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Understanding FATCA

David Weisner, U.S. Tax Counsel for Asia Pacific, Citi

Carolina Caballero, Product Risk and Regulatory Strategy Manager, Clearing and FI Payments, Citi

Treasury and Trade Solutions

3 Citi Transaction Banking Academy for Financial Institutions Professionals | 18 March 2014

Today’s Speakers

Carolina Caballero

Product Risk and Regulatory Strategy, Clearing & FI Payments

Citi Treasury and Trade Solutions

David Weisner

U.S. Tax Counsel for Asia Pacific

Citi

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This presentation does not constitute tax

advice. It is for information purposes only.

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Table of Contents

1. Background on FATCA

2. Due Diligence Requirements

3. Impact on Transactional Documentation

4. Intergovernmental Agreements

5. Timelines /What to Do Next

6. Questions and Answers

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1. Background on FATCA

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What is FATCA?

“Foreign Account Tax Compliance Act” or “FATCA” was signed into law on March 18, 2010 as a revenue raiser

for the “Hiring Incentives to Restore Employment Act” or “HIRE”

Revenue estimate – $8.7 billion over 10 years

Response to hearings conducted by the Senate Permanent Subcommittee on Investigations and findings of

substantial offshore tax evasion

Various effective dates. FATCA withholding on U.S. source income begins on July1, 2014

Objective is to combat offshore tax evasion by U.S. persons who invest:

– Directly through financial accounts maintained offshore; and/or

– Indirectly through ownership of foreign entities

FATCA works by requiring foreign financial institutions (“FFIs”) and non-financial foreign entities (“NFFEs”) to

provide this information

FATCA’s lever is a NEW 30% withholding tax levied on “withholdable payments” to non-participating FFIs and

NFFEs

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30 Percent FATCA Withholding

– Imposed on “withholdable payments”, including:

U.S. source income from securities

Interest on bank deposit accounts maintained in the United States or in a foreign branch of a

U.S. bank

Gross proceeds from the sale/redemption of U.S. securities

– When made to FFIs or NFFEs unless:

the FFI enters into an agreement with the IRS (a participating FFI) or can be classified as a

“deemed-compliant” FFI given that it presents a low risk of being used for tax evasion

the NFFE discloses the identity of its U.S. owners or certifies to non-US ownership to the

withholding agent or can be classified as an exempt NFFE given that it presents a low risk of

being used for tax evasion

Withholding as an Enforcement Tool

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Gross Sales Proceeds

$2000

US Withholding tax

$600

Interest Income

$100

US Withholding tax

$30

Malaysian

Bank

(FFI)

US Treasury

Securities

Malaysian Bank invests in US Treasury securities that generate US source interest income and

eventually gross proceeds from sale

If Bank does not comply with FATCA, a new 30% US withholding tax will apply to payments of

interest income and gross sale proceeds

Example: Impact if a Bank Does Not Comply with FATCA

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CCiti U.S. FFFI

Fixed Rate

Floating Rate

Cash Collateral

Cash Collateral or U.S.

Treasuries

Interest on collateral

Interest on collateral

• Fixed rate payment ― no FATCA withholding; non-U.S. source.

• Floating rate payment ― no FATCA withholding; made to a U.S. financial

institution.

• Interest on collateral paid by FFI ― no FATCA withholding; made to a U.S.

financial institution.

• Interest on collateral paid by Citi U.S. ― FATCA withholding on the gross

amount (no netting) unless FFI is FATCA compliant; U.S. source.

Example –FATCA Impact on Interest Rate Swap

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Besides Withholding - Impact of Non Compliance By a FFIs

Competitiveness – Some PFFIs might close accounts held by non-participating FFIs and recalcitrant

customers. This will adversely impact the FFI’s business.

Impact on Product offerings – Some products of FFIs will have to be limited to only participating FFIs.

Impact on financing – for international business which would like to secure financing from FFIs in for example

Malaysia, if any of these financing involve US source payment (i.e. borrower being US corporates, local

branches of US corporates), those borrowers will shy away from non-participating FFIs in Malaysia as the

borrower will have to withhold 30% tax on repayment of such financing facilities.

Channelling business away from FFIs – in light of the potential 30% tax withholding, some international

financial institutions may begin to channel business away from a FFI particularly business involving US source

payments.

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Any non-U.S. entity that falls into one of the following categories:

– Accepts deposits in the ordinary course of a banking or similar business (e.g., a bank,).

– Holds, as a substantial part of its business, financial assets for the benefit of others (e.g., a custodian, broker-dealers, trust companies, clearing organizations).

– Is an investment entity (e.g., hedge funds, private equity funds, special purpose investment vehicles (SPVs), investment managers).

– An insurance company that issues annuities or cash value insurance policies.

What is an FFI?

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To avoid 30 percent withholding under FATCA, a FFI must enter into agreement with IRS and meet

the following obligations or be classified as “deemed-compliant” as it presents a low risk of tax

evasion:

– Comply with verification and due diligence procedures to be prescribed by Treasury

– Obtain information necessary to determine if each account is a U.S. account

– File annual reports with the IRS on U.S. accounts

– Withhold and pay the IRS 30 percent of withholdable payments made to:

Recalcitrant account holders, Non-compliant FFIs, and FFIs electing to be withheld upon

– Comply with IRS requests for additional information on U.S. accounts

– Obtain a waiver of foreign laws that would prevent disclosure (e.g., privacy or bank secrecy

laws) or close any account failing to provide a required waiver.

The IRS can terminate the FFI agreement for any performance failures.

All FFIs in expanded affiliated group need to be compliant in order for any FFI in that expanded

affiliated group to be compliant.

What is Expected of an FFI?

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An NFFE that has one or more “substantial” U.S. owners (other than a “specified U.S. persons”

owners) is considered a U.S. owned NFFE

Substantial ownership generally means more than 10 percent of:

– Vote or value of a corporation’s stock

– Profit or capital interest in a partnership

– Beneficial interest in a trust if any grantor is a non-exempt US person

– Example: A closely-held manufacturing company

Certain types of NFFEs are not required to disclose their U.S. owners. These include:

– A corporation the stock of which is regularly traded on an established securities market and

any of its affiliates

– Active entities (less than 50% of income or assets is passive)

Non-Financial Foreign Entity (“NFFE”) Defined

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IRS Portal

• Portal is open now.

• FFIs who register are considered Participating FFIs

• Once an FFI has registered, the IRS will approve its registration and issue a GIIN (Global Intermediary

Identification Number) to each Participating FFI and registered deemed compliant FFI.

• Portal will be primary means for FFIs to interact with the IRS to complete and maintain their FATCA

registrations, agreements and certifications.

• Portal will be used for registration, electronic communication between the IRS and FFIs and other registrants

and other FATCA communications.

• A GIIN will be assigned and will be used as the ID number for satisfying the FFI’s reporting obligations and

identifying its status to a withholding agent.

• The IRS will electronically post the first IRS list of Participating FFIs and registered deemed compliant FFIs

(including Model 1 FFIs) on June 2, 2014, and will update the list on a monthly basis.

• The last date by which an FFI can register with the IRS to ensure inclusion on June 2, 2014 list is April

25, 2014.

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2. FATCA Due Diligence Requirements

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FIs need to determine whether to treat:

– An individual account holder as a U.S. person or a foreign person

– An entity account holder as:

a U.S. person

A foreign financial institution (FFI)

An exempt foreign organization (e.g., a foreign government) or

A non-financial foreign entity (NFFE)

– An FFI as:

A participating FFI

A deemed-compliant FFI or

Non-participating FFI

– An NFFE as:

An excepted NFFE or

A passive NFFE (having a substantial US owner)

Presents a new and completely different way to categorize client accounts and service providers

A payor generally cannot treat an FFI as FATCA compliant unless it has received valid documentation prior to the time a U.S. source income payment is made

How to Classify Accounts Under FATCA

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Definition of a US Person

U.S. individual

– U.S. citizen (by birth or naturalization).

– A dual citizen where one country of citizenship is the U.S.

– Non-U.S. citizen that is a U.S. permanent resident (i.e. green card holder).

– Non-U.S. citizen with substantial presence in U.S. (greater than 183 days).

31 days during current calendar year, AND

183 days during 3-year period including current year and 2 prior years

– All of the days present during current calendar year.

– 1/3 days present during 1 year before current year.

– 1/6 days present during 2 years before current year.

U.S. Partnership

U.S. Corporation

U.S. LLC

U.S. Trust or Estate

U.S. Government, State, District of Columbia (or any agency or instrumentality thereof)

A “foreign person” is any person that is not a U.S. person

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FFI Agreements Requirements

FFI Agreements are effective on or after 1 July 2014

PFFI must adopt written policies and procedures regarding due diligence processes

PFFI must conduct periodic internal reviews of its compliance with these policies and procedures and its

FATCA obligations

Observation: US tax authorities will not require mandatory external audits of PFFIs

Within 1 Year of FFI Agreement Within 2 Years of FFI Agreement

Complete review of all high-value accounts,

including the relationship manager query

Complete review of individual accounts not

previously identified as US accounts and obtain

necessary documentation

Perform the requisite review and obtain

documentation for all prima facie FFIs

– Form W-8IMY on file indicates entity is a QI or

NQI

Complete review of pre-existing entity accounts

not previously identified as a prima facie FFIs

Complete a responsible officer certification stating

– Review of all high-value individual accounts

is complete

– There were no formal or informal procedures in

place from 6 August 2011, on to assist account

holders in avoidance of Chapter 4 provisions

Complete a responsible officer certification stating

– PFFI has completed the account identification

procedures and documentation requirements

for all financial accounts that are pre-existing

obligations, or if not, that it treats the accounts

in accordance with the requirements as

outlined in the FFI Agreement

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Account

Type

Exempted Completed Within Two years of FFI

Agreement

Completed Within One year of FFI

Agreement

Individuals US$50,000 or Less

Exempted

US$50,000–1,000,000

Electronic Search for US Indicia

High Value >US$1,000,000

Electronic Search for US Indicia

Manual Search as Required

Relationship Manager Query

Entities US$250,000 or

Less

Exempted

> US$250,000

Review AML / KYC documentation

Document FATCA Status

Prima Facie FFIs (must be completed

within 6 months of FFI Agreement )

Review AML / KYC documentation

Document FATCA Status

Summary of Due Diligence for Pre-existing Accounts at a PFFI

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New Account Due Diligence

• The presumptions may be rebutted obtaining the documentation sufficient to determine the FATCA status of the payee or account holder.

• For New Accounts:

- FFIs must obtain sufficient documentation to identify and classify the payee/account holder

- Must use Form W-9 to document U.S. persons

- For offshore obligations, FFIs can rely on documentary evidence or written statements to establish foreign status

- If there are any U.S. indicia, additional documentation must be obtained to substantiate foreign status

- PFFIs must obtain a waiver from U.S. persons in any jurisdiction where local law would prevent disclosure or reporting to IRS

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Client Management Issues

Prospecting – Certain products and services may no longer be available.

On-Boarding – New clients must provide personal information beyond current requirements

Account Management – Changes to client data may trigger additional requests; clients may be wary of

certain products, services or transactions.

Reporting – Clients must waive privacy rights and grant permission of information to reported

Off-boarding- Recalcitrant accounts may require closure

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3. Impact to Transactional Documentation

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Do You Have a FFI In Your Organization? Impact on Your Relationship with Your Bank

What Your Financial Institution Will Ask you

– Financial Institution will need to determine FATCA status for each entity.

– Establish FATCA status by providing appropriate documentation:

U.S. Legal Entities – Form W-9

Non-U.S. Legal Entities – Form W-8 or self certification and documentary evidence

Request for additional documentation if US indicia are present

– Failure to provide appropriate documentation will result in 30% FATCA withholding and reporting.

Impact on Transactional Documentation

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Do You Have a FFI In Your Organization? Impact on ISDA

ISDA Master Agreement Gross Up Provision:

2(d) (i) Gross Up. All payments under this Agreement will be made without any deduction or withholding for or

on account of any Tax unless such deduction or withholding is required by any applicable law, as modified by

the practice of any relevant governmental revenue authority, then in effect. If a Party is so required to deduct or

withhold, then that party (“X”) will: …

(4) If such Tax is an Indemnifiable Tax, pay to Y, in addition to the payment to which Y is otherwise entitled

under this Agreement, such additional amount as is necessary to ensure that the net amount actually received

by Y (free and clear of Indemnifiable Taxes, whether assessed against X or Y) will equal the full amount Y

would have received had no such deduction or withholding been required. However, X will not be required to

pay any additional amount to Y to the extent that it would not be required to be paid but for :--

(A) the failure by Y to comply with or perform any agreement contained in Section 4(a)(i), 4(a)(iii) or 4(d); or

(B) the failure of a representation made by Y pursuant to Section 3(f) to be accurate and true unless such

failure would not have occurred but for (I) any action taken by a taxing authority, or brought in a court of

competent jurisdiction, after a Transaction is entered into (regardless of whether such action is taken or

brought with respect to a party to this Agreement) or (II) a Change in Tax Law.

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Do You Have a FFI In Your Organization? Impact on ISDA

ISDA FATCA Provision (August 15, 2012)

“Withholding Tax imposed on payments to non-US counterparties under the United States Foreign Account

Tax Compliance Act. “Tax” as used in Part 2(a) of this Schedule (Payer Tax Representation) and

“Indemnifiable Tax” as defined in Section 14 of this Agreement shall not include any U.S. federal withholding

tax imposed or collected pursuant to Sections 1471 through 1474 of the U.S. Internal Revenue Code of 1986,

as amended (the “Code”), any current or future regulations or official interpretations thereof, any agreement

entered into pursuant to Section 1471(b) of the Code, or any fiscal or regulatory legislation, rules or practices

adopted pursuant to any intergovernmental agreement entered into in connection with the implementation of

such Sections of the Code (a "FATCA Withholding Tax"). For the avoidance of doubt, a FATCA

Withholding Tax is a Tax the deduction or withholding of which is required by applicable law for the

purposes of Section 2(d) of this Agreement.”

•Existing Master Agreements can be amended to include the ISDA FATCA Provision by adherence to the

ISDA 2012 FATCA Protocol

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• The Schedule to the ISDA Master Agreement generally contains a representation by the payor that it

is not required to withhold any tax.

• The ISDA Master Agreement requires gross-up for withholding tax, thus putting economic burden on

payor.

• The Protocol excludes FATCA withholding from the payor’s tax representation.

• The main purpose of the 2012 ISDA FATCA Protocol (“Protocol”) is to place the economic burden of

FATCA withholding, if any, on the payee by providing that FATCA withholding is not subject to gross-

up.

• The rationale behind the Protocol is that withholding, if any, is within the control of the payee

because the payee could have avoided withholding by being FATCA compliant.

• The ISDA Master Agreement allows a payor to withhold from a payment that is required by law.

• For the avoidance of doubt, the Protocol states that FATCA withholding tax is a Tax the deduction of

which is required by law.

• The markets have taken the position that the economic burden of FATCA should be borne by the

payee since whether FATCA withholding occurs is within the control of the payee.

• The Protocol represents the approach of the markets in cross-border transactions.

What Does the ISDA Protocol Do?

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• The Protocol incorporates the changes described above into existing and future contracts with all

other parties that have also adhered to the Protocol without the need for bilateral agreements to each

confirmation made under an ISDA Master Agreement.

Thus the protocol is the most efficient means of addressing FATCA withholding

• Currently, there is no cut-off date for entering the Protocol.

The Effect of Entering into the Protocol

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Korean Bank

Malaysian

Bank

UK Bank

Singapore Bank

US Corporation

Agent

(NPFFI)

Lenders

(PFFIs)

Interest, fees

and principal

payments

subject to

withholding at

30%

Borrower

(US*)

Impact on Syndicated Loan when Agent is Not Compliant

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Do You Have a FFI In Your Organization? Impact on Loan Agreements

Loan Provisions from Loan Market Association

Definition of FATCA

Provision requiring the Parties to provide information to the other Parties relating to its FATCA status

Right to withhold on account of FATCA

Carve-out from Gross-up – Example:

“The Borrower shall not be required to make an increased payment to a Finance Party under paragraph (a)

above for (i) a Tax Deduction imposed by reason of such Finance Party’s failure to comply with any

certification, identification, information, documentation or other reporting requirement if such compliance is

required by law, regulation, administrative practice or an applicable treaty as a precondition to exemption from,

or reduction in the rate of, deduction or withholding of any Tax Deduction, (ii) a Tax Deduction imposed by

reason of such Finance Party’s failure to comply with Clause 14.7 or (iii) any U.S. federal income

withholding tax imposed under FATCA.”

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Do You Have a FFI In Your Organization? Impact on Offering Memorandum

Funds likely will have to disclose their FATCA status

FATCA language will be included in offering documentation. Below is an example:

“We intend to structure our investments so that we will not be required to withhold 30% FATCA withholding tax

earlier than 2017 although no assurances can be given in this regard. Pursuant to the FFI Agreement we

intend to enter into, beginning no earlier than 2017, we will be required to withhold 30% FATCA withholding tax

on certain dividends that we pay to foreign financial institutions that have not entered into an FFI Agreement

(including [Name of Depository]) if it does not enter into an FFI Agreement) or to Shareholders that do not

verify their status under the FATCA rules, to the extent such dividends are foreign passthru payments.”

“The application of FATCA to an investment in our Shares will depend on: whether the foreign financial

institutions through which you hold our Shares, including [name of depository] and any broker, have entered an

FFI Agreement, which is outside of our control; and whether you verify your status under the FATCA rules to

us or to the foreign financial institution through which you hold our Shares.”

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4. Intergovernmental Agreements

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FATCA Intergovernmental Agreements

Local law conflicts were the immediate reason that Treasury developed the IGA framework. FFIs in some jurisdictions found that they were unable as a legal matter to report information required under FATCA to the IRS, and IGAs were intended to address that problem. Coordination of the IGAs with the FATCA regulations was necessary to avoid a situation in which one FFI that operated in multiple jurisdictions that included IGA signatories and non-IGA countries had different documentation requirements for each.

Announcement on February 8, 2012 by the United States and 5 European countries of their intent to work together to develop an intergovernmental approach to improving international tax compliance and implementing FATCA. The countries that have publicly announced their interest for Model 1 were Germany, France, Italy, Spain, the U.K. and Ireland.

Willing countries would enter into a bilateral agreement with the United States under which the foreign country would become a “FATCA Partner” in exchange for certain concessions by the U.S.

Model 1 bilateral agreement published in July 2012 and Model II published in November 2012.

As of February 2014, twenty-two IGA Agreements have been executed – UK, Denmark, Germany, Ireland, Italy, Japan, Mexico, Norway, Spain, Switzerland, Bermuda, Malta, Netherlands, Guernsey, the Isle of Man, Jersey, Cayman Islands, Costa Rica , France, Canada, Hungary and Mauritius. Several others have been initialed, meaning all terms have been agreed to, the IGA has just not yet been signed. Still waiting for Hong Kong, Singapore, China and Malaysia agreements.

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Structure of IGAs

Agreement on definitions and obligations

US Treasury has published Model IGAs

Annex 1 on due diligence obligations for identifying and reporting on US accounts and certain payments

Annex II identifies types of institutions and accounts that are exempt from reporting requirements (“Non-

reporting FIs”)

– Contains a country specific list of

• exempt beneficial owners (i.e., government and supranational organizations)

• deemed-compliant FFIs (Non-reporting FIs and Collective Investment Vehicles) , and

• exempt products or accounts (are not financial accounts)

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Local Legal Issues

FATCA imposes obligations on FFIs that may be in conflict with the laws of the jurisdiction in which an FFI

operates, including

– Privacy laws prohibiting the sharing of personal information on clients, including sharing with a foreign tax

authority

– Access-to-banking laws that guarantee that an account must be opened or that accounts may not be closed

unilaterally

– Laws prohibiting the withholding of taxes for a foreign government or withholding without clients’ consent

The IGAs present an opportunity for a country to support its FFIs compliance with FATCA by

– Changing local laws to remove legal obstacles to FATCA compliance

– Accepting the U.S. offer in the IGAs to modify or eliminate certain FFIs obligations that would apply under

the Final FATCA Regulations

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Benefits /Purposes of IGA

• True government to government agreement whereby involvement of government at inception. More authority

to negotiate.

• Sovereignty – control over information being exchanged (Model 1)

• Demonstrate commitment by the government to tackle tax evasion which is a developing global trend

• Establish uniform reporting standards and an automatic information exchange

• Competitiveness – neighbouring countries are exploring IGA

• Typically eliminate local legal obstacles to FATCA compliance (Model 1)

• Reciprocity

• Lifting costly compliance burden from local financial institutions

• Generally, eliminates or reduces U.S. regulatory requirements for an FFI to:

– Enter into an FFI agreement with the IRS

– Withhold on payments made to FIs located in any Partner Country

– Withhold on payments made to recalcitrant accounts or close the accounts

• Once a country enters into a IGA, all financial institutions in that country are regarded as participating. More

time for financial institution to register and design compliance programme.

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Overview of Model 1 Reporting

38

Information Reporting by FATCA Partner FIs

Report U.S. account holders who are:

– Specified U.S. persons,

– Non-U.S. entities having at least 1 controlling person that is a specified U.S. person

– A specified U.S. person is generally means any U.S. person other than an exempt recipient (but includes a

privately held corporation that is not a related entity)

Reportable information

– Name, address and TIN of each specified U.S. person

– Name, address and TIN (if any) of a non-US entity with at controlling specified U.S. person

– Account number

– Account balance or value at year end or account closing date

– Total gross interest, dividends, other income, gross proceeds from sale or redemption of property paid or

credited to the account

Form 8966 will be used by FFIs in reporting on U.S. accounts

FATCA Partners in Model 2 countries must report annually the “aggregate” information required respecting

U.S. accounts that do not consent to reporting

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5.Timelines / What To Do Next

40

Timelines

Phased implementation starting in 2014, and ending no earlier than 2017

Some systems and procedures need to be ready on July 1, 2014

Major key dates:

First Sign Up For FFI Agreements: portal open now-- FFI Agreements start taking effect on July 1, 2014.

Initial List of FFIs: To be Published on June 2, 2014.

New Accounts: July 1, 2014

Grandfathering: July 1, 2014

Withholding: Begins July 1, 2014 for U.S. source income paid to certain payees (new accounts and pre-

existing accounts of known recalcitrant account holders and non-participating FFIs (“NPFFI”)) and then

phases in for additional tiers of payees in 2015 and 2016 – gross proceeds and foreign passthru payment

withholding can begin in 2017 although the Regulations reserve on those rules for now.

Reporting: U.S. account reporting begins March 31, 2015 for the 2014 year

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Action Points – What to Do Next

Understand the Regulations and move towards to compliance

Form a project team

Engage outside advisors

Scope Survey /Diagnostic Survey

Impact Analysis /Gap Analysis

Implementation Plan

Work with Government by responding to any questionnaire or surveys on IGA/FATCA

Industry groups to work on list on products and entities to be included in Annex II

Identify the impact on your financial institution if your country is unable to enter into an IGA by July 1, 2014

Understand the intention of your counterparties whether they will continue doing business with limited financial

institutions

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6. Questions and Answers

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Thank You

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electric power projects; (f) producing equity research related to climate issues that helps to inform investors on risks and opportunities associated with the issue; and (g) engaging with a broad range of stakeholders on the

issue of climate change to help advance understanding and solutions.

Citi works with its clients in greenhouse gas intensive industries to evaluate emerging risks from climate change and, where appropriate, to mitigate those risks.

efficiency, renewable energy and mitigation

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