FATCA_disclose__withold_or_disinvest by suchenfz

VIEWS: 26 PAGES: 39

									London




New York




Geneva




            FATCA:
Greenwich


            Disclose, Withhold or Disinvest?
Hong Kong




Milan




New Haven
            Jay Krause
            26 October 2010
Program

• Selected highlights and client implications


• Special issues for trustees


• Comments and strategies


• Q&A
    • Comments / questions forwarded to Treasury only if specifically
      requested
What is FATCA?


• All FFIs subject to 30% gross withholding on US investments


Unless


• Enter into ‗FFI Agreement‘ to
    • Identify clients; and
    • Withhold where relevant
The Road to FATCA


• LGT and UBS scandals
• The trouble with treaties and TIEAs
• OECD standards don‘t address the problem
• I don‘t know what I don‘t know
FFI Obligations


• What must an FFI do?
   • Identifying US clients and disclosing account details;
   • Withholding on account holders refusing to be identified;
   • Withholding on any FFI not entering adopting these procedures;
   • Closing the account of anyone protected by banking secrecy laws
     who fails to waive the protections of such laws
Financial Institution Defined


• Accepts deposits in ordinary course of banking or similar
  business – 1471(d)(5)(A);


• Holds financial assets for the account of others as a substantial
  portion of its business – 1471(d)(5)(B); or


• Engaged primarily in the business of investing… –
  1471(d)(5)(C)
‗Financial Institutions‘ Generally Affected

• Banks (whether commercial or savings), savings and loans,
  thrifts, credit unions, building societies, etc.


• Broker dealers, clearing organizations, custodians, employee
  benefit plans, trust companies, etc.


• Hedge and private equity funds, funds of funds, mutual funds,
  ETFs and all other collective investment and securitisation
  structures
Comments on Selected FFIs


• Funds


• Employee benefit plans
    • Limited ‗same country‘ exception


• Trust companies and individual trusts


• Life insurance companies
Identifying ‗Account Holders‘ - Individuals

• Existing accounts v New accounts
• Pre-existing individual accounts
    •   Search electronic databases for indicia of US status
    •   Where US, must obtain W-9
    •   Where US place of birth or mailing/residence address
          •   If claiming non-US status, W-8 plus non-US passport
    •   Other indicia only require W-8
          •   Beware ‗care of‘ and ‗PO Box‘ addresses generally

• Transition to new account rules
    •   Five years generally
    •   Two years where account greater $1,000,000

• New accounts
    •   Documentary evidence required
Identifying ‗Account Holders‘ - Entities

• Entities
• Classify entity as FFI or NFFE
    • Participating, non-participating, deemed compliant, excepted,
      recalcitrant or other…
• Identify each individual with an ‗interest‘; and
    • Obtain documentation applicable to new individual account holders
• New accounts
        • must refer to all information collected
        • regardless of whether electronically searchable…
Frequent Reactions


• But we don‘t have US clients…


• We‘ll stop taking on US clients….


• Do you have US investments?
    • All that matters!!!
Frequent Reactions


• But we don‘t have US clients…


• We‘ll stop taking on US clients….


• Do you have US investments?
    • All that matters!!!
Client‘s Perspective

• Implications for all US taxpayers not fully tax and reporting compliant


• Am I US?
    •   Citizen;
    •   Green card holder; or
    •   Resident


• Worldwide tax and reporting
    •   Regardless of residence
    •   Credits generally available for taxes paid, but must be claimed!
Client‘s Perspective - Expatriation

• Expatriation?
    •   Citizens
    •   Green card holders
• Exit tax regime from mid 2008
    •   Deemed sale of assets
    •   Tax on deemed gains in excess of $600,000
    •   Additional implications
• Exceptions
    •   Dual citizens from birth
    •   Age 18 1/2
Client‘s Perspective – Expatriation


• What if not fully tax and reporting compliant?


• Expatriation exit tax regime applies unless
    • Can certify full compliance for last five years


• Voluntary disclosure
Client‘s Perspective – Voluntary Disclosure

• Special disclosure program expired 15 October 2009, BUT
• Long standing IRS voluntary disclosure policy
    • See IRM 9.5.11.9 — Voluntary Disclosure Practice
    • No criminal prosecution
    • Must come to IRS before they come to you
    • Several options for proceeding – ‗Quiet‘ v ‗Noisy‘
• Most recent UBS client sentence
    • 50% account value, plus tax interest and other penalties
    • One year jail followed by house arrest
London




New York




Geneva

            Implications of the New HIRE Act
Greenwich
            Rules:

Hong Kong
            The Trustee View

Milan       Jay Rubinstein, Withers LLP, Geneva
            26 September, 2010
            jay.rubinstein@withersworldwide.com

New Haven
Overview


• Recent History of Foreign Trust US Tax Concerns


• Is a Trust an FFI? NFFE?


• Disclosure and Identification Rules as to beneficiaries and
  settlors


• Additional Hire Act rules implicating trusts
Recent History of Trustee US Tax Concerns


• Distinctions between ―foreign trust‖ vs ―US trust‖ and ―grantor
  trust‖ vs. ―non-grantor trust‖
• Application of QI rules beginning in early 2000‘s
• Proper trustee and beneficiary disclosures on
    • Trust distributions
    • Holding companies
    • Foreign bank accounts
• Now FATCA
Trust As NFFE – US Persons with a ‗Substantial
Interest‘ (10% Interest?)

• Beneficiaries or settlor?


• Foreign grantor trust – settlor
    •   1473(2)(A)(iii)(I)
    •   Trust revocable or or distributions limited to settlor / spouse during settlor‘s
        lifetime
    •   Slightly different rules for certain pre Sept 19, 1995 trusts


• Foreign non-grantor trust – beneficiaries
    •   1473(2)(A)(iii)(II)
Trust as NFFE - Beneficiaries of Discretionary
Trusts as ‗Account Holders‘

• Who is a beneficiary:
    • Letter of wishes?
    • Will new IRC section 679 provisions apply?


• Potential beneficiary attribution regimes:
    • Maximum exercise of discretion
    • Pattern of distributions
    • Trust terms
    • Other?
Identifying Trust ‗Account Holders‘

• Where to begin?


• Notice requires
    • Identify each individual with an ‗interest‘; and
    • Obtain documentation applicable to new individual account holders
    • New accounts
        • Must refer to all information collected
        • Regardless of whether electronically searchable
        • Notice section III.B.3.b.
But is a Trust / Trust Company An FFI?
FATCA - Financial Institution Defined

• Accepts deposits in ordinary course of banking or similar
  business – 1471(d)(5)(A);


• Holds financial assets for the account of others as a substantial
  portion of its business – 1471(d)(5)(B); or


• Engaged primarily in the business of investing – 1471(d)(5)(C)
‗Financial Institutions‘ Generally Affected –
AND NOTICE POTENTIALLY AFFECTING TRUSTS

• Banks (whether commercial or savings), savings and loans,
  thrifts, credit unions, building societies, etc.


• Broker dealers, clearing organizations, custodians, employee
  benefit plans, etc. [ TRUST COMPANIES? (PTC‘s??) ]


• Hedge and private equity funds, funds of funds, mutual funds,
  ETFs and all other collective investment and securitisation
  structures [ INDIVIDUAL TRUSTS ?? ]
Trusts and Trust Companies


• Trust companies
   • Treated as entity holding assets for the benefit of others
   • Notice 2010-60 section II.A.2.


• Trusts
   • ‗Small family trust‘ listed as an example of an FFI
   • FFI status supposedly arising under Section 1471(d)(5)(C) which
      requires that the entity be primarily in the business of investing
   • Notice 2010-60 section II.B.3.
Trusts as FFIs?

• Primarily in the business of investing?


• Existing US classification rules indicate otherwise
    • Regulation section 301.7701-4
    • Ordinary trusts
        • arrangement to protect property for beneficiaries
    • Business trusts
    • Investment trusts
        • generally classified as a ‗business entity‘ for US purposes
Trusts as FFIs (con‘t)

• Trusts as FFIs effectively contradicts other FATCA provisions


• Section 1473(2)(A)(iii)(II) and 1473(2)(B)
    • Substantial US account holder exists where > 10% of trust
      attributed to US person; but
    • Where FFI is primarily in business of investing, substantial US
      ownership exists if anything attributed to a US person
    • If all trusts are treated as FFIs, then 10% test can never apply to
      trusts not withstanding express language that it does apply to
      trusts
OTHER HIRE ACT RULES-
Reporting of Specified Foreign Financial Assets

• In addition to current FBAR reporting
• Reporting of ―specified foreign financial assets‖ that exceed $50,000
  (aggregate)


    • Any financial account maintained by a foreign financial institution;
    • Any of the following assets not maintained in a foreign financial
       account: non-US stock; any interest in a non-US entity; any
       financial instrument or contract with a non-US counter-party
Reporting of Specified Foreign Financial Assets


• Applies to US individuals; IRS has authority to extend to US
  entities
• May apply without regard to whether that individual owns more
  than 50% interest in trust owning such foreign accounts or
  assets
• Reporting on US income tax return (IRS Form 1040)
• Failure to report subject to penalty of $10,000; additional
  penalties up to $50,000 could apply
Passive Foreign Investment Company Reporting


• Definition of Passive Foreign Investment Company (PFIC)
   • 75% of gross income is passive income or 50% average passive
      assets
• Old rule (IRS Form 8621)
   • Upon distributions; upon disposition; upon making an election
• New rule
   • annual reporting obligation regardless of whether any taxable
      event has taken place during the year
Uncompensated Use of Trust Property
• Deemed distribution of income or gains
    • Only for uncompensated use of trust property
    • Only if used by US person beneficiary
    • Only for foreign (non-US) trusts
• Amount of distribution equal to the FMV use of property;
    • Taxable if trust generates income or gains
    • Interest charges if there is accumulated income or gains
    • In all events, reporting of distribution
        • Information statement from trustee to meet US reporting
           obligations
Uncompensated Use of Trust Property


• Impacts any foreign trust that holds property used by a US
  person
    • Real property, art, jewelry, automobiles, yachts and airplanes.
• Exception where beneficiary pays FMV for use of property
  within a ―reasonable period of time‖
    • Rent payment can give rise to passive income subject to 30%
      withholding
Uncompensated Use of Trust Property—
Planning Options

• Segregate the use property in a separate ―dry‖ foreign trust


• Domesticate the use property to a US trust (watch for carrying
  out income)


• Sell property to a grantor trust (watch for gain recognition)
London




            Responses to the New Hire Act
New York


            Rules:
Geneva


            Comments and possible strategies
Greenwich




            Richard Cassell, Withers LLP London
Hong Kong



            26 October 2010

Milan




New Haven
IRS Notice 2010 – 60


• These are only proposals and are open for comment
• IRS specifically is looking for comments as to impact on trusts
  and practical trust issues
• We are assembling comments from interested parties
• In order to be effective the comments must be specific and
  targeted. There is no point in requesting blanket exemptions or
  grandfathering
Surprises in the Notice

• Every trust is an FFI – not the trustee, but the trust, but not undefined
  ―small family trusts‖
• Does offer opportunity for a trust to elect to participate separately from
  trustee but of limited practical use
• Multiplicity of reporting, for example, for private trust companies with
  professional service provider, but confusion about responsibility
  (custodian? Paying agent? FFI?)
• Concept of US financial institution – treated like a participating FFI but
  not defined – does it include US partnerships and US trusts?
• As a result of all trusts being FFIs this ignored Section 1472 definitions
  of US owners and 10% restriction
Comments

•   IRS will be deluged with pointless information (like the FBAR reports) as a result
    of including every non-US trust in the world as an FFI. Should only trustees be
    FFIs not trusts?
•   Should the definition of ―small family trust‖ be expanded? How big is small?
    What is a family?
•   Will the disclosures be limited to the last participating FFI in the chain or will
    intermediate participating FFIs be required to maintain parallel disclosure?
    What about potential inconsistencies in disclosure?
•   Will certification by a participating FFI provide effective disclosure exemptions?
•   Should there be any separate category for charities?
•   How do you value a US beneficiary‘s discretionary trust balance?
Strategies

• Segregate trusts between those with US and non-US investments.
  Those with only non-US investments can be non-participating FFIs.
• Generally strategy must be to manage the disclosure. We expect
  clients will generally need a participating FFI – it must be preferable to
  control the disclosure in the FFI
• A strategy to limit disclosure to third parties may be to use a US
  partnership to segregate all US investments and to manage the
  disclosure – a strategy that could exploit the exemption for family
  offices that we expect under Dodd-Frank regulations
• Eliminate US beneficiaries who are not intended actually to benefit from
  discretionary trusts
Client reactions


• Anticipate disclosure or divest from US but a strategy to avoid
  all US investments seems very restrictive
• If the clients are non-compliant the voluntary disclosure program
  is still open for business and this is the opportunity to become
  compliant
• We anticipate that some compliant clients may use this as the
  opportunity to look at expatriation –covered expatriate limit is
  currently $2m

								
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