2013 IIB Seminar on US Taxation of International Banks Tax Issues Arising from the Dodd Frank Act Melissa Heise (Moderator) Director & Tax Counsel, The Royal Bank of Scotland plc Roger Brown Principal, Ernst & Young LLP Richard Coffman General Counsel, Institute of International Bankers Fred Carchman Tax Director, Deloitte Tax LLP Philip Fried Principal, PwC Davis J. Wang Partner, Sullivan & Cromwell LLP
The Dodd Frank Act Title VII: Swaps issues • Section 716 Swap Push Out • Swaps Dealers and Cross Border Issues FBOs: Section 165 Enhanced Capital, Liquidity and Other Prudential Standards application to Foreign Banking Organizations Basel III Tax Implications Living Wills and Volker Rule
Regulatory Developments: Section 716 Push Out Regulatory Developments • Fed Reserve Interim Final Rule (June 5, 2013) • Insured Depositary Institution (IDI) includes uninsured US branches/agencies • Permitted Activities Exemption Hedging relating to IDIs activities Swaps involving rates or “bank permissible” reference assets • Grandfather Relief • Transition Period • Transfer Non-conforming swaps to a registered swaps dealer
Swaps Dealers & Cross Border Issues Joint CFTC/SEC “entity” and “product” rules finalized CFTC Focus on Swaps Dealers • Final Rules adopted with respect to registration, mandatory clearing, trade execution facilities (SEFs), reporting (SDRs), external business conduct and internal business conduct • Key unfinished business: capital and margin/segregation of collateral rules, cross border guidance SEC approach to regulating security based swap dealers • Registration requirements not yet finalized • Recent cross-border proposed rules and interpretive guidance and re-proposal of certain rules and forms
Cross Border CFTC Regulation of Swaps DFA Section 722(d): Swap requirements do not apply to activities outside the US unless they: • Have a direct and significant connection with activities in or effect on US commerce, or • Contravene rules prescribed by the CFTC to prevent evasion of the swap requirements Key Issues of non-US swap dealers’ US activities • Definition of a “US Person” • Application of the de minimus rule and aggregation requirements Swap dealer registration triggered by conducting more than a de minimus amount of activity over a 12 month period ($8Bn aggregate notional amount) • Aggregation rule includes swaps of legal entities controlled by and under common control with a person • Substituted compliance Applicability to “entity level” vs . “transaction level” requirements Process and Standards for making substituted compliance determinations • Summer 20122-Proposed Guidance and Proposed Exemptive Order • December 2012-Final Exemptive Order and request for further comment • Current Status
Swaps Dealer and Push Out Potential Tax Impacts • Push Out could create multiple tax issues • Example: Assume Non-US Bank currently operates swaps desk in its New York branch • To comply with Push Out, moves swaps desk to home office • Does income/loss on existing book continue to be ECI? • See, e.g., PLR 200018027 (once ECI, always ECI) • Risk of Double Taxation • Relief under Global Dealing Regulations or AOA Treaty • Gain/Loss on existing book under branch profits tax (unless mitigated/eliminated by Treaty) • Alternatively, suppose Bank transfers swaps book to separate non-US company
Section 165: Enhanced Capital, Liquidity and other Prudential Standards FRB Notice of Proposed Rulemaking Implementing Section 165 for large “Foreign Banking Operations (FBOs) Large FBOs have $50bn or more in total consolidated worldwide assets Enhanced Standards with respect to risk based capital, leverage limits, liquidity, single counterparty credit limits, stress testing, risk management and debt to equity limits. Early Remediation provisions (DFA 166) Intermediate Holding Companies (IHC) Requirement • “Supplemental enhanced standard” • Threshold- at least $10Bn in US, non-branch/agency assets • A single IHC would have to be established to hold all of the FBOs US bank and non-bank entities US assets • All IHCs would be subject to US/Fed prescribed risk-based capital and leverage limits • IHCs with $50bn or more in assets would also be subject to the Fed Reserve’s capital plan rule • “Trapped Capital” 30-day liquidity buffers • Threshold-$50bn or more in combined US assets (branches, agencies and IHC) • Highly liquid assets only- cash, US Gov agency securities, GSE securities and other approved assets • Separate buffer for US branch/agencies and IHCs leaving “trapped liquidity” US branch/agencies: first 14 days’ buffer must be held in US, balance at home office with Fed approval IHC: entire 30 day buffer must be held in the US
Section 165: Key elements of the proposal Legal entity ► US IHC required for FBOs with ≥ US$50b in global assets and ≥ US$10b in combined US assets (excluding assets of A . structure US branches and US agencies) ► US risk committee or a risk committee of the global board of directors for publicly traded FBOs with ≥ US$10b in global assets: ► Risk committee may be maintained at the parent or any US subsidiary (must be at the US IHC when US assets surpass US$50b) Risk ► At least one risk “expert” member required management and B . ► Flexibility on committee structure provided for smaller FBOs (< US$50b in US assets) risk committee ► At least one independent member required to oversee and approve specific elements of the risk framework for all requirements FBOs ≥ US$50b in US assets ► US chief risk officer (CRO) to be appointed for FBOs ≥ US$50b in US assets: ► Required to report jointly to the global CRO and the US risk committee ► Risk data aggregation and reporting on combined US operations ► US BHC integrated capital framework, including leverage requirements, to apply to IHCs ► Participation in the annual capital planning program required for IHCs with ≥ US$50b of US assets Risk-based ► Advanced approaches for Basel III and Basel 2.5 market risk rule required if meeting qualification criteria (includes the capital Advanced Internal Ratings-Based Approach, the Advanced Measurement Approach and, potentially, the Internal Models C. requirements and Methodology) leverage limits ► Potential surcharge for those organizations that are designated as domestic systemically important financial institutions (D-SIFIs ) ► High-quality liquidity asset buffer based on stress testing, including all entities ► Contractual and behavioral cash flow projections for on- and off-balance sheet positions Liquidity ► Stress testing at IHC and material legal entity/line of business levels D. ► Granular liquidity regulatory reporting for aggregate IHC and each material entity requirements ► Contingency funding plans aligned with liquidity stress testing ► Granular liquidity cost allocation based on the nature and risk of positions
Section 165: Key elements of the proposal (cont.) ► US IHCs with assets of ≥ US$50b subject to capital plan final rule and Dodd -Frank stress test requirements (i.e., Comprehensive Capital Analysis and Review) ► US IHCs with assets between US$10b and US$50b subject to Dodd-Frank company-run stress test requirements ► Regulatory reporting and stress test disclosure requirements for IHCs similar to those for US BHCs ► FBOs with combined US assets of ≥ US$50b must demonstrate compliance with consistent home -country stress test Stress testing E . requirements requirements ► Similar requirements for other FBOs and foreign savings and loan holding companies with total consolidated assets of ≥ US$10b ► Failure to meet stress test requirements would result in: (a) either a 105% or 108% asset maintenance requirement for third-party liabilities; (b) annual stress test of any US subsidiary not held under a US IHC; and (c) additional intra-group funding/liquidity restrictions, as applicable ► Single- counterparty credit limits separately applied to FBOs with total consolidated assets of ≥ US$50b, covering combined US operations and the IHC Single- ► Combined US operations of an FBO subject to a single-counterparty limit of 25% of the FBO’s parent’s total F. counterparty regulatory capital ► US IHC subject to a limit for a single counterparty of 25% of the IHC’s total regulatory capital credit limits ► More stringent limit applied to FBOs with combined US assets of ≥ US$500b and to FBOs with consolidated global assets of ≥ US$500b ► If the Financial Stability Oversight Council (FSOC) determines an FBO with consolidated global assets of ≥ US$50b Debt-to-equity “poses a grave threat to the financial stability of the United States”: G . ► Debt-to-equity ratio of no more than 15 to 1 limits ► Asset maintenance requirement of 108% applied on its US branch and agency network ► FBOs with combined US assets of ≥ US$50b will automatically be subject to the remediation standards upon a trigger event; FBOs with < US$50b in US assets will be subject to remediation standards on a case-by-case basis Early H. ► Regime will be divided into four levels of remediation consistent with early remediation for US BHCs remediation ► Framework does not include an explicit quantitative liquidity trigger, which could exacerbate funding pressures for an FBO’s US operations
Recommend
More recommend
