FATCA: Disclose, Withhold or Disinvest?

1. FATCA:Disclose, Withhold or Disinvest? Jay Krause26 October 2010

2. Program • Selected highlights and client implications • Special issues for trustees • Comments and strategies • Q&A • Comments / questions forwarded to Treasury only if specifically requested

3. What is FATCA? • All FFIs subject to 30% gross withholding on US investments Unless • Enter into ‘FFI Agreement’ to • Identify clients; and • Withhold where relevant

4. The Road to FATCA • LGT and UBS scandals • The trouble with treaties and TIEAs • OECD standards don’t address the problem • I don’t know what I don’t know

5. FFI Obligations • What must an FFI do? • Identifying US clients and disclosing account details; • Withholding on account holders refusing to be identified; • Withholding on any FFI not entering adopting these procedures; • Closing the account of anyone protected by banking secrecy laws who fails to waive the protections of such laws

6. Financial Institution Defined • Accepts deposits in ordinary course of banking or similar business – 1471(d)(5)(A); • Holds financial assets for the account of others as a substantial portion of its business – 1471(d)(5)(B); or • Engaged primarily in the business of investing… – 1471(d)(5)(C)

7. ‘Financial Institutions’ Generally Affected • Banks (whether commercial or savings), savings and loans, thrifts, credit unions, building societies, etc. • Broker dealers, clearing organizations, custodians, employee benefit plans, trust companies, etc. • Hedge and private equity funds, funds of funds, mutual funds, ETFs and all other collective investment and securitisation structures

8. Comments on Selected FFIs • Funds • Employee benefit plans • Limited ‘same country’ exception • Trust companies and individual trusts • Life insurance companies

9. Identifying ‘Account Holders’ - Individuals • Existing accounts v New accounts • Pre-existing individual accounts • Search electronic databases for indicia of US status • Where US, must obtain W-9 • Where US place of birth or mailing/residence address • If claiming non-US status, W-8 plus non-US passport • Other indicia only require W-8 • Beware ‘care of’ and ‘PO Box’ addresses generally • Transition to new account rules • Five years generally • Two years where account greater $1,000,000 • New accounts • Documentary evidence required

10. Identifying ‘Account Holders’ - Entities • Entities • Classify entity as FFI or NFFE • Participating, non-participating, deemed compliant, excepted, recalcitrant or other… • Identify each individual with an ‘interest’; and • Obtain documentation applicable to new individual account holders • New accounts • must refer to all information collected • regardless of whether electronically searchable…

11. Frequent Reactions • But we don’t have US clients… • We’ll stop taking on US clients…. • Do you have US investments? • All that matters!!!

12. Frequent Reactions • But we don’t have US clients… • We’ll stop taking on US clients…. • Do you have US investments? • All that matters!!!

13. Client’s Perspective • Implications for all US taxpayers not fully tax and reporting compliant • Am I US? • Citizen; • Green card holder; or • Resident • Worldwide tax and reporting • Regardless of residence • Credits generally available for taxes paid, but must be claimed!

14. Client’s Perspective - Expatriation • Expatriation? • Citizens • Green card holders • Exit tax regime from mid 2008 • Deemed sale of assets • Tax on deemed gains in excess of $600,000 • Additional implications • Exceptions • Dual citizens from birth • Age 18 1/2

15. Client’s Perspective – Expatriation • What if not fully tax and reporting compliant? • Expatriation exit tax regime applies unless • Can certify full compliance for last five years • Voluntary disclosure

16. Client’s Perspective – Voluntary Disclosure • Special disclosure program expired 15 October 2009, BUT • Long standing IRS voluntary disclosure policy • See IRM 9.5.11.9 — Voluntary Disclosure Practice • No criminal prosecution • Must come to IRS before they come to you • Several options for proceeding – ‘Quiet’ v ‘Noisy’ • Most recent UBS client sentence • 50% account value, plus tax interest and other penalties • One year jail followed by house arrest

17. Implications of the New HIRE Act Rules: The Trustee View Jay Rubinstein, Withers LLP, Geneva 26 September, 2010 jay.rubinstein@withersworldwide.com

18. Overview • Recent History of Foreign Trust US Tax Concerns • Is a Trust an FFI? NFFE? • Disclosure and Identification Rules as to beneficiaries and settlors • Additional Hire Act rules implicating trusts

19. Recent History of Trustee US Tax Concerns • Distinctions between “foreign trust” vs “US trust” and “grantor trust” vs. “non-grantor trust” • Application of QI rules beginning in early 2000’s • Proper trustee and beneficiary disclosures on • Trust distributions • Holding companies • Foreign bank accounts • Now FATCA

20. Trust As NFFE – US Persons with a ‘Substantial Interest’ (10% Interest?) • Beneficiaries or settlor? • Foreign grantor trust – settlor • 1473(2)(A)(iii)(I) • Trust revocable or or distributions limited to settlor / spouse during settlor’s lifetime • Slightly different rules for certain pre Sept 19, 1995 trusts • Foreign non-grantor trust – beneficiaries • 1473(2)(A)(iii)(II)

21. Trust as NFFE - Beneficiaries of Discretionary Trusts as ‘Account Holders’ • Who is a beneficiary: • Letter of wishes? • Will new IRC section 679 provisions apply? • Potential beneficiary attribution regimes: • Maximum exercise of discretion • Pattern of distributions • Trust terms • Other?

22. Identifying Trust ‘Account Holders’ • Where to begin? • Notice requires • Identify each individual with an ‘interest’; and • Obtain documentation applicable to new individual account holders • New accounts • Must refer to all information collected • Regardless of whether electronically searchable • Notice section III.B.3.b.

23. But is a Trust / Trust Company An FFI?FATCA - Financial Institution Defined • Accepts deposits in ordinary course of banking or similar business – 1471(d)(5)(A); • Holds financial assets for the account of others as a substantial portion of its business – 1471(d)(5)(B); or • Engaged primarily in the business of investing – 1471(d)(5)(C)

24. ‘Financial Institutions’ Generally Affected – AND NOTICE POTENTIALLY AFFECTING TRUSTS • Banks (whether commercial or savings), savings and loans, thrifts, credit unions, building societies, etc. • Broker dealers, clearing organizations, custodians, employee benefit plans, etc. [ TRUST COMPANIES? (PTC’s??) ] • Hedge and private equity funds, funds of funds, mutual funds, ETFs and all other collective investment and securitisation structures [ INDIVIDUAL TRUSTS ?? ]

25. Trusts and Trust Companies • Trust companies • Treated as entity holding assets for the benefit of others • Notice 2010-60 section II.A.2. • Trusts • ‘Small family trust’ listed as an example of an FFI • FFI status supposedly arising under Section 1471(d)(5)(C) which requires that the entity be primarily in the business of investing • Notice 2010-60 section II.B.3.

26. Trusts as FFIs? • Primarily in the business of investing? • Existing US classification rules indicate otherwise • Regulation section 301.7701-4 • Ordinary trusts • arrangement to protect property for beneficiaries • Business trusts • Investment trusts • generally classified as a ‘business entity’ for US purposes

27. Trusts as FFIs (con’t) • Trusts as FFIs effectively contradicts other FATCA provisions • Section 1473(2)(A)(iii)(II) and 1473(2)(B) • Substantial US account holder exists where > 10% of trust attributed to US person; but • Where FFI is primarily in business of investing, substantial US ownership exists if anything attributed to a US person • If all trusts are treated as FFIs, then 10% test can never apply to trusts not withstanding express language that it does apply to trusts

28. OTHER HIRE ACT RULES-Reporting of Specified Foreign Financial Assets • In addition to current FBAR reporting • Reporting of “specified foreign financial assets” that exceed $50,000 (aggregate) • Any financial account maintained by a foreign financial institution; • Any of the following assets not maintained in a foreign financial account: non-US stock; any interest in a non-US entity; any financial instrument or contract with a non-US counter-party

29. Reporting of Specified Foreign Financial Assets • Applies to US individuals; IRS has authority to extend to US entities • May apply without regard to whether that individual owns more than 50% interest in trust owning such foreign accounts or assets • Reporting on US income tax return (IRS Form 1040) • Failure to report subject to penalty of $10,000; additional penalties up to $50,000 could apply

30. Passive Foreign Investment Company Reporting • Definition of Passive Foreign Investment Company (PFIC) • 75% of gross income is passive income or 50% average passive assets • Old rule (IRS Form 8621) • Upon distributions; upon disposition; upon making an election • New rule • annual reporting obligation regardless of whether any taxable event has taken place during the year

31. Uncompensated Use of Trust Property • Deemed distribution of income or gains • Only for uncompensated use of trust property • Only if used by US person beneficiary • Only for foreign (non-US) trusts • Amount of distribution equal to the FMV use of property; • Taxable if trust generates income or gains • Interest charges if there is accumulated income or gains • In all events, reporting of distribution • Information statement from trustee to meet US reporting obligations

32. Uncompensated Use of Trust Property • Impacts any foreign trust that holds property used by a US person • Real property, art, jewelry, automobiles, yachts and airplanes. • Exception where beneficiary pays FMV for use of property within a “reasonable period of time” • Rent payment can give rise to passive income subject to 30% withholding

33. Uncompensated Use of Trust Property—Planning Options • Segregate the use property in a separate “dry” foreign trust • Domesticate the use property to a US trust (watch for carrying out income) • Sell property to a grantor trust (watch for gain recognition)

34. Responses to the New Hire Act Rules:Comments and possible strategies Richard Cassell, Withers LLP London 26 October 2010

35. IRS Notice 2010 – 60 • These are only proposals and are open for comment • IRS specifically is looking for comments as to impact on trusts and practical trust issues • We are assembling comments from interested parties • In order to be effective the comments must be specific and targeted. There is no point in requesting blanket exemptions or grandfathering

36. Surprises in the Notice • Every trust is an FFI – not the trustee, but the trust, but not undefined “small family trusts” • Does offer opportunity for a trust to elect to participate separately from trustee but of limited practical use • Multiplicity of reporting, for example, for private trust companies with professional service provider, but confusion about responsibility (custodian? Paying agent? FFI?) • Concept of US financial institution – treated like a participating FFI but not defined – does it include US partnerships and US trusts? • As a result of all trusts being FFIs this ignored Section 1472 definitions of US owners and 10% restriction

37. Comments • IRS will be deluged with pointless information (like the FBAR reports) as a result of including every non-US trust in the world as an FFI. Should only trustees be FFIs not trusts? • Should the definition of “small family trust” be expanded? How big is small? What is a family? • Will the disclosures be limited to the last participating FFI in the chain or will intermediate participating FFIs be required to maintain parallel disclosure? What about potential inconsistencies in disclosure? • Will certification by a participating FFI provide effective disclosure exemptions? • Should there be any separate category for charities? • How do you value a US beneficiary’s discretionary trust balance?

38. Strategies • Segregate trusts between those with US and non-US investments. Those with only non-US investments can be non-participating FFIs. • Generally strategy must be to manage the disclosure. We expect clients will generally need a participating FFI – it must be preferable to control the disclosure in the FFI • A strategy to limit disclosure to third parties may be to use a US partnership to segregate all US investments and to manage the disclosure – a strategy that could exploit the exemption for family offices that we expect under Dodd-Frank regulations • Eliminate US beneficiaries who are not intended actually to benefit from discretionary trusts

39. Client reactions • Anticipate disclosure or divest from US but a strategy to avoid all US investments seems very restrictive • If the clients are non-compliant the voluntary disclosure program is still open for business and this is the opportunity to become compliant • We anticipate that some compliant clients may use this as the opportunity to look at expatriation –covered expatriate limit is currently $2m