Foreign Account Tax Compliance Provisions US Hire Act signed into - - PowerPoint PPT Presentation

Foreign Account Tax Compliance Provisions US Hire Act signed into law on March 18, 2010

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Agenda

n Background n Provisions overview n Market impacts n Next Step

Foreign Account Tax Compliance Provisions US Hire Act signed into law on March 18, 2010

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Background

n FATCA: Foreign Account Tax Compliance Act of 2009. Proposal from US Senate.

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To improve control over accounts held by US non-exempt persons through foreign financial institutions as per US congressional hearings about Tax Evasion

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To raise additional revenues to contribute to the “HIRE” program (one of the main proposal from President Obama during the last elections)

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Estimated revenue of about $9 billion over 10 years

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Signed into law by President Obama on March 18, 2010 President Obama Statement on Foreign Account Tax Compliance Act of 2009

October 27, 2009

“I commend Chairmen Baucus and Rangel, and Senator Kerry and Congressman Neal, for moving forward

• n the important task of giving the government the tools it needs to crack down on Americans hiding

their assets in overseas tax havens. A small number of individuals and businesses hide their assets

• verseas solely in order to shirk their responsibilities, even as the vast majority of hard-working Americans

honor the obligations of citizenship and fulfill their responsibilities.”

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Provisions overview

n Increased disclosure of beneficial owners:

The provision adds a new chapter 4 to the Code that provides for withholding taxes to enforce new reporting requirements on specified foreign accounts owned by specified U.S. persons or by U.S.-owned foreign entities. The provision establishes rules for withholdable payments to foreign financial institutions and withholdable payments to other foreign entities.

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Provisions overview

Increased disclosure of beneficial owners

n Definitions: n Withholdable payments: U.S. source fixed and determinable annual or

periodical income (FDAP) as well as any gross proceeds from the sale of any property that produces U.S. source interest or dividends.

n Foreign Financial Institution (FFI): any entity that (1) accepts deposits in the

• rdinary course of a banking business; (2) is engaged in the business of holding

financial assets for the account of others; and (3) is engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such securities, partnership interests, or commodities (including investment vehicles such as hedge funds and private equity funds).

n U.S. account: any account held by one or more specified U.S. persons or U.S.

• wned foreign entities.

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Provisions overview

Increased disclosure of beneficial owners

n Definitions: n Specified U.S. person: any U.S. person, other than a publicly traded

corporation, a corporation that is a member of the same expanded affiliate group

• f a publicly traded corporation, an organisation exemption under section 501(a),

an IRA, the U.S., any political subdivision, a bank, a REIT, a RIC, a common trust.

n U.S.-owned foreign entity: any foreign entity that has one or more substantial

U.S. owner.

n Substantial U.S. owner:

– In the case of a corporation: any specified U.S. person that owns directly or indirectly more than 10% of the foreign corporation’s stock, by either vote or value. – In case of a partnership, owning more than 10% of the profits or capital interests in such partnership.

n

In the case of a trust, any specified U.S. person treated as an owner of any portion of such trust under grantor trust rules.

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Provisions overview

Increased disclosure of beneficial owners

n Withholdable payment to “foreign financial institutions” (FFIs)

n

A deduction of 30% withholding tax on all “withholdable payments” required, unless the FFI enters into a special agreement with the IRS to – Obtain information from each account holders as is necessary to determine which accounts are U.S. accounts – Comply with verification and due diligence procedures with respect to the identification of U.S. accounts – Provide any additional information requested by the IRS – Obtain a waiver from U.S. account holders if reporting of information is prevented by foreign law. The provision applies to U.S. accounts maintained by

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The FFI

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Each other financial institution that is a member of the same affiliated group (unless these members have entered into separate agreements with the IRS)

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Provisions overview

Increased disclosure of beneficial owners

n Reporting:

n

Report annually certain information with respect to any U.S. accounts either – Name, address, TIN, account number of each specified U.S. person and U.S.-owned foreign entity; – Account balance or value; and – Gross receipts and gross withdrawals or payments from the account

• r

– Name, address, TIN, account number of each specified U.S. person and U.S.-owned foreign entity; and – Full 1099 reporting of both U.S. and non-U.S. source income, including gross proceeds

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Provisions overview

Increased disclosure of beneficial owners

n Withholdable payments to other foreign entities (non-financial institutions)

n

A deduction of 30% withholding tax on all “withholdable payments” required, unless – The FFI (the withholding agent) obtains from the foreign entity a certificate that the foreign entity does not have a substantial U.S. owner or provides the FFI with the name, address and TIN of each substantial U.S. owner; and – The FFI does not know or have reason to know that the certification is incorrect – The payments are made to publicly traded corporations, international

• rganisations, or foreign governments or central banks, not covered by the

new provisions because they are thought to pose a low risk of tax evasion.

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Provisions overview

n Repeal of the portfolio exemption for foreign targeted bearer bonds:

Today, interest paid on bearer bonds is considered "portfolio interest". A U.S. issuer would, however, not have to collect any W-8 certification to pay gross. The bill states that interest paid on bearer bonds will no longer qualify under the portfolio interest exemption. The only way to reduce the tax is to rely on the double taxation treaties.

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Provisions overview

n Other provisions:

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Under reporting with respect to foreign assets

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Other disclosure provisions

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Provisions related to foreign trusts

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Dividend equivalent payments received by foreign persons treated as U.S. source dividends

n Sources:

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The general explanations published by the Department of the Treasury in May 2009 http://www.ustreas.gov/offices/tax-policy/library/grnbk09

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The technical explanation to the Foreign Account Tax Compliance Act of 2009 published by the Joint Committee on Taxation on October 27, 2009 http://www.jct.gov/publications.html?func=startdown&id=3596

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Market impacts

n Any Financial Institution having US persons as customer is impacted. n This includes as well Mutual Funds, Hedge Funds and Private Equity Funds

classified as F.F.I.’s. Some other investment vehicles may be excluded (under discussion, in case they would present a law risk of tax evasion)

n Potential high additional costs to comply with this new regulation n Any income payment (even non-US source ones) to be reported to US persons

(e.g. a French source dividend)

n Additional information to collect from final investors n Higher complexity for members of the same affiliated group (unless these

members have entered into separate agreements with the IRS)

n NQI status no a possible alternative.

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Next steps

n Law to be enacted on January 1st, 2013 n IRS to publish guidances n Impact assessment with regards to the currently existing QI regime

Conclusion: BE READY!

Thank you!