Further to our prior client updates on the US Foreign Account Tax Compliance Act ("FATCA"), we are pleased to confirm that on 30 June 2014 the British Virgin Islands ("BVI") signed a Model 1(b) (i.e. non-reciprocal) intergovernmental agreement with the United States ("US IGA"). The BVI government's release and a copy of the US IGA can be found through the following links:
Although the US IGA has been executed, it will still need to be brought into force in both jurisdictions in accordance with applicable protocols. Supporting legislation and Guidance Notes are in the process of being drafted for the BVI.
The net effect of the US IGA is that BVI financial institutions ("FIs") will be treated as deemed compliant foreign financial institutions for the purposes of FATCA, even where members of an FIs' affiliated group may not be.
We shall shortly be producing comprehensive legal guides in relation to each major industry that is impacted by FATCA.
In the interim, the key points for consideration are as follows:
FATCA was enacted to require foreign entities to report information on assets held by US persons. Failure to report the required information would result in the imposition of a punitive 30% withholding tax on qualifying US source payments.
When enacted, domestic legislation in the BVI will give effect to the FATCA requirements of the US IGA. That legislation will require BVI FIs to report information annually to the British Virgin Islands International Tax Authority ("BVI ITA") on financial accounts that are held by Specified US Persons (as individuals) or non-US entities controlled by Specified US Persons. The BVI ITA will then forward the information to the US Internal Revenue Service ("IRS") on an annual basis.
In addition, certain non-financial foreign entities ("NFFEs") which do not meet the definition of an FI, may separately be required to self-certify their status to withholding agents and identify substantial US owners (using IRS Form W8 or similar) so as to avoid the application of withholding tax.
FIs that comply with the US IGA and enabling legislation will be treated as satisfying the due diligence and reporting requirements of FATCA. As such, those FIs will be 'deemed compliant' with the requirements of FATCA, will not be subject to withholding, and will not be required to close recalcitrant accounts (i.e. accounts held by clients that refuse to provide, or allow the FI to provide, the information).
Further, the US IGA categorises FIs as either "Reporting FIs" or "Non-Reporting FIs". By default, all FIs are Reporting FIs, unless they qualify as Non-Reporting FIs. The categories of Non-Reporting FIs are specified in Annex II to the US IGA.
For each US Reportable Account that it maintains, a Reporting FI is required, amongst other things, to obtain and ultimately report the name, address, and TIN of each Specified US Person that is a holder of such account (subject to the application of look-through provisions), the account number and certain financial information in relation to the account (e.g. account balance).
An FI includes a Custodial Institution, Depository Institution, Investment Entity, or a Specified Insurance Company, which in practice will cover banks, custodians, nominees, trust companies and trusts, investment funds (including hedge and private equity funds), administrators, managers and advisers, as well as certain structured finance products and insurance companies.
Annex II of the US IGA classifies certain entities as "exempt beneficial owners" and "deemed compliant FIs", which are collectively regarded as "Non-Reporting FIs", as well as describing certain excluded accounts (e.g. retirement and pension plans or term life insurance contracts).
Among the exclusions, Annex II contains specific conditions to be satisfied for Investment Managers and Advisers, Investment Entities (e.g. Sponsored Entities) and Trustee Documented Trusts. We shall elaborate further on the Annex II exclusions in our industry specific legal guides.
A Non-Reporting FI does not need to register on the IRS FATCA registration website, save for certain Sponsored Investment Entities that may have US Reportable Accounts. As such, clients may wish to review Annex II before making arrangements to register.
A Non-Reporting FI will however need to provide certification (e.g. via an IRS Form W8 or similar) to the relevant withholding agent as to its deemed-compliant status.
Annex I of the US IGA also includes certain categories of account that do not need to be reviewed, identified or reported. These include:
(a) a pre-existing individual account with less than US$50,000 as of 30 June 2014; and
(b) a pre-existing entity account with less than US$250,000 as of 30 June 2014. Further, such pre-existing entity account does not need to be reviewed, identified, or reported as a US Reportable Account until the account balance or value exceeds US$1,000,000.
Reporting FIs have until the end of December 2014 to register with the IRS and obtain a Global Intermediary Identification Number ("GIIN"), although given IRS processing time, we would suggest registering by the end of November 2014, if required. From 1 January 2015, withholding agents are required to verify the GIIN for Reporting FIs and, if so verified, are not required to withhold tax on payments to those FIs.
Registration can be completed through the IRS FATCA registration online portal.
Alternatively, you may submit a hard copy Form 8957 to the IRS, but the IRS have noted that such forms will take longer to process and may not be the most reliable form of registration.
A Reporting FI will be compliant with FATCA and the US IGA where it:
- complies with the applicable registration requirements on the IRS FATCA registration website; and
- identifies US Reportable Accounts and reports annually to the BVI ITA specified information in relation to those US Reportable Accounts.
A Reporting FI which fails to comply with paragraph (b) above is not subject to withholding unless it is regarded by the IRS as a Non-Participating FI, under the terms of the US IGA.
As noted above, a "US Reportable Account" is any Financial Account maintained by a Reporting FI and held by one or more Specified US Persons or by a non-US entity with one or more Controlling Persons that is a Specified US Person.
A "Specified US Person" is generally defined as a US Person that is not otherwise a listed corporation, member of an expanded affiliated group (of the FI), a US federal or state agency, any tax exempt organisation (entity or other arrangement) under the Code; or an entity registered with the Securities and Exchange Commission.
A "US Person" is defined as including:
- a US citizen or resident individual;
- a US partnership or corporation; or
- a trust, if a US court has jurisdiction over the administration of the trust, and one or more US Persons have the authority to control all substantial decisions of the trust.
Certain indicia included under Annex I must be used to determine the US status of such persons.
The term "Controlling Person" is to be interpreted in a manner consistent with the Financial Action Task Force Recommendations, which essentially provide that:
- for "legal persons", such as a company, control depends on the ownership structure of the company and may be based on a threshold, e.g. any person owning more than a certain percentage of the company (e.g. 25%); or
- for "legal arrangements" (e.g. trusts) persons exercising ultimate effective control over the trust which may include the settlor, the trustee(s), the protector (if any), the beneficiaries or class of beneficiaries, without reference to thresholds.
The IRS FATCA registration portal has been open since the beginning of 2014 for Reporting FIs to register for a GIIN.
BVI Reporting FIs may therefore proceed to finalise their registration information through the portal (or manually through submission of Form 8597 to the IRS) and should in any event do so by 31 December 2014 to avoid the imposition of withholding tax from 1 January 2015.
Although US withholding agents are required to start withholding from 1 July 2014, it is important to note that they are not required to verify GIINs on payments made prior to 1 January 2015 where the payee is a Model 1 Reporting FI. Accordingly, BVI Reporting FIs can effect registration through to the end of 2014 and, if necessary, may self-certify their Model 1 Reporting FI status to withholding agents to avoid withholding.
The US IGA also requires all individual (not entity) accounts opened from 1 July 2014 to be treated as new accounts and as such Reporting FIs are expected immediately to begin identifying if those account holders are Specified US Persons.
As GIIN registration is required prior to the end of 2014 and due diligence regarding new individual account holders is required immediately with due diligence on existing individual and new/existing entity accounts needing to be completed in 2014 and 2015, clients should be taking the following steps as soon as possible:
- Determine the person who will oversee FATCA compliance.
- Determine if FATCA compliance will be handled internally or outsourced.
- Identify whether entities are FIs or NFFEs.
- If FIs, identify whether any exclusions under Annex II of the US IGA may apply so that an FI can be treated as a Non-Reporting FI.
- Consider the timing of registration of each Reporting FI with the IRS.
- Classify existing account holders and commence information remediation as required.
- Develop and implement updated on-boarding procedures for new account holders, in particular new individual account holders.
The US IGA expressly notes that Reporting FIs may use third party service providers to fulfil their obligations under BVI law.
Our affiliate, MaplesFS, has established a FATCA team and developed a suite of products over the last two years to assist clients with their FATCA obligations. The MaplesFS FATCA services include classification of accountholders and accounts, remediation and validation of Reportable Accounts, implementation of new on-boarding procedures and reporting.