ABBL

Preface

This article reaches readers shortly after the US Treasury and the IRS department issued Notice 2011-53, dated July 14 2011, providing "a workable timeline" for FFIs and U.S. withholding agents to implement the various requirements of FATCA.  Specifically, the notice phases in the implementation of FATCA in the following manner:

•    An FFI must enter an agreement with the IRS by June 30, 2013, to ensure that it will be identified as a participating FFI in sufficient time to allow withholding agents to refrain from withholding beginning on January 1, 2014.
•    Withholding on U.S. source dividends and Interest paid to non-participating FFIs will begin on Jan. 1, 2014, and withholding on all withholdable payments (including on gross proceeds) will be fully phased in on Jan. 1, 2015.
•    Due diligence requirements for identifying new and pre-existing U.S. accounts (including certain high-risk accounts) will begin in 2013.  Reporting requirements will begin in 2014.
•    For purposes of the Notice, high risk accounts include Private Banking accounts with a balance that is equal to or greater than $500,000.


FATCA is coming to town

On 14th March 2011, Paul Chambers of ATOZ had the opportunity to chair a Panel alongside Keith Lawson (Senior Counsel for tax matters at the Investment Company Institute, ICI, in Washington) and Frédéric Batardy (Senior Tax Advisor of KBL European Private Bankers SA) at the alfi Spring conference. The Panel discussed the implications that the new FATCA regulations will have on the European Fund Industry.

FATCA or the Foreign Account Tax Compliance Act aims at identifying dishonest US taxpayers that have accounts at foreign (that is non-US) financial institutions. The rules are designed to force non-US foreign financial institutions (“FFIs”) holding US investments to enter into an agreement with the US tax authorities (IRS) to identify US taxpayers, report to IRS on these taxpayers as well as to withhold 30% on certain payments to “recalcitrant account holders” and FFIs that do not meet FATCA requirements.

Unless an FFI is exempted from these rules or enters into an agreement with the IRS by 31 December 2012, the FFI generally will be subject to a 30% US withholding tax on its US source income (dividends, Interest, etc.) as well as on the proceeds from the sale of its US securities (grandfathered obligations are exempt).

The FATCA rules in brief

Keith Lawson shared his insights on the thinking of the IRS and the US Treasury officials in regards to the practicalities of implementing FATCA. Keith made the point that while the officials at the US Treasury were aware of how difficult the implementation of this project may be, they were and are nevertheless bound by a statute that was passed by Congress and that would most likely not be amended.

Frédéric Batardy commented that while the Qualified Intermediaries (QI) regime enabled qualified institutions to access treaty protection without being required to reveal the identities of individual clients, FATCA offers no advantage to those who comply, except for an escape from a penalizing 30% withholding tax on the proceeds of their US assets.

The definition of an FFI is very broad and includes foreign banks, foreign brokerage firms, as well as foreign funds. Once deemed as an FFI, four requirements apply with respect to your US accounts:

•    obtain information regarding each account holder, necessary to determine which accounts belong to US persons;
•    provide annual reports to the IRS regarding these accounts;
•    comply with IRS requests for additional information with respect to these accounts; and
•    attempt to obtain a waiver in any CASES in which a foreign law, but for a waiver, would prevent information reporting to the IRS and then close the account if a waiver is not received within a reasonable period of time.

In addition, two requirements apply regardless of whether any US accounts are maintained by FFIs:

•    comply with IRS’s-determined verification and due diligence requirements for identifying US accounts; and
•    withhold 30% from any “pass-through payment” made to: (i) a “recalcitrant account holder” or another FFI that does not enter into an agreement with the IRS or (ii) an FFI that has elected to be withheld upon rather than to withhold with respect to the portion of the payment that is allocable to recalcitrant account holders or to FFIs that do not have an agreement with the IRS.

The FATCA exemptions

While Keith was quick to squash any hope for a blanket exemption for the entire fund industry, he nevertheless felt that individual funds should consider the following three exemptions:

•    Publicly-Traded FFIs
Shares of a publicly-traded FFI are not treated as financial accounts for the purpose of the FATCA rules. As a result, a publicly traded FFI must only comply with the last two of the six requirements, i.e. comply with the auditing and due diligence procedures as well as impose a 30% withholding tax in the appropriate CASES.

Nevertheless, if the shares of publicly-traded FFIs are held by an FFI, then the latter must comply with all 6 of the requirements mentioned above.

•    Deemed Compliant FFIs
An FFI will be deemed compliant if it complies with IRS’s procedures, designed to ensure that the FFI does not maintain any US accounts and meets other IRS requirements with respect to the accounts of other FFIs it maintains. Furthermore, an FFI may also be deemed compliant if it is a member of a class of institutions with respect to which the IRS has determined that the application of the FATCA rules is not required.

A deemed compliant fund is treated as meeting all six requirements of the IRS agreement, which means that information regarding the fund’s investors is never reported to the IRS and payments to, by, or with respect to the fund are never subject to FATCA withholding.

For example: A UCITS prohibits US investors from subscribing shares. It highlights this prohibition in its offering documents and it ensures in its distribution agreements and through effective enforcement that no US investors may join. In such case, the IRS may accept that the fund be considered to be deemed compliant.

•    Persons Posing Low Risk of Tax Evasion
This exemption applies to “any (…) class of persons identified by [the IRS] as posing a low risk of tax evasion.” A fund that beneficially owns its income and qualifies as a low risk investor appears to receive treatment that is similar (or perhaps identical) to the deemed compliant funds outlined above.

To date, the IRS have identified only pension funds as ones posing a low risk. In this context, the definition of a Pension fund appears very narrow and useless for practical purposes.

Implications and next steps

In the absence of any precise guidance, it is probable that no IT solution provider will start building appropriate programs for the industry. The best that can currently be undertaken is to identify what will need to be done and explore where small changes in the regulation could potentially generate a high level of savings. Highlighting these savings to the US authorities could probably persuade them to make reasonable changes to the FATCA regulations.

Some funds may want to ban any US investors from investing in their fund in order to pursue the coveted deemed compliant exemption. In this case, the fund will need to explore how its distribution channels can convincingly demonstrate the procedures that will stop US citizens from investing.

Finally, certain fund providers may wish to avoid investing in US securities. This is obviously a concern for the US Treasury but is a risk that they appear prepared to take.

In all CASES, US citizens living abroad may need to live with additional discrimination when attempting to access even basic financial services as most financial institutions are considering whether US customers are simply not worth the trouble.

Paul Chambers is a partner with the International and Corporate Tax department of ATOZ 
 

(Source: ATOZ)