The goal of FATCA is to require Foreign Financial Institutions (FFIs) & Non-financial Foreign Entities (NFFEs) to provide information to the IRS identifying U.S. persons invested in non‐U.S. bank and securities accounts. FATCA’s lever to achieve this goal is a 30% withholding tax levied on “withholdable payments” made to non‐participating FFIs & NFFEs”Withholdable payments” include all U.S. source income (fixed, determinable, annual and periodical – FDAP) and gross proceeds from the sale or disposition of any property of a type that can produce interest or dividends from U.S. sources.
2. Can you further explain”Withholdable Payments”?
- Any payment of U.S. source income (e.g. dividends, interest, rents etc.);
- Any gross proceeds from the sale or other disposition of a security that can give rise to the payment of U.S. source dividends or interest.
FATCA affects United States withholding agents by requiring them to identify whether their entity account holders are U.S. persons, NFFEs or exempted from FATCA compliance.
FATCA also requires U.S withholding agents to withhold when appropriate.
Defined as an FFI which is impacted by the agreement with the IRS and exempt from FATCA withholding.
A Non-participating FFI is an FFI with no agreement with the IRS and subject to FATCA withholding.
An excluded FFI is a holding company involved in non‐FI business – Group hedge/financial company which is non-financial and restricted to affiliates.
6. What is a Non-Financial Foreign Entities (NFFE)?
An NFFE is a foreign entity which is not a financial institution, but may be affected if it receives U.S. income or holds U.S. investments. They are required to disclose substantial U.S. owners or certify that no substantial U.S. owners exist.
Visit the IRS website – http://www.irs.gov/instructions/i8957/ch01.html
Pre‐existing clients ‐ undertake due diligence on these accounts to identify excluded accounts or U.S reportable accounts for:
- Specified U.S Persons ; or
- Non‐U.S Entities with one or more Controlling Persons as a Specified U.S Person
Create a process for the on boarding of any new clients I.e. considering your due diligence requirements.
Self-certification will be the path that FFI’s take with their underlying clients W9, W8, or local self-certification.
- For U.S Persons: W‐9
- For Non-U.S Persons: W‐8
There are several alternatives for Non‐U.S Persons
- W‐8BEN for individuals
- W‐8IMY for intermediaries
- W‐8BENE for other entities
The US Treasury Department provides resources on its site that lists the jurisdictions that have signed Model 1 and Model 2 agreements.
Please see- http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx
There are two broad approaches for compliance with FATCA:
- Financial institutions can enter into a Foreign Financial Institution Agreement (“FFI Agreement”) directly with the United States IRS to comply with FATCA under the FATCA Regulations; or
- Governments may enter into agreements with the United States government through an IGA to allow their financial institutions to comply with FATCA. There are two (2) Model IGAs:
- In the Model I IGA approach, a country’s government agrees to require its financial institutions to collect and report the relevant information on U.S Account Holders required under FATCA to its Competent Authority. The Competent Authority of the country then collates and shares the information with the IRS. The Model I approach can be on a reciprocal or non-reciprocal basis.
- The Model II IGA approach results in a government mandating its financial institutions affected by FATCA to enter into FFI agreements individually and directly with the IRS.
After extensive consultation with industry and government stakeholders, the Cabinet of The Bahamas approved a Model I, non-reciprocal approach for FATCA compliance for The Bahamas. This means that through statute, the Government of The Bahamas will require financial institutions in The Bahamas, to perform due diligence for FATCA compliance in its operations, to collect the necessary information on U.S persons as agreed in the Model I IGA and to transmit this information to the Ministry of Finance, also referred to as The Bahamas Competent Authority (“BCA”). The BCA will then be responsible for passing that information on to the IRS. By virtue of this IGA, Reporting FIs in The Bahamas are not required to enter into separate agreements with the IRS, but will report to the BCA instead of the IRS.The listing of countries that are regarded as having an IGA in effect with the United States is available on the US Treasury’s website at: http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx
The Bahamas-United States FATCA Intergovernmental Agreement defines four categories of Bahamas Reporting FIs. These Reporting FIs will be required to report certain information on their U.S. Accountholders to the BCA under Bahamian law and in compliance with the FATCA IGA.The four categories of Reporting FIs are summarized below:
- Custodial Institution – any entity which, as a substantial portion of its business, holds financial assets for the account of others.
- Depository Institution – any entity accepting deposits in the ordinary course of banking or similar business.
- Investment Entity – any entity that primarily conducts as a business, or is managed by an entity that conducts as a business, one or more of the following activities, for or on behalf of a customer (e.g. an account holder):
- trading in money market instruments (cheques, bills, certificates of deposit, derivatives etc.), foreign exchange, interest rate and index instruments, transferable securities and commodity futures trading;
- individual and collective portfolio management; or
- otherwise investing, administering or managing funds or money on behalf of other persons.
- Additionally, most investment funds (other than certain regulated funds with restricted categories of investors and most pension funds), administrators and some advisors/managers may be regarded as Reporting FIs.
[Note: Trusts and Foundations also fall under this category]
- Specified Insurance Company – when the insurance company has products classified as Cash Value Insurance or Annuity Contracts written by the company or if payments are made with respect to such contracts.
Please review the Model I IGA, Article 1 for a full definition of Financial Institution under FATCA. See Question 22 for a listing of the relevant websites.
Yes, The Bahamas FATCA IGA designates some classes of Bahamas Financial Institutions as Non Reporting Financial Institutions (“Non-Reporting FI”) under FATCA because they have exempt beneficial owners or are deemed to be compliant under FATCA.The criteria for assessing whether a financial institution is a Non-Reporting FI are outlined in Annex II of the IGA. The criterion is based on whether that institution:
- has an exempt beneficial owner (i.e. the Government of The Bahamas, an international organization, Central Bank, certain retirement or pension funds, etc.), or
- is a deemed compliant financial institution, (i.e. certain small and/or local FIs, etc.); or
- has a sponsor that has registered with the IRS and is reporting on their behalf (i.e. Trustee-documented trusts, sponsored investment entities , etc.).
Annex II also specifically outlines the criteria for certain accounts which are excluded from the definition of reportable accounts. These include certain savings accounts, certain term life insurance contracts, accounts held by an estate, escrow accounts and partner jurisdiction accounts.
Please review Annex II of the Model IGA for a full overview of the FATCA exemptions.
Under FATCA, Reporting FIs will be required to report certain information on U.S. persons on an annual basis. For the purposes of determining a U.S Reportable Account, in general, a U.S person includes:
- A citizen or resident of the United States;
- A U.S domestic partnership;
- A U.S domestic corporation;
- Any estate other than a foreign estate in the United States;
- Any other person that is not a foreign person to the United States;
- Any Trust if:
- court within the United States is able to exercise primary supervision over the administration of the Trust; and
- one or more United States persons have the authority to control all substantial decisions of the Trust.
A Financial Institution will need to conduct one or more of the three processes for identification of Specified Persons depending on whether the account holder is an individual or an entity and whether the account is pre-existing or not: indicia search, self-certification or publicly available information (for entities only).Annex I of the IGA provides the indicia to determine if an account holder is a US person. In general, indicia of being a US Account Holder includes the following:
- Identification of an investor as a U.S. resident or citizen;
- U.S. place of birth;
- U.S. resident mailing address (including a U.S. post office box);
- U.S. telephone number (and no non-U.S. telephone number on file);
- Standing instructions to transfer funds to an account maintained in the United States;
- Power of Attorney or signatory authority granted to a person with a U.S. address;
- An “in care of” or “hold mail” address that is the sole address the fund has identified for the investor.
The Guidance Notes also provide further detail on how to make this determination.
If you have determined that you are a Reporting FI you must:
- Register as a Registered Deemed-Compliant FFI (Model 1) on the IRS FATCA Registration Portal, using FORM 8957 to obtain a GIIN.
- For those included on the first FFI list published on June, 2014,the registration date was 5th May, 2014;
- For those included on the second FFI list published on 1 July, 2014, the registration date was 3rd June, 2014;
- For those included on the FFI list published on 1st January, 2015, the registration date was 22nd December, 2014;
- The Bahamas Competent Authority advises that the TIE Portal will open on July 19th 2016 for registration and reporting and close on August 26th at 5 pm EST;
- Review Account Holders
- Existing Accounts: Perform the required due diligence requirements in the manner and timeframes prescribed in Annex I of the Model 1 IGA on pre-existing accounts (i.e. accounts existing as at 30th June, 2014) to determine if there is U.S indicia, i.e. evidence that the account holder may be a U.S person.
- New Accounts: Reporting FIs will be required to undertake certain procedures as outlined in Annex I of the Model 1 IGA with respect to new accounts (i.e. an account opened on or after 1st July, 2014) when the account is opened (or within 90 days of it ceasing to be exempted) to identify reportable accounts.
- Develop and Maintain On-going FATCA Compliance Systems
- Please note that if you are a Bahamas financial institution which registered with the IRS prior to 17th April, 2014, you may need to re-register as a Model 1 Registered Deemed Compliant Financial Institution.
- Please note that withholding for unregistered and therefore Non-Participating Bahamas Financial Institutions commenced 1st January 2015. Registered Bahamas Financial Institutions who have obtained the GIIN through registration or have been sponsored will not face withholding by US paying agents.
- The United States IRS will be publishing updated FFI listings on a monthly basis.
Implement and maintain systems to ensure compliance with the reporting obligations of FATCA.
The Responsible Officer (“RO”) under the Model I IGA is treated as a certifying agent for the registration process and acts to certify that the registration information submitted is accurate and complete. The RO does not have any continuing FATCA obligations directly with the IRS. The RO, also noted at times as Key Officer or Reporting Officer are all terms used to refer to the individual within an organization who has been designated as having the responsibility for FATCA reporting and/or GIIN registration. This individual must review and respond to all new user portal registrations before users can gain access to the portal to process files or Nil Reports.
Article 2 of The Bahamas FATCA IGA outlines, in detail, the information on U.S Reportable Accounts which should be collected by a Reporting FI and ultimately reported to the BCA for onward transmission to the IRS. In general, Reporting FIs will be required to report the identity and the account balance or value at year end of U.S Reportable Accounts. The accounts of Non-participating FIs are not themselves reportable, but any payments to Non-participating FI’s are reportable.With respect to 2014 reportable accounts, only basic information about the account holder and account balance or value is reportable. More detailed information will be required for 2015 and 2016 U.S Reportable Accounts.
Note: The Ministry has issued specific Guidance Notes on the due diligence and reporting requirements under the Model 1 IGA.
Reporting FIs will be required, by Bahamian statute, to report the specified information required under FATCA to the BCA in 2015. The first reporting of U.S Account Holder information by the BCA to the IRS will be on or before September, 2015.Articles 2 and 3 of The Bahamas-U.S FATCA IGA outlines the obligations which have been agreed with respect to obtaining the information on all U.S Reportable Accounts and the timeframes for sharing that information with the United States by the BCA.
There is no requirement in the Bahamas IGA to close or withhold from a recalcitrant account (i.e. an account holder who does not provide the required information). However, The Bahamas government has a duty to ensure compliance with Bahamian legislation and its obligations under the FATCA IGA.Article 5 of The Bahamas IGA obligates the Government of The Bahamas to apply its domestic law to:
- obtain corrected and or complete information from a Reporting FI in the case of identified minor and administrative errors; and
- address instances of significant non-compliance. Where the instance of significant non-compliance by a Reporting FI has not been resolved within a period of 18 months, the United States shall treat the Reporting FI as a Non-participating FI and withholding can commence on U.S sourced payments to that institution.
22. What are some useful websites on FATCA?
|Information on the Model IGAs
|The most relevant Model IGA is the Model I IGA
|Annex I and II of Model I IGA
|IRS Notice 2014-17 on IGAs “In Effect”
|IRS FATCA Registration Resource Website
|Listing of Countries with signed IGAs or IGAs in Effect
Yes, there will be a consultancy period to allow for feedback from the industry.
Yes, many firms are doing this and some are registering as groups with the parent registering them with the IRS.
Bahamas Financial Institutions with no Reportable Accounts are required under the Legislation to make a report to that effect to the Bahamas Competent Authority.
A Non-Financial Foreign Entity (NFFE) is a foreign entity that does not fall within the definition of the FFI. Such entities include professional services firms, some non-publicly traded entities but who are not involved in banking or investing or privately held operating businesses.
An NFFE that is not excepted, in order to ensure compliance with FATCA, and thereby avoid the 30% withholding tax must provide the withholding agent with:
- certification that the NFFE does not have substantial U.S owners that have a more than 10% interest; or
- provide the said agent with the name, address and TIN (Taxpayer Identification Number) of each U.S owner involved.
Any information with regards to substantial U.S owners obtained by the withholding agent must be submitted to the IRS.
TIN’s are not required for clients without a U.S NEXUS.
Once an account is established the FI will manage any updates to its registration form and account online. The FI will log into the FATCA Registration System, and select the” Registration – Edit/Complete/Submit” option from its home page to edit the registration form data, or choose from other available account options