FATCA: Adjusting to the Shift

1. FATCA: Adjusting to the Shift Nicola Virgill-Rolle, PhD Director of Financial Services Ministry of Financial Services The Nassau Conference 16th October, 2013

2. Today’s Discussion • The Shift: • Examining the broader automatic information exchange environment • Bahamas Approach to FATCA • Major Considerations in Choice of Model • The Bahamas Agreement and Legislation • Timeframes

3. A Shifting World • FATCA must be looked at in context “we are witnessing the birth of a new international regime in which financial institutions act as tax intermediaries with respect to offshore accounts.” Grinberg, Itai, P.4 “Beyond FATCA: An Evolutionary Moment for the International Tax System.” Georgetown University Law Center.

4. OECD Harmful Tax Competition Project • In May 1996 Ministers called upon the OECD to “develop measures to counter the distorting effects of harmful tax competition on investment and financing decisions and the consequences for national tax bases, and report back in 1998”. • Tax Haven Checklist • a) No or only nominal taxes • b) Lack of effective exchange of information • c) Lack of transparency • d) No substantial activities Recommendations out the 2000 Progress Report • To impose withholding taxes on certain payments to residents of Uncooperative Tax Havens. • To impose “transactional” charges or levies on certain transactions involving Uncooperative Tax Havens.

5. Results of the OECD Project Source: OECD website

6. Continued Global Developments on Tax Matters • Europe and the Paris-based OECD have been very active in pursuing matters related: • “tax competition” • “tax base erosion” • Today, even market based investment incentives may be criticized as “harmful” to the global economy. Indeed, the freedom of companies to choose their locations in line with their profit strategies is being re-evaluated. • See http://www.oecd.org/ctp/beps.htm

7. G-20 Russia Declaration: The Role of the Global Forum • The G20 has now endorsed the development of a new global tax standard: to automatic exchange of information. • The OECD has initiated work with G20 countries to develop the new single global standard for automatic exchange of information. • G20 Finance Ministers and Central Bank Governors have mandated the OECD to provide a progress report at the October Finance Ministers’ meeting, including a timeline for completing this work in 2014. • The new standard (included in a Model Competent Authority Agreement) will be presented at G20 Finance Ministers and Central Bank Governors’ meeting in February 2014. • There is a clear need for the practical and full implementation of this new tax standard on a global scale. • The Global Forum will establish a mechanism to monitor and review the implementation of the new standard on automatic exchange of information and will be working with the OECD Task Force on Tax and Development, the World Bank Group and others to help developing countries identify their need for technical assistance and capacity building.

8. G-20 Russia Declaration, cont’d • ACTION 12 – Require Taxpayers to Disclose Their Aggressive Tax Planning Arrangements. • Develop recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures, taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences of the increasing number of countries that have such rules. • The work will use a modular design allowing for maximum consistency but allowing for country specific needs and risks. • One focus will be international tax schemes, where the work will explore using a wide definition of “tax benefit” in order to capture such transactions. The work will be co-ordinated with the work on co-operative compliance. • It will also involve designing and putting in place enhanced models of information sharing for international tax schemes between tax administrations.

9. And the Future Holds? • Bahamas ahead of the curve with is financial services model • Movement towards added value services, structuring • Small skills gap in limited areas in the immediate short term, but MoFSprogrammes will ensure that the gap is identified and filled. • Tax compliant structures are key • New world of tax transparency (From Europe to Latin America) • Sovereignty has made The Bahamas more attractive. • Rebranding of Bahamas in terms of what it actually offers already • Full Business Centre • Trusts, banks, funds, insurance, services for the wealthy, second homes, yacht services, aircraft services, arbitration. • Supported by professionals with experience. • Strong compliance environment. • The future is bright – and these are not just words.

10. FATCA: A Corollary to the OECD’s 15 year project • Achieving Compliance: • Direct FFI agreement • Receive GIIN and on list if registered by 25 April, 2014 • Intergovernmental Agreement • Model 1: Government to Government Information Flows • Reciprocal or non-reciprocal • Model 2: Government directs FFIs to enter into a FFI agreement

11. Major Consideration in Choice of Model • Achieving preferential treatment for key areas (trust, funds) • Initially quite concerned about certain FFI definitions in the regulations • Explicit mention of trusts managed by professional trustees in the Regulations • Registration requirement essentially created a trust register under Model 1 & 2 and no-IGA • Initial Annexes did not allow for registration exceptions for non-US reportable accounts of sponsored investment entities • US would then be collecting information of no interest to the purpose of FATCA

12. Major Consideration in Choice of Model , cont’d • Registration, reporting and other administrative burdens to Bahamian financial institutions • Registration/ FFI Agreement • Model 1 – No FFI Agreement (Participating Country FFI, Reporting Model 1 FFI) • Model 2 – Registration, FFI Agreements • Responsible Officer Concerns • Model 1 – Financial Institution accountable to The Bahamas Government, penalties prescribed in Bahamian Law, etc • Model 2 – Responsible Officer certifies to IRS, Form 8957 declarations (potential penalties fsitaxposts.com 03.09.12) • Continuing Compliance (Article 5 (Model 1), Article 4 (Model 2)) • Minor Administrative – direct IRS contact contemplated in both models (Bahamas to address) • Significant Non Compliance • Model 1 (Government to Government, domestic law, 18 months to address) • Model 2 (FFI to IRS, some Government involvement, 12 months or Non-Participating FFI)

13. Major Consideration in Choice of Model , cont’d • Cost to the Government • Where you start matters • A very Competent Authority! • Less than 10 persons • No income tax regime • No large scale entity reporting into the government electronically • Small, but competent, Government Information Technology Division • IRS remains unclear about systems requirements under Model 1 • Model 2 would be lower cost to Government in terms of reporting infrastructure, but still recalcitrant accounts involvement • Treasury/ IRS maintain that costs involve: server, new software development, specific software to move data from Competent Authority to IRS. • Is the infrastructure expenditure under Model 1 a good long term investment ? • depends on what is expected in the future • Necessary for an external consultant working with DIT on Model 1 approach • RFP would be necessary

14. Major Considerations in Choice of Model, cont’d • Costs to Industry • Reporting infrastructure similar under both models (timing is different). See Annex I: • The name, address, and Taxpayer Identification Number (TIN) of each account holder which is a specified United States person and, in the case of any account holder which is a United States owned foreign entity, the name, address, and TIN of each substantial United States owner of such entity • The account number • The account balance or value at year end; • Gross dividends, interest and other income paid or credited to the account • Administrative burdens may be different under Model 2, which could increase costs • FFI Agreement, Certifications, withholding, etc could add costs (legal, compliance) under Model 2.

15. Major Considerations in Choice of Model , cont’d • “Principled” considerations, i.e. • Automatic exchanges between Governments embedded in Model 1; or • Strictly a private sector issue with limited government involvement as under Model 2. • Leading Statements in Both Models , e.g. • “desire to conclude an agreement to improve international tax compliance” • “Whereas, the Parties are committed to working together over the longer term towards achieving common reporting and due diligence standards for financial institutions”; • “The Parties are committed to working with Partner Jurisdictions, the Organisation for Economic Co- operation and Development, [and the European Union,] on adapting the terms of this Agreement and other agreements between the United States and Partner Jurisdictions to a common model for automatic exchange of information, including the development of reporting and due diligence standards for financial institutions.” (In both Models, but not in Swiss)

16. Review of the Annexes • Review of Annex II under Models 1 and 2 • Trustee documented trust • Deemed compliant under Model 1 (no registration, report through trustee, if necessary) • Certified deemed compliant under Model 2 (report through trustee, if necessary) • Sponsored investment entity (PTCs, Master Feeder Fund Structures) • Model 1 - “Ifthe sponsoring entity identifies any U.S. Reportable Accounts with respect to the Financial Institution, the sponsoring entity registers the Financial Institution pursuant to applicable registration requirements on or before the later of December 31, 2015 and the date that is 90 days after such a U.S. Reportable Account is first identified;” • Model 2 – “Prior to December 31, 2015, the sponsoring entity has registered the Financial Institution with the IRS pursuant to the registration requirements set forth in paragraph C of section VI of this Annex II;”

17. Choice of Model: Model 1 • Based on the our experience, views of the Advisory Group, interactions with Industry to date Model 1 is strongly preferred • Cayman, BVI, UK • Greatest level of preferential treatment for key Bahamian products; • Lower costs and reporting burdens for Bahamian financial institutions • Infrastructure within MoF needs to be developed • Costs depends on long term considerations • Both agreements involve facilitating tax compliance on an annual and automatic basis versus information on request.

18. Current Steps • Drafting Agreement, Legislation, Industry Guidelines • Identified key clauses in Model IGA that are not acceptable • Stand alone agreement • An agreement which implements FATCA only • Confidentiality arrangements • Defining how the IRS interacts with Bahamian FFIs • Penalties for Non Compliance • RFP for the development and implementation of the FATCA reporting system “to provide consultancy services related to the conceptual design, development and deployment of an electronic reporting framework to implement a proposed Inter- Governmental Agreement (IGA) between the Government of The Commonwealth of The Bahamas and the Government of the United States of America with respect to the United States’ Foreign Accounts Tax Compliance Act (FATCA).”

19. Goals of the FATCA Electronic Reporting System Project • General • To enable The Bahamas to meet its data collection and reporting obligations under a Model I FATCA agreement; • Specific • To advise on the best approach to ensure that an electronic reporting system is developed which comprehensively captures all of the relevant information from the relevant financial institutions for the purpose of FATCA reporting under a Model I agreement. • To advise on the best approach to ensure that all of the relevant entities report to the Competent Authority in the most secure manner for the purpose of FATCA reporting under a Model I agreement. • To advise on the best approach to ensure that the Competent Authority can securely transmit the information from the reporting financial institutions for the purposes of FATCA to the United States Internal Revenue Service. • To advise on the best approach to appropriately and adequately staff the department within the Competent Authority that will be responsible for the implementation of FATCA and the ongoing compliance of The Bahamas with respect to FATCA. • To build and deploy, within the agreed upon timeframe and the agreed upon specifications, a FATCA reporting system. • To train the relevant stakeholders in the use of the FATCA reporting system. • To participate in roll-out activities associated with the launch of the system.

20. Timeframes FATCA Reporting 2015 Today…

21. What Industry should be doing? • Prepare yourselves for international initiatives like FATCA • Have the right compliance staff/consultants who understand FATCA • But, build your business • Knowing your clients well for compliance and cross selling – old principle of business, but sometimes forgotten. • Don’t just execute business – recommend activities • To do so – know what The Bahamas has to offer, know what your client needs • Invest sensibly in your employees to ensure readiness for the shift • Training using BIFS, COB, etc • Attend workshops (upcoming Taxation Course) • Language training for your staff • Soft-skills training for your staff • Build a relationship with the Ministry of Financial Services • Invest in secure IT and sensitize employees to new shame tactics. • The recent leaks are troubling. This suggests a new tactic being used to name and shame.

22. Questions? • Thank You!