overview of fatca and its implications on caribbean states...• the foreign account tax compliance...

Overview of

FATCA and its

implications on

Caribbean States

Presented by H. Wayne Lovell

October 30, 2012

3 © 2012 KPMG, a Barbados 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. Printed in Barbados .The KPMG name, logo and

“cutting through complexity” are registered trademarks or trademarks of KPMG International.

Contents

■ What is FATCA and Why?

■ FATCA Tax Forms

■ FATCA Definitions

■ Is your business an FFI or NFFE?

■ Who is affected by FATCA?

■ Implications for the Caribbean

■ Consequences of not complying

■ Registration Process

■ Timelines

■ Steps to take now

■ Intergovernmental Agreements

© 2012 KPMG, a Barbados 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. Printed in Barbados .The KPMG name, logo and


What is FATCA and Why?

4



What is FATCA and Why?

• The Foreign Account Tax Compliance Act (FATCA) was enacted on March 18, 2010.

• FATCA introduces a new reporting regime aimed at the disclosure of US persons with

offshore accounts and investments.

• The primary aim is to capture those US persons who obtain offshore accounts and

investments with the sole purpose of evading taxes. The US Treasury estimates it loses over

$100 billion per year because of tax evasion.

• This disclosure is accomplished by a new withholding regime (Chapter 4), that works in

tandem with the current withholding regime (Chapter 3).

• Chapter 4 imposes a penal withholding tax on withholdable payments made to foreign

financial institutions and other foreign entities that fail to comply with the disclosure

requirements.



QI Background & Implications

Foreign intermediaries may enter into an agreement with the

IRS to act as a Qualified Intermediary (QI)

A benefit of the QI regime is that a non-US investor can

anonymously invest in the US, because tax Form reporting

provided by a QI is done on a pooled basis

Under the terms of its Agreement a QI undertakes to comply

with certain documentation, withholding and reporting

requirements



QI Documentation Disclosure Requirements

US Withholding Agent

Qualified Intermediary

IRS

Non-US

entity

Single Form W8-IMY

(includes QI-EIN)

QI Agreement

Separate Forms

W-9 for each US person

(and possibly separate

accounts as well);

Form 1099 reporting by

US withholding agent

(QI can elect to take on

this responsibility but

most do not)

US non-exempt

recipients

(receiving US

source income)

Forms W-8 or

documentary

evidence to QI. No

disclosure of non-US

persons to US

withholding agent or

IRS

US Person Non-US Person



US Tax Reporting For US Persons

US

WITHHOLDING

AGENT

IRS US PERSON

Reports payments made

to US persons on Form

1099 including

information on US

taxpayer (Form W-9)

IRS matches

Form1099 to

tax return

Files tax

return self

assessment



US Person

IRS QI

US Person files own

return

Form 1042 on pooled

basis

- no documentation

- no treaty benefit & withholding tax

Form 1099 – no tax

Dividend

$200

US Treasury

NON-US Person

IBM Stock

Form W-8BEN

Form W-9

Discloses $100 $100

$15

$0

Form 1042-S

Form

1099

$85

US Source Income



US Individual

QI

Relies on US Individual

reporting

Not subject to US Tax

US Treasury

UK Individual

Foreign Stock

Discloses £100

£200

£100

Non-US Source Income



FATCA Tax Forms

11



FATCA Tax Forms

FATCA TAX FORMS

Form W-8BEN -used by foreign person that is the beneficial owner of US source income

subject to withholding tax

-presented to withholding agent to establish foreign status and to claim any

benefits (treaty)

-used to claim exemption from US information reporting and backup

withholding

Form W-8EXP -used by foreign government, int‟l organisation, foreign Central Bank, etc

-presented to withholding agent to establish foreign status and to claim any

benefits (treaty)

-used to claim exemption from US information reporting and backup

withholding

Form W-8IMY -foreign person not acting for its own account

-used by foreign person to establish acting as QI

Form W-9 -to establish US status and to remove any presumption of foreign status e.g.

US citizen, resident alien, etc.

Form 1042-S -used to report certain payments to foreign persons of income subject to US

withholding tax

Form 1099 -used to report various categories of income earned by certain US persons



FATCA Definitions

13



FATCA Definition: Foreign Financial Institution (FFI)

A foreign financial institution 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

• Is in the business of holding financial assets for the account of others

• Is primarily engaged in the business of investing, reinvesting, or trading in

securities, partnership interests (including futures or forward contracts or

options), certain commodities, or any interest in such instruments



Who is a Foreign Financial Institution (FFI)?

FFIs fall into three general categories:

Commercial Banks

Savings and Loan Associations

Credit unions

Co-operative banking institutions

Building Societies

Broker Dealers

Clearing Organisations

Trust Companies

Custodial Banks

Custodian with respect to assets of

Employee Benefit Plan

Commodity Pools

Managed Investment Funds

Collective Investment Vehicles

Life Insurance that issue cash products

A non-financial foreign entity (“NFFE”) is any foreign entity which is not an FFI



Foreign Financial Institution (FFI)

FFI

NPFFI

(Recalcitrant)

Effective agreement with IRS

No effective agreement with IRS –

subject to FATCA withholding

Where member of group may prevent

other members of group from attaining

PFFI status

PFFI



Foreign Financial Institution (FFI) (cont’d)

FFI

DCFFI

EFFI

Exempt from FATCA

withholding and

reporting provisions

Treated as NFFEs

Registered

Certified

Required to

Register with IRS

Not Required to be

Registered



FATCA Definition: Deemed Compliant FFIs

Deemed compliant FFIs are FFIs that have a low inherent risk of US tax evasion and

are not required to enter into an FFI Agreement with the IRS

Deemed compliant with the requirements and exempt from withholding

Categories of deemed-compliant FFIs

Registered deemed-compliant FFIs: Required to register with the IRS to declare

status as deemed-compliant and to attest to the IRS that it satisfies certain procedural

requirements at periodic intervals.

Certified deemed-compliant FFIs: Not required to register with the IRS, but must certify

to withholding agent that it meets the requirements of its certified deemed-compliant

category on Forms W-8



FATCA Definition: Non-Financial Foreign Entity (NFFE)

NFFE

not an FFI

Excepted

(ENFFE) General or Passive

(PNFFE)

Not subject to US FATCA

reporting and withholding

Subject to US FATCA reporting and

withholding

To avoid

-Provide certification to withholding agent that it has

no substantial US owner, or

- provide information on substantial US owner to

withholding agent



FATCA Definition: Withholdable, Passthru Payments and FDAP

• Withholdable Payments

Any payment of interest, dividends, rents, salaries, wages, premiums, annuities, compensations,

remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits,

and income if such payment is from sources within the US.

AND

Any gross proceeds from the sale or other disposition of any property of a type which can

produce interest or dividends from sources within the US.

• Passthru Payments

Any withholdable payment or other payment to the extent attributable to a withholding payment.

The proposed regulations are reserved on the definition of a foreign passthru payment.

• FDAP income

Fixed or Determinable Annual or Periodical (FDAP) Income, generally includes any withholdable

payments.



FATCA Definition : Recalcitrant account holder

An account maintained by a participating FFI (PFFI) that:

−Fails to comply with the PFFI‟s request for documentation or information to establish whether

the account is a US account

−Fails to provide a valid Form W-9 upon PFFI‟s request PFFI

−Fails to provide a correct name and TIN upon request after the PFFI receives notice from the

IRS indicating a name/TIN mismatch

−Fails to provide a valid and effective waiver of foreign law if foreign law prevents reporting with

respect to the account holder by the PFFI

Exceptions:

−FFI

−Account meets exception for US accounts with deposit accounts with a balance of $50,000 or

less

−Qualifies for documentation exceptions for preexisting accounts



FATCA Definition: Financial Account (US Account)

• Any depository account maintained by FFI.

• Any custodial account

• Any equity or debt interest in an FFI, other than interests that are regularly traded on

an established securities market

• Any cash value insurance contract and annuity contract issued or maintained by an

FFI

Held by a specified US person or US owned foreign entity



FATCA Definition: US Person

A US person is one who is

a citizen

a green card holder

meets the requirements as a "tax resident"

as evidenced by "indicia" of US account



FATCA Definition: US Indicia

• Identification of any account holder as a US resident or US citizen

• A US address associated with an account holder of the account

• A US birth place for an account holder of the account

• An “in care of” address, a “hold mail” address (i.e. a request that the US Postal Service

hold mail for a specific address rather than deliver it-usually for a specific period of

time), or a US PO address that is the sole address on file with respect to the account

holder

• A power of attorney or signatory authority granted to a person with a US address

• Outstanding instructions to transfer funds to an account maintained in the US or

directions received from a US address.



FATCA Definition: Exempted Beneficial Owners

• Foreign governments

• International organizations

• Foreign Central Banks of Issue

• Governments of US possessions

• Foreign Retirement Funds



FATCA Definition: Expanded Affiliated Group

• Members of the group are determined where they are at least 50% owned by the

same parent, whether owned directly or indirectly.

• Partnerships and other entities shall be treated as a member of an expanded affiliated

group if such entity is controlled under US law by members of such group (including

any entity treated as a member of such group by reason of this sentence).



Is your business an FFI or NFFE?

27



Foreign Financial

Institutions (FFI)

Accepts deposits

Holds financial

assets for others

Invests into securities &

Trades Securities

Is your business a FFI or NFFE?

Private

Equity

Companies

Funds

Banks

Foreign Financial

Institution

Non-Financial Foreign

Entity

An NFFE is any foreign

entity that is not an FFI.

Insurance

Companies



Determining Entity Classification

From FFI database

Non-US

Entity US Entity

Tentative

FFI

Excepted NFFE

Passive NFFE Identify substantial US

ownership

Satisfies

Exclusion

Criteria

Satisfies

Deemed

Compliant

EFFI

Potential FFI

Identify FATCA Accounts

Satisfies

Excepted

NFFE

DCFFI

No

No

No

No Yes

Yes

Yes

Yes

Yes

No

Exempt from FATCA

withholding and reporting



Who is affected by FATCA?

30




• All banking, investment management/administration, fiduciary and life insurance entities need

to consider FATCA and assess its impact on their organisation.

• Any entity with US assets will be impacted.

• FATCA will apply to any person/entity that makes/receives withholdable payments.



US Taxation assessed

Non-Resident Individual and

Corporations

US Resident Individual and domestic

corporations

On worldwide income


On US source income and limited

categories of foreign-source income

FDAP Connected to P.E.



Implications for the Caribbean

33




FATCA is aimed at the offshore financial world, so you should expect that most of FATCA

will affect you, including withholding on US sourced:

■ Income/dividends

■ Gross proceeds of sale

■ Swap proceeds

Few "carve outs" and unlikely to include most offshore funds.




Under FATCA,

■ you are incentivised (by withholding regime) to capture information for the IRS on US citizens

investing abroad

■ Having no US stakeholders does not relieve the burden

■ Can you exist without being an FFI?




By becoming an FFI, you are committed to:

■ Implement internal policies, procedures and controls around “US accounts”

■ Increased burden of reporting (details not yet finalised)




Under FATCA

■ Foreign Financial Institutions (FFIs) are potentially subject to punitive 30% US withholding tax

on the Withholdable Payments (beginning January 1, 2014) and Passthru Payment

(beginning no sooner than January 1, 2017)

■ NonFinancial Foreign Entities (NFFEs) are also potentially subject to a punitive 30% US

withholding tax imposed on Withholdable Payments

(beginning January 1, 2014)

If 30% FATCA withholding is not required, then regular non-US person withholding rules

(Chapter 3) continue to apply.




• High costs of compliance.

• Changes in systems to accommodate reporting requirements.

• Reduces the probability of entering into Tax Information Exchanges Agreements (“TIEAs”)

and Double Taxation Agreements (“DTAs”) for those countries where such agreements do

not exist already.

• Possible reduction in management companies and banking relationships.

• May raise investor‟s concerns about the privacy and confidentiality of their information.



Implications for the Caribbean: Key Concepts

• The goals of FATCA are to identify US persons and have their investment information

provided to the IRS

• FFIs and NFFEs

• The FFI Agreement will require the FFI to identify US accounts and report them to the IRS on

an annual basis.

• Withholdable payments and “Passthru payments”

• All non-US entities that receive withholdable payments are affected

• Identification

• Due Diligence

• Withholding requirements

• Reporting requirements



Implications for the Caribbean: New and existing account

documentation

FATCA requires that new account policies and procedures be developed to address:

■ Identification and due diligence requirements for all new accounts

■ Be in place as of the effective date of the FFI Agreement

FATCA also requires the review of existing account files to determine:

■ What documentation is in the files from a FATCA perspective

■ Reviewed by the timeline

■ Presumption rules in the absence of required information

■ Indicia of US status found for an existing account



Implications for the Caribbean: Core components of FATCA compliance

FATCA Requirements FFIs

Enter into an FFI Agreement Required of all FFIs

Ensure measures are in place for new accounts Must be completed by all FFIs

Undertake prescribed due-diligence process on existing

accounts Must be completed by all FFIs

Put in place capability to withhold on passthru payments

to non-compliant FFIs (as well as recalcitrant accounts) Must be completed by all FFIs

Report to IRS on all US accounts Must be completed by all FFIs

Governance /compliance New processes required

Funds and other investment structures that comprise both US and foreign institutions,

will have varying compliance burdens depending on the domicile of operations:

A

B

C

D

E

F



Implications for the Caribbean: Due diligence requirements under

FATCA

“Indicia” Required Documentation

a) US citizenship or lawful permanent resident (green card

holder)

• Form W-9

b) US place of birth • Form W-9 and obtain waiver (if applicable) or

• Form W-8BEN and

• Non US passport or similar government-issued document

establishing client‟s citizenship in a country other than US (if

applicable) and

• Written explanation regarding client‟s renunciation of US

citizenship or reason why client did not acquire US citizenship at

birth (if applicable)

c) Residence address or correspondence address in the US

(including US post office box)

• Form W-9 or

• Form W-BEN and non US passport or similar government-issued document

establishing client‟s citizenship in a country other than the US (if applicable)

d) Standing instructions to transfer funds to an account

maintained in the US or directions regularly received from

a US address

• Form W-9 establishing US status or

• Form W-8BEN and non documentary evidence establishing non-US status of

client (if applicable)

e) “In care of” or “hold mail” address that is the sole address

with respect to the client

• Form W-9 establishing US status or

• Form W-BEN and documentary evidence establishing non-US status of

individual account holding (if applicable) f) Power of attorney or signature authority granted to a

person with a US address



Implications for the Caribbean: Information flows under FATCA

IRS

IRS

Withholding

Agent

Account

Holder(s)

Investor(s)

Others Substantial US

Owners

Foreign Financial

Institution (FFI)


Entity (NFFE) Certification or

Information on

“Substantial US

Owners”

Others

Recalcitrant

Account Holders

US Account

Holders

Documentation

Reporting on NFFE

payments for

“Substantial US

owners”

Detailed reporting on US

A/C holders

+

Reporting on certain

other categories

FFI Certification

Documentation



Implications for the Caribbean: Payment flows under FATCA

IRS

IRS

Withholding

Agent

Account

Holder(s)

Investor(s)

Others Substantial US

Owners

Foreign Financial

Institution (FFI)


Entity (NFFE)

Others

Recalcitrant

Account Holders

US Account

Holders

“Passthru

payments”

Withholding on

payments to non-

compliant NFFEs

Withholding on

“recalcitrants” and

certain others

“Withholdable

payments”



Implications for the Caribbean: Actions an FFI Must Do as a Part of its

FFI Agreement

• Obtain information regarding each account holder to determine which (if any) of such accounts are US accounts 1

• Comply with verification and due diligence procedures required by the IRS/Treasury with respect to the identification of US accounts 2

• If the FFI maintains US accounts, it must report on an annual basis certain account information to the IRS 3

• The FFI must deduct and withhold a tax equal to 30 percent on certain payments to recalcitrant account holders and non-participating FFIs

4

• An FFI must comply with requests by the IRS/Treasury for additional information with respect to any US account 5

• If foreign law prevents the reporting of any information the FFI must attempt to obtain a waiver from relevant account holders in a reasonable period of time or exit the account

6

Identify US accounts

Comply with due

diligence procedures

Report annually for US

accounts

Withhold on passthru

payments

Provide further

information on request

Obtain a waiver when

necessary



Consequences of not Complying

46



Consequences of Not Complying

FFI that did not enter into an FFI agreement

• will suffer 30% punitive withholding on any withholdable payment made by US withholding

agent.

• will suffer 30% punitive withholding on any passthru payment made by PFFI.




FATCA withholding not applicable if:

• a PFFI that provides the withholding agent with valid documentation establishing FATCA is not

applicable.

• a deemed-compliant FFI; or

• an Exempt Beneficial Owner.




Where a NFFE receives withholdable payments, the withholidng tax of 30% will apply

unless:

• the NFFE provides information on its substantial US owners

• the NFFE has no substantial US owners; or

• the NFFE is an excepted NFFE.



Registration Process

50



Registration Process

FATCA Administration

It is envisioned that foreign financial institutions will register for FFI status through an IRS online

registration system

For those entering into an FFI agreement , the process will also be completed in the registration.

Within the system, FFIs will identify certain key persons

Responsible Officer (RO)

Point of Contact (POC)

Authorized Third Party (ATP)



Timelines

52



FATCA Timeline – FFI (Previous)

D. 1 July 2013*

FFIs accountable for

identifying all new

„US accounts‟,

recalcitrants, and NPFFI

C. 30 June 2013

Deadline to enter into FFI

Agreements with IRS

(Safe harbor deadline)

E. 1 January 2014

Withholding begins on

non-compliant FFIs and

recalcitrants

2012 2013 2014 2015 2016 2017

G. 30 September 2014

Reporting to IRS begins

on „limited‟ basis

F. 30 June 2014*

Deadline for FFIs to

complete remediation

on all presumed FFIs

and high-value

accounts

H. 1 January 2015


non-compliant accounts for gross

proceeds payments

I. 30 June 2015*


complete second stage of

diligence reviews (non-high

value accounts)

A. Autumn 2012

Final FFI Agreements

to be released

J. 31 March 2016

Begin IRS reporting on

US Source income paid

to „US‟ and recalcitrant

accounts

K. 1 January 2017

Earliest application of

passthru payments

withholding on foreign

source payments

B. 1 January 2013

FFI agreement application process

commences to IRS.

Grandfather rule: Payments made on

non-equity obligations (with a defined

term) outstanding as of January 1,

2013 are exempt from FATCA.

Begin tracking reportable data.

* These dates assume that the FFI’s agreement approved by the IRS is effective on 1 July 2013.



FATCA Timeline – FFI Updated

F. 31 December 2013

Deadline to enter into FFI

Agreement with IRS

(thereafter be considered NPFFI)

2012 2013 2014 2015 2016 2017

A. 8 February 2012

IRS published draft

FATCA regulations

E. Q1 2013

Final FATCA regulations

to be released

Final FFI Agreement to be

released

IRS to begin accepting FFI

agreement applications

I. 31 December 2014

Deadline for FFIs to complete

remediation on all high-value

accounts

H. 30 June 2014*


complete remediation

on all prima facie FFIs

K. 31 December 2015*

Deadline for FFIs to complete

due diligence reviews for all

remaining accounts

C. August 2012

Drafts IRS forms

released

L. 31 March 2016

Annual IRS reporting on „US‟ accounts

and aggregate reporting on recalcitrant

accounts

Begin IRS reporting on accounts held

by NPFFIs

M. 1 January 2017


non-compliant accounts for

gross proceeds payments

Earliest application of passthru

payments withholding on

foreign source payments

G. 1 January 2014

FFI agreement becomes effective

FFIs accountable for identifying all

new „US accounts‟, recalcitrants,

and NPFFI

FATCA Withholding begins on

FDAP payments to certain account

holders

J. 31 March 2015

IRS reporting on „US‟ accounts and

aggregate reporting on recalcitrant

accounts for 2013 and 2014

N. 31 March 2017

Annual IRS reporting on „US

accounts‟ and aggregate

reporting on recalcitrant accounts

Last year of IRS reporting on

accounts held by NPFFIs

B. July 2012

Draft of Model I IGA

released

* These dates assume that the FFI’s PFFI agreement is approved by the IRS and is effective on 1 January 2014.

D. 1 January 2013

Grandfather rule: Payments

made on certain non-equity

obligations (with a defined

term) outstanding as of

January 1, 2013 are exempt

from FATCA withholding



FATCA Timeline - U.S. Withholding Agent

2012 2013 2014 2015 2016 2017

A. 8 February 2012

IRS published draft

FATCA regulations

F. Q1 2013

Final FATCA

regulations to be

released

I. 15 March 2015

Reporting begins on

“Chapter 4 reportable

payments” to the IRS begins

on forms 1042 and 1042-S

L. 1 January 2017


non-compliant accounts for gross

proceeds payments

G. 1 January 2014

Update Onboarding process for new

accounts to include Chapter 4

requirements.

FATCA Withholding begins on FDAP

payments to certain account holders

J. 31 March 2015

Reporting begins on certain US

Owners of Owner-Documented FFIs

& Passive NFFEs

C. August 2012

Draft IRS forms

released

B. 26 July 2012

Draft of Model I

IGA released

D. December 2012

Final versions of the

IRS Forms for

FATCA to be

released

H. 30 June 2014

Deadline for USWAs to

complete remediation on

all prima facie FFIs

E. 1 January 2013

Grandfather rule: Payments made on

certain non-equity obligations (with a

defined term) outstanding as of January

1, 2013 are exempt from FATCA

withholding

K. 31 December 2015

Deadline for USWAs to

complete remediation on all

remaining preexisting entity

accounts



Steps to take now

56



Steps to take now

■ Internal/External Education

■ Clarify FATCA ownership within the organization

■ Analyze and understand potential impact assessment

■ Entity analysis

■ Product/Service analysis

■ Account information and procedures

■ Consider impact on IT system(s)

■ Identify in-flight projects with synergies

■ Analyze and understand potential impact on business

■ Develop a initial plan

■ Communicate with value chain, customers and Treasury



Intergovernmental Approach

58



Intergovernmental approach – An Alternative Approach to FATCA

Alternative intergovernmental approach to FATCA implementation that would:

■ Address legal impediments to compliance

■ Simplify practical implementation

■ Reduce costs

Contemplates reporting by FFIs to their respective governments

US commits to reciprocity in collecting & reporting to FATCA partner

Where the US & FATCA partner have entered into an IGA, FFIs would:

■ Not enter into FFI agreement with IRS

■ Report on US accounts through their local government

■ Eliminate penal withholding requirement on recalcitrant account holders and FFIs in countries

that have entered in an agreement with US.

■ FATCA partner would report the FATCA information to US.

Question and

Answer session



Contact details

H. Wayne Lovell

Senior Director, Tax

[email protected]

Telephone: 1 246 434 3928

Marianne Greenidge

Senior Manager, Tax

[email protected]

Telephone: 1 246 434 3918

Tara Collymore

Senior Associate, Tax

[email protected]

Telephone: 1 246 434 3900

mailto:[email protected]



Thank you

© 2012 KPMG LLP, a Delaware limited liability

partnership and the US member firm of the KPMG

network of independent member firms affiliated with

KPMG International Cooperative (“KPMG

International”), a Swiss entity. All rights reserved.

NDPPS 113795

The KPMG name, logo and “cutting through

complexity” are registered trademarks or

trademarks of KPMG International.

overview of fatca and its implications on caribbean states...• the foreign account tax compliance...

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