Foreign Account Tax Compliance Act (FATCA)

TAX Foreign Account Tax Compliance Act (FATCA) Implications for Funds kpmg.lu Overview of FATCA The U.S. government intends to combat tax evasion by U.S. persons more intensively. The Foreign Account Tax Compliance Act (FATCA), which was enacted into law on 18 March 2010, will bolster the U.S. government’s arsenal and will make it more Documentation Withholding Reporting difficult for U.S. persons to hide income and assets. For investment funds, this translates into new withholding tax and reporting obligations which have the potential to dramatically change the way funds currently operate. Notice 2010-60 and Notice 2011-34 set forth the general framework for implementing FATCA. Final regulations are still to come. Highlights FATCA provisions are applicable to a wide range of foreign financial institutions (FFIs), including investment funds, and require the documentation of all investors in order to identify those that are U.S. persons. Under FATCA, a 30% withholding tax is applied on any payment from U.S. sources (interest, dividend or sales proceeds) made to an investment fund, unless the fund enters into a disclosure agreement with the U.S. Treasury whereby it agrees to: • Identify U.S. investors; • FATCA provisions apply as from 2013 on payments of interest, dividend or sales proceeds on U.S. securities; • Funds agreeing to participate in the programme will face enlarged due diligence and documentation requirements; • In the absence of an agreement with the IRS, the fund will suffer a 30% withholding tax on interest, dividend or sales proceeds on U.S. securities; • Portfolio interest exemption will be repealed for targeted bearer bonds; • Comply with verification and due diligence procedures; • Perform annual reporting; • Deduct and withhold 30% from any payment made by the fund to inadequately documented investors; and • Comply with requests for additional information. • Obligation to withhold 30% U.S. withholding tax on payments made to recalcitrant account holders (U.S. investors refusing disclosure and non U.S. investors without proper FATCA documentation); and • Annual Reporting of all assets held indirectly or directly by U.S. persons. • The 30% US withholding tax will be based on the calculation of Who is impacted? > Funds invested in the U.S. market including, but not limited to, funds of funds, exchange-traded funds, hedge funds, private equity and venture capital funds, other managed funds, commodity pools, and other investment vehicles. the Passthru Payment Percentage (PPP). The failure to calculate or publish this percentage will result in a PPP of 100%. • Possibility for certain funds under set conditions to be deemed-compliant PFFI. Extension of the status envisaged to publicly traded funds. • Certain collective investment funds could benefit from a centralized FFI application option. U.S. Withholding Agent Custodian Investment Fund (with FFI agreement) Investment Fund (without FFI agreement) Investment Fund (with FFI agreement) Investment Fund (without FFI agreement) Transfer agent Distributor (with FFI agreement)* Distributor (without FFI agreement)* Identified non-U.S. Investor Identified Unidentified U.S. recalcitrant Investor investor Non US-owned foreign entities US-owned foreign entities Institutional investor (with FFI agreement) Institutional investor (without FFI agreement) Identified non-U.S. Investor Identified Unidentified U.S. recalcitrant Investor investor Non US-owned foreign entities US-owned foreign entities Recalcitrant Entities 30% withholding tax No withholding tax * Typically, fund distribution channels involve several layers of distributors Widely-held funds The identification of U.S. investors is perhaps the most important requirement introduced by FATCA. For widely-held funds, however, identifying U.S. investors is difficult given the number of investors. The Luxembourg fund distribution model typically involves distributors (e.g. banks, insurance companies, wealth managers, etc.) and transfer agents. In particular this means that units or shares in investment funds are held through nominee accounts. Funds that are exclusively distributed through intermediaries that are themselves FATCA compliant will be in the position to address the problem, as these distributors should be held responsible for identifying the investors and reporting to the IRS. Funds that are distributed through non-compliant distributors, however, will need to address the identification of investors and reporting to the IRS. The Notice 2011-34 provides that in the case Remark: For direct investment , the reporting has to be done at the level of the fund In case of investment through multiple distributors, the reporting has to be done by the last FFI of an affiliated group, funds can appoint a lead FFI (Asset Manager or other Agents) to assume the FATCA compliance requirements on behalf of the funds it manages. Alternative investment funds Specialized investment funds have encountered an increasing success over the last years. Private equity, real estate or hedge funds often are held by a more limited number of investors than UCITS. They are tailored to allow institutional investors, family offices or even qualified individual investors to access investments either directly or through feeder structures (like trusts or companies). These private placements will also need to be adequately documented, enabling the identification of the investors and the reporting to the IRS in order to avoid adverse withholding tax consequences. Foreign trusts FATCA will extend the taxation of U.S. persons who transfer property to non-U.S. trusts. This provision, which is already applicable to transfers made from 18 March 2010, will typically impact U.S. investors who invest into Luxembourg based funds through foreign (e.g. Cayman) trust structures. Dividend equivalent payments Securities lending is part of the management strategies of investment funds today. Substitute dividend payments made under such transactions are also covered. The provisions are applicable since 14 September 2010. FATCA introduces an additional regime for FFIs involved in securities lending on U.S. securities (QSL status). Passthru Payment Percentage A Passthru Payment Percentage is required to determine the withholding to be operated on the passthru payments made by a PFFI. The percentage is determined based on the proportion of U.S. assets on total assets (including off-balance positions). Funds and other PFFI will need to publish such a PPP. This percentage will be used as taxable basis to withhold the 30% tax to recalcitrant account holders irrespective of whether the payment is derived from U.S. assets or not. In case of the non-publication of this PPP, the withholding would be operated on the basis of a deemed prorata of 100% PPP. How can KPMG help you? Considering the implications of FATCA, an FFI which wants to maintain relations with U.S. clients will not only have to comply with FATCA but also with other applicable regulations. The impact on the What has to be done? Milestones • 18 MAR 2010: Law enacted • 18 MAR 2010: U.S. beneficiary presumption for foreign trusts becomes applicable • 14 SEPT 2010: Provision on dividend equivalent payments becomes applicable • 27 AUG 2010: Release of Notice 2010-60 • 18 MAR 2012: End of the grandfathering period for certain obligations • 8 APR 2011: Release of Notice 2011-34 • Further guidance to follow during 2011 and 2012 • 01 JAN 2013: FATCA becomes effective 2010 2011 2012 2013 Action points • Impact analysis of FATCA on the business • Risk assessment • Awareness workshops • Dedicated internal working group • Communication with distributors, investors, transfer agents, etc. • Gap analysis, system analysis and assessment • Decision on becoming a participating FFI or not • Staff training • Formalities to become FFI • Verification process on client information • Electronic search on databases • Verification of documentation • Monitoring • Obtaining waivers • Reporting • Withholding • Compliance verification fund is not negligible and requires assistance of specialists. KPMG can: Why KPMG? To stay up to date and develop knowledge on FATCA, KPMG in Luxembourg has been active conducting different initiatives: • Inform senior management; • Perform an impact analysis; • Create visibility for your organization; • Help develop and train a dedicated team in your organisation; and • Assist you on technical implementation, documentation, reporting and withholding. • KPMG in Luxembourg has set up a dedicated team composed of experienced professionals to perform an in-depth analysis of the new FATCA rules, with the support of KPMG U.S.; • Speakers at various conferences on FATCA; • Regular publication of newsletters with regard to new FATCA provisions; and • KPMG in Luxembourg is a leading contributor to the KPMG worldwide network. Our team is at your disposal to help develop the right strategy for the implementation of FATCA within your organisation. Contact persons Georges Bock T: +352 22 51 51 5522 E: georges.bock@kpmg.lu Gérard Laures T: +352 22 51 51 5549 E: gerard.laures@kpmg.lu Claude Poncelet T:+352 22 51 51 5567 E: claude.poncelet@kpmg.lu KPMG Tax 10, rue Antoine Jans L-1820 Luxembourg T: +352 22 51 51 1 F: +352 46 62 27 E: tax@kpmg.lu ... - tailieumienphi.vn