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JFK London Hire Act Seminar Slides

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London
New York
Geneva
FATCA:
Greenwich
Disclose, Withhold or Disinvest?
Hong Kong
Milan
New Haven
Jay Krause
26 October 2010
Program
• Selected highlights and client implications
• Special issues for trustees
• Comments and strategies
• Q&A
• Comments / questions forwarded to Treasury only if specifically
requested
What is FATCA?
• All FFIs subject to 30% gross withholding on US investments
Unless
• Enter into �FFI Agreement’ to
• Identify clients; and
• Withhold where relevant
The Road to FATCA
• LGT and UBS scandals
• The trouble with treaties and TIEAs
• OECD standards don’t address the problem
• I don’t know what I don’t know
FFI Obligations
• What must an FFI do?
• Identifying US clients and disclosing account details;
• Withholding on account holders refusing to be identified;
• Withholding on any FFI not entering adopting these procedures;
• Closing the account of anyone protected by banking secrecy laws
who fails to waive the protections of such laws
Financial Institution Defined
• Accepts deposits in ordinary course of banking or similar
business – 1471(d)(5)(A);
• Holds financial assets for the account of others as a substantial
portion of its business – 1471(d)(5)(B); or
• Engaged primarily in the business of investing… –
1471(d)(5)(C)
�Financial Institutions’ Generally Affected
• Banks (whether commercial or savings), savings and loans,
thrifts, credit unions, building societies, etc.
• Broker dealers, clearing organizations, custodians, employee
benefit plans, trust companies, etc.
• Hedge and private equity funds, funds of funds, mutual funds,
ETFs and all other collective investment and securitisation
structures
Comments on Selected FFIs
• Funds
• Employee benefit plans
• Limited �same country’ exception
• Trust companies and individual trusts
• Life insurance companies
Identifying �Account Holders’ - Individuals
• Existing accounts v New accounts
• Pre-existing individual accounts
•
Search electronic databases for indicia of US status
•
Where US, must obtain W-9
•
Where US place of birth or mailing/residence address
•
•
If claiming non-US status, W-8 plus non-US passport
Other indicia only require W-8
•
Beware �care of’ and �PO Box’ addresses generally
• Transition to new account rules
•
Five years generally
•
Two years where account greater $1,000,000
• New accounts
•
Documentary evidence required
Identifying �Account Holders’ - Entities
• Entities
• Classify entity as FFI or NFFE
• Participating, non-participating, deemed compliant, excepted,
recalcitrant or other…
• Identify each individual with an �interest’; and
• Obtain documentation applicable to new individual account holders
• New accounts
• must refer to all information collected
• regardless of whether electronically searchable…
Frequent Reactions
• But we don’t have US clients…
• We’ll stop taking on US clients….
• Do you have US investments?
• All that matters!!!
Frequent Reactions
• But we don’t have US clients…
• We’ll stop taking on US clients….
• Do you have US investments?
• All that matters!!!
Client’s Perspective
• Implications for all US taxpayers not fully tax and reporting compliant
• Am I US?
•
Citizen;
•
Green card holder; or
•
Resident
• Worldwide tax and reporting
•
Regardless of residence
•
Credits generally available for taxes paid, but must be claimed!
Client’s Perspective - Expatriation
• Expatriation?
•
Citizens
•
Green card holders
• Exit tax regime from mid 2008
•
Deemed sale of assets
•
Tax on deemed gains in excess of $600,000
•
Additional implications
• Exceptions
•
Dual citizens from birth
•
Age 18 1/2
Client’s Perspective – Expatriation
• What if not fully tax and reporting compliant?
• Expatriation exit tax regime applies unless
• Can certify full compliance for last five years
• Voluntary disclosure
Client’s Perspective – Voluntary Disclosure
• Special disclosure program expired 15 October 2009, BUT
• Long standing IRS voluntary disclosure policy
• See IRM 9.5.11.9 — Voluntary Disclosure Practice
• No criminal prosecution
• Must come to IRS before they come to you
• Several options for proceeding – �Quiet’ v �Noisy’
• Most recent UBS client sentence
• 50% account value, plus tax interest and other penalties
• One year jail followed by house arrest
London
New York
Geneva
Implications of the New HIRE Act
Rules:
Greenwich
Hong Kong
Milan
New Haven
The Trustee View
Jay Rubinstein, Withers LLP, Geneva
26 September, 2010
jay.rubinstein@withersworldwide.com
Overview
• Recent History of Foreign Trust US Tax Concerns
• Is a Trust an FFI? NFFE?
• Disclosure and Identification Rules as to beneficiaries and
settlors
• Additional Hire Act rules implicating trusts
Recent History of Trustee US Tax Concerns
• Distinctions between “foreign trust” vs “US trust” and “grantor
trust” vs. “non-grantor trust”
• Application of QI rules beginning in early 2000’s
• Proper trustee and beneficiary disclosures on
• Trust distributions
• Holding companies
• Foreign bank accounts
• Now FATCA
Trust As NFFE – US Persons with a �Substantial
Interest’ (10% Interest?)
• Beneficiaries or settlor?
• Foreign grantor trust – settlor
•
1473(2)(A)(iii)(I)
•
Trust revocable or or distributions limited to settlor / spouse during settlor’s
lifetime
•
Slightly different rules for certain pre Sept 19, 1995 trusts
• Foreign non-grantor trust – beneficiaries
•
1473(2)(A)(iii)(II)
Trust as NFFE - Beneficiaries of Discretionary
Trusts as �Account Holders’
• Who is a beneficiary:
• Letter of wishes?
• Will new IRC section 679 provisions apply?
• Potential beneficiary attribution regimes:
• Maximum exercise of discretion
• Pattern of distributions
• Trust terms
• Other?
Identifying Trust �Account Holders’
• Where to begin?
• Notice requires
• Identify each individual with an �interest’; and
• Obtain documentation applicable to new individual account holders
• New accounts
• Must refer to all information collected
• Regardless of whether electronically searchable
• Notice section III.B.3.b.
But is a Trust / Trust Company An FFI?
FATCA - Financial Institution Defined
• Accepts deposits in ordinary course of banking or similar
business – 1471(d)(5)(A);
• Holds financial assets for the account of others as a substantial
portion of its business – 1471(d)(5)(B); or
• Engaged primarily in the business of investing – 1471(d)(5)(C)
�Financial Institutions’ Generally Affected –
AND NOTICE POTENTIALLY AFFECTING TRUSTS
• Banks (whether commercial or savings), savings and loans,
thrifts, credit unions, building societies, etc.
• Broker dealers, clearing organizations, custodians, employee
benefit plans, etc. [ TRUST COMPANIES? (PTC’s??) ]
• Hedge and private equity funds, funds of funds, mutual funds,
ETFs and all other collective investment and securitisation
structures [ INDIVIDUAL TRUSTS ?? ]
Trusts and Trust Companies
• Trust companies
• Treated as entity holding assets for the benefit of others
• Notice 2010-60 section II.A.2.
• Trusts
• �Small family trust’ listed as an example of an FFI
• FFI status supposedly arising under Section 1471(d)(5)(C) which
requires that the entity be primarily in the business of investing
• Notice 2010-60 section II.B.3.
Trusts as FFIs?
• Primarily in the business of investing?
• Existing US classification rules indicate otherwise
• Regulation section 301.7701-4
• Ordinary trusts
• arrangement to protect property for beneficiaries
• Business trusts
• Investment trusts
• generally classified as a �business entity’ for US purposes
Trusts as FFIs (con’t)
• Trusts as FFIs effectively contradicts other FATCA provisions
• Section 1473(2)(A)(iii)(II) and 1473(2)(B)
• Substantial US account holder exists where > 10% of trust
attributed to US person; but
• Where FFI is primarily in business of investing, substantial US
ownership exists if anything attributed to a US person
• If all trusts are treated as FFIs, then 10% test can never apply to
trusts not withstanding express language that it does apply to
trusts
OTHER HIRE ACT RULESReporting of Specified Foreign Financial Assets
• In addition to current FBAR reporting
• Reporting of “specified foreign financial assets” that exceed $50,000
(aggregate)
• Any financial account maintained by a foreign financial institution;
• Any of the following assets not maintained in a foreign financial
account: non-US stock; any interest in a non-US entity; any
financial instrument or contract with a non-US counter-party
Reporting of Specified Foreign Financial Assets
• Applies to US individuals; IRS has authority to extend to US
entities
• May apply without regard to whether that individual owns more
than 50% interest in trust owning such foreign accounts or
assets
• Reporting on US income tax return (IRS Form 1040)
• Failure to report subject to penalty of $10,000; additional
penalties up to $50,000 could apply
Passive Foreign Investment Company Reporting
• Definition of Passive Foreign Investment Company (PFIC)
• 75% of gross income is passive income or 50% average passive
assets
• Old rule (IRS Form 8621)
• Upon distributions; upon disposition; upon making an election
• New rule
• annual reporting obligation regardless of whether any taxable
event has taken place during the year
Uncompensated Use of Trust Property
• Deemed distribution of income or gains
• Only for uncompensated use of trust property
• Only if used by US person beneficiary
• Only for foreign (non-US) trusts
• Amount of distribution equal to the FMV use of property;
• Taxable if trust generates income or gains
• Interest charges if there is accumulated income or gains
• In all events, reporting of distribution
• Information statement from trustee to meet US reporting
obligations
Uncompensated Use of Trust Property
• Impacts any foreign trust that holds property used by a US
person
• Real property, art, jewelry, automobiles, yachts and airplanes.
• Exception where beneficiary pays FMV for use of property
within a “reasonable period of time”
• Rent payment can give rise to passive income subject to 30%
withholding
Uncompensated Use of Trust Property—
Planning Options
• Segregate the use property in a separate “dry” foreign trust
• Domesticate the use property to a US trust (watch for carrying
out income)
• Sell property to a grantor trust (watch for gain recognition)
London
New York
Responses to the New Hire Act
Rules:
Geneva
Comments and possible strategies
Greenwich
Hong Kong
Richard Cassell, Withers LLP London
26 October 2010
Milan
New Haven
IRS Notice 2010 – 60
• These are only proposals and are open for comment
• IRS specifically is looking for comments as to impact on trusts
and practical trust issues
• We are assembling comments from interested parties
• In order to be effective the comments must be specific and
targeted. There is no point in requesting blanket exemptions or
grandfathering
Surprises in the Notice
• Every trust is an FFI – not the trustee, but the trust, but not undefined
“small family trusts”
• Does offer opportunity for a trust to elect to participate separately from
trustee but of limited practical use
• Multiplicity of reporting, for example, for private trust companies with
professional service provider, but confusion about responsibility
(custodian? Paying agent? FFI?)
• Concept of US financial institution – treated like a participating FFI but
not defined – does it include US partnerships and US trusts?
• As a result of all trusts being FFIs this ignored Section 1472 definitions
of US owners and 10% restriction
Comments
•
IRS will be deluged with pointless information (like the FBAR reports) as a result
of including every non-US trust in the world as an FFI. Should only trustees be
FFIs not trusts?
•
Should the definition of “small family trust” be expanded? How big is small?
What is a family?
•
Will the disclosures be limited to the last participating FFI in the chain or will
intermediate participating FFIs be required to maintain parallel disclosure?
What about potential inconsistencies in disclosure?
•
Will certification by a participating FFI provide effective disclosure exemptions?
•
Should there be any separate category for charities?
•
How do you value a US beneficiary’s discretionary trust balance?
Strategies
• Segregate trusts between those with US and non-US investments.
Those with only non-US investments can be non-participating FFIs.
• Generally strategy must be to manage the disclosure. We expect
clients will generally need a participating FFI – it must be preferable to
control the disclosure in the FFI
• A strategy to limit disclosure to third parties may be to use a US
partnership to segregate all US investments and to manage the
disclosure – a strategy that could exploit the exemption for family
offices that we expect under Dodd-Frank regulations
• Eliminate US beneficiaries who are not intended actually to benefit
from discretionary trusts
Client reactions
• Anticipate disclosure or divest from US but a strategy to avoid
all US investments seems very restrictive
• If the clients are non-compliant the voluntary disclosure program
is still open for business and this is the opportunity to become
compliant
• We anticipate that some compliant clients may use this as the
opportunity to look at expatriation –covered expatriate limit is
currently $2m
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