International Tax Developments

International Tax Developments – U.S. Daniel M. Berman Principal, International Tax Leader – Northeast Region

Discussion I. Resolution of Fiscal Cliff a. The Fiscal Cliff b. Resolution c. Key Elements of the Deal II. FATCA a. Overview b. Definitions c. Intergovernmental and FFI Agreements d. Timeline for Compliance

Discussion (cont.) III. Treaty Update a. Pending US tax treaties b. Status of Tax Treaty Program IV. Government Gridlock a. Issues at Stake b. Timeline of Government Shutdown b. Final Agreement

The Fiscal Cliff • The U.S. was facing a “fiscal cliff” on January 1, 2013 which threatened to reduce economic output by hundreds of billions of dollars. The three main elements looming on January1: • Expiring Bush tax cuts • Affordable Care Act (“Obamacare”) taxes, and • Additional “Sequester” spending reductions of $109 billion.

Resolution On January 1, 2013 the Senate and House of Representatives passed H.R. 8, the American Taxpayer Relief Act of 2012. The President signed this into law on January 3, 2013. The Joint Committee on Taxation (“JCT”) scores it as a $3.9 trillion tax cut over 10 years

Key Elements of the Deal Restores 39.6% tax rate above $400,000/$450,000 taxable income Raises capital gains tax and dividends tax to 20% above $400,000/$450,000 taxable income Phases out personal exemptions and limits itemized deductions above $200,000/$250,000 AGI Allows new 3.8% health care tax on investment income above $200,000/$250,000 AGI Raises the estate and gift tax rate to 40% with the exemption level at $5.12 million per person, adjusted for inflation in future years.

Key Elements of the Deal(continued) One year extension of 50% bonus depreciation for businesses Extends existing agricultural programs for one year (the “Dairy Cliff”) Postpones additional sequesters by two months Ends the 2% payroll tax cut

FATCA – Overview • FATCA imposes a 30-percent withholding tax on any “withholdable payment” made to: • A foreign financial institution (FFI) or • A non‐financial foreign entity (NFFE) that is owned by “substantial U.S. owners” Unless enter into IRS Agreement, IGA or exception applies • FATCA tax applies as a backstop to “regular” withholding on payments made to foreign persons under Chapter 3 (i.e., “old” withholding rules) • Not a “double tax” • However, Chapter 3 exemptions for portfolio debt and capital gains do NOT apply for FATCA

What does FATCA mean for taxpayers? • The Big picture – • For foreign payees, new 30% tax unless willing to provide information on US investors to US or host government via FATCA Agreement or IGA. These payees must • Examine existing customer/investor base to identify US accounts • Develop new onboarding procedures that identify US persons and require consent to disclosure • Train internal personnel to NOT counsel on FATCA avoidance • For US withholding agents, must withhold tax unless get proper documentation from payees • Must diligence existing documentation • Apprise investors/customers of potential FATCA liability • Withholding begins 7/1/2014

FATCA applies to “Withholdable Payments” • A “Withholdable payment” for FATCA purposes means: • All US source FDAP income • Gross Proceeds from sale of items that produce interest or dividends from sources within the United States Exceptions: - interest/OID on short term obligations - Effectively Connected Income - “nonfinancial payments”, i.e. payments for services (wages, compensation), rents, licenses, transportation, gambling winnings, interest on A/P. However, payments made under derivative contracts, interest, investment/custodial/brokerage fees, insurance premiums are still withholdable payments

What is an FFI ? • a foreign entity that 1. Accepts deposits in the ordinary course of a banking or similar business; or 2. As a substantial portion of its business, holds financial assets for the account of others; 3. Is an Insurance company (P&C companies not likely covered); or 4. Is an “Investment Entity”

What is an Investment Entity? Final Regs have 3 ways to be an IE: 1. Primarily Conducts as a business • (a) trading in money market instruments, FX, interest rate & FX instruments, securities or futures; • (b) portfolio management; or • (c) investing, administering, or managing money or assets for others • “primarily conducts” if GI attributable to such activities equals or exceeds 50% for 3 year period ending on 12/31 of year preceding year of concern; or 2. GI is primarily from investing/reinvesting and is managed by another Investment Entity (>50%); or 3. Holds itself out as a Hedge Fund, PE Fund, CIV, LBO, Mutual fund w/ investment strategy, etc.

Examples 1. Investment Advisor to Fund Manager (if 50% GI test is satisfied) - (manages for others) 2. Fund managed by fund manager or advisor (if 50% GI test is satisfied) – (managed by bank, custodian or investment entity) 3. Foreign real estate fund managed by an FFI is not an investment entity because assets are real estate 4. Foreign trust established for US beneficiaries that invest in securities where trustee is individual – not an IE 5. same as 4. but trustee is an FFI trust company; trust is an IE and is an FFI

Exceptions to FFI status • Holding Company, Treasury Center or captive finance co • Member of nonfinancial group • Passive income <= 25% of GI of Expanded Affiliated Group • No more than 5% of GI of EAG is from FFIs (excluding intercompany transactions) • Passive <= 25% of FMV of group assets • Nonfinancial Start ups • Not FI or passive NFFE • New business or LOB • Not a PE, VC, LCO etc. • Nonfinancial entities in liquidation/bankruptcy • 501(c)

Multinationals may be subject to FATCA • Is CFC Holdco/Treasury/Ins Co an FFI? • Does US Sub have to withhold on payments to CFC? • Does CFC qualify for Holdco exception? • Has US Sub received proper documentation? US CFC Foreign Holdco/ Treasury Center/ Ins Company US Sub

FFI Agreement What does it require ? • If can’t qualify for FFI exception or other exemption, must enter into IRS Agreement • This will involve (in addition to registering online) • Examining existing accounts to identify US accountholders and assessing existing documentation • Establishing procedures for new accounts • Information reporting to IRS (or host country gov’t) • Notice 2013-69 contains draft FFI Agreement

RO Certifications under FFI Agreement • Regarding initial diligence - Responsible Officer must certify • Completed review of high value accounts and identified recalcitrant accounts • Completed account identification and documentation procedures for pre-existing accounts • Has made “reasonable inquiry” to determine that FFI had no policies in place from August 6, 2011, to assist account holders in “avoidance of Chapter 4” • Must send inquiries (written, email, etc.) that require responses from onboarding & mgmt personnel • Effective Internal controls exist and compliance program exists; periodic testing • Periodic Certifications; Qualified certifications if Material Failures (including FIN 48 reserve)

Information Reporting under FATCA Agreement • Must report by 3/31 of year following reporting year • name, address, TIN, account number, account balance/value, payments made, substantial US owners, and any other info req’d in form 8966 (see August draft) • May elect full US based reporting instead (under Chapter 61, i.e. 1099 rules) • No account balance or gross payment information otherwise req’d under normal rules • Election is made by actually doing ch. 61 reporting by 3/31 • Use regular forms for US account holders; 8966 for NFFEs • “Recalcitrant” account holders – must report # of accts and acct value/balance for NFFEs, US persons, persons w & w/out US indicia, dormant accts each as separate group

Intergovernmental agreements (IGAs) • On July 26, 2012, the U.S. Treasury Department published two versions of IGAs (Model I and II) to facilitate FATCA implementation • Model I IGAs • Allows FFIs to report directly to their home country authorities • Foreign government will transmit information directly to IRS automatically • Reciprocal information exchange • No registration with IRS • Model II IGAs – FFI must report directly to IRS using regulations with some possible adjustments • In Dialogue with several dozen countries and some have signed agreements • Cayman agreement recently announced but not released

Is that all? (of course not) • FATCA penalty applies to payments made to a non-financial foreign entity (NFFE), which is any foreign entity that is not an FFI • Penalty applies unless NFFE provides information regarding its substantial U.S. owners (i.e., 10 percent owners) or certifies that it has none and the withholding agent properly reports • Exceptions: Public companies, Active NFFEs, territory entities, excepted nonfinancial entities

When does withholding really begin? Withholding and Reporting • US source FDAP • New investors admitted post 7/1/14 • So, new onboarding procedures need to be in place by 7/1/2013 or by effective date of FFI agreement • Other foreign entities on pre-existing obligations, 1/1/16 • Entities documented as noncompliant (e.g., NFFI) – date of documentation • Gross proceeds • 1/1/17, except • Amounts paid to FFIs covered under a M1 IGA • Foreign “Pass-through” Payments are not subject to withholding until January 1, 2017. • First reporting deadline for US accounts is March 31, 2015.

Treaty Update • Income Treaties Signed, Awaiting U.S. Senate Approval: • Hungary (Treaty), signed at Budapest on February 4, 2010; approved by the Senate Foreign Relations Committee and reported to the full U.S. Senate on July 26, 2011. Adds a comprehensive limitation on benefits provision to the existing treaty’s withholding tax exemptions on interest and royalties. • Luxembourg (Protocol), signed in Luxembourg on May 20, 2009; approved by the Senate Foreign Relations Committee and reported to the full U.S. Senate on July 26, 2011. Allows greater tax information exchange . • Switzerland (Protocol), signed at Washington, D.C. on September 23, 2009; approved by the Senate Foreign Relations Committee and reported to the full U.S. Senate on July 26, 2011. Enables information exchange agreement that settled the dispute over U.S. persons hiding assets in Swiss banks.

Treaty Update (continued) • Income Treaties Signed, Awaiting U.S. Senate Approval: • Poland (Treaty), signed in Poland on February 13, 2013. Modern tax treaty to replace Détente-era agreement. • Japan (Protocol), signed at Washington D.C. on January 24, 2013. Comprehensive update of 2003 treaty. • Spain (Protocol), signed in Spain on January 14, 2013. Comprehensive update including expanded exemptions from source-country taxation. • Chile (Treaty), was signed at Washington, D.C. on February 4, 2010 and sent to the U.S. Senate on May 17, 2012 for advice and consent to ratification. First tax treaty, to accompany existing free trade agreement.

Treaty Update (continued) Holds on Senate floor action Little negotiation effort Prospects for treaty approval

Government Gridlock – Issues at Stake Funds not appropriated for fiscal year 2014, beginning October1, 2013. Tea Party faction, unable to repeal President’s health care program, demanded it be defunded. Government debt ceiling approaching, limiting borrowing to pay for expenditures already appropriated.

Government Gridlock – Timeline of Shutdown • September 20, 2013: House passes a resolution (H.J. Res. 59) denying federal funds to carry out any provision of the Affordable Care Act (“Obamacare”) • September 27, 2013: Senate removes the House approved provisions defunding Obamacare. (Senate Amendment: SA 1974) • September 29, 2013: House adds repeal of medical devise excise tax and one-year delay in implementation of Obamacare. • September 30, 2013: • Senate removes the House provisions postponing Obamacare and erasing the medical device tax. • House approves a new resolution that that would cripple “Obamacare” by delaying the individual health insurance mandate for a year; denying employer-subsidized health care to Members of Congress, their staffs, the President, the Vice President, and any political appointees. • Senate strips the House provisions on individual health insurance and federal health coverage subsidies for lawmakers and staff. • October 1, 2013: With no spending legislation enacted for the new fiscal year, a partial federal shutdown begins. There is no progress toward any possible compromise.

Government Gridlock – Final Agreement • With looming debt ceiling limit, House Speaker rejects Tea Party push for default. • On October 16, 2013, House of Representatives finally votes on a Senate-approved funding bill; it passes with bipartisan support. • The government reopens on October 17th. • Furloughed employees are guaranteed their regular compensation for days out of work during the shutdown. • Funds are appropriated at current levels through January 15, 2014. • Debt ceiling is raised until February 7, 2014. • Congress reaffirms that the government must confirm individuals’ eligibility for subsidized health insurance under Obamacare.

International Tax Developments – U.S.