FATCA & the Cook Islands Presented by Prof. Dr. Daniel N. Erasmus BA(law) BProc H Dip Tax Law PhD(law) EA USTCP

Contact details Counsel to Carreras & Lemoine, LLP international attorneys – Atlanta, NYC, Paris Counsel to Maurice, Phillips, Wisenberg – Cape Town

Background Effective July 1, ,5 years phasing in FFI’s 30% of FDAP after 31 December 2013 Foreign “passthru” payments Jan 1, 2017 Key differences between FATCA & IGA

What reporting is done in the US? An introduction to US tax residents abroad - world-wide taxation from a US perspective “earned income exclusion”; foreign tax credit; tax treaty benefits Form 8938 – foreign financial assets with 1040 Form FBAR or 114 – 30 June electronically Foreign Pension Schemes PFIC regime – Form 8621 CFC regime – Form 5471 Claiming tax treaty benefits - Form 8833 Streamlined Foreign/Domestic Offshore Procedure Typical case studies

What does FATCA mean for CI entities Is the Cook Island entity an FFI? If not an FFI, then a NFFI NFFI self-certify

When will a CI entity be classified FFI Key examples Investment entities – Gross income test – Managed by test Custodial Institutions Depository institutions Specified Insurance Companies Holding Co. or treasury center part of financial group

Examples 1. Foreign entity not residing in a Model 1 IGA or Model 2 IGA country. If foreign company XYZ is a tax resident of the Cook Islands (based on the Cook Islands’ tax law), where the Cook Islands has not entered into a Model 1 IGA or Model 2 IGA and XYZ is treated as a financial institution under the regulations, XYZ will be an FFI and should register to obtain a GIIN to avoid FATCA withholding. 2. Foreign entity resident in a Model 1 IGA and Model 2 IGA country. If foreign company ABC is resident in the United Kingdom, a Model 1 IGA country, because it is centrally managed or controlled in the United Kingdom and is treated as a financial institution under the U.K. Model 1 IGA, ABC will be treated as an FFI in the United Kingdom. If ABC is also a resident in Switzerland because it is organized in Switzerland and is treated as a financial institution under the Swiss Model 2 IGA, it will also be an FFI in Switzerland. Since ABC is a resident in both the United Kingdom and in Switzerland, to avoid FATCA withholding, ABC should register and obtain a separate GIIN for payments to its location(s) in the United Kingdom, and another GIIN for payments to its location(s) in Switzerland. One of the tests for tax residence is central management and control. Also consider the “permanent establishment” principles. …

Examples 3. U.S. entity and global branches. X Co. is a domestic entity and is treated as a financial institution under the regulations. X has several hundred branches, which are located and managed in Model 1 IGA, Model 2 IGA, and non IGA jurisdictions throughout the world. Because X is a USFI, it will not have to register or obtain a GIIN to avoid FATCA withholding for its foreign branches, unless it has a foreign branch located in a Model 1 jurisdiction or a QI that is acting as an intermediary that seeks to renew its QI status on the FATCA portal. A USFI with non QI branch operations in a Model 2 jurisdiction or a foreign branch in a non IGA jurisdiction is not required to register with the IRS and obtain a GIIN. 4. U.S. entity and its CFCs. Same facts as Example 3. Assume X Co. owned several hundred CFCs, which are treated as financial institutions in the Model 1 IGA countries, Model 2 IGA countries, and non IGA jurisdictions in which the CFCs are tax resident. X, as a sponsoring entity, or the CFCs individually, would register the CFCs as FFIs and obtain separate GIINs to avoid FATCA withholding on payments to them. Presumably, if any CFC had one or more foreign branches, GIINs would have to be obtained if those foreign branches were located or maintained outside the CFC's country of tax residence. Section 1471(a); reg. section (a)(3)(vii). Preamble to T.D. 9610, 78 F.R Preamble to T.D. 9610, 78 F.R …

Examples 5. Foreign entity branch maintained in a Model 1 IGA country. If foreign entity DEF is a U.K. incorporated company and has several hundred branches located and maintained throughout the United Kingdom, all of which are treated as financial institutions under the U.K. Model 1 IGA, to avoid FATCA withholding, DEF would register only once and obtain a GIIN that could be used for payments to its branches located within the United Kingdom. 6. Foreign entity branch maintained in a Model 1 IGA and Model 2 IGA country. If foreign entity GHI is organized in Switzerland, a Model 2 IGA country, and is a financial institution under the Model 2 IGA and also has a Branch J located and maintained in the United Kingdom, and Branch J is a financial institution under the Model 1 IGA, both GHI and its Branch J would each have to obtain GIINs for their respective jurisdictions to avoid FATCA withholding in each jurisdiction. …

Examples 7. Foreign entity branch maintained in a Model 1 IGA and non IGA country. Assume foreign entity KLM is a U.K. incorporated company and is a financial institution under the U.K. Model 1 IGA. Also assume KLM has Branch N, which is located and maintained in Hong Kong, a non IGA jurisdiction, where it is treated as a tax resident under local tax law and is a financial institution under the regulations. Both KLM and Branch N would have to obtain GIINs for payments to the U.K. or Hong Kong to avoid FATCA withholding in each jurisdiction. 8. Investment Manager, a U.S. entity, is an investment entity: Investment Manager organizes and registers Fund A in Country A. Investment Manager is authorized to facilitate purchases and sales of financial assets held by Fund A in accordance with Fund A's investment strategy. In every year since it was organized, Fund A has earned more than 50 percent of its gross income from investing, reinvesting, or trading in financial assets. Accordingly, Fund A is an investment entity under reg. section (e)(i)(B). …

Examples 9. Foreign real estate investment fund that is managed by an FFI: The facts are the same as in 8, except that Fund A's assets consist solely of non debt, direct interests in real property located within and without the United States. Fund A is not an investment entity, even though it is managed by Investment Manager, because less than 50 percent of its gross income is attributable to investing, reinvesting, or trading in financial assets. 10. Trust managed by an individual: X, an individual, establishes Trust A, a non grantor foreign trust for the benefit of X's children, Y and Z. X appoints Trustee A, an individual, to act as the trustee. Trust A's assets consist solely of financial assets, and its income consists solely of income from those financial assets. Under the terms of the trust instrument, Trustee A manages and administers the assets of the trust. Trustee A does not hire an entity as a third party service provider to perform any of the activities described in reg. section (e)(4)(i)(A). Trust A is not an investment entity under reg. section (e)(4)(i)(B) because it is managed solely by Trustee A, an individual.

Examples 11. Trust managed by a trust company: The facts are the same as in 10, except that X hires Trust Co., an FFI, to act as trustee on behalf of Trust A. As trustee, Trust Co. manages and administers the assets of Trust A in accordance with the terms of the trust agreement for the benefit of Y and Z. Because Trust A is managed by an FFI, Trust A is an investment entity under reg. section (e)(4)(i)(B) and an FFI under reg. section (e)(1)(iii). 12. Individual introducing broker: IB, an individual introducing broker, provides investing advice to her clients and uses the services of a foreign entity to conduct and execute trades on behalf of her clients. IB has earned 50 percent or more of her gross income for the past three years from her services as an investment adviser. Because IB is an individual, she is not an investment entity under reg. section (e)(4). 13. Entity introducing broker: The facts are the same as in Example 7, except that IB is a foreign entity and not an individual. Because IB is an entity that conducts investment activities and its gross income is primarily attributable to those investment activities, IB is an investment entity under reg. section (e)(4)(i)(A) and reg. section (e)(1)(iii). …

Various types of entities Hedge Funds and Private Equity Funds CI Managers & Advisors of HF’s & PEF’s CI Holding Companies & JV’s Securitization vehicles Financing SPVs Trusts with a CI Trustee Insurance companies Branches & Foreign subsidiaries Excepted Beneficial Owners & Deemed- Compliant FFIs

CI Entities that are not FFIs Active NFFE Passive NFFE

What does a CI FFI Need to do to comply with FATCA GIIN Identify reportable accounts – Minimum threshold – US indicia Existing accounts New accounts Reporting

Simplified Reporting for Groups of FFIs Sponsoring entity Sponsoring GIIN Register each Sponsored Investment Entity Expanded Affiliated Group - EAG’s

Miscellaneous Issues Extended certain deadlines Key Dates and Grandfather Rules Good Faith – Transactional relief under FATCA Documentation of entities Documentation of individuals

Contact details Counsel to Carreras & Lemoine, LLP international attorneys – Atlanta, NYC, Paris Counsel to Maurice, Phillips, Wisenberg – Cape Town

Questions Thank-you