FATCA for LATAM Firms: SESSION 1 - Introduction

1. The Foreign Account Tax Compliance Act (FATCA)
Introduction
SESSION 1
Training Programme
FATCA for LATAM Firms
23-24 February 2015 (Panama City), 25-26 February 2015 (Santo Domingo)
Rodrigo Zepeda
Independent Consultant

2. Section 1:
Historical Background and Context
Section 2:
Key FATCA Aims and Objectives
Section 3:
FATCA Milestones
Section 4:
The Impact of FATCA
Section 5:
The Three Pillars of FATCA (Classification, Reporting, Withholding)

3. Historical Background and
Context
SECTION 1
3

4. Historical Background and Context
The Qualified Intermediary (QI) System:
• Introduced by the United States (U.S.) Government in 2001 to combat (1) tax fraud by U.S. persons
(especially non-U.S. residents); and (2) misuse of double tax treaties by “non-eligible non-U.S.
persons”.
• The QI System regulates withholding of income taxes from payments of U.S. source income to non-
U.S. persons.
• Chapter 3 (Withholding of tax on nonresident aliens and foreign corporations) of the U.S. Internal
Revenue Service (IRS) Internal Revenue Code 1986 (as updated) (IRC) requires withholding on U.S.
source Fixed or Determinable Annual or Periodic (FDAP) income.
• Chapter 3 is referred to as a “Cascade” system, where all entities in a chain which lie between a U.S.
Withholding Agent (USWA) and the U.S. beneficial owner must provide documentation to the entity
above them with regard to U.S. source income.
18 March 2010:
• The Hiring Incentives to Restore Employment Act of 2010 (P.L. 111-147) (§501(a)) added
a new Chapter 4 (Code sections 1471 to 1473) to the U.S. IRC (The Foreign Account Tax
Compliance Act).
4
5

5. Historical Background and Context (continued)
Legislative Activities:
• 8 February 2012 – U.S.Treasury and the IRS issue Proposed FATCA Regulations.
• 18 January 2013 – FATCA Final Regulations issued.
• 12 July 2013 – Notice 2013-43.
• 29 October 2013 – Notice 2013-69.
• 2 May 2014 – Notice 2014-33.
• 6 March 2014 – Revised Final andTemporary FATCA Regulations issued.
Context:
• FATCA heralds the beginning of new global Automatic Information Exchange (AIE) systems where
governments across the world will exchange tax information on individuals (e.g., OECD’s global
‘Common Reporting Standard’ endorsed by the G20, EU amendment to ‘Directive 2011/16/EU’,
and ‘Son of FATCA’Agreements).
5
5

6. Key FATCA Aims and Objectives
SECTION 2
6

7. Key FATCA Aims and Objectives
To addressGlobal U.S.Tax Evasion (U.S.Treasury estimates $100 billion annual offshore losses):
• To combat tax evasion by U.S. persons holding investments in offshore accounts.
• To provide the U.S. IRS with more tools and information to detect U.S. tax evaders concealing
assets either DIRECTLY (foreign accounts) or INDIRECTLY (offshore entities or vehicles).
• To impose (1) documentation (classification); (2) reporting; and (3) withholding requirements
with respect to certain payments made to certain foreign entities.
To Help Pay for the U.S. HIRE Act (Hiring Incentives to Restore Employment):
• Estimated cost of U.S.$13 billion (2010 to 2019) by U.S. Joint Committee onTaxation (JCT).
International Data Exchange and Global Automatic Information Exchange:
• FFIs can register with the IRS and agree to report to the IRS certain information about their
U.S. accounts, including accounts of foreign entities with substantial U.S. owners.
• Will help to develop a global information exchange network (e.g., OECDCRS).
7
5

8. FATCA Milestones
SECTION 3
8

9. FATCA Milestones: Major Deadlines
9
3
DATE FATCA DEADLINES
1 January 2013: Effective date of FATCA legislation (applies to payments made to FFIs and NFFEs.
1 July 2014: FATCA withholding on U.S. source FDAP income (including interest and dividends) for non-
compliant individuals and documented Non Participating FFIs.
1 January 2015: FATCA withholding for non-compliant entities.
1 January 2017: FATCA withholding on gross proceeds from the sale of property that can produce U.S.
source dividends or interest .
1 January 2017: FATCA withholding on passthrough (“passthru”) payments.
15 March 2018: U.S. gross proceeds (year-end 2017) subject to withholding included on IRS Forms
1042/1042-S by P-FFIs, USWAs, andWAs.
30 June 2018: P-FFIs commence 3 year FATCA compliance program (internal controls ) certification cycle.

10. FATCA Milestones: FATCA Timeline
10
2
2010 2011 2012 2013 2014 2015 2016 2017
18 March 2010
FACTA enacted.
August 2010
IRS/Treasury Notice
(Guidance) issued.
April 2011
IRS/Treasury Notice
(Guidance) issued.
14 July 2011
IRS Notice 2011-53
(Guidance) issued (providing
transitional relief for
significant obligations under
FACTA).
31 December 2012
FACTA effective.
1 January 2013
Grandfathered Obligations
(Grandfathering rule) extended until this
date. IRS begins to accept applications
for FFI agreements.
17 January 2013
Final FACTA
Regulation issued.
30 June 2013
Deadline for FFIs to enter
into FFI Agreements in
order to ensure that it is
identified as a P-FFI when
FATCA withholding
begins.
New Account Opening
Procedures apply.
12 July 2013
U.S. Treasury announces 6 month
extension to FACTA withholding
requirement starting on 1 July 2014.
1 January 2014
FATCA withholding for
FDAP payments for NP-
FFIs and RAHs by FFIs.
Transition period begins
for Affiliates in Non-
Consenting
Jurisdictions.
1 July 2014
Withholding by
U.S. Payors to
commence on
U.S. Source
payments made
to foreign (non-
U.S.) financial
institutions
unless such
institutions are
FATCA-
compliant.
30 June 2014
Identifying pre-
existing Entity
account holders
that are prima
facie FFIs.
30 September 2014
First Reporting Date for Accounts Open on 30 June 2014.
31 December 2014
Identifying pre-existing High Value
Individuals accounts (> U.S.$1 million).
1 January 2015
FATCA withholding for FDAP and Gross
Proceeds for NP-FFIs and RAHs by FFIs.
FATCA withholding for Passthru Payments
originally scheduled to commence.
15 March 2015
1st Reporting on Chapter 4
Reportable Payments begins
for WAs (Forms 1042, 1042-S).
31 December 2015
Identifying remaining pre-
existing accounts (Entities
and Low Value).
15 March 2016
1st Reporting on Gross
Proceeds begins for WAs
Forms 1042, 1042-S).
31 March 2016
1st Reporting of FDAP and
Other Payments for NP-FFIs
and RAHs by FFIs.
1 January 2017
Delayed implementation of withholding
on Gross Proceeds.
Delayed implementation of foreign
Passthru Payment withholding
obligation (no earlier than).
31 March 2017
2nd Reporting of FDAP and
Other Payments for NP-FFIs and
RAHs by FFIs.

11. The Impact of FATCA
SECTION 4
11

12. The Impact of FATCA: Industries
12
Commercial banks, retail banks,
investment banks, banking-type
operations and subsidiaries
Mutual funds, hedge funds, private
equity funds, non-U.S. retirement funds,
master funds, feeder funds
Investments in U.S. real estate made
through U.S. and non-U.S. corporations,
U.S. Real Estate Investment Trusts
(REITs), and loans by non-U.S. investors
Insurance companies (and holding
companies) issuing (or liable under)
certain cash value insurance or annuity
contracts, certain captive insurance
companies
Investment advisers,
wealth managers,
brokers in financial instruments,
registrar agents
Trusts, trust companies, private trust
companies
Treasury centers, holding companies,
captive finance companies, securitization
vehicles
Banking Industry
Funds Industry
Real Estate Industry
Insurance Industry
Professional Service Firms
Trusts
Other
3

13. The Impact of FATCA: Institutions
IRS estimates number of FFIs affected by FATCA between 300,000 and 500,000.
High Risk Institutions: FFIs including:
• Depositary institutions (e.g., banks).
• Custodial institutions (e.g., mutual funds).
• Investment entities (e.g., hedge or private equity funds).
• Certain insurance companies (e.g., offering cash value products or annuities).
Low Risk Institutions: FATCA Exempt (registration and reporting) including:
• Government entities.
• Non-profit organisations.
• Small and local financial institutions.
• Certain retirement entities.
13
4

14. The Impact of FATCA: Geographical
14
3
DBFS Ltd. (2015). GenMap, at: http://www.dbfs.co.uk/genmap/.

15. The Impact of FATCA: Financial
• FFIs (that are not exempt) must register and agree to report to the IRS or face a
30% withholding tax on certain U.S. source payments made to them.
• JCT conservative projection of U.S.$8.7 billion over 10 years.*
• The ‘Crossbridge’ Consulting Firm estimates U.S.$150-200 million compliance costs
for medium-sized banks.
• Initial FATCA compliance costs for Canada’s 5 biggest banks were U.S.$693.5 million.**
• Small to medium-sized Financial Institutions likely to find FATCA compliance most difficult because
they may not have existing compliance systems in place, or existing KYC/AML systems may be
inadequate, and client due diligence remediation may be high.
Latest Figures for IRS Registered LATAM FFIs:
• 5082 (Brazil); 795 (Panama); 639 (Mexico); 381(Chile); 112 (Dominican Republic).
• LATAM institutions may potentially have high FATCA compliance costs (e.g., IT; staff; training;
translation, remediation projects, adapting systems, FATCA identification and reporting software).
* JCT, (2010). "JCT Estimates Budget Effect of HIRE Act" JCX-5-10 (23 February), Doc 2010-3977, 2010 TNT 36-20.
** Trichur, R. (2014). “Canada Banks Tally Their Tax-Compliance Tab” (27 July), The Wall Street Journal.
15
5

16. The Three Pillars of FATCA
(Classification, Reporting,
Withholding)
SECTION 5
16

17. The Three Pillars of FATCA
17
5
Classification
• Classification of Financial Institutions.
• Classification of Non-Financial Foreign
Entities.
• Classification of Client Entities.
• Classification of Client U.S. Persons.
• Identification of FATCA Exemptions.
• Determination of Participating or Non-
Participating status for Financial
Institutions.
• Determination of the application of a
Model 1 IGA, a Model 2 IGA, or an U.S.
IRS FFI Agreement.
• Pre-Existing and New Account Due
Diligence for Individuals and Entities.
Reporting
• Determination of reporting obligations
under a Model 1 IGA, Model 2 IGA, or
IRS FFI Agreement reporting
framework.
• Determination of the FATCA reporting
timeline relevant for Foreign Financial
Institutions or Non-Financial Foreign
Entities.
• Collecting Reportable Information on
U.S. persons and financial accounts.
• Registering with the U.S. IRS.
• Reporting by Participating Foreign
Financial Institutions on U.S. accounts.
• Reporting by Participating Foreign
Financial Institutions on Recalcitrant
Accounts.
Withholding
• Determination of who is subject to
withholding.
• Determination of withholdable
payments.
• Determination of gross proceeds.
• Determination of passthru payments.
• Determination of exceptions from
FATCA withholding.
• Determination of grandfathered
obligations.
• Determination of modified
grandfathered obligations.
• Devising a withholding system to
collect and remit withholding
payments to the U.S. IRS.

18. 18

19. 19
Presentation Information
DECLARATION OF CONFLICTING INTERESTS
The author declares that to the best of his knowledge he has no potential conflicts of interest with respect to the research or
authorship of this presentation.
ABOUTTHE PRESENTER
Rodrigo Zepeda is an independent consultant who specialises in derivatives and financial services law, regulation, and
compliance. He holds a LLM Masters degree in International and Comparative Business Law, has been an Associate of the
Chartered Institute for Securities and Investment since 2004, and has passed the New York Bar Examination. He has also
published widely in leading industry journals such as the Capco Institute’s Journal of Financial Transformation, the Journal of
International Banking Law and Regulation, as well as e-books on derivatives law. Noted publications include “Optimizing Risk
Allocation for CCPs under the European Market Infrastructure Regulation”; “The ISDA Master Agreement 2012: A Missed
Opportunity”; “The ISDA Master Agreement: The Derivatives Risk Management Tool of the 21st Century?”; and “To EU, or not to
EU: that is the AIFMD question”.
CONTACT DETAILS
Email: rodrigo@zepeda.co.uk
LinkedIn: http://www.linkedin.com/in/rodrigozepeda
Mobile: UK + (0)7592457373

20. The Foreign Account Tax Compliance Act (FATCA)
Introduction
SESSION 1
Training Programme
FATCA for LATAM Firms
23-24 February 2015 (Panama City), 25-26 February 2015 (Santo Domingo)
Rodrigo Zepeda
Independent Consultant