2013 IIB Seminar on US Taxation of International Banks Tax Issues - PowerPoint PPT Presentation

2013 IIB Seminar on US Taxation of International Banks Tax Issues Arising from the Dodd Frank Act Melissa Heise (Moderator) Director & Tax Counsel, The Royal Bank of Scotland plc Roger Brown Principal, Ernst & Young LLP Richard Coffman General Counsel, Institute of International Bankers Fred Carchman Tax Director, Deloitte Tax LLP Philip Fried Principal, PwC Davis J. Wang Partner, Sullivan & Cromwell LLP

The Dodd Frank Act  Title VII: Swaps issues • Section 716 Swap Push Out • Swaps Dealers and Cross Border Issues  FBOs: Section 165 Enhanced Capital, Liquidity and Other Prudential Standards application to Foreign Banking Organizations  Basel III Tax Implications  Living Wills and Volker Rule

Regulatory Developments: Section 716 Push Out  Regulatory Developments • Fed Reserve Interim Final Rule (June 5, 2013) • Insured Depositary Institution (IDI) includes uninsured US branches/agencies • Permitted Activities Exemption  Hedging relating to IDIs activities  Swaps involving rates or “bank permissible” reference assets • Grandfather Relief • Transition Period • Transfer Non-conforming swaps to a registered swaps dealer

Swaps Dealers & Cross Border Issues  Joint CFTC/SEC “entity” and “product” rules finalized  CFTC Focus on Swaps Dealers • Final Rules adopted with respect to registration, mandatory clearing, trade execution facilities (SEFs), reporting (SDRs), external business conduct and internal business conduct • Key unfinished business: capital and margin/segregation of collateral rules, cross border guidance  SEC approach to regulating security based swap dealers • Registration requirements not yet finalized • Recent cross-border proposed rules and interpretive guidance and re-proposal of certain rules and forms

Cross Border CFTC Regulation of Swaps  DFA Section 722(d): Swap requirements do not apply to activities outside the US unless they: • Have a direct and significant connection with activities in or effect on US commerce, or • Contravene rules prescribed by the CFTC to prevent evasion of the swap requirements  Key Issues of non-US swap dealers’ US activities • Definition of a “US Person” • Application of the de minimus rule and aggregation requirements  Swap dealer registration triggered by conducting more than a de minimus amount of activity over a 12 month period ($8Bn aggregate notional amount) • Aggregation rule includes swaps of legal entities controlled by and under common control with a person • Substituted compliance  Applicability to “entity level” vs . “transaction level” requirements  Process and Standards for making substituted compliance determinations • Summer 20122-Proposed Guidance and Proposed Exemptive Order • December 2012-Final Exemptive Order and request for further comment • Current Status

Swaps Dealer and Push Out Potential Tax Impacts • Push Out could create multiple tax issues • Example: Assume Non-US Bank currently operates swaps desk in its New York branch • To comply with Push Out, moves swaps desk to home office • Does income/loss on existing book continue to be ECI? • See, e.g., PLR 200018027 (once ECI, always ECI) • Risk of Double Taxation • Relief under Global Dealing Regulations or AOA Treaty • Gain/Loss on existing book under branch profits tax (unless mitigated/eliminated by Treaty) • Alternatively, suppose Bank transfers swaps book to separate non-US company

Section 165: Enhanced Capital, Liquidity and other Prudential Standards  FRB Notice of Proposed Rulemaking Implementing Section 165 for large “Foreign Banking Operations (FBOs)  Large FBOs have $50bn or more in total consolidated worldwide assets  Enhanced Standards with respect to risk based capital, leverage limits, liquidity, single counterparty credit limits, stress testing, risk management and debt to equity limits.  Early Remediation provisions (DFA 166)  Intermediate Holding Companies (IHC) Requirement • “Supplemental enhanced standard” • Threshold- at least $10Bn in US, non-branch/agency assets • A single IHC would have to be established to hold all of the FBOs US bank and non-bank entities US assets • All IHCs would be subject to US/Fed prescribed risk-based capital and leverage limits • IHCs with $50bn or more in assets would also be subject to the Fed Reserve’s capital plan rule • “Trapped Capital”  30-day liquidity buffers • Threshold-$50bn or more in combined US assets (branches, agencies and IHC) • Highly liquid assets only- cash, US Gov agency securities, GSE securities and other approved assets • Separate buffer for US branch/agencies and IHCs leaving “trapped liquidity”  US branch/agencies: first 14 days’ buffer must be held in US, balance at home office with Fed approval  IHC: entire 30 day buffer must be held in the US

Section 165: Key elements of the proposal Legal entity ► US IHC required for FBOs with ≥ US$50b in global assets and ≥ US$10b in combined US assets (excluding assets of A . structure US branches and US agencies) ► US risk committee or a risk committee of the global board of directors for publicly traded FBOs with ≥ US$10b in global assets: ► Risk committee may be maintained at the parent or any US subsidiary (must be at the US IHC when US assets surpass US$50b) Risk ► At least one risk “expert” member required management and B . ► Flexibility on committee structure provided for smaller FBOs (< US$50b in US assets) risk committee ► At least one independent member required to oversee and approve specific elements of the risk framework for all requirements FBOs ≥ US$50b in US assets ► US chief risk officer (CRO) to be appointed for FBOs ≥ US$50b in US assets: ► Required to report jointly to the global CRO and the US risk committee ► Risk data aggregation and reporting on combined US operations ► US BHC integrated capital framework, including leverage requirements, to apply to IHCs ► Participation in the annual capital planning program required for IHCs with ≥ US$50b of US assets Risk-based ► Advanced approaches for Basel III and Basel 2.5 market risk rule required if meeting qualification criteria (includes the capital Advanced Internal Ratings-Based Approach, the Advanced Measurement Approach and, potentially, the Internal Models C. requirements and Methodology) leverage limits ► Potential surcharge for those organizations that are designated as domestic systemically important financial institutions (D-SIFIs ) ► High-quality liquidity asset buffer based on stress testing, including all entities ► Contractual and behavioral cash flow projections for on- and off-balance sheet positions Liquidity ► Stress testing at IHC and material legal entity/line of business levels D. ► Granular liquidity regulatory reporting for aggregate IHC and each material entity requirements ► Contingency funding plans aligned with liquidity stress testing ► Granular liquidity cost allocation based on the nature and risk of positions

Section 165: Key elements of the proposal (cont.) ► US IHCs with assets of ≥ US$50b subject to capital plan final rule and Dodd -Frank stress test requirements (i.e., Comprehensive Capital Analysis and Review) ► US IHCs with assets between US$10b and US$50b subject to Dodd-Frank company-run stress test requirements ► Regulatory reporting and stress test disclosure requirements for IHCs similar to those for US BHCs ► FBOs with combined US assets of ≥ US$50b must demonstrate compliance with consistent home -country stress test Stress testing E . requirements requirements ► Similar requirements for other FBOs and foreign savings and loan holding companies with total consolidated assets of ≥ US$10b ► Failure to meet stress test requirements would result in: (a) either a 105% or 108% asset maintenance requirement for third-party liabilities; (b) annual stress test of any US subsidiary not held under a US IHC; and (c) additional intra-group funding/liquidity restrictions, as applicable ► Single- counterparty credit limits separately applied to FBOs with total consolidated assets of ≥ US$50b, covering combined US operations and the IHC Single- ► Combined US operations of an FBO subject to a single-counterparty limit of 25% of the FBO’s parent’s total F. counterparty regulatory capital ► US IHC subject to a limit for a single counterparty of 25% of the IHC’s total regulatory capital credit limits ► More stringent limit applied to FBOs with combined US assets of ≥ US$500b and to FBOs with consolidated global assets of ≥ US$500b ► If the Financial Stability Oversight Council (FSOC) determines an FBO with consolidated global assets of ≥ US$50b Debt-to-equity “poses a grave threat to the financial stability of the United States”: G . ► Debt-to-equity ratio of no more than 15 to 1 limits ► Asset maintenance requirement of 108% applied on its US branch and agency network ► FBOs with combined US assets of ≥ US$50b will automatically be subject to the remediation standards upon a trigger event; FBOs with < US$50b in US assets will be subject to remediation standards on a case-by-case basis Early H. ► Regime will be divided into four levels of remediation consistent with early remediation for US BHCs remediation ► Framework does not include an explicit quantitative liquidity trigger, which could exacerbate funding pressures for an FBO’s US operations