Transcript Slide 1

FATCA and
Investment Funds
November, 2011 – São Paulo - Brasil
Agenda
– Introduction.
– FATCA definitions x investment funds.
– FATCA and the investment funds industry: step-by-step
examples.
– Hot Topics for Funds.
– Questions.
FATCA & the Investment Fund Industry
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FATCA
(HIRE ACT)
The Latest News on FATCA and Voluntary Disclosure Rules in the US
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Introduction
– QI Program (2001)
– The Hiring Incentives to Restore Employment (HIRE) Act
of 2010 was signed into law by President Obama on
Thursday, 18 March 2010.
– As its title suggests, the HIRE Act is primarily aimed at
helping businesses hire and retain new employees by
providing them with tax incentives
FATCA wishes to avoid tax evasion through the use of undeclared
foreign accounts.
Request of information from taxpayer (FFA, Foreign Financial Assets
Report) + Request of information from FFI (FATCA) = Allows cross-check
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FATCA Rules
– The Foreign Account Tax Compliance Act (FATCA) was
added to the bill as a revenue offset
– Section 1471(b) of the United States Internal
Revenue Code of 1986, as amended (the “Code”).
– The Hiring Incentives to Restore Employment
(“HIRE”) Act, March, 2010.
– IRS Notice 2010-37, 2010-60 (“Notice”), de Agosto,
2010.
– IRS Notice 2011-34, 2011-19, IRB 765, 8-04-2011,
2011-53.
Abroad application and interpretation
Open issues to be addressed
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Compliance Schedule
When?
What?
2012 – US Summer
Final Regulations
2013 - 06
2014 - 01
FATCA Agreement. FFI compliant for new
accounts
Withholding starts (on FDAP)
2014 - 06
FFI compliant for accounts over $ 500 T
2014 – 09
Reporting starts
2014 - 12
FFI compliant for all private banking
accounts
2015 - 06
FFI compliant for all custodial, investment,
security accounts and depository accounts
over $ 50 T.
Full withholding on payments.
IRS extension for compliance until 2015
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Definitions –
Funds Industry
(FATCA)
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Relevant Definitions.
– FFI: Foreign Financial Institutions
– Deemed Compliant FFI
– Financial Accounts & Thresholds
– Withholding obligation
– Withholdable Payment
– Withholding Agent
– Pass-thru payment
– NFFE: Non-Financial Foreign Entities
– Excepted NFFE
Subject to further regulation
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Foreign Financial Institutions
– FATCA defines an FFI as any “financial institution” that is a foreign
entity. A financial institution for these purposes is:
– any entity that accepts deposits in the ordinary course of a
banking or similar business, (i.e., banks, etc.)
– any entity that is engaged in the business of holding financial
assets for the account of others, (i.e., broker dealers, clearing
houses, etc.) and
– any entity engaged (or holding itself out as being engaged)
primarily in the business of investing, reinvesting, or trading in
securities, interests in partnerships, commodities, or any interest
(including a futures or forward contract or option) in securities,
partnership interests, or commodities. (i.e., mutual funds, fund
of funds, hedge funds, private equity and venture capital
funds, etc.)
– The Notice further clarifies the definitions by supplying examples
within each category.
Question: are funds in Brazil independent FFI?
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Deemed Compliant FFI (for Funds)
– “Proprietary” funds or funds owned solely by compliant FFI,
excepted NFFE or U.S. financial institutions.
IRS is also studying if it is possible to consider the following entities
deemed compliant to FATCA…
– Funds that do not allow as investors any US Persons, NPFFI and
not-excepted NFFE.
– Publicly traded funds.
– Family investment vehicles: funds, PIC, trusts; if financial institution
assumes responsibility to report information as if they were NFFE.
The following entities are excepted from FFI status and are
considered NFFE …
– Finance and hedging centers of a same non-financial group.
Deemed Compliant FFI still need to apply for status and need to
compute and publish pass-thru payment percentages.
Few deemed compliance status and exceptions currently apply
to funds
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Financial Account & Threshold
The financial account is:
– any depository/deposit account maintained by such
financial institution, option not to due diligence accounts
under US$ 50,000.00
– any custodial or investment account maintained by such
financial institution,
– any equity or debt interest in such financial institution
(other than interests which are regularly traded on an
established securities market).
USD 50,000.00 threshold currently not applicable to
balances in investment funds
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Withholdable Payments to FFIs + NFFEs
– Any payment of interest, dividends, rents, salaries,
wages, premiums, annuities, compensations,
remunerations, or emoluments from sources within
the United States
– Any other fixed or determinable annual or periodical
gains (FDAP), profits, and income from sources
within the United States
– Any gross proceeds from the sale of any property
that could produce interest or dividends from
sources within the United States
Earnings, premiums, income, gains, profits
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Withholdable Payments to FFIs + NFFEs
Exceptions
– US Effectively Connected Income (US ECI) and
Assets.
– Payments under publicly traded securities.
– Government bonds/bills.
– Grandfathered obligations: existing in 03-18-2012,
not equity, determined expiration/maturity, giving rise
to withholdable payments.
Exceptions do not trigger withholdable payments nor
pass-thru payments
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Passthru Payment
– Direct Allocation: 100% to account holder, in the
case of investments “on behalf of”, clear relationship
between a defined US Asset and the investors´
account/transaction.
– Indirect Allocation: pass-thru payment percentage
Different Percentages for
US Assets
– Custodial Account
Total Assets
– Other Accounts
Any withholdable payment and any other payment to
the extent it is attributable to a withholdable payment
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Withholding Agent
– US Source of Payment
– FFI that has control, receipt, custody, disposal or
payment of any withholdable payment.
– If there is more than one FFI in a payment chain, all
are jointly liable.
Any FFI that intermediates payments
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Non-Financial Foreign Entities - NFFE
– Substantial US owner: US person owns/benefits of
more than 10% of equity or profit value.
– FATCA requires withholding agents to identify NFFE,
deduct and withhold a tax equal to 30% of any
withholdable payment made to a “non-financial foreign
entities” (NFFEs) where the beneficial owner of the
payment is an NFFE, unless the NFFE provides the
withholding agent with:
– the name, address, and TIN of each substantial US
owner of the NFFE, or
– a certification that the NFFE does not have a
substantial US owner
Substantially US owned NFFE need to report information
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NFFEs
Non-Financial Foreign Entities (cont’d)
– This withholding does not apply where the owner is excepted
– Publicly traded corporation or a member of an expanded
affiliated group of a publicly traded corporation
– NFFE mainly engaged in an active trade or business
– Government and governmental entities
– Certain US entities: banks, domestic trusts, companies,
regulated investment/real state vehicles, government and
its entities
– International organizations and respective entities
Excepted NFFE: no need for due diligence nor reporting
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Step-by-step
Case Study
(FATCA)
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How do pass-thru payments work?
US B
US Source
Withholdable
Payment
US A
Bank US
US Source
Withholdable
Payment
PPP B =
US B /
Bank B
Total Assets B
PPP B =
Bank A
PPP A =
US B /
(PPP B + US A) /
Total Assets B
Total Assets A
Fund C
Fund C does not have
any US source
income yet it needs
to do withholdings on
passthru payments
allocated to US
person because of
payments received
from A and B
PPP C =
(PPP B + PPP A) /
Total Assets C
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Questions: manager, administrator and custodian obligations
FATCA effects
Market
Market
Manager: n/a
- Administrator:
IRS report,
computation,
FATCA
withholding,
charging the
fund.
- Custodian:
pass-thru
payment
computation.
Portfolio and Passthru payment
percentages
information
Buy and sell
decisions
Manager
Administrator
Custodian
Portfolio
Management
- Custodian and
administrator
are jointly
liable.
FATCA & the Investment Fund Industry
NAV Final
Balance report to IRS
FATCA computation
and withholding
Pre withholding NAV
information, when
applicable. Weighted
pass-thru payment
appreciation and
information
Custody,
sometimes
NAV
Decisions
information
Fundo
©2011 Baker & McKenzie 22
How to establish FATCA obligations for FFI dealing with funds?
Fund C
Fund B´s administrator: identifies if Fund A is a
FFI; computes and reports pass-thru
payment percentage
Fund B
Fund A´
Fund C´s administrator: identifies if Fund B is
a FFI; computes and reports pass-thru
payment percentage
Fund A
Fund A´s administrator:
Bank D
1.
Identifies if Bank D is a FFI.
2.
Certifies contractually that Bank D will make due diligence to
identify a US Person and that will ensure FATCA
compliance.
3.
Computes pass-thru payments and reports to Bank D.
On behalf of
FFI A (Fund or Administrator) will be jointly liable
with Bank D for FATCA compliance. Best efforts
should mitigate risks and impacts.
FATCA & the Investment Fund Industry
©2011 Baker & McKenzie 23
Hot Topics –
Funds Industry
(FATCA)
The Latest News on FATCA and Voluntary Disclosure Rules in the US
©2011 Baker & McKenzie 24
Hot Topics for Funds
– Pass-thru payment percentage: concept, computation, allocation
Definition. Scope. Requests of exclusions in general of swaps, derivatives, and absolutely from all financial instruments
possible. Requests to simplify computation.
– Withholding
Computation and allocation for funds.
Cost affects fund´s profitability and might not be predictable in advance.
– Threshold
Should also apply to investment funds, custodial accounts
– Exceptions and Deemed Compliant Status
For local funds, private placement funds with few investors, publicly traded funds, proprietary funds.
– Compliance Costs
Cost is too high, FATCA needs to simplify application for funds.
– Due Diligence Risks
How to identify account holders in the case of the funds industry.
There is no central system to check whether the FFIs are duly complying with FATCA or not.
– Recalcitrant Accounts
Requests for safe harbor on relative number of accounts/value of accounts classified as recalcitrant accounts without
triggering FATCA Agreement termination.
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Pursuant to requirements relating to practice before the Internal
Revenue Service, any tax advice in this communication
(including any attachments) is not intended to be used, and
cannot be used, for the purpose of (i) avoiding penalties imposed
under the United States Internal Revenue Code, or (ii) promoting,
marketing, or recommending to another person any tax-related
matter.
Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common
terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in
such a law firm. Similarly, reference to an “office” means an office of any such law firm.
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Thank You
November, 2011 – São Paulo - Brasil
Marnin J. Michaels
Baker & McKenzie Zurich
Direct line: (41-44) 384 12 08
Facsimile: (41-44) 384 12 84
Email: [email protected]
www.bakermckenzie.com
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