Who Holds the Master Key Offshore?

31 Aug

Complying with AIFMD, FATCA and CRS

Any financial institution, regardless of its global location, that does not voluntarily comply with FATCA will find that 30% of any US-sourced payments (e.g. a corporate dividend or a maturing principal payment from a US corporate or government bond) will be withheld. Because U.S. stocks and bonds are so widely owned offshore, virtually all financial institutions receive substantial U.S.-sourced payments, mostly on behalf of clients who have no connection to the U.S. Allowing 30% of these payments to be withheld is clearly not an acceptable option.

Moreover, adequate grounds to establish a U.S. connection can be deceptively simple, since the U.S. government claims that simply using the U.S. dollar — which nearly every bank in the world does — gives it jurisdiction, even if there are no other connections to the U.S.

It is clear that institutions must either comply with the provisions of FATCA or seek exemption. It is possible for a firm to be awarded ‘limited conditional’ FATCA status, which means that the offshore institution is exempt from reporting because it is deemed to be compliant and information secrecy laws come into force.

When analyzing an investment account, the provisions of FATCA require the account to be classified into one of the following three categories:

  • ‘Approved’ as of 1 July 2014
  • ‘Limited conditional’ until the end of 2015. These administrators are deemed to be FATCA compliant and may register first and verify their status later.
  • The enormous quantity of FFIs that fall into neither category. The IRS calls them ‘rejects’

The first step in seeking ‘limited conditional’ status is to establish whether or not a U.S. individual or entity is part of a foreign financial institution (FFI) and then whether the FFI concerned is in an offshore jurisdiction that restricts the provision of information.

If this is indeed the case, then ’limited conditional’ registration is awarded and the FFI is declared compliant with FATCA. This means that the FFI can sign the new W8 BEN-E declaration. If not, then the FFI must first register for a Global Intermediary Identification Number (GIIN) before it can sign the W8 BEN-E.

It is possible for an FFI to be dealing with restricted and unrestricted information. An example would be an FFI having both a Foreign Retirement Plan and a Mutual Fund would mean this FFI would have ”limited conditional” covering the retirement plan and a GIIN covering the offshore mutual fund.

The W8 BEN – E Declaration
The rule is simple: no W8 BEN-E, no transactions in U.S. dollars, but what exactly is a W8 BEN-E Declaration? A W8 has been in existence for a long time. It is a declaration by a non-U.S. individual concerning their tax status for U.S. tax purposes.

The W8 BEN declaration used to be very simple: a foreign company would declare that it was not a U.S. company, not U.S. controlled and that it didn’t have U.S. income. This was all that was necessary to allow any foreign company’s U.S. counterparty to remit gross income rather than deducting the required amount. This has all changed since the introduction of FATCA, which has resulted in the introduction of the new W8 BEN-E declaration.

Unless the investment platform is able to sign a W8 BEN-E on behalf of the individual, they cannot be party to any U.S.-dollar investment without having some level of FATCA registration.

The FATCA status ‘limited conditional’ means that the institution is exempt from reporting because it is deemed to be compliant and restricted information secrecy laws override FATCA. This is explicitly for foreign retirement plans as exempt beneficial owners and also for administrators of FATCA identification number pension funds.

The Privacy of Pensions

Many countries have laws imposing secrecy on information about retirement plans and this is in essence why FATCA allows for the ‘limited conditional’ category. By their very nature, retirement plans are viewed and governed differently.

There are sanctions on dealing with retirement plan information which only a Regulator can decide on. There are so many organizations with powers of search and seizure these days that might otherwise demand access to sensitive information. Preventing this is important because retirement plans are proprietary.

Moreover, the US Treasury has formally determined that pensions carry a low risk of tax evasion and they are therefore exempt from FATCA reporting. Request our free invest offshore white paper

Tags: , ,

No comments yet.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.