Overview of FATCA

Brief Overview
• Stands for Foreign Account Tax Compliance Act
(FATCA):
– Derived from the Hiring Incentives to Restore
Employment (HIRE) Act
– Developed to prevent tax evasion by United States
persons and companies
– Final revision was made in January of 2013, and
the registration deadline is on October 13, 2013

Overview of Steps to Prepare for
FATCA
• Determining whether to comply with FATCA
• Registration with the IRS
• Documentation, due diligence, withholding,
and reporting requirements
• Who are withholding agents and what do they
do?
• Expanded Affiliated Groups (EAGs)

Determining whether to become
compliant with FATCA
• Compliance allows Foreign Financial
Institutions (FFIs) to be exempt from the 30%
withholding requirements:
– This would be withheld on the sale of US
securities, dividends and interest payments
• Non-compliance could lead to the interest of
additional investors.

Registration with the IRS
• Portal Registration:
– Electronic method of registration for attaining global
intermediary identification number (GIIN)
– Available on the IRS webpage
– Much quicker response time on processing of the
application
• Required Registration Information:
– Properties of the approved FFI registrants list
– Form 1042-S

Documentation, Due Diligence, Withholding,
and Reporting Requirements
• Documentation and Due Diligence:
• Classifying the Payee
– Payees are those receiving the payments for withholding
– Exemptions are defined, but must be analyzed carefully
– Who are the entities acting as payees?
• Partners
• Beneficiaries
• Owners
• Any other flow through entities, which are not included in the
exceptions list

• Documentation Requirements for Payees
– Certifications will need to be attained to operate
• Form W-9
• Form W-8
– Changes may be made to the certification
requirements and what information is required

• Due Diligence Requirements
– There are two levels of due diligence:
• Individual level
– Will primarily involve new accounts
• Entity level
– Will consist of supplying overall fund information involving
clients for FATCA

• Withholding
– January 1, 2014 will initiate withholdings on
withholdable payments
– Review of entities by USWAs is allowed to ensure
the proper documentation requirements are met
– Gross proceeds will be collected in January 1,
2014

• Withholding
– Withholding agents are liable for collections of
withholding payments
• Are accountable for understanding the guidelines to
follow
– Withholding deposits are held to strict guidelines
and will be penalized for delayed payments

• Reporting
– Form 1042-S is the main source of information
between USWAs and the IRS
• Will be filed on an annual basis
– Form 8966 reports US investors involved with FFIs
on an investor relationship level, and USWAs will
be required to file this for US investors who have
investor relations with passive NFFEs

Who are withholding agents and what
do they do?
• Two types of agents
• US persons who control withholding and foreign pass-
through payment activities
• Those recognized as USWAs through Form W-8
certification
• USWAs primarily work out of partnerships,
corporations, domestic estates, and any trusts
supervised by US authorities.

Expanded Affiliated Groups
• The majority of EAGs will be required to
comply with FATCA
• Requires related entities of FFIs, which are
also FFIs to register unless qualifying for an
exemption
• FFIs will need to determine if the structuring
of their EAG(s) will label it as an FFI

• EAGs can be described as being similar to a
feeder in how it operates
1. The parent (master in the prior illustration) to
the EAG(s) would meet the set requirements of
ownership for the minimum of one EAG, and
2. “Stock meeting the ownership requirement”
by all associated EAGs (in addition to the parent)
in possession of “one or more of the other
members” of the EAG.

• Ownership requirements are set at the
minimum of 50% for voting rights, and a
minimum of 50% of the total value of
includable corporations stock is owned.

• Deciding whether an entity is an EAG or not:
– Those who are in position of a quantity of option
contracts that could possess majority ownership in an
includable corporation if executed are included.
– Pass-through entities will be included if there is proof
that the parent entity possesses a minimum of 50%
ownership in the entity.
– Entities that were funded by seed capital of the parent
entity are excluded by the seed capital exception.

• Reporting
– All entities related to the FFI must be reported if
under jurisdiction of an IGA
– There is a difference between related entities and
EAGs
– IGAs are allowed to decide whether an entity is
considered related, unless it is an EAG
– FFIs in domiciles that prohibit the release of
information about related entities will not be labeled
non-compliant if all other information requested is
given.

Impact on Non-US Funds
• Withholding tax of 30% on US investors will be
enforced on persons receiving direct and
indirect payments from non-US funds
• Non-US entities can avoid this withholding tax
if the strict reporting requirements are met
• Other substance that will need to be observed
relate to how FATCA will be implemented.

Impact on Asset Management and
Managers
• Asset managers will need to perform the
required tasks before withholding registration
can be completed.
– The registration date is October 25, 2013
• Third party service providers are allowed to
assist with implementation.

Impact on Hedge Funds
• Compliance is recommended
• Initial expenses in implementing FATCA may be
significant
• On-boarding processes may need restructuring to
comply with due diligence
• New standards of reporting US investor
information to US authorities will be in effect
• Changes may need to be made to reporting and
tax withholding procedures, plus additional
information about the US investors for due
diligence

• US client information will be sent after one year after
registration, and the second year and subsequent years
will report the amount of withholding taxes paid
• FATCA responsibilities will fall to fund administration
and managers
– Responsibilities will be dealt out by directors of the fund,
and will also decide on whether to be a PFFI or not
• Administrators are mainly responsible for producing
reports and calculating withholding payments

• Prerequisites to implementing FATCA will need to
be performed
• For those who choose to comply, there are
several steps that need to be taken with
compliance for implementation
• There will be continued compliance standards
that will need to be met each year for continuing
compliance with FATCA
• Hiring legal, technology, compliance, and
operational consultants can simplify the
transitioning process for complying with FATCA

Impact on Private Equity
• Most private equity funds are labeled as FFIs and
are mandated to comply with FATCA
• Private equity funds are advised to inform current
investors of changes that will be made, and to
update marketing material
• Investment strategies may need to be altered to
reach greater returns based on changes from
withholding taxes
• Those involved with operations of the fund,
including investors and third party providers, will
need to be briefed on the changes made

Impact on Multinational Corporations that are
not in the Financial Services Industry
The main purpose of non-financial foreign entities
(NFFEs)in FATCA are for withholding purposes.
Payments that NFFEs make might require the NFFE
to be subject to reporting and withholding.
NFFEs must minimally review how FATCA may
impact operations for their entity.
• Broad Span Definition of FFIs
• Withholdable Payments
• NFFEs

• Broad Span Definition of Foreign Entities:
– Multinational corporations who have expanded
entities that perform financial transactions are
included
• Includes foreign holding companies and treasuries, but are
accepted for some exceptions
– NFFEs that qualify are subject to withholdings up to a
maximum of 25%
– Exceptions will be exempt if any EAGs are found to be
an AIF
– Holding companies and treasuries who are associated
with FFIs are exempt from exceptions

• Broad Span Definition of Foreign Entities
– Pensions and retirement funds will desire to
inspect their investment strategy to best suit its
participants
– IGAs and the final draft of FATCA have developed
exemptions for pensions and retirement funds,
but will need to be analyzed by these funds to
assure that they qualify, and make sure their
participants’ contributions are untouched

– NFFEs will need to conclude what payments may be
transacted over the border that is defined by FDAP
– Most overhead and operational costs are exempt
– Hedging, swaps, and futures exchanging with non-US
FFIs can eliminate the exemptions
– If there is belief that errors have been made with
compliance implementation, an audit and correction
procedures should be performed promptly

– Loans and leases taken out from an FFI by a US
fund could be required to withhold the interest
payments on what was borrowed
– NFFEs that distribute dividends or interest should
document each shareholder that receives these
payments
– NFFEs are liable for unfulfilled responsibilities
involving withholding and reporting about third
party agents

• NFFEs
– NFFEs generally do not have to sign FFI
agreements, but are required to be compliant to
FATCA unless they can meet the exemption
qualifications
– NFFEs could also be exempt by meeting certain
entity or activity requirements
– Non-exempt NFFEs are labeled as passive NFFEs
• Must disclose US investor information and file a Form
8966 with the IRS

US Persons
• There are three types of US persons:
– US citizens
– Legal US residents
– Persons residing in the US
• Non-US persons will be impacted very lightly with
FATCA
– Those who refuse documentation for FATCA will have
to cope with withholding taxes
• US persons may be asked to file a Form W-9
– Those who do not comply would encounter
withholding taxes

US Persons
• Evaluating an Investors Positions:
– US persons will want to perform due diligence on
FFIs they may potentially invest in
– US persons with positions in FFIs will be required
to report balances of foreign investments on their
Form 1040
– It is advised that US persons invested in FFIs speak
with a tax professional to construct a game plan

Conclusion
• The amount of money that is being prevented
from “evading” the US is less than .006% of
the US GDP last year
– The amount that is prevented from evasion is
insignificant overall
• It will be burdensome to implement FATCA’s
compliance requirements
• FATCA is not highly esteemed among the
financial industry

Conclusion
• FATCA’s implementation process is very
intricate
• Requirements are inconvenient, especially
while trying to implement AIFMD into a fund’s
operations during the same year
• This is not a proper way to stimulate economic
growth
• Overall impact of FATCA is yet to be
determined

Overview of FATCA

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