International Reporting:
Schedule UTP, FBAR, & FATCA
57th Texas CPA Tax Institute
November 15-16, 2010
Richardson & San Antonio, Texas
Presentation by:
Todd Welty, Partner, Dentons, Dallas
todd.welty@denonts.com
Locations
November 15-16, 2010
Dentons US LLP
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Offices by list
Key
Canada
United States
Europe
Central and
Eastern Europe
l
Offices
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Calgary

Atlanta
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Bratislava

Associate offices
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Edmonton

Boston
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Berlin
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Bucharest

Facilities
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Montréal
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Chicago
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Budapest
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Associate firms
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Istanbul
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Toronto
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Kansas City
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Madrid
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Prague
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Vancouver
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Los Angeles
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Paris
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Warsaw
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Miami
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Zurich
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New Orleans
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New York
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Phoenix
+ Special alliance firms
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San Francisco
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Short Hills
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Silicon Valley
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St. Louis
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Accra
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Algiers
Amman
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Bissau
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Bujumbura
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Cairo
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Cape Town
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Kuwait City
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Casablanca
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Manama
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Dar Es Salaam
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Muscat
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Johannesburg
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Kampala
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Kigali
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Luanda
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Lusaka
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Maputo
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Nairobi
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Moscow
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Praia
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Washington, DC
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Dentons US LLP
Middle East
Abu Dhabi
Asia Pacific
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Beijing
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Hong Kong
Beirut
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Shanghai
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Doha
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Singapore
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Dubai
Riyadh
+ Lagos
United Kingdom
November 15-16, 2010
Africa
London
Milton Keynes
Russia and CIS
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Central Asia
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Almaty
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Ashgabat
São Tomé
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Baku
Tripoli
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Tashkent
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Background
The government has prioritized international tax issues:
• IRS increased resources to international tax issues (e.g., 2009
voluntary disclosure program, new LB&I division).
• DOJ increased prosecutions of civil and criminal tax fraud.
• Congress increased the civil penalty for willful violations of FBAR
reporting.
November 15-16, 2010
Dentons US LLP
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Outline of Presentation
Information exchange is key to IRS strategy:
• Schedule UTP for disclosing uncertain tax positions
• IRS Voluntary Disclosure Initiative and FBAR reporting
• FATCA legislation imposing reporting and withholding requirements on
certain financial institutions
November 15-16, 2010
Dentons US LLP
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Schedule UTP
• Until recently, taxpayers were required to make disclosures under limited
circumstances.
• In late 2010, the IRS significantly broadened taxpayer reporting
requirements by issuing Schedule UTP to require certain corporations to
report uncertain tax positions.
November 15-16, 2010
Dentons US LLP
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Purpose
• To “identify potential noncompliance more efficiently and target [IRS]
resources more effectively.”
• “Our Schedule UTP needs also to be viewed as part of a major
restructuring of the relationship with large corporate taxpayers.”
• Commissioner Shulman
November 15-16, 2010
Dentons US LLP
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Goals of Schedule UTP
• According to Commissioner Shulman, the goals of the reporting are:
1) to create certainty sooner for taxpayers;
2) cut down the time it takes the IRS to find issues and complete an audit;
3) ensure that both the IRS and the taxpayer spend more time discussing the
law and less time looking for information;
4) help the IRS prioritize the taxpayers for examination;
5) help the IRS identify and prioritize the issues during audit and for
developing further guidance; and
6) obtain key information regarding uncertain positions “without getting into
the heads of the taxpayers or their advisors, as it relates to quantifying risk.”
November 15-16, 2010
Dentons US LLP
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Filing Requirements
• Schedule UTP requires reporting of U.S. Federal income tax positions
taken by certain corporations on the return for which either:
1) the taxpayer (or a related entity) has recorded a reserve in its financial
statements with respect to that position, or
2) the taxpayer has not recorded a tax reserve because the taxpayer expects
to litigate the position
• Applicable to tax years beginning in 2010
• Requires a “concise description of each uncertain tax position”
• Must provide the primary Code sections relating to the position
• Requires ranking of tax positions
November 15-16, 2010
Dentons US LLP
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Corporations Required to File
• Originally, “certain corporations” meant those with assets in excess of
$10 million had to file beginning with 2010 tax years
• IRS phased-in implementation:
• 2010: Corporations with assets in excess of $100 million
• 2012: Corporations with assets in excess of $50 million
• 2014: Corporations with assets in excess of $10 million
• Asset threshold test includes world-wide income.
• An affiliated group of corporations filing a consolidated return will file for
the group and need not identify the member of the group to which the
position relates.
November 15-16, 2010
Dentons US LLP
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IRS Original Proposal
Originally proposed more burdensome requirements:
• Concise description also required:
1) statement that the position involves an item of income, gain, loss,
deduction, or credit against tax;
2) statement whether the position involves a determination of the value of
any property or right, or a computation of basis, &
3) rationale for the position and the reasons for determining the position is
uncertain.
• Calculation of the maximum tax amount for which the taxpayer could be
liable if the position were challenged.
November 15-16, 2010
Dentons US LLP
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Comments Received
• IRS requested and received numerous comments to the proposed Form:
– Criticized the uncertainly surrounding the adequacy of the concise statement,
– Requested the Service reduce the level of detail required,
– Opposed the additional requirements to the concise description
• Privilege issues
• Greater burden than an audit
– Recommended statement regarding penalties,
– Requested the Service exclude certain types of tax positions,
– Requested the Service eliminate expectation to litigate requirement.
November 15-16, 2010
Dentons US LLP
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Final Schedule UTP
“Concise Description” Requirement
• The “concise description of each uncertain tax position” must include:
̶ a description of the relevant facts affecting the tax treatment of the position
and
̶ information that reasonably can be expected to apprise the IRS of
• the identity of the tax position and
• the nature of the issue.
November 15-16, 2010
Dentons US LLP
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Final Schedule UTP
“Concise Description” Requirement, cont.
• “In most cases, the description should not exceed a few sentences.”
• A statement that the concise description is “available upon request” is
inadequate.
• Need not include “an assessment of the hazards of the tax position or an
analysis of the support for or against the tax position.”
• Did not incorporate the rationale or the nature of the uncertainly
requirements originally proposed.
November 15-16, 2010
Dentons US LLP
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Final Schedule UTP
Sample Concise Descriptions
• The Service provided three sample concise descriptions and
accompanying hypothetical facts in the Schedule Instructions.
• One or two sentences describe the transaction and another states the
issue.
• Final Examples contain less detail than those originally proposed.
• Example #11 of the Final Instructions provides:
̶
“The corporation is a member of Venture LLC, which is treated as a U.S.
partnership for tax purposes. The corporation received a cash distribution
during the year from Venture LLC. The issue is the potential application of
section 707(a)(2) to recharacterize the distribution as a sale of a portion of the
corporation’s Venture LLC interest.”
November 15-16, 2010
Dentons US LLP
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Final Schedule UTP
Administrative Tax Positions
• The Final Schedule dropped the reporting of administrative practice tax
positions.
• This required the corporation to report tax positions for which no reserve
was recorded because the corporation determined it was the Service’s
administrative practice not to raise the issue in examination.
• Concerns about the administration of this requirement outweighed the
value of the information.
• Service is exploring other ways to assess the impact of these tax
positions on overall tax compliance.
November 15-16, 2010
Dentons US LLP
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Final Schedule UTP
Ranking Requirement
• The Final Schedule dropped the maximum tax adjustment for each
position listed.
• The calculation was replaced with a ranking requirement:
– Taxpayers must rank the positions in the order based on the tax reserve.
– Does not require disclosure of the actual amounts of the tax reserve.
November 15-16, 2010
Dentons US LLP
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Final Schedule UTP
Ranking Requirement
• No specific instructions regarding penalties.
• Possibility of opening an examination or making another type of taxpayer
contact.
• IRS is reviewing the potential applicability of penalties for failing to file.
• Possible legislation to impose a specific penalty for failure to file or
disclose.
November 15-16, 2010
Dentons US LLP
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Final Schedule UTP
Duplicate Reporting
• Section 6662
– Treated as if the corporation filed a Form 8275 or 8275-R.
– Separate disclosure unnecessary.
• Possible coordination with Form 8886.
• Schedule M-3, Net Income (Loss) Reconciliation for Corporations.
November 15-16, 2010
Dentons US LLP
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Final Schedule UTP
Privilege & Policy of Restraint
• Schedule UTP does not affect the policy of restraint.
• Shuman: IRS is not seeking legal analysis of risk, but information.
• IRS will not seek privileged documents even if a taxpayer disclosed the
document to a financial auditor as part of an audit.
• IRS reserves the right to assert privilege waiver if the taxpayer has
engaged in any activity or taken any action other than providing
privileged documents to an independent auditor.
• IRS reserves the right to request tax accrual workpapers under IRM
4.10.20.3 when unusual circumstances exist or the taxpayer has claimed
the benefits of one or more listed transactions.
November 15-16, 2010
Dentons US LLP
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Remaining Issues
Taxpayer Concerns
• Uncertainly surrounding the adequacy of the “concise description.”
• No guidance for determining an “expectation to litigate.”
̶
No exception for CAP participants.
̶
Gauging the possibility of settlement.
• IRS use of the information and how reporting will impact future audits,
appeals, amended returns, and other controversy matters with the IRS.
• Substantiating uncertain positions with tax preparers and preparer
penalties.
• Release of information to foreign governments.
• Potential impact failure to file has on statute of limitations for tax return
and securing a refund.
• State filing requirements
November 15-16, 2010
Dentons US LLP
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Other Important Initiatives
• CAP: Service is expanding CAP to make it permanent. Guidance is
expected to be released shortly.
– Three phases:
• Pre-CAP: allows taxpayer to become current on audit cycle and provides a defined path to get into
CAP.
• CAP: resembles existing pilot program.
• CAP Maintenance: calls for reduction of resources & taxpayer contact.
• Fast Track Appeals
– Expanding resources for more fast track cases, allowing every taxpayer the
opportunity.
– Reduces the cycle time by allowing the examiner to close the case when
placed on Fast Track.
November 15-16, 2010
Dentons US LLP
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Voluntary Disclosure Program
• IRS encouraged taxpayers to disclose previously undisclosed offshore
accounts, file FBARs, and resolve tax
• Potentially avoid criminal prosecution
• October 15, 2009 deadline & uncertainties for late filers
• Penalty structure
November 15-16, 2010
Dentons US LLP
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UPDATE: Commissioner’s Statement
• Released Nov. 16, 2010:
̶
Announced the withdrawal of the John Doe Summons in the UBS AG matter.
• Attributable to the success of the Service obtaining the account holder information under the
August 2009 agreement with Swiss government and UBS.
̶
The Commissioner provided an update on the voluntary disclosure program
and the UBS agreement.
November 15-16, 2010
Dentons US LLP
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UPDATE: Commissioner’s Statement
• Voluntary Disclosure Program
̶ Approximately 15,000 voluntary disclosures from individuals before the VDP
program ended.
̶ Additional 3,000 disclosures after the program closed.
̶ Average of $200,000 in tax collections per case, including back taxes, interest,
and penalties.
• UBS AG Agreement
̶ IRS has received 4,000 UBS treaty-request accounts thus far.
̶ Anticipates more after the remaining accounts are decided by the Swiss
Federal Administrative Court—somewhere close to 7,500.
November 15-16, 2010
Dentons US LLP
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UPDATE: Commissioner’s Statement
• IRS is scouring the vast quantity of data received from VDP applicants
and other sources.
• Information has proved invaluable in corroborating prior leads and
developing new leads, involving numerous banks, advisors, and
promoters from around the world.
• IRS has additional cases and banks in its sights now. “[T]his has never
been about one bank or one country.”
• Commissioner promised that there was “more to come,” and this was
“just the start.”
• “[W]e are sending a clear message to taxpayers that we are serious
about tax compliance.” “[C]ombating international tax evasion will
continue to be a top priority.”
November 15-16, 2010
Dentons US LLP
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FATCA
• Foreign Account Tax Compliance Act (FATCA): included in the Hiring
Incentives to Restore Employment Act of 2010 (HIRE) (enacted Mar. 18,
2010), codified at 26 U.S.C. §§ 1471-1474.
• Shulman characterized FATCA as the “most important international
information reporting legislation enacted in a generation.”
• FATCA impacts investors, foreign financial institutions, investment and
mutual funds, American expatriates, and issuers of non-publicly traded
debt and equity.
November 15-16, 2010
Dentons US LLP
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Purpose
• Prevent the abuse of rules U.S. tax evaders on U.S.-source investment
income through accounts with financial institutions located in tax havens
and increase transparency with respect to reporting and withholding.
• Shulman: FATCA provided the agency with the tools to crack down on
U.S. persons “hiding assets overseas” by:
̶ (1) increasing information reporting by U.S. persons with offshore assets
through imposition of stiff penalties for failure to comply;
̶ (2) requiring foreign financial institutions to disclose information regarding their
U.S. investors or face increased withholding on their U.S. income and gains;
and
̶ (3) ramping up the stakes for foreign financial institutions that have to agree to
disclose U.S. investors to the IRS or feel the pain of a substantial new
withholding tax on U.S. income and gains.
November 15-16, 2010
Dentons US LLP
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Key Provision: Withholding
• A “withholding agent” must withhold 30% from any “withholdable
payment” to a “foreign financial institution” (“FFI”) and certain “nonfinancial foreign entities” (“NFFEs”).
• These requirements also apply to each FFI that is a member of the same
“expanded affiliated group” as the FFI.
November 15-16, 2010
Dentons US LLP
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Definitions
• A “withholding agent” = person having the control, receipt, custody,
disposal or payment of any withholdable payment.
• A “withholdable payment” = payment of U.S.-source fixed or
determinable annual or periodical (FDAP) income (e.g., interest,
dividends, and rents), and any gross proceeds from the sale or
disposition of property which can produce U.S.-source interest or
dividends, not effectively connected with the conduct of a U.S. trade or
business.
• “FFI”= any “financial institution” that is neither a U.S. person nor
organized under the laws of a US possession.
̶ A “financial institution” = entity that accepts deposits in the ordinary course of
a banking or similar business; as a substantial portion of its business, holds
financial assets for the account of others; or is engaged primarily in the
business of investing, reinvesting, or trading in securities, partnership interests,
commodities, or interests therein.
November 15-16, 2010
Dentons US LLP
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Definitions, cont.
• An “expanded affiliated group”= Code § 1504(a) affiliated group of
corporations, but connected by stock ownership of more than 50% by
vote and value, and including Code § 801 insurance companies and
foreign corporations.
̶ Any non-corporate entity is considered a member of the expanded affiliate
group if any member of the group holds, directly or indirectly, more than 50%
of the value of the interests in that non-corporate entity.
November 15-16, 2010
Dentons US LLP
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Exception to Withholding
Secretary Agreement
• The general rule of section 1471 is inapplicable when the FFI has
entered into an agreement with the Secretary under which the FFI
agreed to comply with certain reporting and withholding requirements
(“Secretary Agreement”).
• FFIs with a Secretary Agreement are “Qualified-FFIs” (QFFIs).
November 15-16, 2010
Dentons US LLP
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Exception to Withholding
Obligations Under the Agreement
The FFI must agree to:
• Obtain information
• Verification and due diligence
• Annual reporting
• Comply with requests for additional information
• Withhold 30% from any passthrough payment
• Obtain a waiver
November 15-16, 2010
Dentons US LLP
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Exception to Withholding
Annual Reporting under the Agreement
• In respect of U.S. owned accounts, the following must be reported
annually:
– Name, address, and TIN of each account holder that is a specified U.S.
person
– Name, address, and TIN of each substantial U.S. owner of any account holder
that is a U.S. owned foreign entity
– Account number
– Account balance or value
– Gross receipts and gross withdrawals or payments from the account.
November 15-16, 2010
Dentons US LLP
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Withholding Regime Before FATCA
• Prior information reporting and withholding rules were difficult to enforce.
• FFIs acting as intermediaries were generally required to provide
withholding agents with documentation establishing each account
holder’s exemption from withholding or eligibility for a reduced
withholding rate (e.g., IRS Form W-9 or W-8).
• FFIs with reporting and withholding agreements were not required to
provide documentation to the withholding agent if it could determine for
itself and certify that the account holder was exempt or otherwise
ineligible for a reduced rate.
November 15-16, 2010
Dentons US LLP
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Effective Dates
• Payments made after December 31, 2012.
• No amount is required to be deducted or withheld under FATCA from any
payment under, or from the gross proceeds on any disposition of, an
obligation outstanding on March 18, 2012.
– Applies to obligations issued only after March 18, 2012.
November 15-16, 2010
Dentons US LLP
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Withholding Payments to NFFEs
General Rule
• A withholding agent must withhold a tax equal to 30% of any
withholdable payment to a Non-Foreign Financial Entity (“NFFE”) where
the beneficial owner of the payment is a NFFE.
November 15-16, 2010
Dentons US LLP
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Withholding Payments to NFFEs
Exceptions
• The general rule does not apply if the NFFE provides withholding agent
with:
– (1) the name, address, and TIN of each substantial U.S. owner of the NFFE,
or
– (2) a certification that the NFFE does not have a substantial U.S. owner.
November 15-16, 2010
Dentons US LLP
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Withholding Payments to NFFIs
Exceptions, cont.
• The general rule does not apply to:
– Any payment of which the beneficial owner is:
•
•
•
•
•
•
a corporation whose stock is regularly traded on an established securities market;
an entity organized under the laws of a U.S. possession & wholly owned by its bona fide resident(s);
a foreign government;
an international organization;
a foreign central bank of issue; or
any other class of persons identified by the Secretary as posing a low risk of tax evasion.
– Any class of payments identified by the Secretary as posing a low risk of tax
evasion.
November 15-16, 2010
Dentons US LLP
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Technical Overview
Excerpted from a recent presentation by: Michael D. Shepard
November 15-16, 2010
Dentons US LLP
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Bank Example
Excerpted from a recent presentation by: Michael D. Shepard
November 15-16, 2010
Dentons US LLP
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Original Proposal
Material Advisor Provision
• Final FATCA eliminated a provision required certain material advisors on
a foreign entity transaction to disclose the transaction.
• ‘Material advisor' = any person who provided material aid, assistance, or
advice with respect to carrying out one or more foreign entity
transactions and who directly or indirectly derived gross income in
excess of $100,000 for providing the aid, assistance, or advice during the
calendar year.
• Penalty for failing to file: equal to the greater of $10,000 or 50% of the
fee the advisor earned for providing assistance, i.e., minimum $50,000.
November 15-16, 2010
Dentons US LLP
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Original Proposal
Material Advisor Provision: Issues
• Might appear in future legislation.
• Implicates ethical issues.
• Implicates attorney-client privilege and/or work-product doctrine.
• Practical problems for advisors who do not have the information (e.g.,
advisors who cannot identity all parties involved).
November 15-16, 2010
Dentons US LLP
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International Influence
• Foreign countries emulating FATCA
– E.g. EU proposed Alternative Investment Fund Managers Directive (AIFM), Apr.
2009.
November 15-16, 2010
Dentons US LLP
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Challenges
• FFIs, NFFEs, and U.S. withholding agents face increased burdens and
costs associated with U.S. investment, particularly for small institutions in
small jurisdictions.
• IRS faces increased administrative burden.
– Refunds and credits given for overwithheld amounts.
November 15-16, 2010
Dentons US LLP
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Thank you
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Suite 1900
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