Background
The U.S. Treasury Department and the Internal Revenue Service (“IRS”) issued the final regulations for implementing the Foreign Account Tax Compliance Act (“FATCA”) which is designed to stop U.S. persons from evading U.S. tax obligations by holding foreign accounts at foreign financial institutions (“FFI”) or through ownership in non-financial foreign entities (“NFFE”). 

An FFI is any non-US entity that:
1.          accepts deposits from banking or similar business;
2.          holds financial assets for others; or
3.          is engaged in the business of investing or trading in securities or commodities. 

FATCA aims at combating tax evasion by compelling FFIs to implement due diligence and verification measures to determine accounts holders who are US persons or US-owned foreign entities and to report information of their US accounts to the IRS on annual basis. The IRS will impose a 30% withholding tax on “withholdable payments” to FFIs that are not in compliance with the reporting requirements. Businesses need to register by 25 April 2014 to avoid FACTA penalties starting on 1 July 2014.  

“Withholdable payments” comprise of:
1.          US-payments of interest, dividends and other fixed, determinable, annual or periodical income;
2.          gross proceeds from the disposition of assets that produce US-source dividends and interest; and,
3.          “passthru payments”. 

 A “passthru payment” is any withholdable payment or other payment to the extent attributable to a withholdable payment.

What does FATCA require?
A FFI is required to enter into an agreement with the IRS (the “FFI Agreement”), i.e. becoming a participating-FFI (“PFFI”) to do the following:

1.          Identify and annually report on U.S. accounts. A U.S. account is defined as any financial account held by: 
a.          a specified U.S. Person
i.             A specified U.S. Person includes a U.S. citizen, a U.S. resident, a privately owned domestic corporation, a domestic partnership, and a domestic trust.
ii.           A specified U.S. Person does not include a publicly traded company and its more than 50% controlled affiliate.

b.          a U.S. Owned Foreign Entity
i.             A U.S. Owned Foreign Entity is a foreign entity which has a Substantial U.S. Owner:
(1)               A Substantial US Owner means, with respect to a corporation, more than 10% of the stock of such corporation by vote or value is owned directly or indirectly by a specified U.S. Person. The same rule applies to a partnership and a trust.
(2)               Investment vehicles owned by a specified U.S. Person, regardless of the shareholding percentage owned by the specified U.S. Person, must be reported.

c.          IRS Notice 2010-60 provided that if the sum of the average month-end balances or values for the year of accounts maintained with the FFI by the account holder is less than US$50,000, the accounts can be excluded from the analysis of U.S. accounts.

2.          Report information including:
a.          name, address and taxpayer identification number (“TIN”) of each account holder that is a specified U.S. Person;
b.          name and address of each Substantial U.S. Owner of each account holder that is a U.S. Owned Foreign Entity;
c.          account number;
d.          account balance or value;
e.          the gross receipts and gross withdrawals or payments from the account.

3.          Withhold 30% of withholdable payment made to recalcitrant accounts holders; non-participating FFIs (“non-PFFI”) and NFFEs that fail to disclose Substantial U.S. Owners. A recalcitrant account holder is any account holder that fails to provide:
a.          the information required to determine whether the account is a U.S. account;
b.          the information required to be reported by the FFI, or
c.          a waiver of a foreign law that would prevent reporting of information by the FFI. 

4.          Have a responsible officer certifying compliance to the IRS with the obligations under the FFI Agreement:
a.          within one year of the effective date of the FFI Agreement:
i.             the PFFI has reviewed all of its high-value accounts (i.e. accounts with balances exceeding US$1,000,000) that were in existence prior to the effective date of the FFI Agreement; and
ii.           to the best of the responsible officer’s knowledge after conducting a reasonable inquiry, the PFFI does not have any formal or informal practices or procedures in place to assist the account holders in avoiding FATCA withholding and reporting.

b.          within two years of the effective date of the FFI Agreement:
i.             the PFFI has completed the account identification procedures and documentation requirements for all pre-existing accounts, or if it has not obtained the requisite documentation that it treats such accounts as non-compliant or reportable in accordance with the requirements under the FFI Agreement.

What should FFIs do?

Registration
The FATCA Registration Portal of the IRS has been launched on 19 August 2013 for FFIs to register as PFFIs. For the period from the opening of the FATCA Registration Portal through 31 December 2013, a financial institution will be able to access its account and add or modify registration information and any information entered into the FATCA Registration Portal within this period will not be regarded as a final submission. On or after 1 January 2014, a financial institution will be expected to submitting the information as final on the FATCA Registration Portal. Then PFFIs or deemed-compliant FFIs (as defined below) will be issued a Global Intermediary Identification Number (“GIIN”) by IRS and the GIIN will appear on a published FFI list. The IRS will electronically post the first IRS FFI List by 2 June 2014 and will update the list on a monthly basis thereafter. This GIIN will be used as the FFI’s identifying number for satisfying its reporting requirements and identifying its status to withholding agents and to avoid withholding from 1 July 2014. That being said, a FFI would need to finalise its registration by 25 April 2014 to ensure inclusion in the June 2014 IRS FFI List.

A “withholding agent” refers to a U.S. or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding.  A withholding agent may be an individual, corporation, partnership, trust, association, or any other entity, including any foreign intermediary, foreign partnership, or U.S. branch of certain foreign banks and insurance companies.

A deemed-compliant FFI is exempt from withholding and need not enter into an agreement with IRS. There are two categories of deemed-compliant FFIs:

1.          Registered deemed-compliant FFI

The registered deemed-compliant FFI must register with the IRS, declare its deemed-compliant status and fulfillment of certain procedural requirements. The entities that qualify as registered deemed-compliant FFIs include:

• local FFI;
• non-reporting members of PFFI groups;
• qualified collective investment vehicles;
• restricted funds; and
• an FFI which complies with the requirements pursuant to an intergovernmental agreement (“IGA”) signed between U.S. and a foreign government. The concept of an IGA will be explained further below. 

2.          Certified deemed-compliant FFI

The certified deemed-compliant FFI need not register with the IRS, but it has to certify to a withholding agent on a withholding certificate that it fulfills certain requirements. The entities that qualify as certified deemed-compliant FFIs include, amongst the others:

• Non-registering local banks;
• retirement plans;
• non-profit organizations; and
• FFIs with low-value accounts.

Withholding
Withholding 30% of income payment made to non PFFI and recalcitrant account holders and NFFEs that fail to disclose Substantial U.S. Owners begins on 1 July 2014.

Withholding of payments of gross proceeds from the disposition of assets producing U.S. source dividends and interest begins on 1 January 2017.

Withholding of foreign passthru payments begins earliest on 1 January 2017.

Intergovernmental Agreements (“IGA”)
In many cases, foreign law such as privacy laws would prevent an FFI from reporting directly to the IRS the information required by FATCA.  To overcome these legal hurdles, the U.S. Treasury Department has collaborated with foreign governments to develop two alternative model IGAs that facilitate the implementation of FATCA.

Model 1 IGA
Under model 1 IGA, FFIs of the partner jurisdiction that are not otherwise excepted or exempt must identify U.S. accounts and report specified information about the U.S. accounts to the partner jurisdiction pursuant to the due diligence rules adopted by the partner jurisdiction. The partner jurisdiction will then exchange this information to the IRS on an automatic basis.

Model 1 IGA comes in a reciprocal version (Model 1A) and a non-reciprocal version (Model 1B). The U.S. will also exchange tax information with the partner jurisdiction under the reciprocal Model 1A agreement.

Model 2 IGA
Under model 2 IGA, a partner jurisdiction agrees to direct and enable all FFIs located in the jurisdiction, and that are not otherwise excepted or exempt pursuant to the Model 2 IGA, to register with the IRS and report specified information about U.S. accounts directly to the IRS in a manner consistent with FATCA, except as expressly modified by the Model 2 IGA.  In the case of certain recalcitrant account holders, the information reported to the IRS by FFIs covered by a Model 2 IGA is supplemented by government-to-government exchange of information.

Hong Kong government is in the progress of negotiating IGA with the IRS. It is expected that the Hong Kong government will bargain for certain beneficial owners to be exempted from FATCA requirements, for example mandatory provident fund schemes or certain investments in the U.S. by the Hong Kong Monetary Authority.

What do you as financial institutions, funds or assets managers need to do now?

1.          Designate a responsible officer for FATCA.

2.          Develop a FATCA task force consisting of staff or professionals from the field of tax, information technology software development, operations, compliance to analyse the impact of FATCA on your corporation.

3.          Incorporate FATCA requirements into current policy and compliance menu.

4.          Create an awareness program of FATCA:
a.          Brief management and staff especially client facing relationship managers about the FATCA requirements and the importance of FATCA.
b.          Devise training program on how to answer clients’ questions regarding FATCA.

5.          Alert your clients about FATCA:
a.          Send a mail to clients about the FATCA requirements and possible documentation requested from clients as a result of FATCA implementation.

6.          Review pre-existing clients’ documentation:
a.          Search through customers’ files to see if there are copies of valid identification documents of nationality.
b.          Review pre-existing accounts for U.S. indicia.
c.          Consolidate accounts that have the same address.

7.          New customers:

a.         Revamp account opening forms and procedures to identify potential U.S. accounts holders.

For enquiries, please contact our Corporate & Commercial Department:

E: cc@onc.hk

T: (852) 2810 1212

W: www.onc.hk

F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.