www.bermudacaptive.bm
JUNE 2 - 4, 2014
An overview of FATCA
and the implications
for captives
An overview of FATCA and the
implications for captives
Moderator:
•James Berry – Director, KPMG
Panelists:
•Beverley Todd – Executive Vice President, JLT Insurance Management (Bermuda)
Ltd
•Richard E. Irvine – Managing Director, PwC
•Steven Rees Davies – Counsel, Appleby
Disclaimer
ANY TAX ADVICE IN THIS COMMUNICATION OR PANEL DISCUSSION IS NOT INTENDED OR
WRITTEN BY THE PRESENTERS, PARTICIPANTS OR THEIR FIRMS TO BE USED, AND CANNOT
BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i)
AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING,
MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
The information contained herein is of a general nature and based on authorities that are subject to change.
Applicability of the information to specific situations should be determined through consultation with your
tax adviser.
The Road to FATCA
The U.S. federal income
tax system relies on
voluntary compliance by
taxpayers to self-report
their worldwide income
and compute their
income tax.
It is estimated that
hundreds of billions of
dollars of offshore assets
are owned by U.S.
persons and billions of
dollars of taxes are
evaded annually by
U.S. persons holding
offshore accounts.
When voluntary
compliance is augmented
by third-party information
reporting, the IRS is
able to verify
taxpayer compliance.
The Foreign Account Tax
Compliance Act
(“FATCA”) was enacted
on March 18, 2010.
FATCA introduces a
new regulatory
compliance and reporting
regime which compels
certain foreign entities to
disclose U.S. persons
with offshore
“financial accounts”.
FATCA compliance is
compelled by imposing a
withholding tax on
withholdable payments
paid, directly or indirectly,
to foreign financial
institutions (“FFIs”) and
certain other foreign
entities that fail to comply
with FATCA.
FATCA law, notices and regulations
HIRE Act signed into law by U.S. President Obama on
March 18, 2010
Guidance notices
■ Notice 2010-60: preliminary guidance issued August 27, 2010
■ Notice 2011-34: additional guidance issued April 8, 2011
■ Notice 2011-53: more guidance issued July 14, 2011
Proposed Regulations: Issued February 8, 2012
Final Regulations: Issued January 17, 2013
Bermuda Model II IGA: December 2013
Temporary Regulations: Issued February 20, 2014
FATCA – Highlights
Payments to a Foreign
Financial Institution (FFI) is
subject to 30% withholding
on the following
"withholdable payments":
1) US source interest,
dividends, and similar
income (FDAP), and
2) Gross proceeds from
sale or other disposition
of property that could
generate US source
interest or dividends.
30% withholding is not
required if:
1) The FFI has entered
into an “FFI
Agreement” with the
IRS to identify and
report “US accounts”,
2) The FFI is deemed
compliant, or
3) FFI is an exempted
payee.
FATCA requires punitive
30% withholding on
withholdable payments
to Non-Financial Foreign
Entities (NFFE) that
fail to:
1) Disclose substantial
US owners, or
2) Certify that no
substantial US owners
exist.
What is a Foreign Financial Institution?
An FFI is any non-US entity that does the following:
1. Accepts deposits in the ordinary course of business;
2. Holds financial assets for the benefit of others as a substantial portion of its business;
3. Is an investment entity;
4. Is a specified insurance company; or
5. Is an entity that is a holding company or treasury center.
To what payments does FATCA apply?
Payments subject to FATCA withholding
Generally, FATCA withholding applies to:
“Withholdable Payments”:
– Beginning July 1, 2014, U.S. source investment income (“FDAP” – interest,
dividends, royalties, rents, etc.) and
– Beginning January 1, 2017, gross proceeds from the sale or exchange of U.S.
assets that produce U.S. source interest and dividends.
– Withholdable payments do include insurance and reinsurance premiums.
Alternative regime to FATCA:
Inter-Governmental Agreement (IGA)
•
Governments support FATCA goals but legal impediments prevent compliance
•
Alternative approach to FATCA created where countries (FATCA partners)
Final
Regulations
would enter into Intergovernmental Agreement (IGA)
•
Alternative regime based on automatic exchange authorized in
existing bilateral tax treaties
•
Model 1
IGAs
Model 2
IGAs
IGA Regime
Model 1 IGAs
–
Any FFI that is resident in a Model 1 IGA Partner Country will be governed by the terms of the
IGA in effect with that country and implementing laws and regulations adopted by that country.
Model 2 IGAs
– FFIs will be required to implement FATCA as prescribed by the FATCA Regulations, except to
the extent expressly modified by the relevant IGA.
– FFI will seek consent from account holders to supply information to the IRS.
– Where consent is not granted, the FFI will provide aggregate information to the IRS with respect
to non-consenting investors.
– The IRS may then make further information requests to the Model 2 IGA Partner Country’s
government based on the aggregate information.
Regulations vs. IGA requirements
FATCA regulations
Model 1 IGA
Model 2 IGA
PFFI
Registered
DCFFI
Certified
DCFFI
EBO
Reporting FI
Reporting FI
Registration
Yes
Yes
No
No
Yes*
Yes
Self-certification (e.g., Form
W-8 BEN-E or Form W9)
Yes
Yes
Yes
Yes
Yes
Yes
New Account Due Diligence
Yes
Depends
Generally,
no
No
Yes
(per IGA rules)
Yes
(per IGA rules)
Preexisting Account
Remediation
Yes
Depends
Generally,
no
No
Yes
(per IGA rules)
Yes
(per IGA rules)
Withholding against NPFFIs,
Recalcitrant Account Holders
Yes
Depends
No
No
Generally, No
Generally, No
Reporting
Yes
Depends
No
No
Yes
(locally)
Yes
(to IRS)
Yes
(consent to report
per IGA rules)
Yes
Address Legal Impediments
to Compliance (i.e., account
closure, transfer or blockage)
Yes
Depends
No
No
Generally,
no
Governance
Yes
Yes
No
No
Yes
(if required locally)
* Each Reporting FI that is tax resident in a Model 1 Partner Country must comply with the registration requirements of the relevant Model 1 IGA.
Non-Financial Foreign Entity
-
A “Non-Financial Foreign Entity” (“NFFE”) is any foreign entity that is not a Financial
Institution
-
A NFFE is treated as a “Passive NFFE” unless:
-
Less than 50 percent of the NFFE’s assets held during the preceding calendar year
are assets that produce passive income
-
The stock of the NFFE (or a Related Entity) is publicly traded
-
NFFE is a holding company for subsidiaries engaged in businesses (other than
the business of a Financial Institution), and the NFFE does not function as an
investment fund
-
The entity is an “Excepted NFFE” as described in U.S. Treasury Regulations
-
The entity elects to be a Direct Reporting NFFE
Non-Financial Foreign Entity (cont’d)
-
A Passive NFFE must provide documentation regarding its “Controlling
Persons” in order to avoid FATCA withholding on withholdable payments
(including U.S. insurance premiums)
- Account held by a Passive NFFE with U.S. Controlling Persons is treated
as a U.S. Account for FATCA purposes
-
Treasury Department and the IRS have issued regulations to create new
FATCA classifications to facilitate FATCA administration for Passive NFFEs
- Direct Reporting NFFE – An NFFE that elects to register with the IRS,
obtain a GIIN, and (if necessary) report information regarding U.S.
Controlling Persons directly to the IRS
- Sponsored Direct Reporting NFFE – Sponsor agrees to undertake FATCA
administration on behalf of Direct Reporting NFFE
FATCA timeline – Foreign financial institutions
July 1, 2014
A
• New account due diligence/
identification begins
E
January 17, 2013
Final FATCA
regulations released
C IRS portal
anticipated to
open
G • Tax return reporting
• Grandfathered Obligations:
Payments on certain
obligations outstanding on
7/1/14 are exempt from
FATCA withholding **
Summer/Fall 2013
March 15, 2016
March 15, 2015
• FATCA withholding begins
on U.S. source FDAP payments
to new account holders
identified as NPFFIs,
recalcitrants, and Passive
NFFEs with undisclosed
Substantial U.S. Owners
J • Annual tax return
begins (Form 1042)
• Information return
reporting begins
(Forms 1042-S)
March 31, 2015
Form 8966 reporting
for 2014 on Substantial
U.S. Owners of
Passive NFFEs & all
U.S. owners of ODFFI
accounts identified by
December 31, 2014
• FFI Agreement becomes
effective
2013
2014
Spring 2014
B
July 12, 2013
Revised Model
IGAs and
accompanying
annexes released
D
F
April 25, 2014
Last date to register
with IRS to ensure
inclusion on FFI List
(safe harbor)
June 2, 2014
FFI List published by
IRS List
reporting (Form 1042)
• Annual information
reporting (Forms 042-S)
• Reporting of foreign
reportable amounts to
NPFFIs begins
March 31, 2016
Annual Form 8966 reporting
August 31, 2016
Due date for
L Responsible Officer
due diligence
certifications (unless
previously submitted)*
2015
Deadline for FFIs
to complete
remediation on
preexisting entity
accounts held by
Prima Facie FFIs
(begin
withholding)*
I
H
on certain gross proceeds
payments to noncompliant
accounts
• FATCA withholding begins
on foreign passthru payment
(or 6 months after
publication of regulations
defining term, whichever is
later)
June 30, 2015
Deadline for FFIs to
complete remediation
on preexisting
high-value accounts*
K
2017
December 31, 2016
Final date for FFIs to
qualify for Limited
Branch & Limited FFI
Status
June 30, 2018
P Deadline for
Responsible
Officer to file
certification for
First
Certification
Period
• For qualified collective
investment vehicles, date by
which policies aim to redeem
or immobilize Bearer
Interests
2016
December 31, 2015
December 31,
2014
January 1, 2017
N • FATCA withholding begins
M Final Day of Transitional Rule
2018
O
March 15, 2017
• Annual tax return
reporting (Form 1042)
treating U.S. source FDAP payment
paid by non-intermediaries on
• Annual information
offshore obligations as excluded from
reporting (Forms
definition of “withholdable payment”
1042-S)
June 30, 2016
Deadline for FFIs to complete
remediation on preexisting
accounts, other than Prima Facie
FFIs and high-value accounts
(begin withholding)*
* These dates assume that the PFFI’s FFI agreement is approved by the IRS and effective on July 1, 2014
** Payments treated as dividend equivalents, under section 871(m), may be treated as Grandfathered up to 6 months after the publication of regulation implementing 871(m)
Payments treated as foreign passthru payments may be treated as Grandfathered up to 6 months after the publication of implementing regulations
• Reporting of foreign
reportable amounts to
NPFFIs ends
March 31, 2017
Annual Form 8966
reporting