British Virgin Islands: BVI US And UK FATCA Implementation – Entity Classification And Registration

On 30 June 2014, the British Virgin Islands (“BVI“) government signed a Model 1B (i.e. non-reciprocal) intergovernmental agreement with the United States (the “US IGA“).  The US IGA provides a framework for the implementation of the US Foreign Account Tax Compliance Act (“FATCA“) in the BVI.  The BVI government had, on 28 November 2013, signed an intergovernmental agreement with the United Kingdom which made similar provisions for the reporting of tax information to HM Treasury (the “UK IGA” and, together with the US IGA, “the IGAs“).  Each of the IGAs is largely similar in scope and effect.  The process of preparing the supporting BVI legislation, regulations and guidance notes has now begun in earnest, with draft guidance notes being circulated at the end of July 2014. 

What is the obligation?

The IGAs impose an obligation on the BVI to obtain and annually exchange certain financial information with respect to all Reportable Accounts.

A Reportable Account for the purposes of the IGAs is, broadly, an account maintained by a Reporting BVI Financial Institution (“FI“), which includes equity or debt interests in an Investment Entity, and held, in the case of the US IGA, by one or more Specified US Persons or by a non-US Entity with one or more controlling persons that is a Specified US Person and, in the case of the UK IGA, an account maintained by a Reporting BVI FI and held by one or more Specified UK Persons or by a non-UK Entity with one or more controlling persons that is a Specified UK Person.

An FI for these purposes means a Custodial Institution, a Depositary Institution, an Investment Entity, or a Specified Insurance Company.  These are further defined in the IGAs and the guidance notes but include banks, investment funds and any holding company that holds financial assets for the account of others as a substantial portion of its business.

Annex II to the IGAs contain definitions of certain entities which are to be treated as exempt beneficial owners, deemed-complaint BVI FIs or accounts that are excluded from the definition of Financial Accounts.  In addition, the draft guidance notes explain that, in relation to the US IGA, an entity may also elect to rely on definitions from the US Regulations and explains that, as a result, for certain elements, either the US IGA definition or the definition set out in the US Regulations may be used by an entity when looking at the exemptions available to it.

Failure by a BVI FI to comply with the US IGA, which includes failure to report to the BVI’s International Tax Authority (the “ITA“) where and in the manner required to do so, may lead to an imposition of a 30% withholding on US source payments to the entity. 

Required Analysis

The first step in any analysis is to establish whether the BVI entity in question is an FI.  In practice, this will likely cover custodians, nominees, banks, trust companies and trusts, investment funds (including hedge and private equity funds), administrators, investment managers and investment advisers.

At a minimum, FIs should be considering the following:

(a)  Entity classification – Is it a Reporting FI or a Non-Reporting FI?  Non-Reporting FIs do not need to register with the Internal Revenue Service (“IRS“) for a Global Intermediary Identification Number (“GIIN“) in the case of the US IGA, or report to the ITA in the case of both IGAs.

(b)  Registration – If the entity is a Reporting FI for the purposes of the US IGA, a registration application should be submitted to the IRS for a GIIN.

(c)  Due diligence – For Reporting FIs, a due diligence programme should be put in place which meets the requirements of Annex I to the IGAs within the relevant deadlines.

(d)  Reporting – For Reporting FIs, procedures should also be implemented in due course so that the required information on any Reportable Accounts is reported to the ITA within the prescribed time limits.

The remainder of this update looks at the first two considerations in more detail.

Entity Classification

The IGAs categorise FIs as either “Reporting FIs” or “Non-Reporting FIs”.  By default, all FIs are Reporting FIs, unless they qualify as Non-Reporting FIs.  For the purposes of the US IGA, only Reporting FIs are required to register with the IRS and obtain a GIIN.

The types of Non-Reporting FI are specified in Annex II to the IGAs.  Annex II is significant because it allows entities that can be classified as ‘exempt beneficial owners’ and, for the purposes of the US IGA, ‘deemed compliant FIs’ to operate as Non-Reporting FIs.  Notably, there are no due diligence or reporting obligations on Non-Reporting FIs and, for the purposes of the US IGA, there is no requirement to register with the IRS for a GIIN.

Annex II includes exemptions for sponsored investment entities as well as investment managers and investment advisers who meet certain conditions.  In addition, there is a category of ‘collective investment vehicle’ of which some investment funds may be able to take advantage.  Conditions of this category include being ‘regulated’ and where all debt and equity interests are held by limited categories of investor.

It should be noted that the structure of the US IGA is such that the list of entities in Annex II may be expanded by the inclusion of additional categories of entity either expressly or by reference to categories of deemed compliant entities under the US FATCA Regulations.

Registration

Under the US IGA, a BVI Investment Entity which is a Reporting FI is required to register with the IRS either through the IRS registration portal or through manual submission of Form 8957.

If successfully registered, a Reporting FI will be issued a GIIN.  Obtaining a GIIN is the method by which Reporting FIs demonstrate FATCA compliance as US withholding agents are required to verify the GIIN against lists that will be published by the IRS.

Non-Reporting FIs (under Annex II of the US IGA) and non-financial foreign entities (“NFFEs“), whether Active or Passive NFFEs, are not required to register although they may be required to self-certify their status to withholding agents in order to avoid the imposition of any withholding tax.

Withholding agents are not required to verify GIINs on payments made prior to 1 January 2015 where the payee is a Reporting FI in a Model 1 IGA jurisdiction such as the BVI.  Accordingly, BVI Reporting FIs can effect registration through to the end of 2014 and, if necessary, may self-certify their status to withholding agents after 1 July 2014 to avoid withholding.

It should be noted, however, that BVI Reporting FIs that are: (i) maintaining one or more branches (other than a Limited Branch or US branch) in jurisdiction(s) that are not covered by a Model 1 IGA; (ii) renewing its QI, WP or QT Agreement; or (iii) intending to be a Lead FI for one or more Member FIs that are not established and operating exclusively in other Model 1 IGA jurisdictions, will not benefit from the US IGA and will likely need to be covered by a Foreign Financial Institution (“FFI“) agreement.

Register now or wait? 

Certain FIs may be Non-Reporting FIs if they can take advantage of one of the Annex II exemption categories such as sponsored entities and collective investment vehicles.

Further clarity as to the availability of these exemptions is expected in the BVI supporting legislation and the finalised guidance notes.  FIs that wish to avoid registration may therefore wish to hold off until the guidance notes are finalised.

It may also be prudent to wait until the BVI legislation, regulations and guidance notes have been enacted so that any issues in relation to duties of confidentiality and registration with a foreign tax authority can be avoided.

It is understood that there should be no difficulty in withholding agents accepting self-certification from Reporting FIs until the end of 2014 as they have had to accept self-certification from the many tens of thousands of Non-Reporting FIs and NFFEs globally from 1 July 2014.

Responsible Officer 

The US IGA makes no reference to Reporting FIs having to appoint responsible officers (“ROs“).  Only the GIIN registration application refers to the RO.  The IRS FATCA registration portal guidance and the Form 8957 instructions both state that for Model 1 IGA Reporting FIs, registration is for the purpose of authorising one or more points of contact to receive information related to the registration as well as to obtain a GIIN.  Notably for Model 2 IGA Reporting FIs and (non-IGA) Participating FFIs, both categories of which are expected to have FFI agreements in place with the IRS, the guidance indicates that registration is also for the purpose of confirming acceptance of the terms of the applicable FFI agreement including the ongoing compliance requirements set-out therein which specifically refer to responsibilities of the RO.

While the application requires the RO to certify that the applicant entity will comply with “its FATCA obligations in accordance with the terms and conditions reflected in regulations, intergovernmental agreements, and other administrative guidance to the extent applicable to the FI based on its status in each jurisdiction in which it operates“, put in context for a BVI Reporting FI we believe this should be read to mean compliance with the US IGA and any applicable BVI law.

Unlike W8 and equivalent forms, the GIIN registration form is not subject to penalties for perjury which is likely to reflect the fact that FATCA compliance for BVI Reporting FIs will be driven by BVI law and not US law.

The FATCA registration website guidance and Form 8957 also state the term “RO” means the individual with authority under local law to confirm the Reporting FI’s status and submit the information provided on its behalf.  Controlling persons (such as directors or general partners) of BVI based Investment Entities should have, as a matter of BVI law, the ability (subject perhaps to a board resolution in the case of directors) to confirm the Investment Entity’s status as a “Registered Deemed-Compliant FI under Model 1 IGA” and to submit the registration application.

Controlling persons (such as directors or general partners) of Reporting FIs should therefore be able to nominate/assume the RO role and sign GIIN registration applications.  It is of course still possible to delegate the registration process to a third party providing GIIN registration/RO services.

Action Points

Clients should be taking the following steps as soon as possible:

(a)  Identify whether the relevant BVI entities are FIs.

(b)  Identify whether any exclusions under Annex II of the IGAs or other exclusions under the US FATCA Regulations apply.

(c)  If unable to take advantage of any exclusions under Annex II, consider whether to register immediately and, in any event, register before 1 January 2015.

The classification of entities can be complicated and many clients are looking for assistance in interpreting the IGAs, the draft guidance notes and the implementation of the US FATCA Regulations in the BVI.