Transcript Slide 0

International Tax Developments – U.S.
Daniel M. Berman
Principal, International Tax Leader – Northeast Region
© 2013 McGladrey LLP. All Rights Reserved.
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Discussion
I.
Resolution of Fiscal Cliff
a. The Fiscal Cliff
b. Resolution
c. Key Elements of the Deal
II. FATCA
a. Overview
b. Definitions
c. Intergovernmental and FFI Agreements
d. Timeline for Compliance
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Discussion (cont.)
III. Treaty Update
a. Pending US tax treaties
b. Status of Tax Treaty Program
IV. Government Gridlock
a. Issues at Stake
b. Timeline of Government Shutdown
b. Final Agreement
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The Fiscal Cliff
 The U.S. was facing a “fiscal cliff” on January 1,
2013 which threatened to reduce economic output
by hundreds of billions of dollars. The three main
elements looming on January1:
-
Expiring Bush tax cuts
-
Affordable Care Act (“Obamacare”) taxes, and
-
Additional “Sequester” spending reductions of $109
billion.
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Resolution
 On January 1, 2013 the Senate and House of
Representatives passed H.R. 8, the American
Taxpayer Relief Act of 2012. The President signed
this into law on January 3, 2013.
 The Joint Committee on Taxation (“JCT”) scores it
as a $3.9 trillion tax cut over 10 years
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Key Elements of the Deal
 Restores 39.6% tax rate above $400,000/$450,000
taxable income
 Raises capital gains tax and dividends tax to 20%
above $400,000/$450,000 taxable income
 Phases out personal exemptions and limits
itemized deductions above $200,000/$250,000 AGI
 Allows new 3.8% health care tax on investment
income above $200,000/$250,000 AGI
 Raises the estate and gift tax rate to 40% with the
exemption level at $5.12 million per person,
adjusted for inflation in future years.
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Key Elements of the Deal (continued)
 One year extension of 50% bonus depreciation for
businesses
 Extends existing agricultural programs for one year
(the “Dairy Cliff”)
 Postpones additional sequesters by two months
 Ends the 2% payroll tax cut
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FATCA – Overview
 FATCA imposes a 30-percent withholding tax on any
“withholdable payment” made to:
- A foreign financial institution (FFI) or
- A non‐financial foreign entity (NFFE) that is owned by
“substantial U.S. owners”
Unless enter into IRS Agreement, IGA or exception applies
 FATCA tax applies as a backstop to “regular” withholding on
payments made to foreign persons under Chapter 3 (i.e., “old”
withholding rules)
- Not a “double tax”
- However, Chapter 3 exemptions for portfolio debt and capital
gains do NOT apply for FATCA
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What does FATCA mean for taxpayers?
 The Big picture –
-
For foreign payees, new 30% tax unless willing to provide
information on US investors to US or host government via
FATCA Agreement or IGA. These payees must
• Examine existing customer/investor base to identify
US accounts
• Develop new onboarding procedures that identify US
persons and require consent to disclosure
• Train internal personnel to NOT counsel on FATCA
avoidance
-
For US withholding agents, must withhold tax unless get
proper documentation from payees
• Must diligence existing documentation
• Apprise investors/customers of potential FATCA
liability
• Withholding begins 7/1/2014
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FATCA applies to “Withholdable Payments”
 A “Withholdable payment” for FATCA purposes
means:
-
All US source FDAP income
Gross Proceeds from sale of items that produce interest
or dividends from sources within the United States
Exceptions:
- interest/OID on short term obligations
- Effectively Connected Income
- “nonfinancial payments”, i.e. payments for services
(wages, compensation), rents, licenses, transportation,
gambling winnings, interest on A/P.
However, payments made under derivative contracts,
interest, investment/custodial/brokerage fees, insurance
premiums are still withholdable payments
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What is an FFI ?
 a foreign entity that
1. Accepts deposits in the ordinary course of a banking or
similar business; or
2. As a substantial portion of its business, holds financial
assets for the account of others;
3. Is an Insurance company (P&C companies not likely
covered); or
4. Is an “Investment Entity”
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What is an Investment Entity?
Final Regs have 3 ways to be an IE:
1. Primarily Conducts as a business
- (a) trading in money market instruments, FX, interest rate & FX
-
-
instruments, securities or futures;
(b) portfolio management; or
(c) investing, administering, or managing money or assets for
others
“primarily conducts” if GI attributable to such activities equals or
exceeds 50% for 3 year period ending on 12/31 of year preceding
year of concern; or
2. GI is primarily from investing/reinvesting and is managed by
another Investment Entity (>50%); or
3. Holds itself out as a Hedge Fund, PE Fund, CIV, LBO, Mutual
fund w/ investment strategy, etc.
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Examples
 1. Investment Advisor to Fund Manager (if 50% GI test is
satisfied) - (manages for others)
 2. Fund managed by fund manager or advisor (if 50% GI
test is satisfied) – (managed by bank, custodian or
investment entity)
 3. Foreign real estate fund managed by an FFI is not an
investment entity because assets are real estate
 4. Foreign trust established for US beneficiaries that
invest in securities where trustee is individual – not an IE
 5. same as 4. but trustee is an FFI trust company; trust
is an IE and is an FFI
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Exceptions to FFI status
 Holding Company, Treasury Center or captive finance co
-
Member of nonfinancial group
Passive income <= 25% of GI of Expanded Affiliated Group
No more than 5% of GI of EAG is from FFIs (excluding
intercompany transactions)
Passive <= 25% of FMV of group assets
 Nonfinancial Start ups
-
Not FI or passive NFFE
New business or LOB
Not a PE, VC, LCO etc.
 Nonfinancial entities in liquidation/bankruptcy
 501(c)
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Multinationals may be subject to FATCA


US
Is CFC Holdco/Treasury/Ins Co
an FFI?
Does US Sub have to withhold on
payments to CFC?
-
US Sub
Does CFC qualify for Holdco
exception?
Has US Sub received proper
documentation?
CFC Foreign
Holdco/
Treasury Center/ Ins
Company
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FFI Agreement
What does it require ?
 If can’t qualify for FFI exception or other exemption, must
enter into IRS Agreement
 This will involve (in addition to registering online)
- Examining existing accounts to identify US
accountholders and assessing existing documentation
- Establishing procedures for new accounts
- Information reporting to IRS (or host country gov’t)
- Notice 2013-69 contains draft FFI Agreement
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RO Certifications under FFI Agreement
 Regarding initial diligence - Responsible Officer must certify
-
Completed review of high value accounts and identified recalcitrant
accounts
Completed account identification and documentation procedures for
pre-existing accounts
Has made “reasonable inquiry” to determine that FFI had no policies
in place from August 6, 2011, to assist account holders in
“avoidance of Chapter 4”
•
Must send inquiries (written, email, etc.) that require responses from
onboarding & mgmt personnel
-
Effective Internal controls exist and compliance program exists;
periodic testing
 Periodic Certifications; Qualified certifications if Material Failures
(including FIN 48 reserve)
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Information Reporting under FATCA Agreement
 Must report by 3/31 of year following reporting year
-
name, address, TIN, account number, account balance/value,
payments made, substantial US owners, and any other info req’d
in form 8966 (see August draft)
 May elect full US based reporting instead (under
Chapter 61, i.e. 1099 rules)
-
No account balance or gross payment information otherwise req’d
under normal rules
Election is made by actually doing ch. 61 reporting by 3/31
Use regular forms for US account holders; 8966 for NFFEs
 “Recalcitrant” account holders – must report # of accts
and acct value/balance for NFFEs, US persons, persons
w & w/out US indicia, dormant accts each as separate
group
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Intergovernmental agreements (IGAs)
 On July 26, 2012, the U.S. Treasury Department published two
versions of IGAs (Model I and II) to facilitate FATCA implementation
 Model I IGAs
- Allows FFIs to report directly to their home country authorities
- Foreign government will transmit information directly to IRS
automatically
- Reciprocal information exchange
- No registration with IRS
 Model II IGAs – FFI must report directly to IRS using regulations with
some possible adjustments
 In Dialogue with several dozen countries and some have signed
agreements
 Cayman agreement recently announced but not released
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Is that all? (of course not)
 FATCA penalty applies to payments made to a nonfinancial foreign entity (NFFE), which is any foreign
entity that is not an FFI
 Penalty applies unless NFFE provides information
regarding its substantial U.S. owners (i.e., 10 percent
owners) or certifies that it has none and the withholding
agent properly reports
 Exceptions: Public companies, Active NFFEs, territory
entities, excepted nonfinancial entities
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When does withholding really begin?
Withholding and Reporting
 US source FDAP
- New investors admitted post 7/1/14
•
So, new onboarding procedures need to be in place by
7/1/2013 or by effective date of FFI agreement
-
Other foreign entities on pre-existing obligations, 1/1/16
Entities documented as noncompliant (e.g., NFFI) – date of
documentation
 Gross proceeds
- 1/1/17, except
- Amounts paid to FFIs covered under a M1 IGA
 Foreign “Pass-through” Payments are not subject to withholding
until January 1, 2017.
 First reporting deadline for US accounts is March 31, 2015.
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Treaty Update

Income Treaties Signed, Awaiting U.S. Senate Approval:
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Hungary (Treaty), signed at Budapest on February 4, 2010;
approved by the Senate Foreign Relations Committee and reported
to the full U.S. Senate on July 26, 2011. Adds a comprehensive
limitation on benefits provision to the existing treaty’s withholding tax
exemptions on interest and royalties.
-
Luxembourg (Protocol), signed in Luxembourg on May 20, 2009;
approved by the Senate Foreign Relations Committee and reported
to the full U.S. Senate on July 26, 2011. Allows greater tax
information exchange .
-
Switzerland (Protocol), signed at Washington, D.C. on September
23, 2009; approved by the Senate Foreign Relations Committee and
reported to the full U.S. Senate on July 26, 2011. Enables
information exchange agreement that settled the dispute over U.S.
persons hiding assets in Swiss banks.
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Treaty Update (continued)
 Income Treaties Signed, Awaiting U.S. Senate Approval:
-
Poland (Treaty), signed in Poland on February 13, 2013.
Modern tax treaty to replace Détente-era agreement.
-
Japan (Protocol), signed at Washington D.C. on January 24,
2013. Comprehensive update of 2003 treaty.
-
Spain (Protocol), signed in Spain on January 14, 2013.
Comprehensive update including expanded exemptions from
source-country taxation.
-
Chile (Treaty), was signed at Washington, D.C. on February
4, 2010 and sent to the U.S. Senate on May 17, 2012 for
advice and consent to ratification. First tax treaty, to
accompany existing free trade agreement.
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Treaty Update (continued)
 Holds on Senate floor action
 Little negotiation effort
 Prospects for treaty approval
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Government Gridlock – Issues at Stake
 Funds not appropriated for fiscal year 2014,
beginning October1, 2013.
 Tea Party faction, unable to repeal President’s
health care program, demanded it be defunded.
 Government debt ceiling approaching, limiting
borrowing to pay for expenditures already
appropriated.
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Government Gridlock – Timeline of Shutdown
 September 20, 2013: House passes a resolution (H.J. Res. 59)
denying federal funds to carry out any provision of the Affordable
Care Act (“Obamacare”)
 September 27, 2013: Senate removes the House approved
provisions defunding Obamacare. (Senate Amendment: SA 1974)
 September 29, 2013: House adds repeal of medical devise excise
tax and one-year delay in implementation of Obamacare.
 September 30, 2013:
-
Senate removes the House provisions postponing Obamacare and
erasing the medical device tax.
House approves a new resolution that that would cripple “Obamacare” by
delaying the individual health insurance mandate for a year; denying
employer-subsidized health care to Members of Congress, their staffs,
the President, the Vice President, and any political appointees.
Senate strips the House provisions on individual health insurance and
federal health coverage subsidies for lawmakers and staff.
 October 1, 2013: With no spending legislation enacted for the new
fiscal year, a partial federal shutdown begins. There is no progress
toward any possible compromise.
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Government Gridlock – Final Agreement
 With looming debt ceiling limit, House Speaker rejects Tea Party
push for default.
 On October 16, 2013, House of Representatives finally votes on
a Senate-approved funding bill; it passes with bipartisan support.
 The government reopens on October 17th.
 Furloughed employees are guaranteed their regular
compensation for days out of work during the shutdown.
 Funds are appropriated at current levels through January 15,
2014.
 Debt ceiling is raised until February 7, 2014.
 Congress reaffirms that the government must confirm individuals’
eligibility for subsidized health insurance under Obamacare.
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