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Final verdict




68 APRIL 2013

ollowing a series of scandals involving US taxpayers sheltering their assets from the US Internal Revenue Service (IRS), Congress enacted the Foreign Account Tax Compliance Act (FATCA) on 18 March 2010 as part of the Hiring Incentives to Restore Employment Act. FATCA’s requirements were sweeping, and the

fi nancial world waited for the US Treasury to issue guidance. After a series of notices, on 8 February 2012 the Treasury fi nally issued its proposed FATCA regulations. After allowing for almost a year of practitioner review and commentary, the Treasury issued fi nal FATCA regulations on 17 January 2013.

FATCA overview FATCA categorises non-US entities as either foreign fi nancial institutions (FFIs) or non-fi nancial foreign entities (NFFEs). Generally, if a non-US entity is not an FFI, it is categorised as an NFFE. FFIs are entities that fall into the following groups: • Depository institutions that accept deposits in the ordinary course of banking or similar business.

• Custodial institutions that hold, as a substantial portion of their business, fi nancial assets for the benefi t of one or more other persons.

• Investment entities that trade and manage fi nancial assets on behalf of customers.

• Insurance companies that issue or are obliged to make payments with respect to a cash value insurance or annuity contract.

FATCA off ers FFIs a choice: (1) enter an FFI agreement with the IRS and comply with US-style reporting requirements, or (2) subject payments of specifi ed types of (primarily) US-source income made to the FFI to a 30 per cent withholding tax. FFIs that enter FFI agreements (participating FFIs) agree to comply with myriad requirements, including performing due diligence to identify any accounts they maintain for US persons, reporting specifi ed information on US account holders acquired during due diligence, closing the accounts of ‘recalcitrant account holders’, and withholding on specifi ed types of ‘passthru payments’. The regulations allow specifi ed FFIs (deemed- compliant FFIs and exempt FFIs) to avoid withholding without entering FFI agreements. Exempt FFIs include, among others, specifi ed foreign governments, central banks and retirement funds. Deemed-compliant FFIs are low-risk FFIs

that include registered deemed-compliant FFIs, which must register with the IRS; certifi ed deemed- compliant FFIs, which do not need to register with the IRS but must give withholding agents specifi ed documentation; and owner-documented FFIs. An owner-documented FFI is an FFI that meets certain specifi ed requirements, including: • The FFI must be an FFI solely because it is an investment entity.

• Generally, the FFI’s withholding agent must be a US fi nancial institution or participating FFI.

• The withholding agent must agree to satisfy the FFI’s reporting requirements with respect to any specifi ed US persons who hold an interest in the FFI.

• The FFI must provide its withholding agent with certain specifi ed information, including: > a withholding certifi cate identifying the FFI as an owner-documented FFI that is not acting as an intermediary; and

> either (1) an owner reporting statement and valid documentation with respect to each person identifi ed as an owner, or (2) a letter (‘substitute letter’) from an attorney or auditor who is licensed in the US or whose fi rm has a location in the US, signed no more than four years before the date of the payment, that verifi es that the FFI complies with the owner-documented FFI requirements and that certifi es that the attorney or auditor has reviewed the FFI’s documentation with respect to all of its owners and debt holders. If the FFI opts to provide a substitute letter, it must still provide an FFI owner reporting statement and a Form W-9 with any applicable waiver for each specifi ed US person that owns a direct or indirect interest in, or specifi ed debt interest in, the FFI; and any details relating to a change in circumstances. Owner reporting statements contain details of the FFI’s interest holders, including the name, address and taxpayer identifi cation number of every individual and specifi ed US person who owns a direct or indirect equity interest in the FFI. For instance, a non-US trust that qualifi es as an FFI would need to disclose information not only on its US benefi ciaries (if any), but also on its non-US benefi ciaries. This raises privacy concerns. Therefore, FFIs that are eligible to claim owner-documented status should consider obtaining a substitute letter to protect the privacy of their non-US interest holders. If the FFI does choose to obtain a substitute letter, it should consider the fact that engaging an attorney


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