FATCA Update – UAE

October 28th, 2013 by Stephen Jones Leave a reply »

The IRS final version of Form W-9 adopts the modifications made to the exempt payee box in a prior draft to accommodate the use of Form W-9 by foreign financial institutions that document U.S. account holders under Code sections 1471-1474 (i.e., the statutory FATCA provisions).

Rather than merely checking a box to indicate a payee’s exempt status, the new Form W-9 requires an exempt payee to provide a code designating the category of exemption for which it qualifies and whether it is exempt from domestic (i.e., Form 1099) reporting and / or FATCA (Form 8966) reporting.

Definition of a US person for US tax purposes under FATCA
Both individual and corporate customers can be classified as US persons under the Fatca rules. A US citizen, including an individual born in the US but resident in another country, who has not renounced US citizenship;
A tax resident of the US, including a US green card holder;
A person who spends a significant number of days in the US each year;
A non-US entity that is controlled by a US tax resident or US citizen;
A US partnership, corporation, estate or trust.

Why should the UAE bother about FATCA?
There are millions of international financial transactions flowing through global financial entities on a daily basis. Fatca was enacted on March 18, 2010 to ensure that US citizens pay the relevant US tax on their worldwide investments. It requires FFIs to sign an agreement with the US authorities and to identify, classify and report details of their customers who are from the US and, in certain circumstances, to withhold tax .
The incentive for FFIs to comply with Fatca is that otherwise a non-refundable 30 per cent withholding tax will be applied to US source income from January 1, 2014 and also to gross proceeds of sale of US investments from January 1, 2017.

To date the US has entered into discussions with around 85 countries that will need to follow one of these model agreements. There is the probability that the UAE will enter into such an agreement and discussions are ongoing

While compliance could be burdensome, costly and may be in conflict with local laws, non-compliance is similarly risky from a funding, competitive and client-facing perspective. From a commercial standpoint, for FFIs who are dependent on raising funds in the US, there is no real choice but to comply.

Will there be an Impact on UAE financial institutions ?
Undoubtedly!.FATCA will affect the vast majority of UAE financial institutions: banks, insurance companies, custodial institutions, hedge funds, mutual funds, superannuation funds, trustees, investment companies and managers, securitization vehicles, and private equity firms.

Some FATCA requirements and considerations
The implementation of FATCA is effectively the end of this year. In order to be able generate reports for 2015 data will need to be captured from 1 Jan 2014. Financial institutions have to consider;
Whether they will be subject to FATCA
Whether to review their investment strategies of accounts that provide exposure to US sourced income or assets.
How to identify US account holders. What due diligence procedures are needed to ensure a financial institution is capable of identifying US persons and what internal systems are able to monitor the various disclosure thresholds provided for under FATCA.
How to collect specific data to identify US persons who have invested in either non-US financial accounts or non-US entities.
Whether FATCA disclosure requirements conflict with UAE privacy laws e.g. should a Financial institution first obtain the consent of US account holders before disclosing information which might contravene UAE privacy and confidentiality laws
Who in a financial institution will take executive responsibility for Fatca compliance.
What plans should be put in place to train customer-facing teams to deal with customer inquiries.
How to conduct a thorough analysis and how to map subsidiaries and branches in other jurisdictions. For example do you have joint venture arrangements? Can you identify those subsidiaries in which your ownership exceeds 50 per cent to determine who will be responsible for Fatca compliance?

How to prepare mandatory information on US accounts in appropriate report forms that are not yet agreed and circulated.
When and whether a Financial institutions should withhold 30% on payments to those who refuse to declare their obligations to pay US tax.
The risk of examination by US tax authorities or being declared “off-limits” to US businesses and banking institutions if a UAE financial institution fails to comply with FATCA’s disclosure, reporting, and withholding requirements.
Who will bear the potential risk of FATCA withholding tax in legal documentation. What risk allocation issues may arise due to FATCA.
Legal documents may need to be updated with include representations and warranties that give protection to financial institutions against FATCA withholding tax.

What IT system changes are needed?
How will you capture any additional data? In which language?
Do you need to store and to search supporting documents?
Are any issue management, case management or workflow approval or notification processes needed?
What is the process for generating the required reports?

Ask about our solutions:
BRS Analytics to simplify and automate the reporting process and to support supplementary ad hoc inquiry
Filehold document management easily integrates into your banking systems
Dynamics CRM for customer profiling and case management
Integration and BPM tools to provide cross platform coordination of data and processes

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