Slimming The Fat Linked With Fatca

Attorney-at–Law and Compliance Specialist

We are living in a time where the tax landscape facing the Bahamian financial services industry is changing and evolving rapidly. On November 3, 2014, the Government executed a Model 1 Intergovernmental Agreement (IGA) with the US government to implement the latter’s Foreign Account Tax Compliance Act (FATCA).

By the Government signing the Model 1 IGA, the Bahamas is now committed to the global standard on automatic tax information exchange for FACTA purposes. Accordingly, the Bahamas is now deemed by the US Treasury Department to have a FATCA agreement “in effect”. However, the question that lies in wait is: Are we ready? Are we ready and equipped for FATCA, and the myriad of complex compliance intricacies that are associated with the private banking sector.

What is FATCA?

FATCA is the US Foreign Account Tax Compliance Act. It was enacted into law on March 18, 2010. The mischief behind FATCA’s creation was to create a vehicle to eliminate tax evasion by US citizens. FATCA requires ‘foreign financial institutions’ (FFIs) to report information on US account holders to the Internal Revenue Service (IRS).

In the case of the Bahamas, all FFIs shall report to the Central Bank of the Bahamas, in accordance with the executed Intergovernmental Agreement (IGA) with the IRS. These FFIs will also include Bahamian foreign financial institutions (BFFIs). FFIs are generally non-U.S. entities such as banks, broker/dealers, insurance companies, hedge funds, securitisation vehicles and insurance companies.

FFIs are expected to identify the direct – and sometimes indirect – owners of accounts to determine whether they are ‘US account holders’. On this basis, the FFI is required to disclose its accounts of US origin to the IRS. If it fails to do so, the IRS will impose a 30 per cent withholding tax on any US source income until the FFI agrees to identify all US accounts held by it or its affiliates, and report annually on each account.

FFIs were mandated to comply with the aforementioned before June 30, 2013. If an FFI registered after this time, but before January 1, 2014, it is considered a qualified participant FFI for 2014. However, it will still be subject to withholding.

It is pertinent to realise that FATCA’s rules are not merely driven by whether the FFI has acquired US clients. Its primary focus is on non-US entities, ascertaining certain types of US source income and gross proceeds from the sale or disposition of US property, which can produce US source interest or dividends.

So an FFI is not exempt from complying with FATCA on the mere premise that it has no US clients, as is commonly presumed. On the contrary, an example of this can be seen where a Bahamian financial institution with Canadian ties holds a corporate account for a non-US legal entity, and a US person is the ultimate beneficial owner. The latter individual will be subject to FATCA for tax purposes.

A more complex case may occur where an FFI may be required to report a US business payment to a foreign individual for services rendered outside the US. If the foreign service provider performs any of its services in the US, then in accordance with FATCA, the US payor is mandated upon the payment to issue a Form 1042S to the foreign service provider. This form must state the gross payment and any amounts withheld for US tax purposes.

The obligation to remit the tax is placed squarely on the payor (the withholding agent) of the income; not the foreign payee. The said tax is usually at a 30 per cent rate, but this rate may be reduced or eliminated under the auspices of a tax treaty between the US and the foreign person’s residence country.

The payee must certify the ownership of the income, a foreign residence and their eligibility for treaty benefits. This must be documented on an executed W-8 Ben form. If the payee fails to comply with the same, they shall be subject to a 30 per cent withholding fee.

Therefore, in the case of dividend payments being made by a Bahamian FFI to a non-US client from US stocks and bonds they, too, are subject to withholding if not exempted. Again, these cases fit the criteria for US source-based income. These examples are the mere tip of the iceberg as it relates to the scope and depth of the possible complexities that might occur in complying with FATCA.

What is an FFI Agreement?

It is the day that all FFIs make the formal contractual commitment to love, honour and cherish the IRS for the remainder of their banking lives.

• FFIs must enter into an FFI agreement with the US Treasury to avoid withholding on payments they will acquire. This agreement mandates the identification of all US accounts, compliance with verification, due diligence procedures and annual reporting on these accounts to the US Treasury.
It also stipulates compliance with additional IRS reporting requests and 30 per cent withholding where applicable. This may include recalcitrant account holders, non-participating FFIs and electing FFIs.

Generally, a recalcitrant account holder is any account holder that either fails to comply with reasonable requests for information necessary to determine if the account is a US account; fails to provide the name, address, and TIN of each ‘specified US person’ and each substantial US owner of a US-owned foreign entity; or fails to provide a waiver from any foreign law that would prevent a foreign financial institution from reporting information required under FATCA.

Participating FFIs must report the following information on US accounts:-
• The name, the address, Taxpayer Identification Number (TIN) for all US account holders.
• For any account holder that is a US-owned foreign entity, the name, address and TIN of each substantial US owner of the company.
• The account number.
• The account’s current balance and annual year end value (to be confirmed by regulators).
• Gross dividends, interest and other income paid or credited to the account.
When does withholding start?

FATCA withholding began on January 1, 2014, for non-participating FFIs, recalcitrant accounts, fixed or determinable annual or periodical (FDAP) payments made.

Who is impacted by FATCA?

FATCA’s impact is wide-reaching and deeply felt – from your average FFI to a native Indian whose only crime is being born in the ‘Great United States of America’. He is reluctantly made subject to this nightmare of tax legislation called FATCA, as are many foreigners that hold dual citizenship. Many have renounced their US citizenship to circumvent this plight.

• FATCA may apply to both financial and non-financial operating companies.
• Any bank which is part of a group that invests in the US market for its customers accounts or for its own account.
• FATCA affects all non-US entities, directly or indirectly, receiving most types of US source income, including gross proceeds from sale or disposition of US property that can produce interest or dividends.

There are many factors and variables that FFIs must consider when determining if FATCA applies. So let’s examine the ‘Fat in FATCA’, highlighting the various FATCA criteria that must be contemplated.

FATCA Criteria

There are various factors that determine if an account holder is a US person for FATCA purposes. Once an account holder has been accurately categorised, the relevant documentation to support their FATCA status must be obtained accordingly.

If you are a US citizen or lawful permanent resident, a W-9Ben form must be obtained. If the client has a US birth place, a W-9Ben or W-8Ben is required, and a non-US passport or similar documentation establishing foreign citizenship. A written explanation regarding their US citizenship must be provided. If the client has a US address (residence, correspondence or PO Box), the same documents are also required, along with documentation establishing a foreign citizenship.

In the case of instructions to transfer funds to a US account, or if directions are regularly received from a US address, the same information is required. Lastly, if the only address on file is in care of, ‘hold mail’ or a US PO Box, the same requirements apply.

In accordance with Notice- 2011-34, a foreign PO Box is excluded as a FATCA qualifier. However, having one of these factors only mandates that closer scrutiny and comprehensive due diligence must be applied to the account. It does not automatically make the account holder a US person for FATCA purposes.

Revised timeline for new account opening procedures

Time is now of the essence, as registered FFI’s were required to implement new account opening procedures by January 1, 2014. The final modifications for FATCA stipulate that date as the pre-existing obligations date. This obligation encompasses any account, instrument or contract maintained or executed by a withholding agent prior to January 1, 2013, or the date that the participating FFI’s agreement is deemed effective. This would include an agreement signed before January 1, 2014.

Due Diligence and Withholding dates for pre-existing entity obligations

FFIs were required to perform the requisite due diligence, and ascertain whether the prima facie FFI payee is deemed compliant, or a non-participating FFI, within six months after the effective date of its FFI agreement. The said date would have been by June 30, 2014, or the date of any FFI entering an agreement before December 31, 2013.

This rule stipulates that the FFI had to acquire the appropriate documentation from the FFI Payee to confirm its compliance with the IRS requirements. If a Bahamian FFI is receiving a pass through payment from an international correspondent bank, the onus is on the Bahamian to confirm that the other institution is also FATCA compliant.

If the said bank is unable to produce evidence to establish their status, the payment shall be subject to a 30 per cent withholding fee. An FFI has one year from the effective date of its FFI agreement to comply by identifying and obtaining the necessary documentation from the prima facie FFIs payees.

Due Diligence and Withholding dates for pre-existing individual Accounts

Participating FFIs were mandated to execute the necessary due diligence – and obtain the requisite documentation to determine pre-existing individual accounts that are high-value accounts – by December 31, 2014, or one year after its FFI agreement.

A high value account is any account in excess of $50,000. Participating FFIs must report any pre-existing account of high value as being held by a recalcitrant account holder. If the FFI was successful in executing the requisite identification procedures, and obtained the appropriate documentation required by the IRS, this will not be applicable.

Dates for information reporting and gross proceeds withholding

All participating FFIs will be required to submit information reports for the calendar years of 2013 and 2014 by March 2015.

It is evident that there is no escaping FATCA and its implications. It is incumbent upon all parties concerned to take the necessary steps and exercise the mandated due diligence to comply with its requirements.

Failure to adhere to this complex and diverse tax legislation will prove detrimental to all FFIs, their clients and, ultimately, the Bahamian financial services industry as a whole. Slimming FATCA’s fat begins with you, the Bahamian institution.

• NB: Thamara Saunders-Munnings began her legal practice at Davis & Co in November 2005, and was a junior counsel in the Pinewood and the Marco City election court cases.

Mrs Saunders-Munnings attended the University of Buckingham in England and the BPP Professional Education Law School. She was called to the Bar of England & Wales, and the Bahamas Bar, in 2005. She has acquired numerous compliance certifications.