Source: https://lawprofessors.typepad.com/intfinlaw/gatca/
Timestamp: 2019-04-22 22:33:28+00:00

Document:
This final regulation document finalizes (with limited revisions) certain proposed regulations. The final regulations provide compliance requirements and verification procedures for sponsoring entities of foreign financial institutions (FFIs) and certain non-financial foreign entities (NFFEs), trustees of certain trustee-documented trusts, registered deemed-compliant FFIs, and financial institutions that implement consolidated compliance programs (compliance FIs). These final regulations affect certain financial institutions and NFFEs.
The proposed regulations require a sponsoring entity of a sponsored FFI to appoint a responsible officer to oversee the compliance of the sponsoring entity with respect to each sponsored FFI. The term responsible officer with respect to a sponsoring entity is an officer of the sponsoring entity with sufficient authority to fulfill the duties of a responsible officer. The proposed regulations require the responsible officer of a sponsoring entity to be an individual who is an officer of the sponsoring entity because the certifications required under these regulations should be made by the individual in the best position to know and represent whether the sponsoring entity is complying with its obligations.
The IRS understands that in practice, the person in the best position to know and represent if the sponsoring entity is complying with its obligations under these regulations may be an individual other than an officer of the sponsoring entity given industry practices established by managers and administrators of investment funds and similar vehicles for both chapter 4 and operational purposes. Therefore, these final regulations define responsible officer with respect to a sponsoring entity to include an officer of an entity that establishes and maintains policies and procedures for, and has general oversight over, the sponsoring entity, provided such individual has sufficient authority to fulfill the duties of a responsible officer.
These final regulations revise the definition of a responsible officer of a financial institution or sponsoring entity that is an investment entity to include, in addition to an officer of such entity, an individual who is a director, managing member, or general partner of such entity, or, if the general partner or managing member of the investment entity is itself an entity, an individual who is an officer, director, managing member, or general partner of such other entity.
These final regulations retain the requirement that a sponsoring entity have a written sponsorship agreement in place with each sponsored FFI. A written sponsorship agreement memorializes the agreement between the parties, which helps to ensure compliance. However, these final regulations provide that the written sponsorship agreement may be part of another agreement between the sponsoring entity and the sponsored FFI provided it refers to the requirements of a sponsored FFI under FATCA. For example, a provision in a fund manager agreement that states that the sponsoring entity agrees to satisfy the sponsored FFI's FATCA obligations would be sufficient.
Additionally, the proposed regulations do not specify when a sponsorship agreement must be in place for purposes of a sponsoring entity's certification requirements. To allow sufficient time for a sponsoring entity to enter into sponsorship agreements (or revise existing agreements), these final regulations provide that a sponsoring entity of a sponsored FFI must have the written sponsorship agreement in place with such sponsored FFI by the later of March 31, 2019, or the date when the sponsoring entity begins acting as a sponsoring entity for such sponsored FFI. [See § 1.1471-5(j)(6)]. These final regulations include similar rules for a sponsoring entity of a sponsored direct reporting NFFE regarding the date by which the written sponsorship agreement must be in place and that it need not be a standalone agreement. [See § 1.1472-1(f)(4)].
These final regulations address the comment by providing additional time for sponsoring entities to make certifications that would otherwise be due on July 1, 2018. Under these final regulations, certifications by sponsoring entities and trustees of trustee-documented trusts for the certification period ending on December 31, 2017, must be submitted on or before March 31, 2019.
IRC Section 267(b) describes certain relationships among individuals, corporations, trusts, tax-exempt organizations, and S corporations. The rules described in this paragraph are intended to prevent a sponsored FFI or sponsored direct reporting NFFE from registering under an entity that is related to the terminated sponsoring entity, such as an entity under common control with the terminated sponsoring entity. However, the proposed regulations inadvertently omitted certain relationships between sponsoring entities that are partnerships.
These final regulations correct this omission by providing that the rules described in this paragraph generally prohibit registration by a sponsored FFI or sponsored direct reporting NFFE under a sponsoring entity that has a relationship described in IRC Sections 267(b) or 707(b) to the terminated sponsoring entity. Thus, for example, a sponsored FFI of a terminated sponsoring entity that is a partnership may not register under another sponsoring entity that is a partnership if the same person owns, directly or indirectly, more than 50 percent of capital interests or profits interests of both sponsoring entities. Additionally, these final regulations conform the rule for sponsored direct reporting NFFEs with the rule for sponsored FFIs by allowing a sponsored direct reporting NFFE to register under a sponsoring entity, notwithstanding that there is the impermissible relationship described in this paragraph, if the sponsored direct reporting NFFE obtains written approval from the IRS.
The preamble to the proposed regulations provides that a financial institution covered by a Model 1 IGA that chooses to qualify as a sponsored FFI under § 1.1471-5(f) instead of Annex II of the Model 1 IGA must satisfy all of the requirements of the regulations applicable to such an entity. 82 FR 1629 at 1631. Comments requested that a financial institution located in a jurisdiction with a Model 1 IGA that does not include a sponsored entity as a type of nonreporting financial institution in Annex II be allowed to comply with local guidance on sponsored entities or the Model 1 IGA Annex II rather than the regulations. The Treasury Department and the IRS are open to discussing the issue with the competent authorities of affected jurisdictions.
These final regulations include several minor nonsubstantive changes to the proposed regulations. Section 1.1471-4(f)(2)(ii)(B)(1) was reorganized for clarity. Minor clarifying edits were made in §§ 1.1471-4(f)(3)(i), 1.1471-5(f)(1)(i)(F)(4), (f)(1)(iv) introductory text, (f)(1)(iv)(A) and (B), (f)(2)(iii)(E), (j)(3)(ii) and (iii), (j)(4)(ii), (j)(5) and (6), (k)(4)(i), (ii), (iii), and (v), and (l)(2)(ii) and (iii), and 1.1472-1(f)(2)(ii) and (iii), (f)(3)(ii), (f)(4)(vii), and (g)(4)(i), (ii), and (iii).
The collection of information is on a certification filed with the IRS regarding the filer's compliance with its chapter 4 requirements. This information is required to enable the IRS to verify that a taxpayer is complying with its requirements under chapter 4. Certifications are required from compliance FIs, sponsoring entities, and Start Printed Page 10979trustees of trustee-documented trusts. Information on the estimated number of compliance FIs, sponsoring entities, and trustees of trustee-documented trusts required to submit a certification under these final regulations is shown in table 1.
Information on the number of compliance FIs, sponsoring entities, and trustees of trustee-documented trusts shown in table 1 is from the IRS's FATCA registration data. Comments are requested on the estimated number of respondents.
This eight edition (2019) of LexisNexis® Guide to FATCA & CRS Compliance has been vastly improved based on over 50 in-house workshops and interviews with tier 1 banks, with company and trusts service providers, with government revenue departments, and with central banks. The enterprises are headquartered in the Caribbean, Latin America, Asia, Europe, and the United States, as are the revenue departments and the central bank staff interviewed.
Several new contributing authors joined the FATCA/CRS Expert Contributor team this edition. This eigth edition has been expanded by new chapters and now totals 98 chapters, growing to over 2,100 pages of regulatory and compliance analysis based upon industry feedback of internal challenges with systems implementation. All chapters have been substantially updated and expanded in this edition, including many more practical examples to assist a compliance officer contextualize the FATCA and CRS regulations, IGA provisions, and national rules enacted pursuant to an IGA. The new chapters include by example an in-depth analysis of designing a FATCA and CRS internal policy, designing an equivalent form to the W-8 that captures CRS criteria, reporting accounts, reporting payments, operational specificity of the mechanisms of information capture, management and exchange by firms and between countries, insights as to the application of FATCA and the IGAs within BRIC, Asian, and European country chapters, and a project management schedule for the compliance officer.
FATCA - Do taxpayers need a right to know foreign government will receive their private financial information from IRS?
Taxpayer is a citizen of the U.S. but is currently a resident of a foreign country. The U.S. and the foreign country enter into an IGA, which contemplates the reciprocal sharing of axpayert information. Once the IGA is in force and the U.S. has done as much as it can to confirm that the cybersecurity measures of the foreign country are satisfactory, the reciprocal exchange of information begins. As part of that exchange, Taxpayer’s personal information is provided to the foreign country without Taxpayer’s specific knowledge. Once the information arrives in the foreign country and is beyond the continuing oversight of the IRS, a data breach occurs. As a result, Taxpayer’s personal information is exposed and taxpayer becomes the victim of identity theft.
Unlike in the U.S., the foreign country does not follow the practice of alerting taxpayers when data breaches occur. Thus, the identity theft results in substantial economic damage to Taxpayer in part because Taxpayer remains unaware of the data breach until unauthorized account activity begins to appear. Moreover, Taxpayer’s risk for subsequent damage has effectively been doubled by the circumstance that Taxpayer’s personal information now is maintained in two different jurisdictions, thereby increasing exposure to unauthorized disclosure or improper use of that information.
IRS Issues Proposed FATCA Regulations Impacting WIthholding on Gross Proceeds and Insurance Premiums. Kicks the Can on Passthru Withholding.
The Treasury released 50 pages of FATCA proposed regulation changes today.
For an in-depth discussion, see the 2,500 page Analytical Treatise for FATCA and CRS Compliance here. The Guide to FATCA & CRS Compliance provides 2,500 of analysis and a framework for meaningful interactions among enterprise stakeholders, and between the FATCA/CRS Compliance Officer and the FATCA/CRS advisors/vendors. Analysis of the complicated regulations, recognition of overlapping complex regime and intergovernmental agreement requirements (e.g. FATCA, CRS, Qualified Intermediary, source withholding, national and international information exchange, European Union tax information exchange, information confidentiality laws, money laundering prevention, risk management, and the application of an IGA) is balanced with substantive analysis and descriptive examples. The contributors hail from several countries and an offshore financial center and include attorneys, accountants, information technology engineers, and risk managers from large, medium and small firms and from large financial institutions. Thus, the challenges of the FATCA / CRS Compliance Officer are approached from several perspectives and contextual backgrounds.
Under IRC Sections 1471(a) and 1472, withholdable payments made to certain foreign financial institutions (FFIs) and certain non-financial foreign entities (NFFEs) are subject to withholding under Chapter 4. IRC Section 1473(1) states that the term “withholdable payment” means: (i) Any payment of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income, if such payment is from sources within the United States; and (ii) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends from sources within the United States.
The 2017 Chapter 4 regulations provide that such withholding will begin on January 1, 2019. Many U.S. and foreign financial institutions, foreign governments, the Treasury Department, the IRS, and other stakeholders have devoted substantial resources to implementing FATCA withholding on withholdable payments. At the same time, 87 jurisdictions have an IGA in force or in effect and 26 jurisdictions are treated as having an IGA in effect because they have an IGA signed or agreed in substance, which allows for international cooperation to facilitate FATCA implementation. The Treasury Department determined that the current withholding requirements under chapter 4 on U.S. investments already serve as a significant incentive for FFIs investing in U.S. securities to avoid status as nonparticipating FFIs, and that withholding on gross proceeds is no longer necessary in light of the current compliance with FATCA.
The 2019 proposed regulations eliminate withholding on gross proceeds by removing gross proceeds from the definition of the term “withholdable payment” in §1.1473-1(a)(1) and by removing certain other provisions in the Chapter 4 regulations that relate to withholding on gross proceeds. As a result of these proposed changes to the Chapter 4 regulations, only payments of U.S. source FDAP that are withholdable payments under §1.1473-1(a) and that are not otherwise excepted from withholding under §1.1471-2(a) or (b) would be subject to withholding under sections 1471(a) and 1472.
An FFI that has an agreement described in IRC Section 1471(b) in effect with the IRS is required to withhold on any passthru payments made to its recalcitrant account holders and to FFIs that are not compliant with chapter 4 (nonparticipating FFIs). IRC Section 1471(d)(7) defines a “passthru payment” as any withholdable payment or other payment to the extent attributable to a withholdable payment.
The 2017 chapter 4 regulations provide that such withholding will not begin until the later of January 1, 2019, or the date of publication in the Federal Register of final regulations defining the term “foreign passthru payment.” 2018’s proposed regulation §1.1471-4(b)(4), a participating FFI will not be required to withhold tax on a foreign passthru payment made to a recalcitrant account holder or nonparticipating FFI before the date that is two years after the date of publication in the Federal Register of final regulations defining the term “foreign passthru payment.” The proposed regulations also make conforming changes to other provisions in the Chapter 4 regulations that relate to foreign passthru payment withholding.
Notwithstanding these proposed amendments, the Treasury Department remains concerned about the long-term omission of withholding on foreign passthru payments. Withholding on foreign passthru payments serves important purposes. First, it provides one way for an FFI that has entered into an FFI agreement to continue to remain in compliance with its agreement, even if some of its account holders have failed to provide the FFI with the information necessary for the FFI to properly determine whether the accounts are U.S. accounts and perform the required reporting, or, in the case of account holders that are FFIs, have failed to enter into an FFI agreement. Second, withholding on foreign passthru payments prevents nonparticipating FFIs from avoiding FATCA by investing in the United States through a participating FFI “blocker.” For example, a participating FFI that is an investment entity could receive U.S. source FDAP income free of withholding under Chapter 4 and then effectively pay the amount over to a nonparticipating FFI as a corporate distribution. Despite being attributable to the U.S. source payment, the payment made to the nonparticipating FFI may be treated as foreign source income and therefore not a withholdable payment subject to Chapter 4 withholding. Accordingly, the Treasury Department continues to consider the feasibility of a system for implementing withholding on foreign passthru payments.
The 2019 proposed regulations provide that premiums for insurance contracts that do not have cash value (as defined in §1.1471-5(b)(3)(vii)(B)) are excluded nonfinancial payments and, therefore, not withholdable payments.
The clarification in these proposed regulations is similar to the guidance published by the OECD interpreting the definition of a “managed by” investment entity under the Common Reporting Standard.
These proposed regulations include several changes to the rules on treaty statements provided with documentary evidence.
Extend the time for withholding agents to obtain treaty statements with the specific LOB provision identified for preexisting accounts until January 1, 2020 (rather than January 1, 2019).
Add exceptions to the three-year validity period for treaty statements provided by tax exempt organizations (other than tax-exempt pension trusts or pension funds), governments, and publicly traded corporations, entities whose qualification under an applicable treaty is unlikely to change.
Correct an inadvertent omission of the actual knowledge standard for a withholding agent’s reliance on the beneficial owner’s identification of an LOB provision on a treaty statement provided with documentary evidence, the same as the standard that applies to a withholding certificate used to make a treaty claim.
These three proposed amendments will also be incorporated into the 2017 QI agreement and 2017 WP and WT agreements, and a QI, WP, or WT may rely upon these proposed modifications until such time.
The proposed regulations provide that the documentary evidence required in order to treat an address that is provided subject to a hold mail instruction as a permanent residence address is documentary evidence that supports the person’s claim of foreign status or, for a person claiming treaty benefits, documentary evidence that supports the person’s residence in the country where the person claims treaty benefits.
Regardless of whether the person claims treaty benefits, the documentary evidence on which a withholding agent may rely is the documentary evidence described in §1.1471- 3(c)(5)(i), without regard to the requirement that the documentation contains a permanent residence address.
Proposed §1.1471-1(b)(62) adds a definition of a hold mail instruction to clarify that a hold mail instruction does not include a request to receive all correspondence (including account statements) electronically.
return submission procedures. Although they could be discontinued at any time, these other programs are still available.
that penalties are applied consistently, fully developed, and documented in all cases.
timely voluntary disclosures and who fully cooperate with the Service.
Residence and citizenship by investment (CBI/RBI) schemes, often referred to as golden passports or visas, can create the potential for misuse as tools to hide assets held abroad from reporting under the OECD/G20 Common Reporting Standard (CRS).
Further to the press coverage following yesterday's publication of the guidance for financial institutions on residence by investment (RBI) and citizenship by investment (CBI) schemes, the OECD would like to reiterate that the sole objective of the high-risk RBI/CBI schemes included in this guidance is to provide Financial Institutions with the right tools to identify accountholders that may misuse RBI/CBI schemes to circumvent the Common Reporting Standard (CRS) and carry out enhanced CRS due diligence procedures, where appropriate. This guidance was issued as part of the OECD's ongoing efforts to address any risks to the integrity of the CRS, including those arising from the possible misuse of RBI/CBI schemes.
On June 14, 2010, the Treasury Department and the IRS published Notice 2010-46, which addresses potential overwithholding in the context of securities lending and sale repurchase agreements. Notice 2010-46 provides a two-part solution to the problem of overwithholding on a chain of dividends and dividend equivalents. First, it provides an exception from withholding for payments to a qualified securities lender (QSL). Second, it provides a proposed framework to credit forward prior withholding on a chain of substitute dividends paid pursuant to a chain of securities loans or stock repurchase agreements. The QSL regime requires a person that agrees to act as a QSL to comply with certain withholding and documentation requirements. The Treasury Department and the IRS permitted withholding agents to rely on transition rules described in Notice 2010-46, Part III, until guidance was developed that would include documentation and substantiation of withholding.
section 871(m) regulations to allow for the orderly implementation of those final regulations and announced that taxpayers may continue to rely on Notice 2010-46 until January 1, 2018.
On January 17, 2017, the Treasury Department and the IRS published Revenue Procedure 2017-15, 2017-3 I.R.B. 437, which sets forth the final QI Agreement (2017 QI Agreement), including the requirements and obligations applicable to QDDs, and provided that taxpayers may continue to rely on Notice 2010-46 during 2017. On January 24, 2017, the Federal Register published final regulations and temporary regulations (TD 9815, 82 FR 8144) (the 2017 regulations), which finalized the 2015 notice of proposed rulemaking (80 FR 56415) that was issued in conjunction with the 2015 temporary regulations. The effective/applicability dates in the 2017 regulations reflect the phased-in application described in Notice 2016-76.
On August 21, 2017, the Treasury Department and the IRS published Notice 2017-42, 2017-34 I.R.B. 212, which extended certain transition relief. On February 5, 2018, the Treasury Department and the IRS published Notice 2018-5, 2018-6 I.R.B. 341, which permits withholding agents to apply the transition rules from Notice 2010-46 in 2018 and 2019.
This paper reviews and evaluates the efficacy of simplified tax registration and collection mechanisms for securing compliance of taxpayers over which the jurisdiction with taxing rights has limited or no authority to effectively enforce a tax collection or other compliance obligation. The experience in addressing this problem has involved primarily consumption taxes, but the lessons that can be learned from it are applicable as well to other tax regimes that confront the same problem. The best available evidence at present indicates that simplified regimes can work well in practice, achieving a high level of compliance. The paper notes that the adoption of thresholds may be an appropriate solution to avoid imposing a disproportionate administrative burden on small businesses while a good communications strategy is essential to the success of a simplified regime.
Earlier today in federal court in Brooklyn, Adrian Baron, the former Chief Business Officer and former Chief Executive Officer of Loyal Bank Ltd, an off-shore bank with offices in Budapest, Hungary and Saint Vincent and the Grenadines, pleaded guilty to conspiring to defraud the United States by failing to comply with the Foreign Account Tax Compliance Act (FATCA). Baron was extradited to the United States from Hungary in July 2018. The guilty plea was entered before United States District Judge Kiyo A. Matsumoto.
Richard P. Donoghue, United States Attorney for the Eastern District of New York; Richard E. Zuckerman, Principal Deputy Assistant Attorney General of the Justice Department’s Tax Division; William F. Sweeney, Jr., Assistant Director-in-Charge, Federal Bureau of Investigation, New York Field Office (FBI); and James D. Robnett, Special Agent-in-Charge, Internal Revenue Service Criminal Investigation, New York (IRS-CI), announced the guilty plea. Mr. Donoghue thanked the U.S. Securities and Exchange Commission (SEC), both the New York Regional Office and the Washington, D.C. Office; the City of London Police; the U.K.’s Financial Conduct Authority and the Hungarian National Bureau of Investigation for their significant cooperation and assistance during the investigation.
The case is being handled by the Office’s Business and Securities Fraud Section. Assistant United States Attorneys Jacquelyn M. Kasulis, Michael T. Keilty and David Gopstein are in charge of the prosecution. The Criminal Division’s Office of International Affairs provided significant assistance in this matter.
Revenue Procedure 2018-36 adds two countries – Argentina and Moldova – to the list of countries with which the United States has in force an information exchange agreement such that interest paid to residents of such jurisdictions must be reported by payors to the extent required under Treas. Reg. §§1.6049-8(a) and 1.6049-4(b)(5). This revenue procedure also adds on jurisdiction, Greece, to the list of jurisdictions with which Treasury and the IRS have determined that it is appropriate to have an automatic exchange relationship with respect to bank deposit interest income information under those regulatory provisions.
Revenue Procedure 2018-36 will be in IRB: 2018-38, dated 9/17/2018.
The Swiss Bank Program, which was announced on August 29, 2013, provided a path for Swiss banks to resolve potential criminal liabilities in the United States relating to offshore banking services provided to United States taxpayers. Swiss banks eligible to enter the program were required to advise the Department by December 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. Swiss banks participating in the program were required to make a complete disclosure of their cross-border activities, provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers had a direct or indirect interest, cooperate in treaty requests for account information, and provide detailed information about the transfer of funds into and out of U.S.-related accounts, including undeclared accounts, that identifies the sending and receiving banks involved in the transactions.
The Department executed non-prosecution agreements with 80 banks between March 2015 and January 2016. The Department imposed a total of more than $1.36 billion in Swiss Bank Program penalties, including more than $99 million in penalties from Lombard Odier. Pursuant to today’s agreement, an addendum to Lombard Odier’s non-prosecution agreement, Lombard Odier will pay to the Department an additional sum of $5,300,000, and will provide to the Department supplemental information regarding its U.S.-related account population, which now includes 88 additional accounts.
Principal Deputy Assistant Attorney General Zuckerman thanked Trial Attorney Kimberly M. Shartar, who served as counsel on this matter, as well as Senior Counsel for International Tax Matters and Coordinator of the Swiss Bank Program Thomas J. Sawyer, Senior Litigation Counsel Nanette L. Davis, and Attorney Kimberle E. Dodd of the Tax Division.
By Peter D. Hardy wherein the attorney for Ballad Spahr states: "As noted, the new FBAR opinions (United States v. Markus, from the District of New Jersey, and Norman v. United States, from the U.S. Court of Federal Claims) are merely the latest opinions issued in an ongoing battle between the government and the tax controversy and white collar defense bar regarding the proper definition of “willfulness” for the purposes of the civil FBAR penalty – a penalty which can be very severe (half the value of the undisclosed offshore account, for each year of the violation), and a battle which the government, with some wrinkles, has been winning. True to this trend, both Markus and Norman find that the IRS properly assessed a willfulness penalty against the taxpayers who previously had undisclosed foreign accounts. What is important for our purposes here is how they describe the willfulness standard."
Read his analysis of these opinions, and their impact on FBAR compliance, penalties, and litigation on his Ballad Spahr blog here.
The Department of Justice announced that Swiss-based Mirelis Holding S.A. reached a resolution with the Tax Division.
The Department of Justice announced that NPB Neue Privat Bank (NPB) reached a resolution with the Tax Division. NPB will pay a penalty of $5 million.
According to the terms of the non-prosecution agreement signed today, NPB agrees to cooperate in any related criminal or civil proceedings, demonstrate its implementation of controls to stop misconduct involving undeclared U.S. accounts and pay a penalty in return for the Department’s agreement not to prosecute this bank for tax-related criminal offenses.
NPB is a Swiss private bank based in Zurich, Switzerland. Until 2012, NPB conducted a U.S. cross-border banking business that aided and assisted certain of its U.S. clients in opening and maintaining undeclared accounts in Switzerland and concealing the assets and income they held in these accounts from the U.S. government. NPB offered a variety of traditional Swiss banking services that it knew could assist, and did in fact assist, U.S. clients in the concealment of assets and income from the IRS, including the use of numbered accounts and hold mail services.
NPB signed agreements with individual external asset managers or external asset management firms, whereby clients of the external asset manager could open and maintain accounts at NPB, with account management services being provided by the external asset manager. Almost all of NPB’s U.S. accounts were managed by external asset managers, for whom it provided custodial and limited banking services. In such cases, NPB generally did not contact the clients directly once they had opened their account. The Bank required an external asset manager mandate, so that communication about asset management and investment decisions were done between the U.S. customer and their external asset manager(s). In a few circumstances, NPB managed U.S. customers directly without an external asset manager. In those cases, the Bank required the U.S. customer to sign a direct asset management mandate, allowing the Bank to make investment decisions for the account.
In 2001, NPB entered into a Qualified Intermediary Agreement (QI Agreement) with the Internal Revenue Service (IRS). The Qualified Intermediary regime provided a comprehensive framework for U.S. information reporting and tax withholding by a non-U.S. financial institution with respect to U.S. securities. The QI Agreement required NPB to obtain IRS Forms W-9 and to undertake IRS Form 1099 reporting for new and existing U.S. clients engaged in U.S. securities transactions. Notwithstanding this requirement, NPB chose to continue to service U.S. clients without disclosing their identity to the IRS. NPB’s view was that it could continue to accept and service U.S. account holders, even if it knew or had reason to believe they were engaged in tax evasion, so long as it complied with the QI Agreement, which in NPB’s view did not apply to account holders who were not trading in U.S.-based securities or to accounts that were nominally structured in the name of a non-U.S.-based entity. NPB formed this view without consulting legal counsel.
Between August 1, 2008 and December 31, 2015, NPB held a total of 353 U.S.-related accounts, which included both declared and undeclared accounts, with an aggregate peak year-end value of approximately $400 million in assets under management.
In approximately early 2009, NPB was approached by certain external asset managers who managed accounts on behalf of U.S. taxpayers and were seeking a replacement custodian bank for accounts for U.S. taxpayers that were being closed by other Swiss banks, including UBS AG. Some of these external asset managers and NPB discussed the long-term trend towards tax compliance in Switzerland and that eventually the external asset managers would only be able to manage accounts that were declared to the U.S. government. Those external asset managers told NPB that they were telling their clients to become tax compliant. However, the external asset managers also made clear to NPB that many of their clients who wished to onboard accounts at the Bank had not yet declared their accounts to the U.S. government. The external asset managers did not promise, and NPB did not require, that all accounts onboarded to NPB would become compliant within a specific period of time. In one instance, however, an external asset manager onboarded accounts from other Swiss banks that the Bank knew were undeclared with no discussion of tax compliance until 2011.
NPB viewed the taking of clients from other banks that were exiting U.S. taxpayers as a business opportunity. During a board of directors meeting held on March 9, 2009, the board unanimously resolved that it would allow U.S. taxpayers to open accounts at NPB, including customers who were forced to exit other banks. Prior to 2009, NPB had few U.S. clients. At the close of 2008, U.S. Related Accounts held approximately 8 million Swiss francs in assets. By the end of 2009, NPB had approximately 450 million Swiss francs under management in accounts owned or beneficially owned by U.S. taxpayers, an influx of approximately 442 million Swiss Francs. Approximately 69% of the U.S.-related assets held by the Bank at the end of 2009 were reported to the U.S. government by the account holder in or before the 2009 tax year.
Until at least August 2010, NPB did not require a Form W-9 from U.S. clients to open an account. NPB did not require the completion of Forms W-9 for existing U.S. customers until approximately summer of 2011.
NPB serviced some U.S. customers who structured their accounts so that they appeared as if they were held by a non-U.S. legal structure, such as an offshore corporation or trust, which aided and abetted the clients’ ability to conceal their undeclared accounts from the IRS. At least 89 of NPB’s U.S. Related Accounts, both declared and undeclared, were held in the name of offshore structures, including trusts or corporations purportedly domiciled in Panama, Liechtenstein, the British Virgin Islands, Hong Kong, and Belize. NPB never assisted customers in setting up such offshore structures. For accounts held in non-U.S. legal structures opened in 2009 and prior to Summer 2010, NPB did not require the signing of either a Form W-9 or Form W-8BEN.
NPB increased its efforts to obtain tax compliance from its U.S. customers in 2010 and 2011, but continued to service undeclared accounts. NPB first requested tax compliance evidence from its external asset managers for U.S. clients in August 2011. NPB serviced the declared and undeclared clients of two external asset managers after their respective indictments in the United States.
NPB has cooperated with the Department of Justice in this investigation, including by producing information relating to the U.S. taxpayer clients who maintained assets overseas, including the identities of the account holders and/or beneficial owners of more than 88% of assets, and by making multiple executives available for interview by the Department of Justice.
While U.S. accountholders at NPB who have not yet declared their accounts to the IRS may still be eligible to participate in the IRS Offshore Voluntary Disclosure Program, the price of such disclosure has increased. Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts. On Aug. 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement. With today’s announcement of this non-prosecution agreement, noncompliant U.S. accountholders at NPB must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program. The IRS recently announced that the Offshore Voluntary Disclosure Program will close on September 28, 2018.
Principal Assistant Attorney General Zuckerman of the Justice Department’s Tax Division thanked Senior Litigation Counsel Nanette Davis of the Tax Division and Assistant United States Attorneys Michelle Petersen and Patrick King of the U.S. Attorney’s Office for the Northern District of Illinois and IRS-Criminal Investigation, in particular IRS Special Agent Michael Leach, for their substantial assistance.
In total, the international legal network for the automatic exchange of offshore financial account information under the CRS now covers over 90 jurisdictions, with the remaining dozen set to follow suit over summer. The network will allow over 100 committed jurisdictions to exchange CRS information in September 2018 under more than 3200 bilateral relationships that are now in place, an increase of over 500 since April of 2018. All 124 participating jurisdictions are due to exchange CRS information in September 2018.
The U.S. Congress intended the Foreign Account Tax Compliance Act (FATCA) to improve U.S. taxpayer compliance with reporting foreign financial assets and offshore accounts. Under the FATCA, individual taxpayers with specified foreign financial assets that meet a certain dollar threshold should report this information to the IRS, beginning with Tax Year 2011, by filing Form 8938, Statement of Specified Foreign Financial Assets, with their income tax return.
To avoid being subject to withholding, the FATCA also requires foreign financial institutions (FFI) to register and agree to report to the IRS certain information about financial accounts held by U.S. taxpayers or held by foreign entities in which U.S. taxpayers hold a substantial ownership interest.
This audit was initiated to evaluate the IRS’s efforts to ensure that taxpayers, the FFIs, and withholding agents comply with the FATCA.
TIGTA determined that, despite spending nearly $380 million, the IRS has taken limited or no action on a majority of the planned activities outlined in the FATCA Compliance Roadmap.
The reports filed by the FFIs did not include (or included invalid) Taxpayer Identification Numbers (TIN). As a result, the IRS’s efforts to match FFI and individual taxpayer data were unsuccessful, which affected the IRS’s ability to identify and enforce FATCA requirements for individual taxpayers.
Also, the IRS only recently initiated action to enforce withholding agent compliance with the FATCA after TIGTA provided feedback. TIGTA observed that a significant percentage of the Forms 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, the IRS receives that pertain to the FATCA do not have valid TINs. However, most Form 1099 series information returns pertaining to the FATCA do have valid TINs and can be used by the IRS in its FATCA compliance strategies. There were 62,398 Tax Year 2015 Forms 1042-S with invalid TINs reporting more than $717 million, of which just over $47 million was withheld.
TIGTA recommended that the IRS: 1) establish follow-up procedures and initiate action to address error notices related to file submissions rejected by the International Compliance Management Model; 2) initiate compliance efforts to address taxpayers who did not file a Form 8938 but who were reported on a Form 8966 filed by an FFI; 3) add guidance to the Form 8938 instructions to inform taxpayers on how to use the FFI List Search and Download Tool on the IRS’s website; 4) initiate compliance efforts to address and correct missing or invalid TINs on Form 8966 filings by non-IGA FFIs and Model 2 IGA FFIs; 5) expand compliance efforts to address and correct the invalid TINs on all Form 1042-S filings by non-IGA FFIs and Model 2 IGA FFIs; and 6) initiate compliance efforts to compare Form 1099 filings with valid TINs to corresponding Form 8938 filings.
The IRS agreed with four of TIGTA’s six recommendations. Corrective actions include: 1) establishing follow-up procedures and initiating action on error notices with the FFIs; 2) continuing efforts to systemically match Form 8966 and Form 8938 data to identify nonfilers and underreporting related to U.S. holders of foreign accounts and to the FFIs; 3) informing taxpayers how to obtain global intermediary numbers; and 4) strengthening overall compliance efforts directed toward improving the accuracy of reporting by Form 1042-S filers.
The approach of the study is based on methodologies developed by international experts. According to the most recent study, the estimate for the offshore investment tax gap for individuals was between $0.8 billion and $3 billion in 2014, or between 0.6% and 2.2% of individual income tax revenue. Canada is the first G7 country to study the offshore tax gap. In previous studies, the tax gaps for personal income tax and the federal portion of the goods and services tax / harmonized sales tax were estimated at up to $14.6 billion in 2014.
The studies conducted to date underline the importance of examining not only individuals, but also their related entities when investigating non-compliance. The Government of Canada's recent Budget 2016, 2017, and 2018 investments in the fight against tax evasion and aggressive tax avoidance will further support this approach and promote enhanced information sharing among the Canada Revenue Agency (Agency) and its international partners.
With these investments, the Government is delivering better data, better approaches and better results. Furthermore, the Agency has the capacity to leverage new global collaboration and data sharing to crack down on tax cheating.
New approaches include being able to automatically access and review all international electronic funds transfers over $10,000 entering or leaving the country, allowing us to better risk assess individuals and businesses. The Agency has also improved its audit capacity to focus on high net worth taxpayers and thanks to the Common Reporting Standard is gaining easier access to information on Canadians’ overseas bank accounts.
The Agency's next tax gap study will be released in 2019 and will focus on incorporated businesses.
"Most Canadians pay their fair share of taxes. They expect their government to do all it can to pursue people and businesses that try to avoid doing the same. This latest study of the tax gap is evidence of our Government's ongoing commitment to better target international tax evasion and aggressive tax avoidance."
The Agency describes the tax gap as the difference between the taxes that would be paid if all obligations were fully met in all cases and the taxes that are actually received and collected.
Each year, the CRA processes about 29 million income tax and benefit returns and assesses about $180 billion in individual federal income taxes.
Canada is one of over 65 nations sharing Country-by-Country Reports (CbCRs). CbCRs provide automatic access to information about multinational corporations’ activities in every country they operate in, giving us a deeper understanding of the operations of these large companies.
This year, we are also gaining easier access to information on Canadians’ overseas bank accounts, with the implementation of the Common Reporting Standard. With this new system, Canada and close to 100 other countries will begin exchanging financial account information. This information will help us connect the dots and identify instances where Canadians hide money in offshore accounts to avoid paying taxes.

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