business Activities Test”) “EAG” means an affiliated group with a 50% stock ownership connection and including foreign corporations 16

80% and 60% Inversions 80% Inversion: If, under the Ownership Test, the former shareholders or partners of the acquired domestic entity hold at least 80% of the FAC, the FAC is treated as a domestic corporation for all purposes of the IRC, thus subjecting the FAC to US income tax (e.g., income of the FAC is subject to US tax, the non-US subsidiaries of the FAC are controlled foreign corporations for US tax purposes, etc. 60% Inversion: If, under the Ownership Test, the former shareholders or partners of the acquired domestic entity hold at least 60%, but less than 80%, of the FAC, the FAC is respected as a foreign corporation, but the domestic acquired entity is limited in its ability to use tax attributes (e.g., NOLs) to reduce tax on income from the inversion transaction, as well as from certain transactions with related parties (e.g., gain or income resulting from post-acquisition restructurings) for 10 years – Also, section 4985 imposes a 15% excise tax on certain equity based compensation of “insiders” of the expatriated corporation 17

The Ownership Test Typically represented as a fraction If the fraction is 0.8 or greater, the FAC will be treated as a domestic corporation for all tax purposes 18 FAC Stock held by former shareholders “by reason of…” (“bad stock”) Total FAC Stock

Legislative Proposal Bills introduced in 2014 and re-introduced in 2015 – The Ownership Test is modified so that the FAC may be treated as an “inverted corporation” if more than 50% of the stock of the FAC is held by the former shareholders of the acquired domestic corporation – A new “Place of Management Test” is introduced - the FAC may be treated as an “inverted corporation” if it is managed and controlled from the US and the EAG has “significant domestic activities,” regardless of the percentage of ownership by the former domestic entity owners 19