FATCA's Impact on the Fund Industry
Mary Burke Baker, Government Affairs Advisor, Washington D.C.
Joel D. Almquist, Partner, Boston
October 19, 2012
Copyright © 2012 by K&L Gates LLP. All rights reserved.
Copyright © 2012 by K&L Gates LLP. All rights reserved.
FATCA in Fewer than Fifty Words
 What: Foreign Account Tax Compliance Act
 Why:
Deter offshore tax evasion
 Who:
Foreign financial institutions (FFIs),
non-financial foreign entities (NFFEs)
 How:
Tell the IRS about US accounts or
30% withholding tax on US-source income
 When: 2013 information reporting,
2014 withholding
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Fast FATCA Facts
 Who is an FFI?
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Bank
Custodian or Broker-Dealer
Investment Vehicle
Insurance Company
Who is an NFFE?
 Other than an FFI
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Fast FATCA Facts
 If you have US-source payments, you need to care
about FATCA
3
Fast FATCA Facts
Carrot: Foreign financial institutions (“FFIs”)
agree to tell the IRS about their US accounts;
non-financial foreign entities (“NFFEs”) agree
to tell withholding agents about their
substantial US owners
Stick: 30% withholding tax on all
“withholdable payments”
4
FATCA Timeline
 Enter into FFI Agreement with IRS:
 Due diligence for individual pre-existing accounts:
 Due diligence for entity accounts:
June 30, 2013
June 30, 2015
June 30, 2015
 June 30, 2014 for high value accounts and “prima facie” FFIs
 Information reports for 2013 to IRS:
Sept. 30, 2014
 Name, address, TIN, acct. number & balance
 Information reports for 2014 to IRS:
March 31, 2015
 Same type of information as 2013 reports
 Information reports for 2015 to IRS:
March 31, 2016
 Same as 2013/2014, plus account income
Information reports for 2016 to IRS:
March 31, 2017
 Same as 2015, plus gross proceeds
5
Specified
US Person
Investment Vehicle: any
entity that is engaged (or
holding itself out as being
engaged) primarily in the
business of investing,
reinvesting, or trading in
securities, partnership
interests, commodities,
notional principal
contracts, insurance or
annuity contracts, or any
interest (including a futures
or forward contract or
option) in any of these
US-Owned
Foreign Entity
Non-US
Account Holder
Deemed-Compliant
Entity
Financial
Account
FFI:
Non-US
Bank/Custodian/Broker
Investment Vehicle
Insurance Company
Gross
proceeds
from sales
Dividends
US
Stock
Bank: any entity that accepts
deposits in the ordinary course of a
banking or similar business
Custodian / Broker-dealer: any
entity that holds, as a substantial
portion of its business, financial
assets for the account of others
Interest
US
Bond
Insurance Company: any entity
that is an insurance company (or
the holding company of an
insurance company) that issues or
is obligated to make payments with
respect to any financial account
6
Highlights of Proposed Regulations
 Deemed-compliant entities
 Due diligence procedures
 Verification procedures
 Phase-in of withholding, passthru payments
 Phase-in of information to be reported
 Legal barriers to compliance
 Grandfathered obligations
7
Highlights of Proposed Regulations:
Deemed-Compliant Entities
 Deemed-compliant entities divided into 2 broad categories:
 Certified: involves certification to withholding agent, no
direct IRS oversight or registration
 Registered: must register with IRS and undertake due
diligence
 New types of registered deemed-compliant entities
 Qualified collective investment vehicle
 Restricted fund
8
Highlights of Proposed Regulations:
Due Diligence Procedures for FFIs
 Individual accounts
 ≤ $50,000 exempt ($250,000 for annuities/insurance)
 New accounts: Generally rely on AML/KYC
 Preexisting accounts: Search for US indicia
 $50,000 - $1 million: electronic search
 Over $1 million: electronic and paper record search
 Generally must complete by June 30, 2015
 Aggregation rules apply, including when relationship
manager has knowledge
9
Highlights of Proposed Regulations:
Due Diligence Procedures for FFIs (continued)
 Entity accounts
 ≤ $250,000 exempt
 In general, must determine status of account holder
by June 30, 2015
 June 30, 2014 for “prima facie FFIs”
 Exceptions provide more time in specific situations
 Special focus on “passive NFFEs”
 For preexisting accounts $250,000 to $1 million, rely
on AML/KYC
 For accounts > $1 million, need certification
10
Highlights of Proposed Regulations:
Verification
 FFI agreement with IRS by June 30, 2013
 FFI agreement will specify verification requirements
 FFI may rely on third parties to perform due diligence,
but FFI ultimately responsible
 Third party audits not required
 “Responsible officer” must certify compliance to IRS
 Non-compliance may trigger additional IRS scrutiny
 But no strict liability: high threshold before kicked out of
program
11
Highlights of Proposed Regulations:
Due Diligence Procedures for
Withholding Agents
 Withholding agent determines payee’s “chapter 4 status”
 For example, as non-US individual or participating FFI
 Generally look through offshore partnership to partners
 For payments before 2017, withholding agent may
generally supplement existing documentation
 For example, request FFI-EIN to supplement Form W-8
 New IRS Forms W-8BEN and W-8BEN-E
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Highlights of Proposed Regulations:
Phase-in of Information to be Reported
 September 30, 2014: Reports due for 2013
 March 31, 2015: Reports due for 2014
 For 2013 and 2014, report only name, address, TIN, account
number, and account balance
 March 31, 2016: Reports due for 2015
 In addition to above, also report income
 March 31, 2017: Reports due for 2016
 In addition to above, also report gross proceeds
13
Highlights of Proposed Regulations:
Phase-in of Withholding, Passthru Payments
 Starting in 2014: Withholding on payments of US-source passive
income
 “Fixed and determinable annual or periodical” or “FDAP” income
 Starting in 2015: Withholding on gross proceeds
 No withholding on “foreign passthru payments” until January 1, 2017
at earliest
 But reporting required on “foreign reportable amounts” made in
2015 and 2016
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Highlights of Proposed Regulations:
Phase-in of Withholding, Passthru Payments
 FFI must withhold 30% from any “passthru payment” to recalcitrant
account holder or non-participating FFI
 Withholdable payment
 “Foreign passthru payment”: not yet defined
 Rather than withholding on passthru payments to its accountholders,
FFI can elect for its payors to withhold on portion of payments to FFI
15
Highlights of Proposed Regulations:
Legal Barriers to Compliance
 In general, FFI cannot comply with FATCA unless all members of its
expanded affiliated group also comply
 However, this rule prevents any FFI from coming into the
system if even one of its affiliates cannot because of local law
restrictions
 Regulations provide 2 years for all members to come into
compliance
 In meantime, restrictions apply to these affiliates, referred to as
“limited FFIs” and “limited branches”
16
Highlights of Proposed Regulations:
Grandfathered Obligations
 No withholding on payments on, or gross proceeds from disposition
of, “grandfathered obligations”
 Grandfathered obligation: any obligation outstanding on January 1,
2013
 Had been March 18, 2012
 More detail on definition of “obligation”
 Debt instrument under tax principles
 Revolving credit facility or line of credit
 Certain life insurance and annuity contracts
 Confirmation under ISDA master agreement
 But not equity or if lacks stated expiration or term
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“All generalizations
are false, including
this one.”
Mark Twain
18
Intergovernmental Agreements
19
Intergovernmental Agreement #1
 Framework announced same day as proposed regulations
 US, UK, France, Germany, Italy and Spain agreed to
“explore” alternative way to comply with FATCA
 Model agreement released July 26, 2012
 FFI reports FATCA information to home country, not IRS
 Home country shares information with IRS
 May or may not include reciprocity
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Intergovernmental Agreement #2
 Evolved out of IGA #1
 Some countries don’t want the expense and the burden of collecting,
housing and sharing FATCA information
 FFIs would report directly to IRS under the aegis of their home
country
 Home country coordinates with IRS to share information on
recalcitrant account holders so FFIs don’t have to close those
accounts
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Intergovernmental Agreements
 Way to overcome legal barriers to FATCA compliance
 Privacy laws
 Other jurisdictional restraints
 Potentially less burden on FFIs
 No requirement to withhold on or close recalcitrant
accounts
 Avoid direct FFI contact with IRS
 Consistent with Treasury and OECD strategy to increase
transparency and information sharing among countries
22
Intergovernmental Agreements
 Uncertainty for FFIs in possible IGA countries
 Potentially more burden for FFIs in multiple jurisdictions
 Different rules in regulations and each IGA
 IGAs will take longer than final regulations, unclear how
Treasury will coordinate timelines, due dates
 Concerns about security and use of information
 Will Capitol Hill go along?
 Can IRS administer?
23
Intergovernmental Agreements
 IGA signed with UK
 In consultation status
 Draft legislation by end of 2012
 Plans to include in Finance Bill 2013
 Reporting and systems requirements not finalized
 Registration process not finalized
 IGA and statute may not cover all the details
 Definitions of income may differ between US and UK
 FFIs could elect to follow regulations, not IGA
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What FFIs are Facing
 No final rules yet … expected this fall
 IGAs may give a hint of changes in final regulations
 Intergovernmental agreements in progress and growing global interest
 No FFI agreement
 Draft forms
 Several iterations of preliminary guidance
 Proposed regulations in February, 2012
 Will Treasury postpone FATCA?
25
Potential Effects of FATCA on Clients
 Additional documentation during intake process
 Concerns about being reported to IRS – both from US and non-US
persons
 Concerns about accurate reporting to the IRS
 “False-positives” from IRS information matching
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What Should FFIs Be Doing?
 Implementation strategy should be underway
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Are you an FFI? Deemed compliant? NFFE?
Understand FATCA obligations
FFI Agreement, including responsible officer
Customer due diligence/verification procedures
Review and update contracts
Review and update intake procedures
Review and update AML/KYC procedures
Systems programming
Withholding procedures
Reporting procedures
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What should U.S. Persons Be Doing?
 IRS Form W-8BEN-E (used for non-U.S. entities)
 Form went from one page to six pages
 24 different categories of FATCA status included on the Form,
plus “not applicable”
 Burden on both non-U.S. entity to complete and U.S. person to
make sure it is correct and complete (is facially correct
enough?)
 When will draft be finalized?
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What should U.S. Persons be doing?
 FATCA Risk Allocation
 Loan Agreements
 ISDA
 Approaching FATCA as a U.S. person, be sure FATCA is accounted
for in any agreement (including any gross up/indemnity provisions)
 A foreign financial institution that does not join the information
sharing program raises FATCA issues.
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FATCA Risk Allocation in Lending Transactions

Assume obligation is not grandfathered

Are there any cross-border parties?

What if the loan is transferred?

Gross up risks for U.S. and participating FFI obligors

Withholding risks for participating and non-participating FFI
lenders

Withholding burden on participating FFI agents with respect to
non-participating FFIs

Loan Syndication and Trading Association, Inc. (LSTA) Model
Credit Agreement Provisions
30
FATCA Risk Allocation in Lending Transactions

LSTA Model Credit Agreement provisions revised for FATCA

Remove FATCA from “indemnified tax”

Exclude FATCA taxes from gross-up/indemnity

Define FATCA to include statutory provisions as of the date of the
agreement or any amended or successor version

Borrower is not required to compensate lender for increased costs
resulting in a change of law relating to FATCA

Lender must comply with FATCA forms provision
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FATCA Risk Allocation in ISDAs

In August 2012, ISDA released a new protocol relating to the effect of FATCA
on ISDA derivatives

Protocol proposes a standardized set of amendments to the ISDA Master
Agreement that can be automatically adopted by a participant in the swap
market

Rather than adopting the protocol, parties can address FATCA and amend
their Master Agreements on a bilateral basis.

ISDA derivatives entered into during years prior to and including 2012 are
grandfathered

Need to address FATCA in any new transactions after December 31, 2012

Under ISDA FATCA protocol, payee bears the risk of any FATCA withholding
tax

FATCA withholding is not an “indemnifiable tax” under protocol
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Questions?
Mary Burke Baker
mary.baker@klgates.com
202.778.9223
Joel Almquist
joel.almquist@klgates.com
617.261.3104
Roger Wise
roger.wise@klgates.com
202.778.9023
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Internal Revenue Code or (ii) promoting,
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transaction or matter addressed within.
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