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Mastering FATCA Compliance and

Implementation for NFFEs: Navigating

Who, What, When and How Much Understanding the Complexities of the Withholding Requirements

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

WEDNESDAY, JULY 8, 2015

Presenting a live 110-minute webinar with interactive Q&A

Ian M. Comisky, Partner, Blank Rome, Philadelphia

Bill Leary, Director, International Tax, Doeren Mayhew, Houston

Matthew D. Lee, Partner, Blank Rome, Philadelphia

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FATCA in Context:

Historical Attempts to Regulate Conduct of U.S. Citizens and Residents Offshore

Ian M. Comisky comisky-im@blankrome.com

Matthew D. Lee lee-m@blankrome.com

Obligation to Report Worldwide Income

•United States law has always obligated U.S. citizens (including dual citizens) and U.S. residents to declare and pay taxes on all of their worldwide income, regardless of where those earnings have been derived.

•Historically, some U.S. taxpayers have attempted to avoid or evade reporting income earned outside of the U.S. because of the U.S. government’s inability to identify those earnings from overseas banks and other financial institutions.

5

U.S. Efforts to Combat Offshore Tax Evasion

• To combat the perceived problem of international tax avoidance and evasion by U.S. citizens and residents, the U.S. government enacted and implemented a new law, namely FATCA.

•Under FATCA, non-U.S. banks and financial institutions are required to withhold on certain U.S source payments and to annually disclose information regarding their U.S. accountholders to U.S. tax authorities.

• Failure to comply with FATCA requirements can subject banks and financial institutions to reputational and other consequences.

6

U.S. Enforcement Efforts to Date

7

Why the Focus on International Tax Compliance?

•IRS/DOJ have intense focus on curtailing offshore tax avoidance

–U.S. Tax Gap: $450 billion

–U.S. Senate PSI Report (2/26/14): Offshore tax schemes cause $150 billion in lost tax revenue per year

•How?

–using “carrot and stick” approach

8

The Carrot: Voluntary Disclosure Programs

• 2014 Offshore Voluntary Disclosure Program (OVDP) which follows highly successful 2009, 2011, and 2012 amnesty programs

– Provides participating taxpayers with amnesty from criminal prosecution by filing of amended tax returns and payment of taxes, interest, and penalties

– 50,000 voluntary disclosures since 2009 (versus 100 annually under traditional voluntary disclosure program)

– Over $7 billion in additional revenue collected to date

•Also “Expanded Streamlined Filing Compliance Procedures” for non-willful taxpayers

9

The Stick: Unprecedented Enforcement

• “Today’s agreements reflect the Tax Division’s continued progress towards reaching appropriate resolutions with the banks that self-reported and voluntarily entered the Swiss Bank Program. The department is currently investigating accountholders, bank employees, and other facilitators and institutions based on information supplied by various sources, including the banks participating in this Program. Our message is clear – there is no safe haven.” (DOJ Tax May 29, 2015)

• “These four additional bank agreements signal a change in terrain for offshore banking. No longer is it safe to hide money offshore and expect that it will not be discovered. ‎ IRS CI Special Agents will continue to follow the money to find those who circumvent the offshore disclosure laws and hold them accountable.” (IRS-CI May 29, 2015) 10

Enforcement Efforts to Date (through May 29, 2015)

•UBS Deferred Prosecution Agreement (Feb. 2009)

•Approximately 117 individual account holders have been criminally charged to date

– 90 guilty pleas

– 12 convictions following trial

– 5 fugitives from justice

•Numerous prosecutions of facilitators – 12 guilty pleas

– 2 convictions following trial

– 23 fugitives from justice

11

Enforcement Actions Against Banks Post-UBS

•Bank Leumi (Israel) – December 2014; deferred prosecution agreement. $270 million penalty and turn over of more than 1,500 names of account holders.

•Credit Suisse (Switzerland) – May 2014; guilty plea. $2.6 billion penalty.

• LLB-Vaduz (Liechtenstein) – July 2013; non-prosecution agreement. $23 million penalty.

•Wegelin Bank (Switzerland) – January 2013; guilty plea. $58 penalty and $16.2 forfeiture.

12

Swiss Bank Program Resolutions (as of July 2, 2015)

•More than 100 Swiss Banks enrolled

•BSI SA (March 30; $211 million)

•Vadian Bank AG (May 8; $4.3 million)

•Finter Bank Zurich AG (May 15; $5.4 million)

•Societe Generale (May 28; $1.4 million)

•MediBank AG (May 28; $826,000)

• LBBW (Schweiz) AG (May 28; $34,000)

•Scobag Privatbank AG (May 28; $9,090)

13

Swiss Bank Program Resolutions, continued (as of July 2, 2015)

•Rothschild Bank AG (effective 6/3/15)

•Banca Credinvest SA (effective 6/3/15)

•Societe Generale Private Banking (Suisse) SA (effective 6/9/15)

•Berner Kantonalbank AG (effective 6/9/15)

•Bank Linth LLB AG (effective 6/19/15)

•Bank Sparhafen Zurich AG (effective 6/19/15)

•Ersparniskasse Schaffhausen AG (effective 6/26/15)

•Privatbank Von Graffenried AG (effective 7/2/15)

14

Introduction to FATCA

15

What is FATCA?

• “The Foreign Account Tax Compliance Act (FATCA) is an important development in U.S. efforts to improve tax compliance involving foreign financial assets and offshore accounts.” (www.IRS.gov) • “FATCA was enacted in 2010 by Congress to target non-

compliance by U.S. taxpayers using foreign accounts. FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.” (www.treasury.gov) • FATCA became fully effective on July 1, 2014.

16

Two Primary FATCA Requirements

• In general terms, foreign financial institutions are annually required to report to the U.S. government information about financial accounts held by U.S. taxpayers, or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

•U.S. taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS annually on the Form 8938 information return.

17

FATCA Mechanics

• Imposes a 30% withholding tax on payments of U.S.-source FDAP income paid to:

– Certain FFIs

– Certain nonfinancial foreign entities (NFFEs)

• The tax is not imposed if the entity agrees to provide certain information to the U.S. government or to the person or entity making the payment.

• The goal of FATCA is not to increase tax revenues, but isntaed to collect of information.

18

FATCA Entity Classification

•Foreign Financial Institution (FFI)

– Non-compliant FFIs are subject to FATCA withholding

•Non-Financial Foreign Entity (NFFE)

– A legal entity that is not a FFI

– Excepted NFFEs are not subject to FATCA withholding

– Passive NFFEs are subject to FATCA withholding

19

FFI Types

•Depository Institution

•Custodial Institution

• Investment Entity

•Holding Company and Treasury Center

•Specified Insurance Company

20

Excepted FFI

•Even though an entity falls under the definition of an FFI, it may still be excluded if the entity is an excepted nonfinancial group entity (one that is not a depository institution or custodial institution); an excepted nonfinancial start-up or an entity entering a new line of business; an excepted nonfinancial entity in liquidation or bankruptcy; an excepted inter-affiliate FFI; a Section 501(c) entity (tax exempt U.S. entities); a non-profit organization; or an insurance company that falls under the FFI definition solely because of its reserving activities.

21

Deemed-Compliant FFIs

• If an entity falls under the definition of an FFI and is not excluded from the definition, it can nevertheless fall under a deemed-compliant FFI category. Generally, deemed-compliant FFIs have less impact in terms of what they are required to do to comply with FATCA, but the impact varies depending on the category of deemed-compliant status.

• There are three categories with varying responsibilities: – registered deemed-compliant FFIs;

– certified deemed-compliant FFIs; and

– owner-documented FFIs.

22

Registered Deemed-Compliant FFIs

• Registered deemed-compliant FFIs will have to register with the IRS, obtain a GIIN and comply with certain other requirements. Like participating FFIs, registered deemed-compliant FFIs must select a Responsible Officer and such officer must certify every three years that the entity remains compliant.

• Registered deemed-compliant FFIs include local FFIs, nonreporting members of participating FFI groups, qualified credit issuers, qualified collective investment vehicles, restricted funds, and sponsored investment entities and controlled foreign corporations.

23

Non-Financial Foreign Entities (“NFFEs”)

24

FATCA Impact on NFFEs

•Withholding obligation for certain payments to foreign payees

•Reporting obligations for certain payments to foreign payees

•Potential registration of foreign affiliates with IRS

•Documentary requirements for foreign accounts

25

NFFEs

• All NFFEs must be categorized as one of the following: – Exempt;

– Excepted;

– Active;

– Excepted Other;

– Passive; or

– Direct Reporting.

• Default rule: Passive NFFE unless an exception applies

• Depending upon this categorization, documentation must be collected and retained and reporting requirements may apply.

• The NFFE categorization is for determining whether an FFI must withhold on U.S. source funds to the NFFE.

• If the NFFE has a “Substantial U.S. Owner,” then reporting requirements will apply regardless of whether withholding is required.

26

NFFEs, continued • All non-U.S. entities that are any of the following are deemed to be

an Excepted NFFE and not subject to FATCA withholding or reporting requirements:

– Publicly-traded corporations;

– NFFE affiliates;

– territory NFFEs;

– active NFFEs: less than 50% of gross income last year is passive income and less than 50% of the weighted average percentage of assets (tested quarterly) are held to produce passive income;

– nonfinancial group entities (holding companies, treasury centers, captive finance companies);

– nonfinancial start-up companies;

27

NFFEs, continued

– nonfinancial entities in liquidation or bankruptcy;

– non-profit organizations;

– section 501(c) organizations (U.S. tax exempt entites); and

– direct reporting NFFEs.

• A direct reporting NFFE is one that elects to report information about its direct or indirect Substantial U.S. Owners to the IRS. The NFFE must register on Form 8957 (“FATCA Registration”) with the IRS and obtain a GIIN. For purposes of an FFI, any direct reporting NFFE must provide a GIIN. Since direct reporting status may be revoked, an FFI should request notification from any NFFE of a change in status. In this regard, the IRS will publish monthly a list of those registered to be a GIIN and an FFI may check against this list to determine current direct reporting NFFE status.

28

NFFEs, continued

•Again, it is important to note that an excepted NFFE is not subject to withholding but still may be subject to reporting if it has a Substantial U.S. Owner.

•All other non-U.S. entities are deemed to be Passive NFFEs subject to FATCA withholding and reporting if it has a Substantial United States Owner.

– Passive NFFEs must either certify that they do not have

substantial U.S. owners, or if they do, provide a withholding

agent the name, address, and U.S. taxpayer identification

number of each substantial U.S. owner.

29

Substantial United States Owner

30

Substantial United States Owner

• If an entity is not a U.S. Person, the FFI must determine whether the entity has an owner or an owner with family members (or related parties) that is defined as a “Substantial United States Owner.”

• A “Substantial United States Owner” includes all of the following:

– A U. S. Person with a greater than 10 percent direct or indirect ownership interest (by vote or by value) in any non-U.S. company.

• Note: stock in a non-U.S. corporation that is owned directly or indirectly by another entity is deemed to be owned proportionately by the entity’s owners who are United States Person(s).

– A U. S. Person with a greater than a 10 percent direct or indirect ownership of the profits or capital in any non-U.S. partnership.

31

Substantial United States Owner, continued

– A U. S. Person treated as owing a U.S. grantor trust is treated as a Substantial U. S. Owner without any threshold ownership percentage because the U. S. Person is considered the owner of the trust.

• Note: a “grantor trust” is any trust to the extent that the trust is treated as owned by a person other than the trust under U.S. tax laws. An owner of a non-U.S. trust is the person that is treated as owning a non-U.S. trust under U.S. tax laws.

– A U.S. Person with a greater than 10 percent direct or indirect interest in a non-U.S. trust.

32

Substantial United States Owner, continued

– A capital or profits interest in a partnership or an ownership or beneficial interest in a non-U.S. trust is deemed owned by the entity’s shareholders, partners or in the case of a trust persons treated as owners of the trust.

– In the case of insurance companies and investment vehicles (such as a private equity fund or a hedge fund), a U. S. Person with any interest in the company.

– A U. S. owner of an owner-documented FFI.

33

Special FATCA Related Party/ Attribution Rules

• In the context of determining whether someone is a Substantial United States Owner, special rules apply under FATCA which require consideration of ownership interests held by related parties, including certain family members.

• For purposes of determining whether a person has more than a 10 percent interest in a non-U.S. corporation, non-U.S. partnership, or non-U.S. trust, the person must aggregate (combine) the ownership or beneficial interests in the non-U.S. corporation, non-U.S. partnership, or non-U.S. trust that are owned or held by any person “related” to such person.

• Under these rules, a related party includes certain family members: brothers, sisters, spouse, ancestors, and lineal descendants. A related party also includes the spouses of members of the individual’s family.

• These rules also apply, in modified fashion, in the context of partnership interests.

• A person must have direct or indirect ownership in the entity before the aggregation rules apply, such that a Substantial U.S. Owner does not include an individual with no ownership interest other than an interest attributed to him from a related person.

34

Example

• If a U.S. Person owns five percent of a corporation but his spouse (a non-United States Person) owns fifty percent of a corporation, the United States Person is considered to own both his own interest and the fifty percent interest owned by his wife, thereby making the United States Person a fifty-five percent owner of the corporation and a Substantial U.S. Owner.

• If a U.S. Person owns none of the corporation but his spouse (a non-U.S. Person) owns fifty percent of a corporation, the U.S. Person is not considered to own any of the corporation.

35

Registering as a Participating FFI

36

FFI Registration

• The IRS maintains an Internet-based tool known as the FATCA Portal, which will be used to manage all required registrations, agreements, and certifications between an FFI and the IRS.

• The FATCA Portal is located at https://sa2.www4.irs.gov/fatca-rup/. • FFIs will register on the FATCA Registration Portal (Form 8957) , will

execute what is known as an FFI Agreement, will receive a GIIN, and will be considered a Participating Foreign Financial Institution (“PFFI”).

• The GIIN is used as the FFI’s identifying number for reporting requirements and identifying its status to withholding agents.

• The FFI will then be listed on the published IRS FFI List as a Participating FFI.

• Registration is required for Model 2 IGA jurisdictions. • As of June 1, 2015, over 165,000 FFIs had registered.

37

Intergovernmental Agreements

(Model 1 and Model 2)

38

International Coordination and Model Intergovernmental Agreements

• Because of potential foreign law impediments, Treasury is collaborating with foreign governments to develop two alternative model intergovernmental agreements that facilitate the effective and efficient implementation of FATCA.

• Model 1 IGA: FFIs in jurisdictions that have signed Model 1 IGAs report the information about U.S. accounts required by FACTA to their respective governments who then exchange this information with the IRS.

• Model 2 IGA: A partner jurisdiction signing an agreement based on the Model 2 IGA agrees to direct its FFIs to register with the IRS and report the information about U.S. accounts required by FATCA directly to the IRS.

39

Model 1 IGA

• The partner jurisdiction agrees to report to the IRS specified information about the U.S. accounts maintained by all relevant FFIs located in the jurisdiction.

• FFIs identify U.S. accounts pursuant to due diligence rules contained in Annex to the IGA.

• FFIs report specified information about their U.S. accounts to the partner jurisdiction.

• The partner jurisdiction, in turn, reports such information to the IRS on an automatic basis.

• The exchange of information under a Model 1 IGA may be on a reciprocal or nonreciprocal basis.

40

Model 2 IGA

• The partner jurisdiction agrees to direct and enable all relevant FFIs located in the jurisdiction to report specified information about their U.S. accounts directly to the IRS.

• FFIs identify U.S. accounts pursuant to due diligence rules contained in Annex to the IGA.

• FFIs report specified information about their U.S. accounts to the IRS.

• FFIs also report to the IRS aggregate information with respect to holders of pre-existing accounts who do not consent to have their account information reported, on the basis of which the IRS may make a “group request” to the partner jurisdiction for more specific information.

41

International Coordination (continued)

•To date, over 100 countries have either signed IGAs or are actively in negotiations with United States

• Including Bermuda, Canada, Cayman Islands, Chile, Costa Rica, Denmark, Finland, France, Germany, Guernsey, Honduras, Hungary, Ireland, Isle of Man, Italy, Japan, Jersey, Luxembourg, Malta, Mauritius, Mexico, the Netherlands, Norway, Spain, Switzerland, and United Kingdom.

•Full list: http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx

42

FATCA Responsible Officer Anti-Money Laundering and Reporting Obligations

43

FATCA Responsible Officer

• FATCA requires that an FFI appoint a Responsible Officer to manage overseeing compliance with the obligations of FATCA. The FATCA Responsible Officer, who also is an officer of an FFI, is responsible for establishing a compliance program, which includes an FFI’s policies, procedures, and processes to satisfy and ensure an FFI’s FATCA obligations. These policies and procedures are designed to build upon an FFIs existing anti-money laundering (“AML”) policies.

• On behalf of an FFI, the Responsible Officer will have to certify to the best of his knowledge that (1) the information submitted to the IRS is accurate and complete; and (2) an FFI will comply with all FATCA obligations, whether set forth in the FATCA regulations, any agreement between the foreign country and the U.S. (to the extent there is one), and any other guidance made available to an FFI. The Responsible Officer also has to provide explanations for any failure of an FFI to adhere to FATCA regulations that are not remedied prior to the date of certification.

44

FATCA Responsible Officer

• The Responsible Officer also must make other periodic certifications on behalf of an FFI, including that an FFI is in compliance with FATCA. The Responsible Officer must make a certification no later than 60 days following the date that is two years after the effective date of the FFI agreement. The Responsible Officer must certify:

– That all high-value accounts have been reviewed and that it has treated as recalcitrant any account holder for which it has not received the required information;

– By July 1, 2016, an FFI will complete the identification process of its accounts and gather the necessary documentation required to substantiate the FATCA account classification requirements;

– An FFI will treat any accounts for which it does not have documentation required by FATCA as a “Non-Participating Foreign Financial Institution and for individual accounts as a recalcitrant account holder;”

45

FATCA Responsible Officer

– That after conducting a reasonable inquiry (an annual survey should be conducted in this regard), the Responsible Officer certifies that an FFI did not have any formal or informal practices or procedures in place from August 6, 2011 through the date of the certification to assist account holders in the avoidance of FATCA requirements.

• Note: Practices and procedures include suggesting that account holders, close, transfer or withdraw from their accounts to avoid reporting and the intentional failure to disclose a known U.S. account. The Responsible Officer may make a qualified certification and state that corrective actions are being undertaken.

• Additional certifications are required. This certification is due six months after the third full calendar year following the effective date of the FFI agreement. The first certification period begins on July 1, 2014 for an FFI, and ends June 30, 2017. The subsequent certification periods are in successive three-year periods.

46

FATCA Responsible Officer

• The Responsible Officer also will be responsible for ensuring that: – A FATCA compliance program is established that includes policies, procedures,

and processes for an FFI to satisfy its obligations under FATCA. This program will be reviewed periodically by an FFI’s internal audit department;

– There are no material failures for the certification period or if there were any such failures, they have been remediated;

– With respect to any failure to withhold, deposit or report, any such failure has been corrected.

• A qualified certification may also be made in certain circumstances.

• If an FFI defaults on any of its obligations to the IRS and an FFI cannot cure the default, then the IRS can terminate an FFI’s participating FFI status, and an FFI may have to undergo an extensive remediation plan.

• Acts of default include the failure to make required certifications; failure to obtain waivers from U.S. account holders; failure to close U.S. accounts if required disclosures are not obtained; or making any misrepresentation to the IRS.

47

Insight. Oversight. Foresight. SM Michigan l Texas l Florida

STRAFFORD

MASTERING FATCA COMPLIANCE AND IMPLEMENTATION FOR NFFES: NAVIGATING WHO, WHAT, WHEN AND HOW MUCH

JULY 8, 2015

William F. Leary, J.D., CPA

Houston, TX

WFLeary@aol.com

(832) 444-6306

FATCA Reflection

49

• “This‎is‎a‎piece‎of‎legislation‎that‎is‎so‎big‎and‎so‎far-reaching, and [has] so many

different moving pieces, and is rolling out in an incremental fashion . . . that you really

won't be able to know what its consequences are, intended or otherwise," Nina Olson

(IRS National Taxpayer Advocate) said. "I don't think we'll know that for years. And by

that‎point‎we'll‎actually‎be‎a‎little‎too‎late‎to‎go,‎'Oops,‎…‎we‎shouldn't‎have‎done‎this,'‎

and‎then‎try‎to‎unwind‎it….

• "I really don't know what people's assumptions were when they enacted this

requirement,"‎Olson‎said.‎"Did‎we‎expect‎to‎get‎7‎million‎(Forms‎8938‎“Statement‎of‎

Specific‎Foreign‎Financial‎Assets”)?‎Did‎we‎expect‎to‎get‎10‎million?‎Did‎we‎expect‎to‎

get 500,000? Is this a good result? Is this a bad result?" Just one-half of 1 percent of

Form 8938 filers had a balance due account after getting notices, compared with 4

percent‎for‎the‎general‎taxpayer‎population,‎she‎noted….

• “There‎is‎good‎news‎for‎some,‎Olson‎said.‎After‎foreign‎banks‎expressed‎reluctance‎to‎

open accounts for some U.S. taxpayers overseas, some enterprising businesses began

offering‎insurance‎to‎protect‎against‎incomplete‎FATCA‎disclosures,‎she‎said.”

William‎Hoffman,‎“FATCA‎'Tormenting'‎Taxpayers,‎Olson‎Says.”‎‎Tax Notes (October 8, 2014)

Where‎We’ve‎Been

50

• Oversight Hearings Into the Operations of the IRS: (Operation Tradewinds, Project Haven, and Narcotics Traffickers Tax Program) : Hearings Before a Subcommittee of the Committee on Government Operations, House of Representatives, 94th Cong., (1st Sess.), October 6, November 4 and 11, 1975.

• United States v. Payner, 447 U.S. 727 (1980) (No reasonable expectation of privacy under the 4th Amendment exclusionary rule)

• Richard Gordon, Tax Havens and Their Use by United States Taxpayers - An Overview, (1981). (A study and analysis of tax haven transactions, United States internal tax laws applicable thereto. United States income tax treaties, and the attempts of the tax administrators to deal with these transactions.)

• Martin A. Sullivan, Lessons From the Last War on Tax Havens, Tax Notes (July 30, 2007)

• Walter H. Boss and William M. Sharp Sr.,The Swiss-U.S. 'Turnover' Ground Rules: A Technical Update”‎‎Tax‎Notes‎‎(Nov.‎11,‎2011)‎

• IRS Voluntary Disclosure Program – Unwinding the strategies used to obsure funds offshore and avoid deemed income inclusions (e.g., FPHC, subpart F, Sec. 956, PFIC) and compliance disclosures (e.g., Form 5471 and Sec. 926 disclosure).

Starting Point

51

• Applicable rules are contained in Chapter 4 of Subtitle A of the Internal Revenue Code (Secs. 1471- 1474).‎‎Section‎1472‎applies‎to‎“other‎foreign‎entities”).‎‎

• Historic‎withholding‎on‎“FDAP”‎income‎paid‎(i.e.,‎passive-type, U.S. source income that is periodic and determinable) to foreign individuals and entities is covered by Chapter 3 withholding (Sections 1441 et seq.). Income tax treaties (“Conventions”)‎often‎reduce‎the‎rate‎of‎withholding‎for‎treaty‎“residents”‎from‎the statutory rate of 30-percent.

• Non-Financial‎Foreign‎Entities‎(“NFFE’s”)‎are‎foreign‎entities‎that‎are‎not‎Foreign Finanical Institutions‎(“FFI’s”).

• Consider:

• Foreign holding companies

• Treasury centers

• Foreign Partnerships

• Foreign Trusts

FATCA Withholding Agents

– Any person, acting in any capacity, having the

control, receipt, custody, disposal, or payment of

an item of income that is subject to FATCA

withholding (i.e., withholdable payment to

certain foreign persons) is required to have

appropriate documentation. IRC §§ 1473; 1472.

– FATCA would otherwise require that the

withholding agent deduct and withhold the tax

and is liable for unpaid withholding. Treas. Reg. §

1.1474-1(a)(2).

– Notice 2014-33 announces that 2014 and 2015

will be transitional periods for enforcement and

administration of the new rules.

Withholding Agent

52

Withholdable Payment

Certain Foreign Persons

Options:

Documentation or

Withholding

53

• Chapter 4 withholding is required for payments made after June 30, 2014, when the

following conditions are all present:

– The payee is foreign.

– The payment is not a specifically identified exempt payment—in‎other‎words,‎it‎is‎a‎“withholdable payment.”

– The payer is not in possession of a Form W-8BEN-E, Certificate of Status of Beneficial Owner for United

States Tax Withholding and Reporting (Entities), that certifies that either:

» The foreign payee is excepted;

» The‎foreign‎payee‎has‎“substantial”‎U.S.‎owners‎and‎these‎owners‎are‎disclosed;‎or

» The foreign payee has no substantial U.S. owners.

• The name, TIN and other information about substantial U.S. owners are reported to the

withholding agent.

• Chapter 4 withholding requires that U.S. payers (and certain NFFEs) withhold 30 percent

on payments to non-compliant,‎“Recalcitrant‎Account‎Holders‎“‎Treas.‎Reg.‎§ 1.1471-5(g)

– Impact on other owners

– Foreign characterization of FATCA withholding.

Required Withholding

Substantial U.S. Owners

• Fundamental question: Does the foreign entity have substantial U.S. owners

that may be avoiding on such things as subpart F, Sec. 956 income, etc. and

U.S. reporting (e.g., Form 5471).

• Generally, a specified U.S. person (including inpatriates & green card holders)

holding more than 10% of the interests of a corporation, partnership, or trust

Treas. Reg. § 1.1473-1(b).

• A substantial U.S. owner is defined for these purposes as a U.S. person who

owns, directly or indirectly, more than 10 percent of:

• The stock of a payee corporation, by vote or value

• The profits interests or capital interests of a payee partnership

• The beneficial interest in a foreign trust (or is treated as the owner of a

foreign grantor trust)

• A substantial U.S. owner of a foreign trust also includes a U.S. person who is

an owner of any portion of that trust under the grantor trust rules

• Attribution rules under Reg. §1.1472-1(b)(1)(iii) apply.

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Withholdable Payments

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• Fixed or‎determinable‎annual‎or‎periodical‎income‎(“FDAP”)‎‎and‎certain‎gross‎

proceeds from the sale or disposition of a type that can produce interest or dividends

from U.S. sources. IRC § 1473(1).

• Generally, the exceptions from foreign withholding otherwise applicable (such as for

portfolio interest or bank deposits) only if the NFFE supplies the required information.

• Treaty provisions will reduce the tax even for nonparticipating NFFE, but only by

means of a refund, and no interest will be allowed. Treas. Reg. §1.1474-5. The U.S.

views FATCA withholding as a procedure mechanism to enforce compliance and

therefore permissible under treaty obligations.

• Certain exceptions apply, e.g., effectively connected income and grandfathered

obligations. Treas. Reg. § 1.1472-2(b).

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Interaction with Withholding Regimes

• Sections 1471 and 1472 impose a new 30% withholding tax, in addition to the historic

30% withholding tax imposed on FDAP income under Sections 1441, 1442 & 1443.

• In‎the‎case‎of‎a‎“withholdable”‎payment‎that‎is‎both‎subject‎to‎withholding‎under‎

Chapter 4 and is an amount subject to FDAP withholding, a withholding agent may

credit the withholding applied under Chapter 4 against its liability for tax due under §§

1441, 1442 or 1443. In other words, Chapter 4 takes precedence.

FDAP

Chapter 4 Withholdable Payments

Categories of NFFEs

• Exempt‎NFFE’s

• Active‎NFFE’s

• Excepted NFFE. Includes Active NFFEs and publicly traded companies (or

certain members of a group). Payments to excepted NFFEs are not subject

to withholding and minimal withholding (i.e., applicable IRS Form W-8).

• Passive NFFE. An NFFE other than an excepted NFFE. Treas. Reg. §

1.1471-1(b)(94)

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Excepted NFFE (Active or Exempt NFFE’s)

Passive NFFE’s

Exempt Beneficial Owners

• A corporation, if its stock is regularly traded on an established securities

market for a calendar year or if it is a member of an expanded affiliated group

that includes a corporation with stock regularly traded on an established

securities market. Treas. Reg. § 1.1472-1(c)

• Any entity that is organized under the laws of a U.S. possession and wholly

owned by bona fide residents of the possession

• A foreign government, a political subdivision of a foreign government, an

international organization or a wholly owned agency or instrumentality

• A foreign central bank of issue

• Certain foreign retirement funds

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Excludable Nonfinancial Payments

• Foreign-source income, payments of interest or original-issue discount on a

short-term obligation, and payments of income effectively connected with a

U.S. trade or business, where a treaty exemption is claimed, as well as

payments made in the ordinary course of business for nonfinancial services,

goods and the use of property

• Services (including wages and other employee compensation, such as stock

option income)

• Use of property payments (e.g., rents)

• Office and equipment leases

• Software licenses

• Transportation and freight payments

• Gambling winnings, awards, prizes and scholarship amounts

• Interest arising from the acquisition of goods or services

Caveat: FDAP withholding may nevertheless apply

Specific Withholdable Amounts

• Interest (including OID as defined in § 871(g)(1)), dividends and other U.S.

source FDAP payments

• Lending transaction payments, including loans of securities

• Forward, futures, options or notional principal contracts

• Investment advisory fees

• Custodial fees

• Bank or brokerage fees

• Premiums for insurance or annuity contracts

• Cash-value insurance or annuity payments

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Exempt Amounts

• Amounts paid by a U.S. Real Property Holding Corporation or a qualified

investment entity subject to FIRPTA withholding.

• A‎foreign‎partner’s‎distributable‎share‎of‎a‎partnership‎income‎subject‎to‎

withholding under § 1446 (i.e., distributable share of effectively connected

income reported on IRS Form 8805)

• Payments of income treated as effectively connected with a U.S. trade or

business (IRS Form W-8ECI).

• Consider Treas. Reg. Sec. 1.864-4(c).

• Exception: Income will not be treated as taken into account under this exception if it is or is

deemed to be effectively connected with the conduct of a trade or business in the United States

and the beneficial owner claims an exception from tax under an income tax treaty because the

income is not attributable to a permanent establishment in the United States. (Reported on IRS

Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) )

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Grandfathered Obligations

• Any legally binding agreement or instrument outstanding on January 1, 2014.

Treas. Reg. § 1.1471-2(b)(2).

• Grandfathered obligations are permanently exempt from withholding. This

does not include obligations that are treated (or should be treated) as equity

for tax purposes, or that lack a stated expiration date. If the obligation is

materially modified‎(“novated”),‎it will be treated as newly issued as of the

effective date of the modification.

• A‎withholding‎agent‎may‎rely‎on‎the‎issuer’s‎written‎statement‎to‎determine‎

whether the obligation is considered a Grandfathered Obligation. Treas. Reg.

§ 1.1471-2(b)(4).

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Preexisting Obligations

• For Non-Grandfathered Obligations

• Any account, instrument, contract, debt, or equity interest maintained,

executed, or issued by the withholding agent that is outstanding on December

31, 2013. Treas. Reg. § 1.1471-1(b)(98).

• Payments on these obligations, if made to an NFFE, are excluded from the

withholding requirements. Treas. Reg. § 1.1472-1(b)(2). The withholding

agent‎must‎also‎not‎have‎documentation‎indicating‎the‎payee’s‎status‎as‎a‎

passive NFFE with substantial U.S. owners.

• New accounts of preexisting customers are also treated as Preexisting

Accounts, provided the withholding agent treats the accounts as a

consolidated obligation. Treas. Reg. § 1.1471-1(b)(98)(ii)(B).

• Preexisting Obligation exemption on payments lasts only through 2015.

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Reporting Requirements

• When a foreign payee who is not an excepted NFFE has substantial U.S.

owners, U.S. payers will not only be required to obtain a completed Form W-

8BEN-E, but also to use the information provided on the Form W-8BEN-E to

complete‎Form‎8966,‎“FATCA‎Report.”

• Form 8966 will provide the IRS the name, address and tax identification

number of each substantial U.S. owner of the passive NFFE, and the total

payments made to the NFFE.

• Under Reg.§ 1.1472-1(e), a withholding agent that treats a withholdable

payment is made to designated payee must provide information about such

payee on Form 1042-S and file a withholding income tax return on Form 1042

as provided in Reg. §1.1474 – 1(d) and (c).

• Information on substantial US owners must be reported in accordance with

Reg. § 1.1474–1(i)(2).

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W-8BEN

• W-8BEN was revised February 2014, and updated to reflect the

documentation changes mandated by FATCA. Form W-8BEN is now used

exclusively by individuals. Entities documenting their foreign status, chapter 4

status, or making a claim of treaty benefits (if applicable) should use Form W-

8BEN-E. Pre-FATCA filings may still apply

• Generally, a Form W-8BEN will remain in effect for purposes of establishing

foreign status for a period starting on the date the form is signed and ending

on the last day of the third succeeding calendar year, unless a change in

circumstances makes any information on the form incorrect.

• Withholding certificates and documentary evidence obtained for chapter 3 or

chapter 61 purposes that would otherwise expire on December 31, 2013, will

not expire before January 1, 2015, unless a change in circumstances occurs.

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W-8BEN-E

• On March 29, 2014, the IRS announced the release of the final Form W-

8BEN-E. The updated form will be used by foreign entities to certify their

status under FATCA and chapter 3 as well as their entitlement to treaty

benefits.

• Withholding agents can rely on the older Form W-8BEN (2006) until it sunsets

in August. Using the older form will allow them to rely on the form until it

expires.

• Any U.S. taxpayer that has non-product related transactions with a foreign

entity must receive a completed Form W-8BEN-E from that foreign entity to

determine if the it is subject to the default 30% withholding on payments to

foreign entities or if is the foreign entity is eligible for any reduced withholdings

related to an applicable treaty.

• The form is prepared by the beneficial owner of the payment.

• Too many references in the instructions reference the regulations. As one

commentator‎pointed‎out,‎“Persons might find that they need legal counsel just

to‎fill‎out‎a‎tax‎document.”

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Form 8966

• Form 8966 will be used for the FATCA reporting and will be due by March 31st

of the year following the reporting calendar year..

• Identification of Filer

• Account Holder or Recipient Information

• Identifying Information of U.S. Owners that are specified U.S. persons

• Financial Information

• Pooled Reporting Type

• The Form 8966 reporting is required to be submitted electronically reporting

does not begin until 2015. Unextended due date is August 13, 2015.

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Other W-8 Forms

• W-8ECI is used to report many types of effectively connected income that

would otherwise be subject to FDAP withholding or backup withholding. The

form was revised in February 2014. In this latest form iteration, the IRS has

removed the capacity line and replaced it with a self-certification checkbox for

the person signing the form to certify to his or her capacity to sign on behalf of

the entity.

• W-8IMY was revised June 2014. An intermediary or flow-through entity

receiving a withholdable payment will be required to provide its chapters 3 and

4 status and the chapters 3 and 4 status of persons for whom it receives a

withholdable payment.

• W-8EXP (for foreign governments and organizations) was revised April 2014

and has been revised, for among other things, to permit certification of

Chapter 4 status. Those entities claiming a treaty benefit , though, must file

Form W-8BEN-E.

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What Does The Future Hold?

Mutual commitment to continue transparency, reciprocity and the development of common reporting and automatic exchange of information

New U.S. Model Treaty

Update to the OECD Model Treaty & Exchange of Information Commentary on Article 26 “Moreover, in view of the increasing internationalisation of

economic relations, the Contracting States have a growing interest in the reciprocal supply of information on the basis of which domestic taxation laws have to be administered, even if there is no question of the application of any particular article of the Convention…”

“Foreseeable Relevance”

Jeremiah Coder, Numerous New John Doe Summonses in the Works, Tax Notes (December 12, 2012) “Even though the Foreign Account Tax Compliance Act is giving new information collection

tools to the IRS, the Service will continue to need treaty exchanges to obtain relevant information such as foreign bank statements and documents about entity structure with regard to accounts, McDougal said. "Treaty requests are going to go through the roof and will be common, everyday business," said Welty.”

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