BNY Mellon tells pension funds what they can expect from the Foreign Accountant Tax Compliance Act.

St Gallen, located in Switzerland, is geographically one of the highest towns above sea level in the country. Nestled between Lake Constance and the Appenzell Alps, the town is most famous for its Abbey, considered a world heritage site, and for Wegelin, a private bank established 35 years before the US Declaration of Independence in 1741. Earlier this year, Wegelin said it would cease to operate as a bank after pleading guilty in a federal US District Court to helping American citizens evade tax.

After admitting its guilt, Wegelin agreed to pay nearly $75m (€58m) in restitution, fine and forfeiture as part of its plea agreement. This was historically significant because it not only marked the end of Switzerland's oldest bank, but it also marked the first time a non-US bank pleaded guilty to tax evasion charges in the US.

In response to situations similar to the one noted above, the Internal Revenue Service (IRS), in combination with the US Treasury, are currently in the process of implementing the Foreign Accountant Tax Compliance Act (FATCA), which comes into effect 1 January 2014. FATCA was enacted as part of the 2010 Hiring Incentives to Restore Employment (HIRE) Act. Pursuant to the initiative, FATCA is designed to provide incentives for financial institutions to provide information to the IRS on financial accounts held by US persons.

Between now and 1 January 2014, Foreign Financial Institutions (FFIs) will need to determine their relevant FATCA classification and subsequently register via the IRS portal.  The first wave of portal registration is between 15 July 15 and 25 October. Registration will include the assignment of a Global Intermediary Identification Number (GIIN).

Impact on European pension funds
An FFI will generally have the legal responsibility to comply with the withholding and reporting obligations associated with FATCA. FFIs will have to identify, validate and store the necessary documentation and report the relevant information to the IRS or appropriate local tax authority.  

An exemption to FATCA withholding is available for certain pension funds classified as exempt beneficial owners. The FATCA regulations list six different categories of "certain retirement funds". If a fund meets the definition of a certain retirement fund, then the fund will be considered an exempt beneficial owner. Pursuant to the FATCA regulations, FATCA withholding does not apply to withholdable payments (or portions thereof) made directly, or through intermediaries, to exempt beneficial owners.

The six FATCA categories for certain retirement funds are:

Treaty-qualified retirement fund Broad participation retirement fund Narrow participation retirement funds Fund formed pursuant to a plan similar to a section 401(a) plan Investment vehicles exclusively for retirement funds Pension fund of an exempt beneficial owner

European pension funds may qualify as a "certain retirement fund", and therefore will not be subject to FATCA withholding. Specifically, pension funds in treaty countries should be able to claim an exception from FATCA withholding. For example, a European pension fund will meet the treatments of a "treaty-qualified retirement fund" if the fund is located in a country with which the US has a Double Taxation Convention (DTC) and is operated principally to administer or provide pension or retirement benefits.  

As a result of the recently released, updated Model IGAs, the list of exemptions is no longer country specific, but rather general exemptions derived from the final regulations. The impact of this change to European pension funds is unclear.

Intergovernmental agreements
Intergovernmental Agreements (IGAs) were a concept developed jointly by the US, France, Germany, Italy, Spain and the UK. The purpose of the IGAs is to address a conflict of law issues presented by FATCA, since a financial institution in an IGA country is not required to withhold tax on recalcitrant account holders or close accounts that refuse to provide a waiver. As such, the IGA removes withholding requirement in most cases (where there is a conflict with local laws) in favour of a reporting solution.

Two versions of IGAs, commonly referred to as Model 1 and Model 2, are available. Model 1 IGAs deals with data privacy concerns via home -country fiscal authority reporting and information exchange under DTCs or Tax Information Exchange Agreements (TIEAs).  Model 2 is expected to require some local law changes to allow direct reporting to the IRS followed by Competent Authority requests for further information.

The IGAs are intended to be a one-size-fits-all model and are supplemented by country-specific annexes that outline the due diligence requirements and country-specific exceptions, i.e. products or entities considered a low risk of tax evasion.

The US Treasury and IRS's release of the new Model IGAs in May made it clear that any newly signed IGA would be unlikely to contain an enumerated list of exempt entities, but instead include a general overview of the FATCA regulations. Going forward, a list of exempt entities will not be available. Therefore, validation of exempt pensions will need to be determined on a fact specific, case-by-case basis.

Since September 2012, when the IGA was originally initiated, more than 50 countries have come forward or are currently in discussions with the US in their willingness to join forces and to reciprocate information about their citizens' investments in foreign countries. As of the date of the publication, there have been 10 countries that have signed IGAs with the US.  

Next steps
In preparation for FATCA, we suggest your organisation, in conjunction with your tax advisers, take the following steps to ensure FATCA compliance:

Analyse your legal entities to determine the FATCA category of your pension funds, retirement funds, investment structures and legal entities. Determine which structures are exempted under FATCA, or if any structure might be in scope for FATCA compliance. Finalise your entities' classification under FATCA or relevant IGA.   Determine whether your entities are required to register on the FATCA website, and if they are required to obtain a GIIN number. Analyse and determine whether your entities are required to have a FATCA responsible officer, whether it is an IRS responsible officer or a person as defined by a relevant IGA. Monitor very closely and lobby the IGA development in those countries in which you have investment structures. If you are in a country that has not yet signed an IGA, work with your local regulators to ensure guidance or legislation clarifies your FATCA status. Review your providers, especially those providers that are non-US financial institutions and understand their compliance with FATCA.  


Mariano Giralt is managing director and head of tax services at BNY Mellon. Amy Harkins is senior vice-president and managing director of global client service delivery, while Lorraine White is managing director and head of security service and US tax