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Uncle Sam & FATCA!

Published on Mon, Oct 07,2013 | 15:44, Updated at Tue, Oct 08 at 08:31Source : 

By: Paresh Parekh, EY 

I am proud to be a large corporation operating all over the world and having subsidiaries worldwide and having my functions spread across the globe. Uncle Sam calls me a multi-National Enterprise (MNE). I am based out of India and have central functions here and in Panama, Gibraltar, Mauritius, Luxembourg, Singapore and Dubai. My products are sold in the present day global village including Europe, the Americas, Middle East and Africa.

I have really worked hard over several decades to establish myself with a global footprint and my products serves the need of old and young irrespective of nationalities and ethnicities and people from every background and every facets of life. Uncle Sam calls me a global giant with a local approach.   

I must admit that even giants get scared at times and things escaped unnoticed when it comes to keeping every jurisdictional legislation compliant either voluntarily or statutorily. I have zero tolerance zone for legislative non-compliance. Uncle Sam very well knows that and he took the liberty to come over last night and tell me that US legislators (Internal Revenue Services “IRS”) have already given a time bomb in my hands and the clock is ticking and bringing me close to their time schedule to be compliant with what they call Foreign Account Tax Compliance Act “FATCA”. I laughed at Uncle Sam and asked him why am I covered under it, I have minimal operations in the US and my group entity in the US shall take care of the requirements in the Americas. I am a smart MNE and I know that the IRS is primarily interested in the information about the US persons who are liable to US taxes based on their US source of Income or proceeds which could be from the sale of equity or debt instruments issued by US persons. I educated Uncle SAM and told him that according to my research this legislation is enacted to seek information primarily from a foreign financial institution (FFI) outside of the US about the US account holders and members. I knew that if this information is not provided to the IRS then the FFI are required to withhold tax at the rate of 30% on those withhold able payments that are from the sources in the United States.

Uncle SAM acknowledged my intellect and re-named me as a NFEE (Non-Financial Foreign Institution) for FATCA purposes which is applicable 1 July 2014 onwards. He told that it’s not only the non US financial institutions but non US NFEE as well who may be subject to FATCA compliance. I recalled my conversation with Paresh & Ashish who are FATCA consultants and good friends of mine and they mentioned that publicly listed companies like me are excepted from the FATCA regime. I quickly rang Paresh to confirm what Uncle SAM just told me.

First and foremost how I am affected? Peter told me that I should not be deceived with the commonly used meaning of Financial Institutions in our daily usage. Being an MNE my business operations were diverse enough that some of the group entities may be covered under the definition of FFI under FATCA.

Peter you are confusing me now, am I a MNE, NFEE or FFI? I myself looked into regulation 1.1471-5(e) of FATCA and learnt that a holding company or a treasury centre that is part of the same expanded affiliated group that includes a depository institution, custodial, insurance or investment entity or is formed in connection with or availed of by a collective investment vehicle like private equity fund, exchange traded fund or similar investment vehicle established with an investment strategy of investing, reinvesting or trading in financial assets may be covered. FATCA classifies entities based on their activities and business purposes and their treatment depends accordingly.

Peter, I know what you mean now and I want you to undertake this due diligence for me to analyse my legal entity group structure and classify these entities for FATCA, based on their activity and operations. Identify for me if my central functions would be classified as pension funds, investment vehicles, treasury centres and other obliged FATCA defined financial services. Each entity that has potential of being classified as FFI needs to be assessed in detail. Once you are done with this primary classification then we shall further sub- classify each entities obligation under the rules and define the gap between the current state of affairs and future compliance state.

Peter sent out a questionnaire to me which he told me to roll out to my group entities and based on the responses he would then compile a list of non-US legal entities or vehicles differentiating between the operating and non-operating entities. For each non-operating entity we would then determine if they have any US source investments or activity either directly or indirectly through intermediary. Each operating entity needs to be classified as NFEEs or FFIs. Based on this entity classification we would be in a better position to apply the appropriate set of rules of FATCA for NFEE and FFIs.

I was convinced again that I am in safe hands and would let Peter take his focused approach on the highest impact areas in a cost effective way in a timely manner before the FATCA bomb explodes. I know that the end result would have a varied impact on each central areas containing treasury functions, pension funds, with-holdable payments, investment and financing functions that could fall within the FFI definition and therefore have consequent registration and compliance obligations. Likewise I am prepared to classify my non-financial regional business activities in local markets into pension funds, investment vehicles which may be classified as financial entities. They may be engaged into certain transactions giving rise to with-hold able payments. This would give me an opportunity to have a look into my group activities and to carve a qualification for exemption under FATCA regime moving forward.

FATCA Scorecard: A tax information reporting regime by IRS

Legislative Intention

Combat foreign tax evasion

Recoup Federal tax revenues

FATCA characterization of entities

1.   US Withholding agents

2.      Foreign Entity

·         FFI

·         NFFE

Obligations for US Withholding agent

·      Identify non-resident alien entity account holders, customers, vendors and classify as financial institution of NFEE

·      Report Information to the IRS about any substantial US owners of NFEE account holders

·      Withhold 30% on US source income paid to a non-participating FFI or non-certifying NFFE

Obligations of Foreign Entities

·      Withholdable payments to FFIs: 30% taxes unless FFI assumes substantial information reporting and withholding responsibilities under FFI agreement or an exception applies

·      Withholdable payments to NFFE: 30% taxes unless NFFE identifies its substantial US owners or an exception applies

Thanks for the heads up Uncle SAM!  An exercise for you as well.  I know that you are a US Green card holder and recently moved back to India. The interest income you are earning on your half a million dollars deposits in India sourced  from an insurance company post your accident in the US is subject to US taxes .To become tax compliant with the IRS, it would require you to make appropriate declarations. Good luck with your due diligence!

(Views expressed are personal. Ashish Arora, Senior Tax Professional, EY contributed to the article)


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