Foreign Account Tax Compliance Provisions US Hire Act signed into law on March 18, 2010
Clearstream, 7 June 2010 Foreign Account Tax Compliance Provisions US Hire Act signed into law on March 18, 2010 Agenda n Background n Provisions overview n Market impacts n Next Step 2
Clearstream, 7 June 2010 Background n FATCA: Foreign Account Tax Compliance Act of 2009. Proposal from US Senate. To improve control over accounts held by US non-exempt persons through n foreign financial institutions as per US congressional hearings about Tax Evasion To raise additional revenues to contribute to the “HIRE” program (one of the n main proposal from President Obama during the last elections) Estimated revenue of about $9 billion over 10 years n Signed into law by President Obama on March 18, 2010 n President Obama Statement on Foreign Account Tax Compliance Act of 2009 October 27, 2009 “I commend Chairmen Baucus and Rangel, and Senator Kerry and Congressman Neal, for moving forward on the important task of giving the government the tools it needs to crack down on Americans hiding their assets in overseas tax havens . A small number of individuals and businesses hide their assets overseas solely in order to shirk their responsibilities, even as the vast majority of hard-working Americans honor the obligations of citizenship and fulfill their responsibilities.” 3
Clearstream, 7 June 2010 Provisions overview n Increased disclosure of beneficial owners : The provision adds a new chapter 4 to the Code that provides for withholding taxes to enforce new reporting requirements on specified foreign accounts owned by specified U.S. persons or by U.S.-owned foreign entities. The provision establishes rules for withholdable payments to foreign financial institutions and withholdable payments to other foreign entities. 4
Clearstream, 7 June 2010 Provisions overview Increased disclosure of beneficial owners n Definitions: n Withholdable payments : U.S. source fixed and determinable annual or periodical income (FDAP) as well as any gross proceeds from the sale of any property that produces U.S. source interest or dividends. n Foreign Financial Institution (FFI): any entity that (1) accepts deposits in the ordinary course of a banking business; (2) is engaged in the business of holding financial assets for the account of others; and (3) is engaged primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest in such securities, partnership interests, or commodities (including investment vehicles such as hedge funds and private equity funds). n U.S. account : any account held by one or more specified U.S. persons or U.S. owned foreign entities. 5
Clearstream, 7 June 2010 Provisions overview Increased disclosure of beneficial owners n Definitions: n Specified U.S. person : any U.S. person, other than a publicly traded corporation, a corporation that is a member of the same expanded affiliate group of a publicly traded corporation, an organisation exemption under section 501(a), an IRA, the U.S., any political subdivision, a bank, a REIT, a RIC, a common trust. n U.S.-owned foreign entity : any foreign entity that has one or more substantial U.S. owner. n Substantial U.S. owner: – In the case of a corporation: any specified U.S. person that owns directly or indirectly more than 10% of the foreign corporation’s stock, by either vote or value. – In case of a partnership, owning more than 10% of the profits or capital interests in such partnership. In the case of a trust, any specified U.S. person treated as an owner of any n portion of such trust under grantor trust rules. 6
Clearstream, 7 June 2010 Provisions overview Increased disclosure of beneficial owners n Withholdable payment to “foreign financial institutions” (FFIs) A deduction of 30% withholding tax on all “withholdable payments” required, n unless the FFI enters into a special agreement with the IRS to – Obtain information from each account holders as is necessary to determine which accounts are U.S. accounts – Comply with verification and due diligence procedures with respect to the identification of U.S. accounts – Provide any additional information requested by the IRS – Obtain a waiver from U.S. account holders if reporting of information is prevented by foreign law. The provision applies to U.S. accounts maintained by The FFI n Each other financial institution that is a member of the same affiliated group n (unless these members have entered into separate agreements with the IRS) 7
Clearstream, 7 June 2010 Provisions overview Increased disclosure of beneficial owners n Reporting: Report annually certain information with respect to any U.S. accounts n either – Name, address, TIN, account number of each specified U.S. person and U.S.-owned foreign entity; – Account balance or value; and – Gross receipts and gross withdrawals or payments from the account or – Name, address, TIN, account number of each specified U.S. person and U.S.-owned foreign entity; and – Full 1099 reporting of both U.S. and non-U.S. source income, including gross proceeds 8
Clearstream, 7 June 2010 Provisions overview Increased disclosure of beneficial owners n Withholdable payments to other foreign entities (non-financial institutions) A deduction of 30% withholding tax on all “withholdable payments” required, n unless – The FFI (the withholding agent) obtains from the foreign entity a certificate that the foreign entity does not have a substantial U.S. owner or provides the FFI with the name, address and TIN of each substantial U.S. owner; and – The FFI does not know or have reason to know that the certification is incorrect – The payments are made to publicly traded corporations, international organisations, or foreign governments or central banks, not covered by the new provisions because they are thought to pose a low risk of tax evasion. 9
Clearstream, 7 June 2010 Provisions overview n Repeal of the portfolio exemption for foreign targeted bearer bonds: Today, interest paid on bearer bonds is considered "portfolio interest". A U.S. issuer would, however, not have to collect any W-8 certification to pay gross. The bill states that interest paid on bearer bonds will no longer qualify under the portfolio interest exemption. The only way to reduce the tax is to rely on the double taxation treaties. 10
Clearstream, 7 June 2010 Provisions overview n Other provisions: Under reporting with respect to foreign assets n Other disclosure provisions n Provisions related to foreign trusts n Dividend equivalent payments received by foreign persons treated as U.S. source n dividends n Sources: The general explanations published by the Department of the Treasury in May 2009 n http://www.ustreas.gov/offices/tax-policy/library/grnbk09 The technical explanation to the Foreign Account Tax Compliance Act of 2009 published n by the Joint Committee on Taxation on October 27, 2009 http://www.jct.gov/publications.html?func=startdown&id=3596 11
Clearstream, 7 June 2010 Market impacts n Any Financial Institution having US persons as customer is impacted. n This includes as well Mutual Funds, Hedge Funds and Private Equity Funds classified as F.F.I.’s. Some other investment vehicles may be excluded (under discussion, in case they would present a law risk of tax evasion) n Potential high additional costs to comply with this new regulation n Any income payment (even non-US source ones) to be reported to US persons (e.g. a French source dividend) n Additional information to collect from final investors n Higher complexity for members of the same affiliated group (unless these members have entered into separate agreements with the IRS) n NQI status no a possible alternative. 12
Clearstream, 7 June 2010 Next steps n Law to be enacted on January 1 st , 2013 n IRS to publish guidances n Impact assessment with regards to the currently existing QI regime Conclusion: BE READY! 13
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