New FATCA regulations briefing highlights intergovernmental approach

Briefing on new proposed
FATCA regulations
Financial Services

15 March 2012

Agenda

1) Welcome and introductory comments
Koen Marsoul

2) The New proposed regulations of February 8, 2012: highlights
and insights
Koen Marsoul

► Overview and highlights of new proposed regulations
► Market Reaction
► Key changes
► Insights and implications
► What next?

3. The FATCA Challenge
Sylvie Goethals

4. Wrap-up and question time
Koen Marsoul and Sylvie Goethals

Page 2 15 March 2012 Briefing on new proposed
FATCA regulations

Welcome and introductory
comments

by Koen Marsoul

15 March 2012

The New proposed regulations
of February 8, 2012: highlights
and insights
by Koen Marsoul

15 March 2012

Overview and highlights of new proposed
regulations

Overview of draft regulations

• Abolishment of concept of Private Banking
• ―High value‖ individual account threshold increased to US$1m
• de minimis thresholds for insurance contracts and entity accounts introduced: US$250k
• Expanded scope of ―Deemed Compliant‖ Foreign Financial Institutions (FFI)
• Introduction of ―Limited FFIs‖ to help with legal and data privacy barriers some FFIs face
in complying with FATCA
• Deadlines unchanged for enhancements to new account onboarding processes and
systems
• Reliance on existing KYC/AML processes and information for account due diligence and
new account on-boarding
Highlights
• Significant clarity on due diligence required for Non Financial Foreign Entities (NFFE)
• Clarifies scope and responsibilities for US and foreign (Non-US) withholding agents
• IRS reporting on ―Specified US Persons‖ in 2014 and 2015 focused on account holder
identification
• Reporting on Specified US Persons in 2016 and 2017 phases-in income and gross
proceeds reporting
• Phased withholding begins in 2014 for US sourced income and gross proceeds
• Withholding on foreign passthru payments no earlier than 1 January 2017
• No obligation to check if account holders have a green card or dual nationality individuals
• ―Grandfathered obligation‖ exception extended to 1 January 2013

• Treasury also released a joint statement from the United States, France, Germany, Italy,
Spain and the United Kingdom announcing an agreement to explore an intergovernmental
approach to FATCA implementation
Potential • Would allow FFIs in each ―FATCA partner‖ country to report required information to each
intergovernmental country's tax authority, rather than to the IRS directly. Foreign tax authorities would, in turn,
FATCA approach pass information to the IRS under the respective countries‘ Treaty Exchange Information
Agreements
• Eliminates certain onerous aspects of FATCA, such as foreign passthru payment
withholding, for FFIs in partner countries

FATCA regulations

Market reactions to draft regulations

► On 8 February the proposed regulations were published by the IRS
covering 388 pages, including a preamble of 93 pages. Do not
underestimate the time required for sign off from key stakeholders

FATCA regulations

Section #

1. General
Section and overall scope

1. General and overall scope
Additional guidance has been provided on what constitutes a financial institution or financial account, but otherwise the
overall scope for banking and asset management is broadly speaking unchanged. Insurance companies have greater
clarity on which products are in and out of scope.

No. Category Guidance under the Notices Proposed Regulations Implications
1.1 FFI Agreements Each FFI that intends to become The Treasury and the IRS intend to Despite the lack of a draft FFI
a participating foreign financial publish a draft model FFI Agreement Agreement, the Proposed
institution (PFFI) will be required in early 2012 and a final model in Regulations set forth the general
to execute an FFI Agreement autumn 2012. requirements that will apply to an FFI
with the IRS. The exact terms under the FFI Agreement. Especially
and language of the agreement in light of the relative short comment
have not yet been released. period for the Proposed Regulations,
FFIs should commence assessing
their capacity to comply with the
Agreement‘s requirements and, if
applicable, may want to consider
providing comments to the Treasury
and the IRS.

1.2 Joint statement A joint statement was made by the While this approach may deal with
UK, France, Germany, Italy, Spain any potential conflicts between
and the United States that they will FATCA and laws in FFI home states
develop an intergovernmental and mitigate the more onerous
approach to FATCA in exchange for a remove the worst aspects of FATCA,
reciprocal agreement by the United in particular the passthru payment
States. It is likely that if this approach regime, it appears that customer
is pursued then other countries would identification and documentation
follow suit, both in the EU and requirements will broadly remain the
elsewhere. same.

FATCA regulations

The concept of deemed compliance has been expanded.

1.3 Deemed Certain FFIs may be deemed The deemed compliance rules have Deemed compliance status may
Compliance compliant even though they do been expanded beyond earlier especially be of interest to certain
not enter into an FFI Agreement, guidance. Certain FFIs may be retirement funds, non-profit
provided certain conditions are treated as deemed-compliant without organisations, and members of
met. For example, a local FFI having to register with the IRS, if they groups with other members that are
with no operations or customer satisfy certain conditions. participating FFIs. Because of the
solicitation outside of its home restrictions in place, other types of
However, depending on the type of
country, which engages in financial institutions such as banks
FFI, geographical restrictions on the
customer identification to ensure may find it difficult to avail
location of business, restrictions on
there are no US (or certain other themselves of deemed-compliant
permitted account holders, limitations
types of) accounts, and which status.
on the value of balance sheet assets,
agrees to transfer or close any
etc., may apply in order to qualify for
such account that it finds, may
deemed compliance status.
qualify as a deemed-compliant
FFI if certain requirements are
satisfied.

FATCA regulations

The Expanded Affiliated Group can contain a Non-participating FFI during two years. The concept of the Limited FFI does
involve being withheld upon.

1.4 Expanded For groups of financial Members of an EAG generally must The window allowed for bringing all
Affiliate Group institutions each member of the be either a PFFI or a registered members of the EAG into compliance
(EAG) ‗expanded affiliate group‘ (EAG) deemed-compliant FFI. However, should be welcome relief for certain
must be a PFFI or a deemed- certain branches and FFI affiliates that FFI groups. However, it is important
compliant FFI in order for any are unable to comply with all the that the conditions are satisfied and
group member to avoid requirements in the FFI Agreement that alternative solutions are effected
withholding under FATCA. An because of local law restrictions will before the end of the ―grace period‖.
EAG generally includes every not necessarily ―taint‖ other members
non-US financial institution that of the EAG before 1 January 2016
is more than 50% owned by a During this ―grace period‖, such
common parent. Each EAG branches and affiliates are generally
generally is required to treated as non-participating FFIs and
designate a lead FFI to act as a are required to satisfy certain other
central contact point with the requirements.
IRS for certain issues
concerning the members of the
group.

FATCA regulations

Insurance products remain in scope but de minimus rule for pre-existing contracts has been introduced. Changes to
previous deemed compliance rules for funds may not be satisfactory.

1.5 Product Scope There is some uncertainty Insurance companies (and holding Insurance remains in scope for
(Insurance) around the product scope for companies of insurance companies) FATCA despite many of the
insurance. Guidance suggests generally are expressly included in representations made by global
that the insurance contracts with the definition of financial institutions. insurance companies. The de
a cash value or investment minimis rule for pre-existing
Insurance contracts with a cash value
component are within scope. contracts will significantly reduce the
will be in scope subject to a $250,000
number of contracts which have to
de minimis rule for pre-existing
be reviewed. However, changes for
contracts.
new customers will remain a key
issue for securing FATCA
compliance.

1.6 Product Scope There is some uncertainty There is additional guidance on the Asset managers will need to assess
(Asset around the product scope for application of FATCA to funds and the the impact across their fund range
Management) certain investment vehicles. The asset management industry. However and quickly determine where
IRS and the Treasury are many of the technical issues raised by uncertainties in the Proposed
considering whether, for asset managers in comments to Regulations still raise concerns and
example, exchange traded funds Treasury have not been addressed. consider highlighting these to the
may qualify as deemed- IRS.
Additionally, the scope for deemed-
compliant FFIs.
compliant status for investment funds
has been expanded but contains
some key restrictions.

FATCA regulations

Compliance self-certification required.

1.7 CCO The Chief Compliance Officer or The FFI Agreement will require the Mechanisms and procedures need to
another equivalent-level officer PFFI to adopt written policies and be established to allow and support
(responsible officer) of an FFI procedures on due diligence and to the officer sign-off and certification.
will be required to certify to the conduct periodic reviews of its
In large and diverse organisations
IRS to compliance with these policies and
establishing and maintaining the
(1) the timely completion of procedures.
appropriate control mechanisms may
various steps in the account In addition, a responsible officer must be burdensome.
identification procedure as also certify to the IRS that (1) the PFFI
prescribed in Notice 2011-34, has completed various stages in the The Treasury Department and the
(2) the absence of any activity or account review and identification IRS request comments regarding the
policy in place between the process at prescribed times and (2) scope and content of such reviews
publication date of Notice 2011- the PFFI did not have any formal or and the factual information and
34 and the effective date of the informal practices in place from 6 representations FFIs should be
FFI Agreement assisting or August 2011 through the date of the required to include as part of such
encouraging circumvention of certification to assist account holders certifications
US account identification in avoiding the FATCA rules.
procedures and For a registered deemed-compliant
(3) the existence of written FFI the Chief Compliance Officer (or
policies and procedures in place an individual of equivalent standing)
as of the effective date of the also has certification obligations
FFI Agreement prohibiting regarding the FFI‘s satisfaction of
employees from advising US relevant requirements.
account holders on how to avoid
having their US accounts
identified..

FATCA regulations

External audits not routinely required. De minimis rule for individuals is largely unchanged. Aggregation rules have been
further detailed with new role for relationship manager. New de minimis rule for entities.

1.8 External audit The existence of a requirement The FFI agreement will not require It is being considered to coordinate
to have external audits that compliance be verified through the audit requirements for QIs with
performed was unclear. third-party audits on a predetermined the verification procedures for PFFIs.
or random basis.
In case IRS has concerns about
compliance it may impose ,
enhanced compliance verification
requirements such as an external
audit .
1.9 De minimis Accounts held by individuals The de minimis rule for individual Aggregation was the most significant
Rule with a balance not exceeding accounts is largely unchanged. change (to Banks in particular) when
$50,000 may be treated as non- Aggregation in applying the de applying the de minimis rules. These
US and therefore outside the minimis threshold is only required changes mean that FFIs will need to
scope of the FATCA where the accounts are already linked revisit decisions made around
documentation and reporting by the FFI‘s computerised systems or applying the de minimis thresholds
requirements. For purposes of for accounts that a relationship and should reduce the compliance
determining the account manager has reason to know are burden in retail banking in particular.
balance, an FFI is required to owned by the same person. The de minimis rule may remove the
treat as a single account all A new de minimis threshold of need to establish whether an entity is
accounts treated by the FFI (or $250,000 has been introduced in excepted (for example as trading) or
its affiliates) as commonly respect of entity accounts. establish the ownership for entities
owned under the FFI‘s and will be particularly beneficial to
computerized recordkeeping commercial and SME relationships
systems. meaning a significant reduction in
cost for those segments of the
business.

FATCA regulations


1.10 Private Banking There are heightened account The additional private banking Whilst high value accounts remain a
identification requirements on requirements have been removed. focus of the Proposed Regulations,
FFIs with respect to accounts Instead there is an ‗enhanced review‘ the changes result in a better defined
classified as private banking for all preexisting individual accounts framework for private banking
accounts. The definition is with a balance or value exceeding departments and wealth managers to
based on a number of criteria $1m. apply and should reduce the scale of
and potentially includes areas the task faced.
This enhanced review involves an
not typically considered to be
inquiry into the knowledge of the Relationship managers will still be
within private banking. In
relationship manager and a review of involved in this process and may
addition, Relationship Managers
a defined list of documents—there is need to identify changes in
are required to personally
no longer a requirement to review all circumstances of an account.
perform identification
documents held by the FFI.
procedures on certain private Overall there remains a substantial
banking clients, and to create training and compliance burden of
and maintain lists of US, non- private banks and on the relationship
US and recalcitrant accounts. managers.
1.11 Grandfathered Withholding under FATCA Grandfathering has been extended to Extended grandfathering means that
Obligations generally is not required with cover obligations outstanding on 1 more products are likely to be out of
respect to obligations January 2013. scope. For example, a life insurance
outstanding on 18 March 2012. contract that is payable upon the
earlier of reaching a stated age or
death is grandfathered if it is
outstanding on 1 January 2013.

FATCA regulations


1.12 Certain New New provisions have been introduced The scope of products benefiting
Provisions to exclude certain retirement, pension from this rule will need to be
and other tax-favoured accounts from considered in each local market but
the scope of FATCA provided they this should reduce the process and
meet specific criteria. system changes.
Debt and equity interests in financial
institutions other than investment
vehicles generally are not treated as
financial accounts unless the value of
the interests is determined primarily
by reference to assets that give rise to
withholdable payments.

FATCA regulations

Section #

2. New
Sectionaccounts

2. New accounts
The most pressing deadline for FFIs is to have a FATCA compliant on-boarding process by 1st July 2013. Despite positive
commentary from Treasury accompanying their release on FFIs being able to rely extensively on existing customer intake
procedures, changes may be needed to FFIs’ processes.

No. Guidance under the Notices Proposed Regulations Implications
2.1 Obtain documentary evidence to Whilst the intent appears to be that FFIs The requirement to review and/or obtain
establish if a customer is a US or generally may rely on existing account- paper copies may create a significant
non-US person. opening procedures, the requirement to burden for those markets where paperless
obtain/review government-issued AML/KYC checks are in place. This will
identification for individuals generally has involve a material change to procedures
remained. particularly for telephone and on-line
channels.
2.2 Review the customer file for US Broadly, the scope of US indicia is Manual or automated processes will need
indicia and if US indicia are identified unchanged except that a US telephone to be put in place to review information
obtain the appropriate documentation number has been added as one of the captured during the on-boarding process
to establish status. US indicia include possible US indicia. to check for US indicia.
US citizenship or permanent resident
―Care of‖ addresses outside of the US New processes will need to be created for
status, a US birthplace, a US
remain one of the US indicia for new accounts where US indicia are identified to
residence or correspondence
accounts. gather additional documentation.
address, standing instructions to
transfer funds to an account in the Critically, there is no positive duty on FFIs
US, an ―in care of‖ or ―hold mail‖ to capture new information above what is
address that is the sole address for currently required by KYC/AML
the client, etc. Documentation requirements to positively rule out all US
required to be furnished may include indicia. Subject to the issue with
one or more of the following: a US documentary evidence above, no additional
tax certificate (Form W-9 or Form W- information gathering is mandated for
8BEN), a non-US passport, written individuals.
explanation regarding renunciation of
or failure to acquire US citizenship,
etc.

FATCA regulations

2. New accounts
Additional classifications for identification of Payees have been introduced and NFFE treatment has changed.
(Additionally changes to the proposed regulations have been announced)

2.3 Establish the status of each entity The Proposed Regulations contain very Many FFIs are already aware that the
account holder as a US entity, PFFI, specific details on the identification of entity analysis was complex. The
non-financial foreign entity (NFFE), entities - with the documentation Proposed Regulations indicate that the
etc., and if necessary obtain requirements varying according to the entity complexity remains but the end result
information on the ownership of an type and potential FATCA classification. should be that FFIs would need to
entity account holder. ascertain the ownership makeup of fewer
There is a significant amount of detail
entities.
contained in these rules, including
standards of knowledge and presumption
rules, indicating that new entity
identification may be a complex procedure
for FFIs to apply.

FATCA regulations

Section #

3. Pre-existing accounts
Section

Changes have been made to the process of reviewing pre-existing accounts– for example, the heightened review
procedures for private banking accounts have been replaced by an enhanced review requirement on high-value accounts
– but the overall framework is largely similar.

3.1 Perform a diligent (paper file) review Enhanced review for pre-existing individual The higher threshold amount below which
of records of pre-existing private accounts with a balance or value exceeding electronic searching is permissible should
banking accounts and accounts with $1m, as described in 1.9 above. reduce the burden of many FFIs.
a balance or value of $500k or more.

3.2 Search electronic records on pre- The requirements to search for US indicia, The change of rules on ―care of‖
existing accounts for US indicia as well as what constitutes US indicia, are addresses, whilst appearing relatively
(subject to the de minimis exception largely unchanged, although a US minor, should significantly reduce the
for individual accounts described telephone number has been added as one numbers of customers impacted by
above). For accounts with US indicia, of the possible US indicia. In addition, FATCA with no connection to the US.
obtain additional documentation to solely for purposes of electronic searches
A challenge for FFIs will be to design an
establish account as US or non-US. on pre-existing individual accounts, an ―in
appropriate search which correctly
US indicia include US citizenship or care of‖ address that is outside of the
identifies US telephone numbers and does
permanent resident status, a US United States by itself does not give rise to
not pick up accounts in other countries
birthplace, a US residence or US indicia.
such as Canada.
correspondence address, standing
instructions to transfer funds to an
account in the US, an ―in care of‖ or
―hold mail‖ address that is the sole
address for the client, etc.
Documentation required to be
furnished may include one or more of
the following: a US tax certificate
(Form W-9 or Form W-8BEN), a non-
US passport, written explanation
regarding renunciation of or failure to
acquire US citizenship, etc.

FATCA regulations

Insurance companies should benefit significantly from the new de minimis limit.

3.3 Establish the status of each entity The Proposed Regulations contain very There is a significant amount of detail
account holder as a US entity, PFFI, specific details on the identification of contained in these rules, indicating that
NFFE, etc., and if necessary obtain entities - with the documentation review of pre-existing entity accounts may
information on the ownership of an requirements varying according to the entity be a complex procedure for FFIs to apply.
entity account holder. type and potential FATCA classification.
The end result should be fewer entities
which the FFI is required to look through to
identify US owners.
3.4 Annual retest of all pre-existing Across-the-board annual retesting is not Whilst an ongoing monitoring process
individual accounts to determine if required under the Proposed Regulations. needs to be put in place, the higher limits
the high-value threshold ($500,000), However, pre-existing accounts that were will reduce the numbers of customers
which would trigger heightened out of scope under the de minimis rule lose breaching the $1m limit each year.
review procedures, is met (beginning their status if the balance or value exceeds
in the third year following the $1m.
effective date of the FFI Agreement).

FATCA regulations

Section #

4. Reporting
Section

4. Reporting
Under the Proposed Regulations, reporting requirements for PFFIs are phased in over several years.

4.1 Key Dates for PFFIs: Key Dates for PFFIs:
► First reporting to IRS by 30th First reporting by 30 September 2014 on
September 2014, if received a accounts treated as US accounts or as
W-9 by 30th June 2014 recalcitrant accounts as of 30 June 2014.
Thereafter, annual reporting on accounts
generally due by 31 March of each year.

4.2 Annual reporting requirements on all The information required to be reported is The phased reporting period is likely to be
US accounts: largely unchanged. Special reporting rules welcome by FFIs. However in developing
phasing in the amount of information the solution design the full reporting
► Name, address and Taxpayer
required) apply to the 2013, 2014 and 2015 requirements will need to be considered.
Identification Number of
tax years. Account balances and payments
account holder
may be reported either in US dollars or in
► Name, address and Taxpayer the currency in which the amount is
Identification Number of certain denominated. Conversion to US dollars is
US owners of certain entity to be applied using the spot rate on the last
account holders day of the year (or, for the balance of an
► Account number account that was closed during the year,
► Account balance the date of closure).
► Certain other information on
certain payments into and out
of the account (gross amount
of dividends, interest and other
income paid or credited to the
account, etc.)

FATCA regulations

4. Reporting
A new requirement to report certain payments made to non-participating FFIs for 2015 and 2016 has been introduced.

4.3 Annual reporting of the number and The aggregate reporting requirements Whilst not an immediate priority for
aggregate value of financial accounts applicable to recalcitrant accounts are implementation FFIs FATCA solution will
held by recalcitrant account holders, generally unchanged, although a new need to consider recalcitrant and dormant
non-participating FFIs, and requirement to report on the number and account reporting.
recalcitrant account holders with US aggregate value of dormant accounts has
indicia been added.

4.4 New Requirement A PFFI is required to report the aggregate Those FFIs who expect to hold accounts
amount of certain payments made to each of non-participating FFIs will need to build
non-participating FFI for each of 2015 and reporting requirements into the final
2016. Such reportable payments include FATCA solution
non-US source dividends and interest.

FATCA regulations

Section #

5. Withholding
Section

5. Withholding
The rules on withholding on payments other than foreign passthru payments are generally unchanged.

5.1 A withholding tax of 30% is imposed The definition of withholdable payments is The carveouts from the definition of
on certain US-source income, e.g., generally unchanged. However, some withholdable payments should reduce the
dividend, interest (FDAP payments), important carveouts have been introduced; burden of compliance, and the likelihood
and on gross proceeds on the sale of for example, interest on certain short-term of being withheld upon, for many
assets generating US-source interest obligations and "ordinary course" payments institutions.
or dividends, paid to non- for wages, office and equipment leases,
participating FFIs or to recalcitrant software licenses, etc., are not withholdable
account holders. payments
5.2 Withholding is to be implemented in Withholding on foreign passthru payments For those PFFIs impacted developing a
phases: is further delayed and will not apply until withholding solution for US-source FDAP
2017 at the earliest. needs to be built into FATCA
► withholding on US-source
implementation plans. However for PFFIs
FDAP payments commences
that are not directly making US sourced
on 1 January 2014;
FDAP payments to account holders,
► withholding on gross sales developing a withholding capability may
proceeds and withholding not be an immediate priority (except, for
under the ―passthru payment‖ example, if the PFFI is a QI with primary
rules described below withholding responsibility).
commence on 1 January 2015.

FATCA regulations

5. Withholding
There is no further clarification in the Proposed Regulations with respect to foreign passthru payments.

5.3 Key Dates: Withholding on foreign passthru payments See below
is further delayed and will not apply until
► Withholding on gross sales
2017 at the earliest.
proceeds and withholding
under the ―passthru payment‖
rules described below
commence on 1 January 2015

5.4 In addition to the US-source income There is no further clarification in the Developing a solution to foreign passthru
and gross proceeds mentioned Proposed Regulations. The IRS has withholding and calculation of PTP%
above, a PFFI is also required to indicated that further guidance would be should be de-prioritized until greater clarity
withhold on certain non-US source issued on a later date. is available.
payments made to non-participating
However, the industry should engage with
FFIs or to recalcitrant account
the IRS to develop a workable solution.
holders to the extent of the ‗passthru
payment percentage‘ (PTP%) of the
applicable paying or issuing FFI.
Each FFI is required to calculate and
publish its PTP% on a quarterly
basis.
An FFI‘s PTP% is determined by
dividing the sum of its US assets
over its total assets held on each of
the last four quarterly testing dates.

FATCA regulations

FATCA – Proposed Regulations
Modified Implementation Timeline
Identification procedures should be Identification procedures should
completed within 1 year of the effective be completed within 2 years of
date of FFI Agreement for pre-existing the effective date of the FFI
On-boarding process for new Agreement for remaining pre-
accounts must be operational by accounts of ―prima facie FFIs‖ and for pre-
Identification of pre-existing US existing high-value (> $1m) individual existing entity and individual
the effective date of FFI Agreement
accounts should start by 1 st July 2013 accounts accounts
(1 st July 2013 at the earliest)

2012 2013 2014 2015 2016 2017
First reporting
Registration (FFI agreement)
03 for the 2013
Registration with the IRS (1) Effective calendar year
Extended period for full EAG compliance (2) Date due by 30
September 2014
Client identification and account classification
on accounts
New accounts (3) treated as US
Preexisting individual accounts accounts or as
High-value accounts > USD 1 million (4) recalcitrant
Remaining accounts ≤ USD 1 million (5) accounts as of
Preexisting entity accounts 30 June 2014
Accounts of prima facie FFIs (4)
Remaining accounts (5)
Withholding
Withholding on US-source FDAP payments Withholding on
Withholding on gross proceeds foreign passthru
Withholding on foreign passthru payments payments is
further delayed
Reporting (6)
and will not
Reporting of U.S. accounts apply until 2017
30.09.2014 31.03.2015
identifying info (7) + account balance at the earliest
31.03.2016
+ income paid or credited to account 31.03.2017
+ gross proceeds
Aggregated reporting of recalcitrants (8) Thereafter,
Reporting of payments made to NPFFIs (9) annual reporting
on accounts
Withholding on US-source FDAP payments generally due by
commences on 1 January 2014 31 March of
each year
(1) The online process for registering an FFI as a PFFI or a Deemed Compliant FFI will be open no later than January 1, 2013. The effective date of the FFI agreement will be July 1, 2013 or later.
(2) Certain ―limited branches‖ and ―limited FFIs‖ that are unable to be fully compliant as a result of local law restrictions may remain non-participating until December 31, 2015 without tainting the other members of the EAG
group, although they may be subject to withholding.
(3) Accounts opened on or after the effective date of the FFI agreement.
(4) Within one year of the effective date of the FFI agreement—earliest effective date is July 1, 2013.
(5) Within two years of the effective date of the FFI agreement—earliest effective date is July 1, 2013.
(6) This slide does not address reporting requirements of withholding agents that are not FFIs.
(7) Name, address, TIN and account number either (i) of the account holder that is a specified U.S. person or (ii) of the U.S. owned foreign entity (TIN if available) and of each substantial U.S. owner of such entity.
(8) Separate reporting of recalcitrants with U.S. indicia and of dormant accounts (each on an aggregated basis) required.
(9) Payments of ―foreign reportable amounts‖ (including non-U.S. source FDAP payments) to NPFFIs made in 2015 and 2016 required to be reported.

FATCA regulations

Proposed regulations introduce new
concepts and new timelines
Participation
► The IRS has published 380+ pages of proposed regulations. Within these,
steps have been made to reduce the implementation effort
► The Lead FFI will remain responsible for the coordination of the application
process for the entire Expanded Affiliated Group
► A new class of ―Limited FFIs‖ has been introduced to allow the transition of
members of an EAG that have laws prohibiting the tax withholding or
reporting required under FATCA. These limited FFIs are provided additional
time to (fully) implement FATCA (max 2 years)
► Introduction of an additional ―joint statement‖, separate from the proposed
regulations, entailing that an agreement is made between local tax
authorities and the U.S., replacing the need for FFIs in the respective
―partner‖ countries to sign an agreement with the IRS

Preliminary conclusion: the FFI will face less legal barriers but will be confronted
with a ‗two tier‘ FATCA (partner countries versus non-partner countries)

FATCA regulations

Identification
► For new accounts the identification procedures and necessary
documentation are aligned with local AML/KYC legislation
► Threshold for manual reviews increased from $500K to $1,000K for pre-
existing individual accounts
► Threshold for pre-existing entity accounts, of $250K has been introduced
► The special rules in the Notices for so-called "private banking accounts―
are eliminated
► Relationship manager involved in the aggregation of accounts.
► New complex regulations on the identification of payees are introduced

Preliminary conclusion: the FFI will face less stringent rules in identification, but will
be confronted with additional requirements on payee identification

FATCA regulations

Transition rules for affiliated groups / reporting
► The limited FFI status prevents a non-participating FFI or branch that
is subject to foreign laws that prohibit FATCA compliance from
disqualifying an otherwise participating FFI group during a transition
period. The transition period will end January 1, 2016 and these limited FFIs
or branches will be subject to withholding upon receipt of withholdable
payments.
► The proposed regulations extend the transition period on the scope of
information reporting by FFIs as follows:
► 2014 and 2015: FFIs must begin reporting name, address, TIN and account
balance of U.S. accounts
► 2016: FFIs must begin reporting income associated with U.S. accounts
► 2017: FFIs must begin reporting gross proceeds from securities transactions

Preliminary conclusion: the FFI will face less legal barriers in reporting and is
allowed more time to meet the reporting requirements

FATCA regulations

Withholding
► Scope of withholding per 1 January 2014 is limited to NPFFIs and
withholdable payments to recalcitrant account holders
► Full withholding will not start before January 1, 2017
► Passthru payments concept will not be introduced earlier than 1 January
2017. The definition of passthru payments has been delayed.
► Many additional regulations (~100 pages) have been published for
withholding. Market induced changes are expected for the final regulations
in the summer of 2012.

Preliminary conclusion: FFIs can await the summer regulations to identify the
activities that are needed to sustain its decision to avoid withholding. This allows for
full focus on identification and reporting first.

FATCA regulations

De minimis rule

The proposed FATCA regulation provides thresholds (de minimis rule) on the balance or value of
accounts to limit efforts of FFI’s in identification of their preexisting accounts

Preexisting individuals accounts Preexisting entity accounts
► FFI is allowed to treat preexisting ► FFI is allowed to treat any preexisting
individuals depository accounts entity financial accounts with a balance
previously documented as U.S. or value of $250K or less as Non U.S.
accounts with a balance or value of $50K accounts
or less as Non U.S. accounts
► FFI is allowed to treat any preexisting other
individuals financial accounts with a
balance or value of $50K or less as Non
U.S. accounts
► FFI is allowed to treat preexisting cash
value insurance or annuity contracts
with a balance or value of $250K or less as
Non U.S. accounts

FATCA regulations

High value accounts and aggregation rules

The proposed FATCA regulation provides thresholds (de minimis rule)or value balance or value of
High value account - preexisting individual accounts that have a balance on the that exceeds
accountsat the end of theof FFI’s in identification thetheir preexistingthe participating FFI‘s
$1,000K to limit efforts calendar year preceding of effective date of accounts
agreement with the IRS, or at the end of any subsequent calendar year
High-value account subject to the additional enhanced review requirements that include
► relationship manager inquiry (if there is such a manager in an FFI) and
► a review of the current customer master file and other documents (e.g. account opening contract,
documentation for purposes of AML due diligence, any power of attorney) that are associated with
the account and were obtained by the participating FFI within the last five years

Aggregation of accounts (applicable to de minimis rule and High value accounts)
► For purposes of applying de minimis rule and identification of High value accounts FFI should
aggregate value of accounts held by an individual and maintained by the FFI, or members of its
expanded affiliated group.
► However aggregation is required only to the extent that the FFI‘s computerized systems link the
accounts by reference to a data element such as client number or taxpayer identification number.
► FFI is also required to aggregate all accounts of a High value account holder that a relationship
manager has the ability to aggregate

FATCA regulations

Section #

1. Banking specific
Section
implications

Insights and implications of the draft
regulations
Topic Obligations Implications
► Removes all individual relationship-
1. Private ► Private banking concept removed and
managed business below $1m from
Banking replaced with >$1m threshold
diligent review

► Applies to accounts >$1m ► Reduced number of customers to review
2. Diligent
► Electronic review required plus ―paper ► Must be completed within 1 year
review
search‖ of documents ► Defined set of documents to review
threshold
changes ► Relationship Manager to act on ► Procedures required to track change of
knowledge of change of circumstances circumstance

3. Pre- ► $50k de minimis remains, raised to
► All customers will need to be classified
existing $250k for cash value insurance and
annuity contracts ► Identification of customer data
individual
customers ► Indicia searches modified ► Management of search output to provide
(<$1m) evidence of customer status
► Account aggregation rules clarified

► Reliance on existing KYC/AML ► Unclear status of e-KYC: need to see
4. New processes, but… ―documentary evidence‖
individual
customers ► Response required if US indicia arise ► Exceptions process needed if US indicia
during due diligence processes identified through existing KYC/AML

FATCA regulations

regulations
5. Pre- ► 12 months to review and document FFI ► Identification of FFIs
existing customers ► Identification of NFFE type
entity ► < $250k excluded ► 10% ownership threshold for passive
customers ► Passive NFFEs key focus NFFEs

► Documents required to define NFFE in
► Actively trading non-financial foreign
active trade or business
6. New entity entities are exempt
customers ► Need to obtain certification from account
► Passive NFFEs, e.g. investment entities
holder to establish US owners for
clarified as the major focus
passive entities

► Jan 1 2014 – FDAP
7. Passthru & ► Jan 1 2015 + gross proceeds ► ―foreign passthru payments‖ not defined
Withholding ► Withholding not required on foreign in regulations
passthru payments until Jan 1, 2017

Extension of timelines:
► Data must be collected about the year
► Initial US accounts reporting for 2013 &
prior to reporting
8. Reporting 2014
► Design options for timing of building
► Income reporting starts 2015
reporting capability vs. activation
► Gross proceeds reporting starts in 2016

FATCA regulations

regulations
► Simplified compliance for FFIs in partner
► Timing uncertain – domestic legislation
countries
9. Joint to be enacted
► Reporting to local tax authorities instead
Statement ► Information still required
of direct to IRS
► Potential for additional partner countries
► No withholding within partner countries

► Apply by 30 June 2013
► Draft FFI agreement due early 2012
► Periodic attestation by responsible
► FFI required to have written policies &
10. FFI officer
procedures
Agreement ► Mechanics of group or multiple
► Transitional arrangement possible for
attestations / FFI agreements not
some members of EAG
defined

► New categories of deemed compliant
FFIs (more may be added)
11. Deemed ► Restrictions on definitions may reduce
Compliance ► Intent to focus FATCA on global usefulness of status
investment community rather than truly
local entities

FATCA regulations

Section #

2. Insurance specific
Section
implications

Proposed Regulation Highlight for Insurers

Highlights for Insurers
► The increase in de minimis for contracts with a value in excess of $250,000 is
good news for all insurers.
► Confirmation that insurance contacts which do not have a cash surrender or
termination value are out of scope is also welcome.
► Retirement exemptions broadened
► ―Care of‖ address indicia for existing accounts has been modified.
► Grandfathering is now extended to contacts outstanding on 1 January 2013 AND
where the contract is payable on the earlier of a stated age or death.
► Detailed review threshold has been increased to greater than $1m.
► Private banking proposal have dropped (but some concepts move to detailed
review).
Some of the less welcome changes are
► No de minimis exclusion for new contracts
► Annuities generally included
► Complex rules for retirement saving and annuities

FATCA regulations

Retirement plans – deemed compliance and
exempt beneficial owners
Deemed compliance conditions include:
► The fund is organized for the provision of pension benefits in its country of
organization,
► Contributions must come from the employer, employee or the government and be
restricted by reference to earned income and must be tax advantaged in some
way.
► No one beneficiary can be interested in more than 5% of the assets of the
pension plan.
There are different requirements for small retirement plans with less than 20
members.
Exempt beneficial owner conditions include that the entity must be:
► the beneficial owner of payments made to it,
► established in a country with which the US has an income tax treaty in force,
► generally exempt from income taxation in its country of establishment and
► entitled to treaty benefits under the applicable US treaty.
Entities wholly owned by exempt beneficial owners are themselves exempt.
FATCA regulations

Impact on insurance product range
High impact anticipated

Cash FATCA
Products Remarks
value? impact

Offshore bonds are likely to require significant focus in
Single and regular premium
Yes meeting FATCA requirements and this is expected to
offshore investment products
be a key area for your FATCA programme

Bonds and investment products are likely to require
Single and regular premium UK significant focus in meeting FATCA requirements and
Yes
Some impact anticipated

investment products this is expected to be a key area for your FATCA
programme

Under current drafting these are in-scope unless they
Individual pensions Yes qualify for an exemption under the definition of
retirement plan (refer to slide 6 and appendix)

Under current drafting these are in-scope unless they
Corporate pensions Yes qualify as deemed compliant or for an exemption(refer
No impact anticipated

to slide 6 and appendix)

Protection business (e.g. Critical
No cash value and current drafting implies out of
illness, long term care, term No
scope
assurance)

Under current drafting these are in-scope even if they
Pension annuities No
have no cash value.

Would be covered by an exemption except the
Individual Savings Accounts (ISA) Yes
Key

exemption demands contributions from earned income

FATCA regulations

Retirement product overview

Pension Savings Products

Retirement Funds Contract Based Pensions
(e.g. Trusts) (e.g. Individual Pension)

• The retirement fund exemption is not applicable to
contract based pensions however it could qualify as a
retirement account which provides a separate exemption
• The requirements for a contract based pension to be an
Deemed Compliant Exempt Fund exempt account are as follows. It is important to note that
in the UK, no contract based pension will be an exempt
account due to annual contributions being limited to
Self certify deemed compliance if • Other retirement funds $50,000 or less
certain conditions are met including: may be considered
• Organisation under law of country ―exempt beneficial owner‖
in which established or operate; posing a low risk of tax
• Contributions only from evasion
employee, employer, government • A retirement fund will be
by reference to earned income; considered an exempt
• No beneficiary has right to 5% or beneficial owner of a
more of the assets; and payment if it meets one of
• Income tax deferral on two retirements detailed
contributions on slide 19
Special requirements are in place
for small funds

FATCA regulations

Section #

3. AM specific
Section
implications

The key challenges for the funds industry

Asset managers Administrators
Most asset managers operate within a complex Service providers will have to address their own
network of relationships with their distributors FATCA impacts and consider how they can
and service providers. They will have to: support their fund clients in achieving FATCA
• Determine direct impacts to their operating compliance
model and initiate plans accordingly • Assess the services clients require and
• Consider the degree of their dependency to determine the business case – onboarding,
third parties to achieve FATCA compliance investor identification, reporting, PPP
• Manage their reputational risk, by working calculation and withholding
closely with their distributors to ascertain their • Determine their own impacts and obligations
intentions for becoming compliant with FATCA and initiate plans accordingly
• Identify a Responsible Officer to certify their • Align their own Group requirements to their
status client requirements and address areas of
conflict

FATCA regulations

What are the specific FATCA challenges

Topic Proposed regulations Challenges & implications

• Intent to focus FATCA on • Restrictive conditions – significant impact likely in
global investment order to achieve deemed compliant status in
community rather than truly many cases
local entities • Additional complexity for onboarding and existing
• May help reduce most customer analysis – many categories
significant FATCA issue – • Potential significant legal work to update
withholding distributor agreements, prospectus etc
• Operational complexity in: • May require redemptions of US investors,
1. Deemed • Meeting requirements recalcitrants
Compliance • Determining status • Saves you reporting and withholding
• Operational obligations
• Funds – QCIVs, restricted
funds
• Banks/distributors – Local
FFIs, local banks

FATCA regulations

What are the specific FATCA challenges

FFI

2. EAG & FFI Agreements EAG Entities
(p271)
Non-US
(Foreign Financial
Institution)
(p121, 293-296)
Participating FFI
(p122)

(status to be
Participating FFI resolved
Limited
(with transitional by end
Branch
arrangement) of 2015)
(p272)
(p226)
Local FFI
US Territory FI (p298)
(p126) (p128) Limited FFI (with

• Significant number of potential entity transitional
agreement)
(p276)
Non-reporting member of
PFFI Group (p301) Unlikely to be in EAG but

classifications within an EAG
funds managed by the group
Registered may be)
Deemed Compliant Qualified collective
Non-Participating Deemed Compliant FFI investment vehicles (p302)

• Still uncertainty in regards how FFI FFI FFI (RDCFFI)
(p122) (p298) (p298)
Restricted Funds (p302)

agreements will work – particularly for
Owner Unlikely to qualify under
Documented current proposed regs: all
Excepted FFI (p311) entities in the EAG must be
(p121, 295-8) local banks in the same
(Note: treated as country

funds excepted NFFE) Certified Deemed
Compliant FFI
(p306)
Non registering local bank
(p307)

• Organizations will need to determine their NFFE
Retirement Fund
(p308)
Unlikely to be in EAG unless
the retirement fund of a
(Non-Financial Excepted NFFE Active NFFE business within EAG.

framework to enable responsible officer Key
Classification group
Foreign Entity)
(p124)
(p328) (p331)
Most of the non-FI
businesses will fall here, Non-profit organisations
Must have no shareholders
Time-limited status including insurance (p310)

certification FATCA classification type

Potential end status
Publically traded
(p328)
companies without “financial
accounts” - ie issuing only
protection policies.
with a proprietary or
beneficial interest in its
income or assets

• How will this work for funds and
Certain territory
FFI with only low value
Unlikely to apply within EAG entities
accounts (p311)
Passive NFFE (p331)
(p124) Note: other excepted NFFEs exist – eg foreign Rules include limits of not

administrators? governments, retirement funds etc more than $50m assets in
entire EAG

Note: this chart refers to the Legal Entities of an EAG. It does not include such excepted entities as governmental agencies or central banks which are subject to an
exclusion from the definition of FFI or NFFE under the statute

FATCA regulations

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New FATCA regulations briefing highlights intergovernmental approach

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