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   out because the foreign financial institution        counsel to provide your answers and not
   will commence reporting annually on the US           answer yourself directly.
   owned accounts on their books. Also remember
   that the IRS is already carrying out a number            Q16: You are preparing an individual tax
   of investigations using the tax information          return for a client. The client has foreign
   exchange agreements set up through the OECD          financial asset but refused to provide more
   (over 800 agreements across 89 countries), its       information, and asks you not to report it or
   own treaties and tax information exchange            tell anyone. What would you do?
   agreements and an enhanced whistleblower                 A16: I would strongly advise the client to
   program. They are also increasing the number         truthfully and openly comply with his tax
   of IRS agents posted overseas by opening new         reporting obligations and not file a false return.
   IRS embassy attaché offices overseas manned          If the client persisted in refusing to transparently
   by criminal investigation agents.                    report, I would withdraw from representing the
                                                        client. We are in an age of global transparency
      Q12: Is there a statute of limitations for        and there is no longer a place to hide.£
   FATCA?                                                                               By Bachir El Nakib
      A12: Under FATCA, The taxpayer is required                       Head of Compliance Industrial and
   to extend the normal 6 year criminal statute of             Commercial Bank of China Doha - Qatar
   limitations to 8 years as a condition of making
   an offshore voluntary disclosure.

      Q13: How can I prove that I do not have a
   foreign account?
      A13: You do not have to prove that you do
   not have a foreign account. If you do not have
   one then you are automatically in compliance
   as far as your foreign asset filing is concerned.
   Remember that under FATCA a foreign account
   also includes bonds, investments and capital
   ownership of structured entities.

       Q14: If the IRS asks for my foreign bank
   account details do I need to provide it or they
   can find it themselves?
       A14: It is recommended that you always
   truthfully answer IRS inquiries. Keep in mind
   that if the IRS is asking you for the details
   of your foreign bank account, it is because
   they already have information about it. So,
   it is recommended that you interpose US tax


         (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬
  131    Union of Arab Bank Magazine (September 2012)
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     Q5: Should you close a foreign bank                 accepted into the program, and truthfully
  account?                                               fully report, it virtually eliminates the risk of
     A5: It is expected that most foreign banks will     criminal prosecution. This window can close
  participate in FATCA so closing an account to          at any time
  open another one would only make sense if you        • They should immediately consult a US
  plan to repatriate funds. In any case, the best        licensed international tax attorney and a US
  thing to do is to consult with US international        licensed CPA to evaluate their best options
  tax specialists for your best option to getting        to achieve compliance.
  back into compliance.
                                                           Q8: Do I have to report all my foreign real
     Q6: What information about my foreign             estate under FATCA?
  bank account is given to the IRS?                        A8: The answer to this question is multi-
     A6: Initially (2014) the account name,            faceted. First, you have to report income from
  address, your US TIN (tax identification             properties but not the real estate itself unless
  number), account number and year end closing         the real estate is held under a structured entity
  balance. After 2014, enhanced reporting,             account, trust, foundation, etc.) for which you
  (the same reporting as in 2014) plus income          are a full or partial beneficial owner and then it
  amounts and gross proceeds, commences for            is reportable. Also, during an investigation, real
  reporting years 2015 and 2016 account activity       estate assets may come into play if purchased
  respectively. After 2016, reporting continues on     with previously unreported financial assets.
  the same basis as for 2016.
                                                          Q9: Are foreign bonds specified foreign
     Q7: what do you need to communicate to            financial assets and do they need to be reported
  your client on FATCA?                                under FATCA?
     A7: As of august 2012, financial institutions        A9: Yes they are treated as a financial account
  have to certify to the IRS that its employees are    and need to be reported.
  not giving their clients any advice or assistance
  that could be construed as aiding them in tax           Q10: What countries have a FATCA
  or tax reporting evasion. What you do need to        agreement with the US?
  advise your client is the following:                    A10: Currently there are 5 FATCA partner
  • Foreign banks will start reporting their           nations; Spain, Italy, Germany, France and the
     accounts to the IRS in 2014                       United Kingdom. Canada already has a far
  • The IRS is already investigating many non-         reaching bi-lateral tax information exchange
     compliant US taxpayers who own assets             with the US and Switzerland and Japan have
     abroad and with this new information, these       also declared their statements of intent to join
     investigations will escalate                      as FATCA partners.
  • There is a window of opportunity right now
     to become compliant through the offshore             Q11: How can the IRS find out if I have a
     voluntary disclosure program; this typically      foreign bank account?
     reduces overall penalties and if you are             A11: Through FATCA, the IRS will find


                                                                    (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬
                                                                   Union of Arab Bank Magazine (September 2012)   132
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   policy objectives of foreign passthru payment        recalcitrant accounts, accounts whose owners
   and gross proceeds withholding that minimizes        refuse to provide ownership information or
   burden.”                                             the necessary waivers, are reported annually in
                                                        aggregate and the IRS can ask the banks or the
      Reporting by USFIs - The U.S. has only            local governments for additional details.
   committed to exchange information that USFIs
   are currently reporting to the IRS with regard          Q2: How do you know if your bank has
   to U.S. source income payments paid to direct        signed FATCA?
   account holders. They do not need to look               A2: participating banks in FATCA will
   through and report on the Partner Country            register on the IRS on-line system and will
   owners of entities nor do they have to report        be issued an FFI –EIN number. The IRS will
   on the account balances and other requirements       publish lists of participating banks. You can also
   that will be imposed on reporting of U.S.            ask your bank for a copy of their withholding
   accounts by Partner FIs.                             certificate which should contain their FFI –EIN
                                                        number which can be checked back against the
   Conclusion:                                          IRS published list.
       The publication of the Model is a positive
   development given the severe conflict of                Q3: Are FATCA matters covered by attorney
   law problems that have plagued FATCA                 client privilege?
   implementation projects since day one.                  A3: Yes as long as the individual goes through
   However, it is clear that Partner FIs continue       a US licensed tax attorney and the US licensed
   to have substantial FATCA compliance                 certified public accountant is hired through the
   obligations and significant downsides if they        attorney. It is important to note that you should
   fail to meet them. The IGAs are hardly an ”out”      not go through any tax or accountant service
   from FATCA. Financial institutions should            provider who may have assisted you through a
   carefully assess the differences between the         non compliant period as they could conceivably
   Model and the proposed regulations to read the       be used in testimony against you.
   tea leaves as to what the final regulations may
   well contain; U.S. officials have stated publicly       Q4: How many years will the foreign banks
   that their goal is to have uniform due diligence     report?
   and reporting requirements under both the               A4: Foreign banks will initially start
   IGAs and the regulations. To the extent that         reporting basic account data on an annual
   they miss their target of uniformity, FATCA          basis commencing in 2014. In 2016 they start
   implementation plans will need to be modified        enhanced reporting on 2015 account activity.
   to take these differences into account.              Although the banks will not report historical
                                                        data, the IRS can request additional data on
      Q1: Does one have to report closed bank           individual accounts from them at any time
   accounts FATCA?                                      which could go back as far as 10 years in cases
      A1: There is no requirement in FATCA to           of suspected fraud.
   report closed bank accounts to the IRS. However,


         (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬
  133    Union of Arab Bank Magazine (September 2012)
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  2014, income payments are added for 2015, and       unless it is assumed that the Partner Country
  gross proceeds paid to a custodial account are      would proactively share such information with
  added for 2016 and subsequent years.                the IRS under its exchange agreement.
     However, that the reporting for 2015
  includes redemption payments made outside           Defusing the ”Limited” Time Bomb
  of a custodial account, and that these gross         Partner FIs that do everything required under
  proceeds would not be reportable outside of         the agreement are treated as complying with
  a Partner Country. It is not clear whether this     FATCA, even if branches in other countries
  more burdensome result for Partner FIs was          or other members of their expanded affiliated
  intended. In the reciprocity version of the         group are not able to comply with FATCA. In
  Model, U.S. financial institutions are required     the proposed regulations, the IRS would have
  to report to the IRS deposit interest and U.S.      temporarily allowed ”Limited Branches” and
  source payments, which is largely consistent        ”Limited Affiliates” until the end of 2015, but
  with what they are required to do currently         at that point the existence of even one Limited
  under U.S. law. Oddly, the Model does not           Branch or Affiliate would have prevented
  state how withholding on U.S. source income         members of the group from maintaining
  amounts paid to NPFFIs should be reported.          participating FFI status, subjecting all FFIs in
  Presumably, such reporting will follow the          the group to 30% withholding under FATCA.
  proposed regulation rule of using Forms 1042-          The Model defuses the ticking time bomb
  S.                                                  of limited status. Partner FIs are, however,
     Conditions for a Partner FI to Escape            required to treat Limited Branches and Affiliates
  FATCA Withholding. Partner FIs must satisfy         as NPFFIs and the branches and affiliates
  several key conditions to escape FATCA              are required to identify and report upon U.S.
  withholding on payments made to them – it is        accounts to the extent possible and to not solicit
  neither automatic by virtue of being located in a   nonresident U.S. and NPFFI account holders. In
  Partner Country nor absolute.                       addition, the branches and affiliates may not be
     Partner FIs must report on U.S. accounts         used to circumvent the IGA or FATCA.
  annually, report payments to nonparticipating
  FFIs (”NPFFIs”) for 2015 and 2016, comply with         Withholding Limited to U.S. Source Income
  registration requirements, and either withhold      - A Partner FI’s withholding obligation under
  30% on U.S. source payments to NPFFIs               the Model is limited to U.S. source income.
  or provide information to the withholding           Gross proceeds and foreign passthru payments
  agent responsible for withholding. Significant      are excluded from the definition of ”U.S.
  noncompliance could cause a Partner FI to           source withholdable payment.” In addition,
  be treated as an NPFFI subject to full FATCA        no withholding is required on recalcitrant
  withholding and the IRS will apparently             accounts at Partner FIs, and such accounts
  publish a list of such FIs. It remains uncertain,   would not need to be closed. On the other
  however, how the IRS would identify such non-       hand, the parties agree ”to work together, along
  compliance if the Partner Country is charged        with other partners, to develop a practical and
  with overseeing the Partner FI’s compliance,        effective alternative approach to achieve the


                                                                   (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬
                                                                  Union of Arab Bank Magazine (September 2012)   134
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   the individual is a U.S. tax resident, and that      implementation projects should take this
   the certification be reasonable in light of other    into account in designing search queries for
   account opening information, such AML/KYC            electronic databases.
   documentation. The self-certification can be             Deadlines Extended. The deadlines for
   included in the account opening documents.           completing preexisting account due diligence
   There is no prescribed form, but Partner FIs will    are later under the Model. The measuring
   need a defined, reviewable process to obtain         date for new versus preexisting accounts
   certifications. Forms W-8 and W-9 will remain        is December 31, 2013, six months after the
   an effective solution for doing so.                  first wave of participating FFIs. High value
      Entities: Identification of Entity Type:          individual accounts must be reviewed by the
   A Partner FI can treat an entity as an Active        end of 2014 and other individual accounts
   NFFE or Partner FI (including from another           must be reviewed by the end of 2015 (a six-
   Partner Country) on the basis of publicly            month extension in both cases). Preexisting
   available information or other information in        entity accounts must be reviewed by the end of
   the Partner FI’s possession. Other entities can      2015 (a six- or 18-month extension, depending
   establish their status with a self-certification.    on the type of entity). Partner FIs do not need
   Key to Partner FI compliance will be the             to identify ”prima facie” FFIs within one year
   ability to establish standardized processes for      of the effective date of its FFI Agreement as
   collecting, validating, and maintaining this         required by the proposed regulations. (See
   documentation. As with individuals, Forms            chart at the end of this letter.)
   W-8 and W-9 continue to be a solution.                   Information Exchange. Partner Countries
      Change in NFFE Ownership Threshold: A             and the U.S. are expected to exchange
   Partner FI is not required to identify 10%-or-       information for a calendar year within nine
   greater U.S. owners of an NFFE; rather, it must      months of the year-end, except that the exchange
   identify the ”Controlling Persons” under the         for 2013 is delayed for an additional year to
   AML/KYC principles adopted by the FATCA              September 2015. There is no explicit deadline
   Partner, which in many jurisdictions is a 25%        for Partner FIs to provide the information to
   ownership threshold. This is a highly welcomed       their governments. In addition, the competent
   change to conform the FATCA requirement              authorities of the parties will make further
   with local AML/KYC requirements, as strongly         agreements governing the details of information
   advocated by the industry. The Partner FI must       exchange and other collaboration. (See chart at
   determine whether any of the Controlling             the end of this letter.)
   Persons are U.S. individuals; if so, the account         Reporting. The Model reporting largely
   must be treated as a U.S. account.                   mirrors the proposed regulations with respect
      The Search for U.S. Phone Numbers. The            to reporting. Partner FIs must report account
   industry had hoped that U.S. phone numbers           balances and amounts paid to account holders,
   would be removed from the U.S. indicia list,         except that they report to the Partner Country
   but they remain a part of the Model. The final       instead of the IRS. Like the proposed regulations,
   regulations are likely to also retain U.S. phone     these obligations are phased in so that only
   numbers as indicia of U.S. status and FATCA          balance information is required for 2013 and


         (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬
  135    Union of Arab Bank Magazine (September 2012)
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     New ”Category 3” FFI Definition. Both the        final regulations to address the troubling
  proposed regulations and the Model impose           repercussions of treating non-professionally
  much of the burden of FATCA compliance on           managed investment companies, which can be
  ”financial institutions” and largely define them    quite small and unsophisticated, as ”FFIs” with
  in the same way – with one major exception.         FATCA compliance obligations.
  The Model replaces the ”Category 3” FFI                 Due Diligence Similarities - Both the
  definition in the proposed regulations with a       proposed regulations and the Model have
  new ”investment entity” category. The Model         distinct rules for individual and entity accounts
  defines ”investment entity” as ”any entity that     which are further refined for preexisting and
  conducts as a business (or is managed by an         new accounts.
  entity that conducts as a business) one or more         - Individual accounts of $1 million or less
  of the following activities or operations for or           are subject to an electronic search for U.S.
  on behalf of a customer:                                   indicia, and
     (1) trading in money market instruments;             - Accounts greater than $1 million are
  foreign exchange; exchange, interest rate and              subject to a more thorough review, which
  index instruments; transferable securities; or             may include asking relationship managers
  commodity futures trading;                                 whether they know if the account has U.S.
     (2) individual and collective portfolio                 indicia.
  management; or                                          Preexisting individual accounts (and all
     (3) otherwise investing, administering, or       individual depository accounts) of $50,000 or
  managing funds or money on behalf of other          less and preexisting entity accounts of $250,000
  persons.”                                           or less generally can be excluded from FATCA
     The new definition both expands and              duties. The procedures for dealing with U.S.
  contracts the concept of the Category 3 FFIs in     indicia are also similar, and Forms W-8 would
  important ways.                                     still be one of the more straightforward ways to
     First, entities that are not directly engaged    cure that indicia.
  in trading or investing in various assets, but
  only in managing such activities, will be treated   Due Diligence Differences:
  as FIs under the Model (such as investment             Individuals. The Model is more permissive
  advisors and certain trustees).                     than the proposed regulations in the types
     Second, small passive investment vehicles,       of documents that can be used to establish an
  such as family trusts and personal investment       account holder’s FATCA status. For example,
  companies that are treated as Category 3 FFIs       to establish foreign individual status for a
  under the proposed regulations are not treated      new account, the proposed regulations would
  as financial institutions under the Model but       require either a Form W-8BEN or government-
  will instead be treated as passive NFFEs unless     issued identification (and require that ”none of
  they are being professionally managed. Its          the documentation associated with the payee
  believed that the Model’s approach, which has       contains U.S. indicia”). On the other hand, the
  been strongly urged by many in the financial        Model requires merely a ”self-certification”
  industry, will ultimately be adopted by the         that allows the Partner FI to determine whether


                                                                   (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬
                                                                  Union of Arab Bank Magazine (September 2012)   136
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     There are two categories of deemed-                   Where is ”Model 2”? It is expected that the
   compliant FFIs:                                      U.S. to release a Model 2 IGA soon; that model
     - registered deemed-compliant, and                 would provide for reporting directly to the IRS,
     - certified deemed compliant.                      rather than the Partner Country. Japan and
     Registered deemed-compliant FFIs will be           Switzerland announced last month that they
     required to apply for deemed-compliant             would agree to Model 2 agreements.
     status with the IRS and certify every three           Structure of the Model - The Model consists
     years to the IRS.                                  of three parts: a seven-article body, an annex
     Certified deemed compliant FFIs (e.g., non-        covering due diligence, and another annex
     registering local banks, retirement funds,         covering entities and accounts in each country
     non-profits, certain owner-documented              that are considered to be outside the scope of
     FFIs, FFIs with low value account only) are        FATCA reporting. Only the second annex is
     not required to register with the IRS.             likely to differ substantially from country to
                                                        country.
      One of the basic problems with FATCA                 Limited Shelf Life? The Model anticipates
   has been that it imposes obligations on              that the parties will ”consult in good faith” to
   foreign financial institutions (”FFIs”) that may     amend the agreement to ”reflect progress” on
   contravene the laws of other jurisdictions, such     a variety of issues, including the treatment of
   as reporting information to the IRS or closing       withholding on ”foreign passthru payments”
   the accounts of uncooperative customers. IGAs        and gross proceeds and the development of
   are agreements between the U.S. and FATCA            a common reporting and exchange model. In
   ”Partner Countries” intended to allow ”FATCA         addition, the Model suggests that the parties
   Partner Financial Institutions” (”Partner            will work with the OECD and, as appropriate,
   FIs”) to comply with both FATCA and local            the EU to adapt the agreement to become a
   law. Yesterday the U.S. government released          common model for automatic exchange of
   two versions of the FATCA ”Model 1” IGA              information and financial institution due
   (”Model”).                                           diligence. Such ”developments” are a two-
      The Two Versions - The Model provides             edged sword for the industry.
   that Partner FIs would report to their local
   government rather than to the IRS. One                  They could be beneficial if they lead to a less
   version provides that the U.S. and the Partner       burdensome compliance approach. However,
   Country will exchange information about each         they could also require systems and procedures
   other’s taxpayers (the “reciprocal version) and      currently under development by Partner FIs
   apparently will be used by France, Germany,          to be substantially modified to reflect the
   Italy, Spain and the United Kingdom. The             ”evolution” in the regime. The industry should
   “nonreciprocal version does not require the U.S.     work with these bodies to urge them to take into
   to share information with the Partner Country,       consideration that new requirements can lead
   and would be used if the U.S. believes that          to costly overhauls to systems and procedures
   there are insufficient safeguards in the Partner     and modify their governmental wish lists
   Country to protect any transmitted information.      accordingly.


         (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬
  137    Union of Arab Bank Magazine (September 2012)
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  FATCA Part II – Defusing the
  ”Limited” Time Bomb”
  FATCA: What should Financial Institutions             As well as, “any class of payments identified
  do right now?                                      by the U.S. Treasury Secretary for purposes
     As anyone in the financial services industry    of this subsection as posing a low risk of
  knows, FATCA’s implications affects just           tax evasion.” FFI can be assigned one of the
  about any institution doing business with US       following Chapter 4 statuses:
  customers. FATCA generally requires that              - Deemed Compliant
  withholding agents withhold a tax equal to            - Limited Branch
  30% on Withholdable payments made to an               - Limited FFI
  FFI or NFFE, with certain exceptions. The             - Nonparticipating FFI
  withholding exceptions, Section 1472 of the           - Participating FFI.
  Hiring Incentives to Restore Employment Act,
  which implements FATCA, include payments               Non-participating FFI status is most likely
  in which the beneficiary:                          to result in 30% withholding penalties, and
     (A) any corporation the stock of which is       to be avoided. Majority of the FFI will have
  regularly traded on an established securities      to obtain Participating FFI status which will
  market,                                            require registration with IRS (via online portal),
     (B) any corporation which is a member of        preferably before 30 June 2013, otherwise, FFI
  the same expanded affiliated group (as defined     may be considered a Participating FFI with
  in section 1471(e)(2) without regard to the last   regard to 2014 only.
  sentence thereof) as a corporation described in        To maintain a Participating FFI status, FFI
  subparagraph (A),                                  must provide certain compliance certificates
     (C) any entity which is organized under the     and report certain data to IRS. The first certificate
  laws of a possession of the United States and      is to confirm that participating FFI completed
  which is wholly owned by one or more bona          required review of the pre-existing high-value
  fide residents (as defined in section 937(a)) of   accounts within one year of the effective date
  such possession,                                   of the FFI agreement. The certificate should
     (D) any foreign government, any political       state that FFI did not have any procedures in
  subdivision of a foreign government, or any        place at any time from August 6, 2011 to assist
  wholly owned agency or instrumentality of any      account holders in the avoidance of chapter
  one or more of the foregoing,                      4. Therefore, the initial focus of the review is
     (E) any international organization or any       on high-value accounts (e.g., USD 1M+ for
  wholly owned agency or instrumentality             individual accounts) opened before the FFI
  thereof,                                           agreement date.
     (F) any foreign central bank of issue, or           With regard to the exemption, FFI must
     (G) any other class of persons identified by    obtain Chapter 4 status “Deemed-Compliant”
  the Secretary for purposes of this subsection,”    to be relieved from FATCA obligations.


                                                                   (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬
                                                                  Union of Arab Bank Magazine (September 2012)   138

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Fatca ii defusing the bomb (ban) uab magazine september 2012

  • 1. ££££ Study out because the foreign financial institution counsel to provide your answers and not will commence reporting annually on the US answer yourself directly. owned accounts on their books. Also remember that the IRS is already carrying out a number Q16: You are preparing an individual tax of investigations using the tax information return for a client. The client has foreign exchange agreements set up through the OECD financial asset but refused to provide more (over 800 agreements across 89 countries), its information, and asks you not to report it or own treaties and tax information exchange tell anyone. What would you do? agreements and an enhanced whistleblower A16: I would strongly advise the client to program. They are also increasing the number truthfully and openly comply with his tax of IRS agents posted overseas by opening new reporting obligations and not file a false return. IRS embassy attaché offices overseas manned If the client persisted in refusing to transparently by criminal investigation agents. report, I would withdraw from representing the client. We are in an age of global transparency Q12: Is there a statute of limitations for and there is no longer a place to hide.£ FATCA? By Bachir El Nakib A12: Under FATCA, The taxpayer is required Head of Compliance Industrial and to extend the normal 6 year criminal statute of Commercial Bank of China Doha - Qatar limitations to 8 years as a condition of making an offshore voluntary disclosure. Q13: How can I prove that I do not have a foreign account? A13: You do not have to prove that you do not have a foreign account. If you do not have one then you are automatically in compliance as far as your foreign asset filing is concerned. Remember that under FATCA a foreign account also includes bonds, investments and capital ownership of structured entities. Q14: If the IRS asks for my foreign bank account details do I need to provide it or they can find it themselves? A14: It is recommended that you always truthfully answer IRS inquiries. Keep in mind that if the IRS is asking you for the details of your foreign bank account, it is because they already have information about it. So, it is recommended that you interpose US tax (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ 131 Union of Arab Bank Magazine (September 2012)
  • 2. ££££ Study Q5: Should you close a foreign bank accepted into the program, and truthfully account? fully report, it virtually eliminates the risk of A5: It is expected that most foreign banks will criminal prosecution. This window can close participate in FATCA so closing an account to at any time open another one would only make sense if you • They should immediately consult a US plan to repatriate funds. In any case, the best licensed international tax attorney and a US thing to do is to consult with US international licensed CPA to evaluate their best options tax specialists for your best option to getting to achieve compliance. back into compliance. Q8: Do I have to report all my foreign real Q6: What information about my foreign estate under FATCA? bank account is given to the IRS? A8: The answer to this question is multi- A6: Initially (2014) the account name, faceted. First, you have to report income from address, your US TIN (tax identification properties but not the real estate itself unless number), account number and year end closing the real estate is held under a structured entity balance. After 2014, enhanced reporting, account, trust, foundation, etc.) for which you (the same reporting as in 2014) plus income are a full or partial beneficial owner and then it amounts and gross proceeds, commences for is reportable. Also, during an investigation, real reporting years 2015 and 2016 account activity estate assets may come into play if purchased respectively. After 2016, reporting continues on with previously unreported financial assets. the same basis as for 2016. Q9: Are foreign bonds specified foreign Q7: what do you need to communicate to financial assets and do they need to be reported your client on FATCA? under FATCA? A7: As of august 2012, financial institutions A9: Yes they are treated as a financial account have to certify to the IRS that its employees are and need to be reported. not giving their clients any advice or assistance that could be construed as aiding them in tax Q10: What countries have a FATCA or tax reporting evasion. What you do need to agreement with the US? advise your client is the following: A10: Currently there are 5 FATCA partner • Foreign banks will start reporting their nations; Spain, Italy, Germany, France and the accounts to the IRS in 2014 United Kingdom. Canada already has a far • The IRS is already investigating many non- reaching bi-lateral tax information exchange compliant US taxpayers who own assets with the US and Switzerland and Japan have abroad and with this new information, these also declared their statements of intent to join investigations will escalate as FATCA partners. • There is a window of opportunity right now to become compliant through the offshore Q11: How can the IRS find out if I have a voluntary disclosure program; this typically foreign bank account? reduces overall penalties and if you are A11: Through FATCA, the IRS will find (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ Union of Arab Bank Magazine (September 2012) 132
  • 3. ££££ Study policy objectives of foreign passthru payment recalcitrant accounts, accounts whose owners and gross proceeds withholding that minimizes refuse to provide ownership information or burden.” the necessary waivers, are reported annually in aggregate and the IRS can ask the banks or the Reporting by USFIs - The U.S. has only local governments for additional details. committed to exchange information that USFIs are currently reporting to the IRS with regard Q2: How do you know if your bank has to U.S. source income payments paid to direct signed FATCA? account holders. They do not need to look A2: participating banks in FATCA will through and report on the Partner Country register on the IRS on-line system and will owners of entities nor do they have to report be issued an FFI –EIN number. The IRS will on the account balances and other requirements publish lists of participating banks. You can also that will be imposed on reporting of U.S. ask your bank for a copy of their withholding accounts by Partner FIs. certificate which should contain their FFI –EIN number which can be checked back against the Conclusion: IRS published list. The publication of the Model is a positive development given the severe conflict of Q3: Are FATCA matters covered by attorney law problems that have plagued FATCA client privilege? implementation projects since day one. A3: Yes as long as the individual goes through However, it is clear that Partner FIs continue a US licensed tax attorney and the US licensed to have substantial FATCA compliance certified public accountant is hired through the obligations and significant downsides if they attorney. It is important to note that you should fail to meet them. The IGAs are hardly an ”out” not go through any tax or accountant service from FATCA. Financial institutions should provider who may have assisted you through a carefully assess the differences between the non compliant period as they could conceivably Model and the proposed regulations to read the be used in testimony against you. tea leaves as to what the final regulations may well contain; U.S. officials have stated publicly Q4: How many years will the foreign banks that their goal is to have uniform due diligence report? and reporting requirements under both the A4: Foreign banks will initially start IGAs and the regulations. To the extent that reporting basic account data on an annual they miss their target of uniformity, FATCA basis commencing in 2014. In 2016 they start implementation plans will need to be modified enhanced reporting on 2015 account activity. to take these differences into account. Although the banks will not report historical data, the IRS can request additional data on Q1: Does one have to report closed bank individual accounts from them at any time accounts FATCA? which could go back as far as 10 years in cases A1: There is no requirement in FATCA to of suspected fraud. report closed bank accounts to the IRS. However, (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ 133 Union of Arab Bank Magazine (September 2012)
  • 4. ££££ Study 2014, income payments are added for 2015, and unless it is assumed that the Partner Country gross proceeds paid to a custodial account are would proactively share such information with added for 2016 and subsequent years. the IRS under its exchange agreement. However, that the reporting for 2015 includes redemption payments made outside Defusing the ”Limited” Time Bomb of a custodial account, and that these gross Partner FIs that do everything required under proceeds would not be reportable outside of the agreement are treated as complying with a Partner Country. It is not clear whether this FATCA, even if branches in other countries more burdensome result for Partner FIs was or other members of their expanded affiliated intended. In the reciprocity version of the group are not able to comply with FATCA. In Model, U.S. financial institutions are required the proposed regulations, the IRS would have to report to the IRS deposit interest and U.S. temporarily allowed ”Limited Branches” and source payments, which is largely consistent ”Limited Affiliates” until the end of 2015, but with what they are required to do currently at that point the existence of even one Limited under U.S. law. Oddly, the Model does not Branch or Affiliate would have prevented state how withholding on U.S. source income members of the group from maintaining amounts paid to NPFFIs should be reported. participating FFI status, subjecting all FFIs in Presumably, such reporting will follow the the group to 30% withholding under FATCA. proposed regulation rule of using Forms 1042- The Model defuses the ticking time bomb S. of limited status. Partner FIs are, however, Conditions for a Partner FI to Escape required to treat Limited Branches and Affiliates FATCA Withholding. Partner FIs must satisfy as NPFFIs and the branches and affiliates several key conditions to escape FATCA are required to identify and report upon U.S. withholding on payments made to them – it is accounts to the extent possible and to not solicit neither automatic by virtue of being located in a nonresident U.S. and NPFFI account holders. In Partner Country nor absolute. addition, the branches and affiliates may not be Partner FIs must report on U.S. accounts used to circumvent the IGA or FATCA. annually, report payments to nonparticipating FFIs (”NPFFIs”) for 2015 and 2016, comply with Withholding Limited to U.S. Source Income registration requirements, and either withhold - A Partner FI’s withholding obligation under 30% on U.S. source payments to NPFFIs the Model is limited to U.S. source income. or provide information to the withholding Gross proceeds and foreign passthru payments agent responsible for withholding. Significant are excluded from the definition of ”U.S. noncompliance could cause a Partner FI to source withholdable payment.” In addition, be treated as an NPFFI subject to full FATCA no withholding is required on recalcitrant withholding and the IRS will apparently accounts at Partner FIs, and such accounts publish a list of such FIs. It remains uncertain, would not need to be closed. On the other however, how the IRS would identify such non- hand, the parties agree ”to work together, along compliance if the Partner Country is charged with other partners, to develop a practical and with overseeing the Partner FI’s compliance, effective alternative approach to achieve the (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ Union of Arab Bank Magazine (September 2012) 134
  • 5. ££££ Study the individual is a U.S. tax resident, and that implementation projects should take this the certification be reasonable in light of other into account in designing search queries for account opening information, such AML/KYC electronic databases. documentation. The self-certification can be Deadlines Extended. The deadlines for included in the account opening documents. completing preexisting account due diligence There is no prescribed form, but Partner FIs will are later under the Model. The measuring need a defined, reviewable process to obtain date for new versus preexisting accounts certifications. Forms W-8 and W-9 will remain is December 31, 2013, six months after the an effective solution for doing so. first wave of participating FFIs. High value Entities: Identification of Entity Type: individual accounts must be reviewed by the A Partner FI can treat an entity as an Active end of 2014 and other individual accounts NFFE or Partner FI (including from another must be reviewed by the end of 2015 (a six- Partner Country) on the basis of publicly month extension in both cases). Preexisting available information or other information in entity accounts must be reviewed by the end of the Partner FI’s possession. Other entities can 2015 (a six- or 18-month extension, depending establish their status with a self-certification. on the type of entity). Partner FIs do not need Key to Partner FI compliance will be the to identify ”prima facie” FFIs within one year ability to establish standardized processes for of the effective date of its FFI Agreement as collecting, validating, and maintaining this required by the proposed regulations. (See documentation. As with individuals, Forms chart at the end of this letter.) W-8 and W-9 continue to be a solution. Information Exchange. Partner Countries Change in NFFE Ownership Threshold: A and the U.S. are expected to exchange Partner FI is not required to identify 10%-or- information for a calendar year within nine greater U.S. owners of an NFFE; rather, it must months of the year-end, except that the exchange identify the ”Controlling Persons” under the for 2013 is delayed for an additional year to AML/KYC principles adopted by the FATCA September 2015. There is no explicit deadline Partner, which in many jurisdictions is a 25% for Partner FIs to provide the information to ownership threshold. This is a highly welcomed their governments. In addition, the competent change to conform the FATCA requirement authorities of the parties will make further with local AML/KYC requirements, as strongly agreements governing the details of information advocated by the industry. The Partner FI must exchange and other collaboration. (See chart at determine whether any of the Controlling the end of this letter.) Persons are U.S. individuals; if so, the account Reporting. The Model reporting largely must be treated as a U.S. account. mirrors the proposed regulations with respect The Search for U.S. Phone Numbers. The to reporting. Partner FIs must report account industry had hoped that U.S. phone numbers balances and amounts paid to account holders, would be removed from the U.S. indicia list, except that they report to the Partner Country but they remain a part of the Model. The final instead of the IRS. Like the proposed regulations, regulations are likely to also retain U.S. phone these obligations are phased in so that only numbers as indicia of U.S. status and FATCA balance information is required for 2013 and (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ 135 Union of Arab Bank Magazine (September 2012)
  • 6. ££££ Study New ”Category 3” FFI Definition. Both the final regulations to address the troubling proposed regulations and the Model impose repercussions of treating non-professionally much of the burden of FATCA compliance on managed investment companies, which can be ”financial institutions” and largely define them quite small and unsophisticated, as ”FFIs” with in the same way – with one major exception. FATCA compliance obligations. The Model replaces the ”Category 3” FFI Due Diligence Similarities - Both the definition in the proposed regulations with a proposed regulations and the Model have new ”investment entity” category. The Model distinct rules for individual and entity accounts defines ”investment entity” as ”any entity that which are further refined for preexisting and conducts as a business (or is managed by an new accounts. entity that conducts as a business) one or more - Individual accounts of $1 million or less of the following activities or operations for or are subject to an electronic search for U.S. on behalf of a customer: indicia, and (1) trading in money market instruments; - Accounts greater than $1 million are foreign exchange; exchange, interest rate and subject to a more thorough review, which index instruments; transferable securities; or may include asking relationship managers commodity futures trading; whether they know if the account has U.S. (2) individual and collective portfolio indicia. management; or Preexisting individual accounts (and all (3) otherwise investing, administering, or individual depository accounts) of $50,000 or managing funds or money on behalf of other less and preexisting entity accounts of $250,000 persons.” or less generally can be excluded from FATCA The new definition both expands and duties. The procedures for dealing with U.S. contracts the concept of the Category 3 FFIs in indicia are also similar, and Forms W-8 would important ways. still be one of the more straightforward ways to First, entities that are not directly engaged cure that indicia. in trading or investing in various assets, but only in managing such activities, will be treated Due Diligence Differences: as FIs under the Model (such as investment Individuals. The Model is more permissive advisors and certain trustees). than the proposed regulations in the types Second, small passive investment vehicles, of documents that can be used to establish an such as family trusts and personal investment account holder’s FATCA status. For example, companies that are treated as Category 3 FFIs to establish foreign individual status for a under the proposed regulations are not treated new account, the proposed regulations would as financial institutions under the Model but require either a Form W-8BEN or government- will instead be treated as passive NFFEs unless issued identification (and require that ”none of they are being professionally managed. Its the documentation associated with the payee believed that the Model’s approach, which has contains U.S. indicia”). On the other hand, the been strongly urged by many in the financial Model requires merely a ”self-certification” industry, will ultimately be adopted by the that allows the Partner FI to determine whether (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ Union of Arab Bank Magazine (September 2012) 136
  • 7. ££££ Study There are two categories of deemed- Where is ”Model 2”? It is expected that the compliant FFIs: U.S. to release a Model 2 IGA soon; that model - registered deemed-compliant, and would provide for reporting directly to the IRS, - certified deemed compliant. rather than the Partner Country. Japan and Registered deemed-compliant FFIs will be Switzerland announced last month that they required to apply for deemed-compliant would agree to Model 2 agreements. status with the IRS and certify every three Structure of the Model - The Model consists years to the IRS. of three parts: a seven-article body, an annex Certified deemed compliant FFIs (e.g., non- covering due diligence, and another annex registering local banks, retirement funds, covering entities and accounts in each country non-profits, certain owner-documented that are considered to be outside the scope of FFIs, FFIs with low value account only) are FATCA reporting. Only the second annex is not required to register with the IRS. likely to differ substantially from country to country. One of the basic problems with FATCA Limited Shelf Life? The Model anticipates has been that it imposes obligations on that the parties will ”consult in good faith” to foreign financial institutions (”FFIs”) that may amend the agreement to ”reflect progress” on contravene the laws of other jurisdictions, such a variety of issues, including the treatment of as reporting information to the IRS or closing withholding on ”foreign passthru payments” the accounts of uncooperative customers. IGAs and gross proceeds and the development of are agreements between the U.S. and FATCA a common reporting and exchange model. In ”Partner Countries” intended to allow ”FATCA addition, the Model suggests that the parties Partner Financial Institutions” (”Partner will work with the OECD and, as appropriate, FIs”) to comply with both FATCA and local the EU to adapt the agreement to become a law. Yesterday the U.S. government released common model for automatic exchange of two versions of the FATCA ”Model 1” IGA information and financial institution due (”Model”). diligence. Such ”developments” are a two- The Two Versions - The Model provides edged sword for the industry. that Partner FIs would report to their local government rather than to the IRS. One They could be beneficial if they lead to a less version provides that the U.S. and the Partner burdensome compliance approach. However, Country will exchange information about each they could also require systems and procedures other’s taxpayers (the “reciprocal version) and currently under development by Partner FIs apparently will be used by France, Germany, to be substantially modified to reflect the Italy, Spain and the United Kingdom. The ”evolution” in the regime. The industry should “nonreciprocal version does not require the U.S. work with these bodies to urge them to take into to share information with the Partner Country, consideration that new requirements can lead and would be used if the U.S. believes that to costly overhauls to systems and procedures there are insufficient safeguards in the Partner and modify their governmental wish lists Country to protect any transmitted information. accordingly. (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ 137 Union of Arab Bank Magazine (September 2012)
  • 8. ££££ Study FATCA Part II – Defusing the ”Limited” Time Bomb” FATCA: What should Financial Institutions As well as, “any class of payments identified do right now? by the U.S. Treasury Secretary for purposes As anyone in the financial services industry of this subsection as posing a low risk of knows, FATCA’s implications affects just tax evasion.” FFI can be assigned one of the about any institution doing business with US following Chapter 4 statuses: customers. FATCA generally requires that - Deemed Compliant withholding agents withhold a tax equal to - Limited Branch 30% on Withholdable payments made to an - Limited FFI FFI or NFFE, with certain exceptions. The - Nonparticipating FFI withholding exceptions, Section 1472 of the - Participating FFI. Hiring Incentives to Restore Employment Act, which implements FATCA, include payments Non-participating FFI status is most likely in which the beneficiary: to result in 30% withholding penalties, and (A) any corporation the stock of which is to be avoided. Majority of the FFI will have regularly traded on an established securities to obtain Participating FFI status which will market, require registration with IRS (via online portal), (B) any corporation which is a member of preferably before 30 June 2013, otherwise, FFI the same expanded affiliated group (as defined may be considered a Participating FFI with in section 1471(e)(2) without regard to the last regard to 2014 only. sentence thereof) as a corporation described in To maintain a Participating FFI status, FFI subparagraph (A), must provide certain compliance certificates (C) any entity which is organized under the and report certain data to IRS. The first certificate laws of a possession of the United States and is to confirm that participating FFI completed which is wholly owned by one or more bona required review of the pre-existing high-value fide residents (as defined in section 937(a)) of accounts within one year of the effective date such possession, of the FFI agreement. The certificate should (D) any foreign government, any political state that FFI did not have any procedures in subdivision of a foreign government, or any place at any time from August 6, 2011 to assist wholly owned agency or instrumentality of any account holders in the avoidance of chapter one or more of the foregoing, 4. Therefore, the initial focus of the review is (E) any international organization or any on high-value accounts (e.g., USD 1M+ for wholly owned agency or instrumentality individual accounts) opened before the FFI thereof, agreement date. (F) any foreign central bank of issue, or With regard to the exemption, FFI must (G) any other class of persons identified by obtain Chapter 4 status “Deemed-Compliant” the Secretary for purposes of this subsection,” to be relieved from FATCA obligations. (2012 ‫اﲢﺎد اﳌﺼﺎرف اﻟﻌﺮﺑﻴﺔ )أﻳﻠﻮل/ ﺳﺒﺘﻤ‬ Union of Arab Bank Magazine (September 2012) 138