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Summary of draft FATCA regulations (121647-10) 1. Background The draft regulations issued on 8th February 2012, go a long way to addressing industry concerns raised from previously issued notices, and see a number of concessions that will make compliance with the FATCA regime easier and less costly for businesses operating in an environment of global economic uncertainty. The draft FATCA regulations comprise 389 pages and the purpose of this summary is to highlight what has been removed, what has changed and what has remained the same to assist organisations in starting to understand the impact that FATCA will have on their businesses. The devil as always, is in the detail and organisations have until 30 April 2012 to make submissions to the Inland Revenue Service (IRS). A public hearing is scheduled for 15 May 2012, and organisations may request an opportunity to speak or provide outlines of topics for discussion by 1 May 2012.

2. Summary of key changes The key changes that will be examined in this article are:  Transitional rules for affiliates with legal prohibitions on compliance  Guidance procedures required to verify compliance  Expanded scope of ‘grandfathered’ obligations  Additional categories of “Deemed Compliant FFI” (DCFFI) entities  Refinement of the definition of financial account  Changes to the identification of U.S. accounts (new and pre-existing)  Transition period for withholding and reporting

2.1 Transition rules for affiliates with legal prohibitions on compliance In the draft regulations Treasury and IRS recognised that it is not always possible for all legal entities within the Designated Affiliate Group to be compliant with FATCA, as some countries have certain prohibitions against withholding and reporting. To allow for this an FFI can still enter into an agreement whilst its “Limited FFI Affiliates” or “Limited Branches” may not be fully compliant. The draft regulations set out actions that must be taken by the FFI on behalf of any non-compliant affiliates/ branches, including: 1. Conduct due diligence on U.S. accounts 2. Maintain certain records 3. Meet certain other requirements 4. Are subject to withholding upon receipt of withholdable payments There is a two-year transition ending 1 January 2016 with the above actions required in the interim period.


2.2 Guidance procedures required to verify compliance FFIs are not required to hire external auditors to independently conduct a compliance review to attest to compliance with FATCA (unlike the Qualified Intermediary scheme, which requires this to occur twice in every six year agreement term). However, the FFI Reporting Officer is still “expected to certify that the FFI has complied with the terms of the FFI agreement”. This can be achieved through internal reviews and attestations, which may save FFIs money, if they chose to handle this internally. A welcome addition is that FFIs that follow the terms of the FFI agreement, will not be strictly held liable in the event that it fails to identify a U.S. account.

2.3 Expanded scope of ‘grandfathered’ obligations The draft FATCA regulations provide relief for withholding agents from applying the 30% penalty on any ‘withholdable payments’ related to any obligation outstanding as at 18 March 2012. This relief extends by excluding from the definition of withholdable or passthru payment, any payment made under an obligation outstanding on 1 January 2013. Whilst there is some relief in terms of timing and breadth of these obligations they remain broadly the same as earlier notices.

2.4 Additional categories of deemed compliant FFI (DCFFI) status Previously, the requirements for FFIs to qualify for a ‘deemed compliance’ status were very comprehensive, meaning that very few organisations would have qualified. In the latest guidance, additional entities (such as group retirement plans) will fall under the DCFFI status and the qualifying criteria has been relaxed, meaning more organisations will be able to qualify. Under the previous guidance even DCFFIs would have to register with the IRS – now they are no longer required to formally register and are permitted to self-certify.

2.5 Refinement of the definition of the term “Financial Account” The draft FATCA regulations further refine the definition of the term ‘financial account’ by focusing on the traditional meaning of “bank, brokerage, money market accounts, and interests in investment vehicles, and to exclude most debt and equity securities issued by banks and brokerage firms, subject to an anti-abuse rule”. In addition, to an individual account an insurance contract with a cash value is specifically referenced, whereby preexisting accounts held with values of <=USD$250k are not required to be subject to electronic searches.

2.6 Changes to the identification of U.S. accounts (new and pre-existing) The draft FATCA regulations abolish the previous requirement for enhanced scrutiny of accounts that fell under the definition of “Private Banking / Wealth Management” accounts and instead replace this on a USD$1m threshold. The number of accounts that fall within this higher band should be less and will therefore reduce the amount of ‘paper based’ searches that are required to be conducted. The draft regulations scale back this requirement further and may not even be required where an electronic search provides adequate information. In the circumstances where a ‘paper based’ review is still required this has also been moderated to include only recent account data, as opposed to every paper document that an FFI might have on file. The threshold by which individual accounts are not required to be subject to electronic searches remains the same at USD$50k (unless the account value relates to a cash value on an insurance policy, in which case the de minimus threshold is USD$250k). USD$250k is also the de minimus threshold for entity accounts.


The U.S. indica search criteria has been modified slightly with the removal of Countr(ries) of citizenship / Nationality (although U.S. place of birth is still required), U.S. lawful permanent resident (i.e. green card holder) or the regular receipt of funds from U.S. sources. The table below summarises the U.S. indica including U.S. telephone number, which is a new requirement:

Finally, the existing AML/KYC procedures that an FFI has in place can be relied upon for the purposes of FATCA. However, it is worth noting that the draft guidance specifies that the threshold by which â&#x20AC;&#x153;substantial beneficial ownershipâ&#x20AC;? is recognised for U.S. owners of a financial operating entity is 10%, however in Australia under the AML/CFT Act this remains 25%. The table below summarises the revised requirements for new and pre-existing accounts for individuals and entities:


2.7 Transition period for withholding and reporting In recognition of the issues and concerns raised around FFIs ability to modify systems and procedures to accommodate withholding and reporting, there are a number of significant concessions in respect to the scope and timing of the reporting requirements. The data requirements will be phased in over 2014/2015 to include basic account information that is required to be expanded in 2016 and 2017 to include more detailed information. Also, the commencement date for passthru payments was previously due to start from 1 January 2015 but given the significant pushback from industry the IRS have deferred this by 2 years and will now commence from 1 January 2017. The table below summarises the reporting requirements and timing for each:

Another major concession is that reporting is permissible in local currency or U.S. dollars which will greatly reduce the cost of multi-currency reporting, however, the reporting period for U.S. tax years will still need to be followed which may prove burdensome for FFIs (like Australia and New Zealand) that have local tax reporting years outside these times. Another significant announcement includes the opportunity for FFIs and NFFEs operating in “FATCA Partner” countries to collect and report tax information to the local tax authority, as long as the local tax authority has signed either an Income Tax Treaty Agreement, a Tax Information Exchange Agreement or other type of agreement with the IRS. A joint statement was also issued by the U.S. Treasury Department that signified that Government-to-Government discussions have started between the U.S. and France, Germany, Italy, Spain and the United Kingdom to reach a mutually beneficial outcome in respect of cross-country tax information sharing. Many other countries, including Australia and New Zealand were notably absent from this announcement but the IRS indicated its ongoing commitment to reaching similar arrangements by stating “the IRS will continue to engage with interested stakeholders, including foreign governments, in connection with finalizing these proposed regulations regarding the efficient and effective implementation of Chapter 4”. This is clearly something that other non-FATCA Government Partners at this point in time will seek to address, since the absence of this agreement will require reporting directly to the IRS which will significantly increase the implementation cost since existing tax reporting protocols could not be leveraged under this scenario.


3. Where can I go to find out more? To assist FFIs in understanding their obligations under FATCA, Financial Crimes Consulting (FCC) will soon be conducting a series of 1-day seminars through the Australian Financial Markets Association (AFMA) (dates tbc), which will assist people tasked with FATCA compliance in understanding the potential extent of the impact and implementation effort required to meet this obligation. Financial Crimes Consulting also provides an online FATCA impact assessment tool (which we are currently updating) and are actively working on a solution, to offer a fully integrated online account opening form that conducts verification checks against U.S. data sources. If you would like to find out more about the products and services FCC offers please contact us Telephone Mobile email Web

+61 (2) 8001 6433 +61 (0) 431 157 006 Anthony.Quinn@financialcrimesconsulting.com.au http://www.financialcrimesconsulting.com

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