FATCA Impact on UK Financial Institutions

September 2010
FI N AN CIA L S E RV I C E S

The U.S. Foreign Account Tax Compliance Act (FATCA) confronts Foreign Financial Institutions (FFI) with increased information demands in the KYC process, additional reporting requirements and other duties. FATCA will challenge banks in their cross border activities.

Key points of the Foreign Account Tax Compliance Act In principal, FATCA introduces a 30 percent withholding tax on all withholdable payments of a Foreign Financial Institution (FFI). This tax is not deducted from Foreign Financial Institutions (FFIs) if they comply with certain reporting requirements to the Internal Revenue Service (IRS) as outlined in Section B of FATCA. If a foreign law prevents reporting of any information with respect to a U.S. account maintained by the FFI, the company will need to either attempt or obtain a valid and effective waiver of the law from each holder of such an account or exit the relationship.

You and KPMG KPMG rms can advise you on the challenges around the U.S. market, cross-border issues as well as the processes and controls required for FFIs. We offer you with the right combination of specialists needed to obtain compliance with US requirements and the mitigation of risks afliated with US clients, while also respecting data privacy laws.

On March 10, 2010, the U.S. senate passed the Tax Extenders Act (H.R. 4213) of 2009. The Act includes an updated proposal for a new law to prevent tax evasion by U.S. persons and focuses on high net-worth individuals (so-called fat cats). The act will be put in force in 2013. For which nancial institutions will FATCA be applicable? FATCA will be applicable for all types of nancial institutions (e.g. banks, traditional funds, hedge funds, private equity companies, etc.) An FFI will be subject to FATCA if the company either has U.S. clients or holds U.S. assets in any form.

Others Accepts deposits

Banks

T Trade Securities

Foreign Financial Institution (FFI)

Holds financial assets for others

Private equity companies

Invests into securites Funds

Return on investment

Personal income Subject of

Proceeds form sales

Signicant side-effects that can occur One aim of the US Stop Tax Haven Abuse Act 2009 and other acts is to obtain transparency of all U.S. accounts. According to FATCA, which follows the direction suggested by the US Stop Tax Haven Abuse Act 2009 the IRS may request additional , information on all U.S. accounts. Consequently, it can collect information with respect to detailed positions inherent in such an account. Providing, such information can potentially result in further issues for the FFI, for example: Questions on whether the business of the FFI is in line with current U.S. laws and regulations (e.g. if a bank would purchase a U.S. Stock for a U.S. person). The IRS has no discretion for the information received and can share information with other tax authorities around the globe. Consequently, potential violation of laws and regulations is not only limited to UK and the U.S. but might occur in all countries in which a U.S. person is resident. As a result, the cross-border activities of an FFI may be brought into increased scrutiny.

Challenges to Foreign Financial Institutions related to FATCA FFIs will have to make the strategic decision to either establish a (U.S.) compliant business model or exit U.S. clients.

FATCA 30% withholding tax

Foreign Financial Institution (FFI)

Exit strategy Reporting Compliant structure

Monitoring

Duties to comply with FATCA

Maintain verification and due diligence procedures to identify U.S. accounts Obtain information of each account holder Report detailed information regarding U.S. accounts to IRS on an annual basis Provide IRS with additional information regarding U.S. accounts upon request Deduct and withhold 30% tax of passthru payments made by recalcitrant account holders or FFIs

Establish (U.S.) compliant business

Cross-border activities

AML KYC

Indentification

Decision

Establish (U.S.) compliant business model

Exit U.S. business and monitor adherence

The key challenge for FFIs under the FATCA in both cases will be the identication of U.S. clients and especially in the case of institutional clients the identication of potential U.S. owned foreign entities. This imposes more detailed information gathering and due diligence procedures during the Know Your Customer (KYC) process as well as the related anti-money laundering (AML) procedures.

2 FATCA Impact on UK Financial Institutions

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If an FFI decides to establish a (U.S.) compliant business model, the following aspects need to be considered: The operational systems need to be in a position to detect U.S. clients at the moment when an account is opened, as well as during the entire lifecycle of a client (monitoring). The system environment needs to be designed in a manner which ensures that information required by the IRS is available in the required format and within the required timeframe while limiting the data to U.S. accounts only. A process needs to be established that identies recalcitrant FFIs and account holders to ensure that the company in its role as a Withholding Agent is deducting 30% of pass through payments, or such relationships need to be cancelled. Establishment of both an exit strategy for account holders who do not agree to waive banking secrecy as well as a standardized process should a U.S. account be detected within an organization (e.g. a UK person obtains a Green Card). Additionally, if an organization has fully exited out of any relations with U.S. clients, the FFI will still have to demonstrate the manner in which U.S. clients are detected in the future and that the FFI would immediately exit the relationship upon detection.

How KPMG rms can assist you Deciencies in these processes can result in non-compliance with U.S. tax law and agreements based on such law. The case of UBS has made sufciently clear what is at stake for foreign nancial institutions in this respect. Taking all facts into consideration, an FFI that plans to maintain U.S. client relationships will not only need to comply with FATCA but also with all other rules and regulations (e.g. SEC rules, cross-border activities, etc.). The efforts needed to full all of these obligations can be quite substantial for a nancial institution and requires specialist knowledge or assistance. KPMG member rms can provide you a combination of required experience in the areas of: IT Regulatory matters Strategic Business Set-up Tax (with in-depth knowledge of U.S. tax law) Regulations We can assist you with effectively exiting of U.S. clients, obtaining compliance with U.S. requirements and mitigating risks afliated with U.S. clients, while respecting data privacy laws. As the business strategy, the size as well as the importance of U.S. clients varies with each FFI. The advice provided will be aligned with your specic situation and strategic objectives.

A combination of specialists can assist you in the following areas: Identication of U.S. accounts Establishing Monitoring and Due Diligence processes Dene Exit-Strategy for individual clients Design and implement FATCA and other Reporting Establishing organisational set-up that is (U.S.) compliant Review and redesign of IT set-up UK regulatory issues and ring-fencing requirements U.S. licensing requirements

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FATCA Impact on UK Financial Institutions 3

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Contacts
Tom Brown Head of Investment Management, EMEA Region Tel: +44 20 7694 2011 tom.brown@kpmg.co.uk Richard Hinton Director Tel: +44 20 7311 6527 richard.hinton@kpmg.co.uk Katie DAngelo Senior Manager Tel: +44 20 7694 2839 katie.dangelo@kpmg.co.uk Rachel Hanger Head of Tax, Investment Management Tel: +44 20 7311 5328 rachel.hanger@kpmg.co.uk

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

2010 KPMG International Cooperative (KPMG International), a Swiss entity. Member rms of the KPMG network of independent rms are afliated with KPMG International. KPMG International provides no client services. No member rm has any authority to obligate or bind KPMG International or any other member rm vis--vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved. Printed in the United Kingdom. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity. Designed and produced by KPMG LLP (UK)s Design Services Publication name: FATCA Impact on UK Financial Institutions Publication number: RRD-221666 Publication date: September 2010