Qualified Intermediaries and FATCA Global Financial Services Industry What is FATCA? Enacted in 2010 as part of the Hiring Incentives to Restore Employment (“HIRE”) Act, the Foreign Account Tax Compliance Act (“FATCA”) addresses perceived abuses by U.S. taxpayers with respect to offshore financial assets. FATCA compels foreign financial institutions (“FFIs”) to report U.S. financial asset holders to the IRS beginning in 2014. It requires payors (withholding agents) of U.S. sourced income to withhold 30% of gross payments made to FFIs and non-financial foreign entities (“NFFEs”). To avoid FATCA withholding, an FFI must register with the IRS, generally by June 30, 2013, and sign an FFI agreement to become a participating FFI, while an NFFE must provide the withholding agent with either (1) a certification that it does not have any substantial specified U.S. owners or (2) information its substantial specified U.S. owners. Proposed Regulations providing detail with regard to FATCA were issued February 8, 2012. Qualified Intermediaries (“QIs”): Under current regulations an “intermediary” is “a person that acts as a custodian, broker, nominee, or otherwise as an agent for another person, regardless of whether such other person is the beneficial owner of the amount paid, a flow-through entity, or another intermediary.” 1 Intermediaries have certain obligations regarding their receipt of certain U.S. sourced income payments. Specifically, intermediaries must furnish withholding certificates such as W-8s, W9s and Forms 8233 to withholding agents to reduce or eliminate withholding under regular U.S. tax rules applicable to cross-border payments. Entities meeting certain requirements may apply to enter into a “QI agreement” with the IRS. 2 Under a QI agreement, a QI may provide a withholding agent an intermediary withholding certificate along with a withholding statement allocating the amounts required to be withheld from a payment along with other required information. As a result, the QI does not have to provide the withholding agent with withholding certificates or other appropriate documentation for beneficial owners, payees, or 1 Treas. Reg. §1.1441-1(c)(13). Section 1441 is also commonly referred to as Chapter 3 withholding. 2 Treas. Reg. §1.1441-1(e)(5). interest holders of payments it receives, and may also accept U.S. withholding responsibilities with regard to these payments. To become a QI, an entity must be: 1. An FFI or a foreign clearing organization (as defined in §1.163-5(c)(2)(i)(D)(8), without regard to the requirement that the organization hold obligations for members), other than a U.S. branch or U.S. office of such institution or organization; 2. A foreign branch or office of a U.S. financial institution or a foreign branch or office of a U.S. clearing organization (as defined in §1.163-5(c)(2)(i)(D)(8), without regard to the requirement that the organization hold obligations for members); 3. A foreign corporation for purposes of presenting claims of benefits under an income tax treaty on behalf of its shareholders; or 4. Any other “person” acceptable to the IRS. 3 The Intersect Between FATCA and the QI Regime While FATCA creates a new layer of customer documentation and information reporting requirements for FFIs, the impact of the law on Qualified Intermediaries (“QIs”) is altered significantly under the current Proposed Regulations. Because of several overlaps between the FATCA (Chapter 4) reporting requirements and the §1441 (Chapter 3) reporting requirements, the Proposed Regulations reduce certain QI reporting obligations while imposing other additional obligations on QIs. Examples include: 1. A participating FFI that under its QI agreement previously obtained documentation from an account holder to establish the account holder's status as a non-U.S. individual does not need to perform the electronic search or the enhanced review described in the Proposed Regulations for such an account. However, the Proposed Regulations require the participating FFI to perform the relationship manager inquiry if the account is a high-value account (accounts with a balance or value exceeding $ 1 million). 2. If an FFI that is a QI meets the conditions of a limited FFI under the rules of the Proposed Regulations, the FFI may enroll as a limited FFI notwithstanding that none of the FFIs in its expanded affiliated group can comply with the provisions of an FFI agreement. The IRS stated in its opening comments in the Proposed Regulations that it intends to require all QIs to be participating FFIs. 3. The IRS will require a participating FFI that is a QI and that has not assumed primary withholding responsibility under chapter 3 to make the election under section 1471(b)(3) to be withheld upon. If it has assumed primary withholding responsibility under Chapter 3, it may not make such an election. 4. While payments to foreign branches of U.S. persons are generally considered to be payments to U.S. payees, a payment to a foreign branch of a U.S. financial institution will be treated as a payment to a foreign payee if the foreign branch is a QI. Therefore, a foreign branch that is a QI will provide the withholding agent with an intermediary withholding certificate and the withholding agent will report the payment as having been made to a foreign branch of the QI on a Form 1042-S. The IRS has indicated that it intends to create separate reporting requirements specifically for QIs with respect to U.S. accounts. It has also stated that it seeks comments on coordinating the Chapter 3 reporting requirements and existing withholding requirements of these entities under their respective agreements with the reporting and withholding requirements under Chapter 4 (including QIs that are foreign branches of U.S. financial institutions). 3 Similar but distinct agreements are available with regard to certain foreign partnerships and withholding foreign trusts that wish to take advantage of pooled reporting and are willing to accept U.S. withholding obligations to do so. Next Steps While many of the information reporting functions QIs conduct currently may be leveraged for FFI reporting responsibilities under FATCA, there are several considerations QIs should analyze before FATCA’s effective date and before the Treasury issues further guidance. Some specific action items to consider when developing QI FATCA compliance programs include: • Reviewing the QI’s current organization structure to understand its administrative requirements and potential documentation, withholding, depositing, and reporting obligations under FATCA, including classification of the QI’s legal entities into FATCA taxonomy categories, and determining existing documentation, withholding, depositing, and reporting capabilities and processes that can be leveraged and enhanced to support FATCA requirements; • Classifying accounts into FATCA categories; • Identifying high-value accounts subject to the additional relationship manager inquiry requirements; • Analyzing the QI’s capability and obligation to elect under section 1471(b)(3) to be withheld upon; • Identifying foreign branches of U.S. persons and implementing additional information reporting functionality for these entities; • Communicating with business partners and service providers to determine division of responsibilities, develop a ‘FATCA readiness plan’, and consider whether service provider agreements may need modifications to require associates to be FATCA compliant; • Managing impact on client relations processes, including updating processes for new client onboarding, and developing a plan and approach for reaching out to existing clients to determine their FATCA classification, determining the roles and responsibilities of the organization and each client, obtaining waivers and/or additional information required under FATCA, and understanding non-U.S. clients’ plans for becoming FATCA compliant; • Analyzing AML/KYC programs performed internally and by third party service providers to confirm compliance with FATCA requirements; • Developing a governance structure for implementation and identifying “Responsible Officer(s)” who are required to certify compliance; • Coordinating communications with clients and managing the various vendor communications to maintain a consistent and cohesive client experience; • Managing the process for identifying, recording, reconciling, and reporting the new withholding information to the IRS; • Educating cross departmental teams on the impact to their business units or functions, and appropriately identifying the impact to existing processes or technology platforms; • Reviewing and updating internal policies and procedures to help monitor FATCA compliance, and establishing controls and governance structure to monitor and resolve FATCA issues (e.g., nonFATCA compliant clients); • Consulting with tax professionals on questions and concerns regarding reporting regimes; and • Contributing comments and feedback to the IRS and Treasury. How Deloitte Can Help In an environment where FFIs are already under significant cost pressure resulting from the rapidly expanding regulatory environment, Deloitte can provide help by assisting management with all or some segments of complying with FATCA. For our clients, this typically involves deploying an engagement team led by an internal champion and a Deloitte FATCA specialist, who work together to provide recommendations and guidance for the FFI and internal stakeholders in preparing for and implementing the new rules. For more information please click here or please contact: Denise Hintzke Director, Global FATCA Tax Leader Deloitte Tax LLP +1 212 436 4792 [email protected] Anne Mericle Global FATCA PMO Manager Deloitte Tax LLP +1 212 436 3908 [email protected] Americas John Rieger Partner, National Tax Financial Services Industry Deloitte Tax LLP +1 212 436 6934 [email protected] John Kocjan Partner, FATCA Consulting Leader, U.S. Deloitte Consulting LLP +1 212 618 4181 [email protected] Greg Thomas Principal, FATCA Enterprise Risk Services Leader, U.S. Deloitte & Touche LLP +1 415 783 5211 [email protected] Stephen Cryer FATCA Leader, Canada Deloitte & Touche LLP + 1 416 874 3169 [email protected] Oscar Ortiz FATCA Leader, LatAm Deloitte Mexico +52 55 5080 6513 x6513 [email protected] Mike Wade Director, FATCA Enterprise Risk Services Leader, U.S. Deloitte & Touche LLP +1 804 697 1537 [email protected] James Dockeray FATCA Leader, Caribbean/Bermuda Deloitte & Touche Ltd. +1 441 299 1399 [email protected] Michael Shepard Partner, U.S. FATCA Financial Advisory Services Leader, Deloitte Financial Advisory Services LLP +1 215 299 5260 [email protected] Europe, Middle East & Africa Asia-Pacific Piero Molinario FATCA FAS Leader, Europe Deloitte & Touche, S.p.A +39 02 8332 5102 [email protected] Jim Calvin FATCA Leader, Asia-Pacific Deloitte & Touche LLP +65 6224 8288 [email protected] Nick Sandall FATCA Consulting Leader, EMEA Deloitte LLP + 44 20 7007 1850 [email protected] Graham Dillon FATCA Leader, Australia Deloitte LLP +61 2 9322 5111 [email protected] Chris Tragheim FATCA Tax Leader, EMEA Deloitte LLP + 44 20 7303 2848 [email protected] Hiromi Ikuta FATCA Leader, Japan Deloitte Touche Tohmatsu +036 213 1164 [email protected] Julian Hawkins FATCA Consulting Leader, Middle East. Deloitte & Touche (M.E.) +971 55 1094465 [email protected] Andy MacDonald FATCA FAS Leader, Asia-Pacific Deloitte & Touche Financial Advisory Services +65 6216 3180 [email protected] Brandon George FATCA Tax Leader, Middle East. Deloitte LLP +971 4 5064892 [email protected] Stephen Mollenkamp FATCA Consulting Leader, Japan Deloitte Touche Tohmatsu +81 80 3367 2572 [email protected] Umair Hameed FATCA FAS Leader, Middle East Deloitte Corporate Finance Ltd +971 50 658 4486 [email protected] Karon Wan FATCA Consulting Leader, Asia Pacific (excl. Japan) Deloitte Touche Tohmatsu +852 28526562 [email protected] U.S. National contacts U.S. regional tax information reporting contacts Denise Hintzke Central Tracey Fielman Terence Coppinger Mid-America Wade McKnight Anthony Martirano Northeast Terence Coppinger Marvin Michelman Southeast Joan Millett West Jeff Wax, Cindy Hustad About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright © 2012 Deloitte Development LLC. All rights reserved. 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