FATCA and the UAE January 2015

January 12th, 2015 by Stephen Jones Leave a reply »

The governments of the US and the UAE have reached an agreement in substance, a model 1 Intergovernmental Agreement (IGA).
The UAE has consented to disclose this status.

In accordance with this status, the text of such IGA has not been released and financial institutions in the UAE are allowed to register on the FATCA registration website consistent with the treatment of having an IGA in effect until December 31, 2014.

More than 100 countries including India, China and Russia have already entered into agreements with the US on the Foreign Account Tax Compliance Act (FATCA) and with new FATCA requirements coming into effect on 1st of January 2015 applying to U.S. and non-U.S insurers and insurance brokers, large portions of the financial services sector are being affected.

After a relatively quiet four-year ramp up, America’s global tax law is now being enforced.

FATCA requires foreign banks to reveal Americans with accounts over $50,000 and considering the risks of being frozen out of U.S. markets, everyone is complying.

Firms that fail to comply with FATCA will be subjected to a stringent 30% withholding tax on any US sourced income even if they do not have any US customers.

The compliance aspects being forced upon financial services firms globally by the US tax authorities are complex and costly. It includes amending everything, from more thorough KYC requirements to changes in the account opening processes for new customers to take into account the new information required under FATCA, and systems will have to be updated to comply with the withholding taxes if so required. Insurers and insurance brokers will have to comply with new information gathering and reporting rules when U.S. insurance and reinsurance premiums are sent outside the U.S.

A Model 1 IGA is treated as ‘in effect’ by the US Treasury as of May 21, 2014. (http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx)
On 3 June 2013, the Governor of the DIFC signed a Memorandum of Understanding with the UAE Ministry of Finance which named the DIFC Registrar of Companies as the DIFC’s contact point for any international tax agreement entered into between the UAE and another country. FATCA is an example of such an agreement.

According to DIFC release as of 17 November 2014, “The reporting form will be available (for financial institutions) on the Registrar’s website at a time agreed and instructed by federal officials. Further instructions will be circulated as soon as the reporting framework is in place, and the guidance will be made available to DIFC entities as soon as it is finalised by the Ministry of Finance”.

Who will be affected by FATCA?
• Banks and deposit taking institutions;
• Trust company – Custodial institutions;
• Investment entities – those businesses involved in trading in transferable securities; money market instruments, foreign exchange derivatives etc.; individual or collective portfolio management or otherwise investing, administering or managing funds, money or financial instruments on behalf of other persons;
• Certain types of insurance companies that have cash value products or annuities;
• Family offices would be included in the definition;
• Certain holding companies or treasury centres.

FATCA objective

Disclosure of assets and income of U.S. taxpayers (US person) held with foreign financial institutions.

Definition of US person:
• a citizen or resident of the United States,
• a domestic partnership,
• a domestic corporation,
• any estate (other than a foreign estate) and
• any trust if:
1. a court within the United States is able to exercise primary supervision over the administration of the trust, and
2. one or more United States persons have the authority to control all substantial decisions of the trust.
How will financial institutions be affected?
If a Foreign Financial Institution (FFI) fails to address FATCA requirements promptly, all relevant US-sourced payments, such as dividends and interest paid by US corporations, will be subject to a 30% withholding tax.
The same 30% withholding tax will also apply to gross sale proceeds from the sale of relevant US property.
This will be inconvenient for the customers of the Foreign Financial Institution who will then need to claim refunds from the U.S. IRS after proving that they are non U.S. persons, and not liable for tax.

The definition of a Foreign Financial Institution which is an Investment Entity in Model 1 IGA covers:
• Investment managers;
• Investment advisors;
• Fund administrators.
However, the IGA includes a deemed compliant category for Investment Advisors and Managers, whereas an Investment entity established in a FATCA Partner Jurisdiction can obtain a status of Non-Reporting Financial Institution if it is a financial institution solely because it:
• Renders investment advice to, and acts on behalf of, or;
• Manages portfolios for, and acts on behalf of a customer for the purpose of investing, managing or administering funds deposited in the name of the customer with a Financial Institution other than an Non-Performing Foreign Financial Institution (NPFFI).

It is important to note that if an Investment Advisor / Investment Manager provides services of investment advice or manages portfolios of customers whose funds are deposited with the financial institution which is non-compliant with FATCA, or is located in a jurisdiction other than a FATCA Partner jurisdiction, the DFSA regulated Investment Advisor / Investment Manager might have FATCA reporting obligation for those clients.

According to a notice1 from the UAE Central Bank, at the start of 2014 banks and other financial institutions in the UAE must complete the following actions to facilitate the signing of the IGA:
1.Identify customer accounts that are a “US Reportable Account”, which is defined as a financial account maintained by a reporting UAE financial institution and held by one or more specified US persons or by a non-U.S. entity with one or more controlling persons that is a specified U.S. person (implementation date: 19 November 2013).
2.Adopt FATCA’s due diligence procedures for identifying and reporting on US Reportable Accounts and for payments to certain nonparticipating financial institutions (implementation date: 1 January 2014).
3.Prepare relevant systems for establishing electronic connection to the Central Bank’s FATCA Reporting System, currently in development. All banks and other financial institutions should expect to be contacted for this purpose during the first quarter of 2014 (implementation date: 1 March 2014).
4.Be prepared to register via the IRS portal to obtain a “Global Intermediary Identification Number” (final registration date: 1 November 2014).
5.Adopt reporting procedures specified in the IGA (first report for 2014 must be sent to the Central Bank by 1 August 2015).

The Central Bank, with help from a US law firm, will provide legal support and conduct workshops to assist banks and other financial institutions in implementing the FATCA requirements.

New FAQ on IGA registration issued by IRS

On 22 December 2014, the IRS posted updated FAQs regarding IGA Registration to the FATCA website. This update acknowledges Announcement 2014-38 and addresses whether Reporting Model 1 FFIs in certain jurisdictions need to register and obtain a Global Intermediary Identification Number (“GIIN”) before 1 January 2015. This update confirms that a jurisdiction which was treated in 2013 as if it has an IGA in effect, but which has not yet signed an IGA, retains such status beyond December 31, 2014, provided the jurisdiction continues to demonstrate firm resolve to sign the IGA that was agreed in substance.
New Form W-9 and accompanying instructions released by IRS

The IRS has published on its website a new revised version of Form W-9 (revision date December 2014) as well as the Instructions for the Requestor of Form W-9.

Ask us about BRS Analytics Regulatory reporting platform.


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