J.P.

MORGAN T&SS GLOBAL TAX SERVICES – FATCA TAX SEMINAR

November 16, 2010

Agenda
 Background

 Definitions of FFI and NFFE

 Key Withholding Requirements

 FFI Compliance Requirements and Withholding Exceptions

 NFFE Compliance Requirements and Withholding Exemptions

 Overlay with NRA Withholding Rules

 Withholding Scenarios

 Other Features of FATCA

 IRS Notice 2010-60

 Next Steps – Timeline

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Background
On March 18, 2010, President Obama signed the “Foreign Account Tax Compliance Act” (FATCA)

FATCA is effective on:

 September 14, 2010 for provisions related to withholding tax on substitute dividends and dividend
equivalent payments.

 March 18, 2010 for provisions related to withholding tax on other dividend equivalent payments.

 January 1, 2013 for the general provisions.

FATCA is designed to compel foreign financial institutions and foreign entities to provide information
to the U.S. Internal Revenue Service (IRS) that identifies U.S. persons invested in non-U.S. bank or
securities accounts.

FATCA does NOT replace the current:

 U.S. documentation, Reporting and Withholding Tax rules applicable to U.S. and non-U.S.
persons.

 Qualified Intermediaries regime.

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Background
FATCA achieves the goal of identifying U.S. persons for:

 Foreign Financial Institutions (“FFI”)

by imposing a new 30% withholding tax on U.S. source “withholdable payments,”

UNLESS

the FFI enters into an agreement with the IRS to identify its U.S. investors (or is deemed to
have entered into such an agreement).

 Non-Financial Foreign Entities (“NFFE”)

by imposing a new 30% withholding tax on U.S. source “withholdable payments,”

UNLESS

the NFFE certifies that it has no owners that are “substantial U.S. persons” or provides
information on substantial U.S. owners to the withholding agent.

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Definition of FFI and NFFE
FATCA will apply to two types of foreign entities: FFIs and NFFEs.
 Foreign Financial Institution (“FFI”)
 FATCA legislation defines FFI as “any financial institution which is a foreign entity.”
 FATCA defines the term “Financial Institution” as any entity that:
– accepts deposits;
New IRS guidance (IRS Notice 2010-60, issued August 27, 2010) states that the IRS
intends to issue regulations that will provide that this category of financial institution will
include savings banks, commercial banks, savings & loan associations, thrifts, credit unions,
building societies, and other cooperative banking institutions.
– holds financial assets for the account of others; or
Under Notice 2010-60, this category will include broker-dealers, clearing organizations, trust
companies, custodial banks, and entities acting as custodians with respect to the assets of
employee benefit plans.
– is engaged primarily in the business of investing, reinvesting, or trading in securities,
partnerships interests, commodities, or any interest (including a futures or forward
contract or option) in such securities, partnership interests, or commodities.
Under Notice 2010-60, this category will include mutual funds (or their foreign equivalent),
fund of funds (and other similar investments), exchange-traded funds, hedge funds, private
equity and venture capital funds, other managed funds, commodity pools, and other
investment vehicles.
 Non-Financial Foreign Entity (“NFFE”)

 FATCA legislation defines a NFFE as “any foreign entity which is not a financial institution”.

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Key Withholding Requirements
 FATCA requires “withholding agents” to apply a 30% withholding tax on “withholdable
payments” to non compliant FFIs and NFFEs.
 Withholdable Payments include:
– Interest, dividends and other periodic payments from U.S. assets;
– Gross proceeds on the disposition of property of a type that can produce interest or
dividends from U.S. sources; and
– Deposit interest paid by foreign branches of U.S. banks, even though this interest is
not treated as U.S. source under current U.S. tax law.
 Withholding Agents are:
– all persons having control, receipt, custody, disposal, or payment of any withholdable
payment.

 TAX REFUNDS?
Claims for refunds are limited. For example, if an FFI is a beneficial owner of the payment, it
may claim a refund only if it is entitled to a reduced rate of tax under a Double Tax Treaty and
complies with the FFI/NFFE requirements. Moreover, no interest on refundable amounts is
payable.

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Key Withholding Requirements

U.S. Withholdable Payment

U.S. source income + gross proceeds

30% U.S. WHT

UNLESS

Foreign Financial Institution (FFI) Non Financial Foreign Entity (NFFE)

enters into an agreement with provides information
the IRS to identify its U.S. investors on substantial U.S. owners (if any)

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Key Withholding Requirements
FATCA does NOT require Withholding Tax if the FFI enters into an agreement with the U.S. Treasury
to identify its U.S. accounts:

 “U.S. Account” means any “financial account” held by a “specified U.S. person”.

 “Financial Account” includes:

 Any depository or custodial account maintained by a FFI
 Any equity or debt interest in a FFI
 Excluded from this definition are deposit accounts maintained by an individual if the
aggregate value of all accounts owned by that individual is less than $50,000.

 “Specified U.S. person” means any U.S. person other than a publicly traded corporation and their
affiliates; certain organizations considered tax exempt under U.S. law (e.g. charities, pension
plans, etc.); governmental units and banks, REITS, regulated investment companies or certain
common trust funds.

 “Recalcitrant Account Holder” means any account holder which fails to comply with reasonable
request of information requested for identification or fails to provide a waiver.

 An FFI that is compliant with the terms of FFI agreement, but unable to obtain the required
information regarding a particular account holder (recalcitrant account holder) must either:
 Withhold 30% from payments to the recalcitrant account holder, or
 Elect to receive its withholdable payments subject to 30% withholding tax on the portion that
is allocable to the recalcitrant account holder.

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FFI Withholding Exceptions
FATCA does NOT require Withholding Tax in the following cases:

 The FFI enters into an agreement with the U.S. Treasury to identify its U.S. investors:
1) Obtain information for each holder of each account to determine which are U.S. accounts;
2) Comply with verification and due diligence procedures to identify “U.S. accounts;”
3) Report annually certain information (i.e., name, address, TIN, account number, account
balance, and gross receipts and withdrawals) with respect to each account held by a U.S.
person;
4) Deduct and withhold 30% from certain payments to non compliant account holders;
5) Comply with IRS requests for additional information on any U.S. account; and
6) Obtain a waiver where a foreign law would prevent the reporting of information on a U.S.
account, and if no waiver is obtained, close that account.
7) As an alternative to reporting in 3) above, an FFI can elect to do full 1099 reporting of
both U.S. and foreign-source amounts (including gross proceeds) to all account holders
that are specified U.S. persons or U.S.-owned foreign entities.
 Exception for certain financial institutions:
If the FFI is a member of a class of institutions for which the IRS has determined the FATCA
withholding and reporting requirements are not necessary or if the FFI complies with IRS
procedures to ensure there are no U.S. accounts.
 Exception for certain payments:
Payments beneficially owned by a foreign government, international organization, foreign
central bank of issue, and any other class of persons that pose a low risk of tax evasion are not
subject to withholding.

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NFFE Withholding Exceptions
FATCA does NOT require Withholding Tax in the following cases:

 The NFFE certifies that it has no owners that are “substantial U.S. persons” or provides
information on substantial U.S. owners to the withholding agent:
1) a certification that the foreign entity has no direct or indirect “substantial U.S. owner,” or
2) the name, address, and TIN of each substantial U.S. owner.
3) Additionally, the withholding agent must not know or have reason to know that the
certification or information provided is incorrect, and
4) The withholding agent must report the name, address, and TIN of each substantial U.S.
owner to the IRS.
A “substantial U.S. owner” is a U.S. person that owns more than 10% of the stock of a
corporation or the profits or capital interests of a partnership; any portion of a grantor
trust; or more than 10% of any other trust.

 Exception for certain payments:

No withholding is required on payments that are beneficially owned by: (i) publicly traded
corporations (and their affiliates); (ii) entities organized under the laws of a U.S. possession (i.e.
Puerto Rico); (iii) foreign governments, international organizations and foreign central banks of
issue.
Withholding does not apply to payments that are identified as posing a low risk of U.S. tax
evasion.

COMMENT: Regulations & Guidance are needed to clarify documentation and exceptions.

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Overlay with NRA Withholding Rules

Source: Burt, Staples & Maner, LLP 10

Withholding Scenarios

Source: Cravath, Swaine and Moore, LLP

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Other Features of FATCA
Other significant provisions of FATCA include:

 Repeal of portfolio interest exemption to non registered bonds

 If the bond is not registered, it would be subject to a 30% withholding tax (or a reduced
treaty rate if applicable). This provision will apply to debt obligations issued after March 18,
2012.

 Inclusion of 30% U.S. withholding tax for substitute dividend and dividend equivalent payments

 With respect to swaps, the legislation will impose U.S. withholding tax on dividend-
equivalent payments made on or after September 14, 2010 where the referenced security is
a U.S. equity and the equity is transferred between the parties upon entering into or
terminating the contract. Withholding is also required if the referenced equity is not market-
traded.

 With respect to securities lending, the legislation will impose U.S. withholding tax on
substitute dividend payments made to foreign investors on or after September 14, 2010,
unless the withholding agent has proof that U.S. tax has already been withheld. This
provision applies only to substitute dividend payments with respect to U.S. equities.

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IRS Notice 2010-60
 Treasury and the IRS are responsible for the administration/implementation of FATCA, thus
forthcoming IRS regulations will fill in many of the gaps and questions unanswered by the statute

 On August 27, 2010, the IRS released Notice 2010-60. This Notice sets forth the general
framework that Treasury and the IRS intend to follow when implementing FATCA. In addition to
providing preliminary guidance, the IRS also requests additional comments.

 In particular, the Notice includes guidance on the following topics:

 Documentation Requirements
 Reporting Requirements
 Definition of FFI

 Documentation Requirements
 The Notice sets out very detailed information on documentation requirements for both FFIs and
U.S. financial institutions (USFIs).
 Broadly, “participating FFIs” (FFIs that have entered into an agreement with the IRS in
compliance with FATCA) must distinguish between U.S. and non-U.S. accounts and provide the
IRS information about the owners of U.S. accounts. Different rules will apply depending on
whether the account was pre-existing before the FFI entered into a FATCA agreement or it is a
newly opened account, and whether the account is held by an individual or an entity.
 With respect to entity accounts and for purposes of determining if payments to such entities
must suffer FATCA withholding, participating FFIs must determine if the entity is a participating
FFI, a deemed compliant FFI, a non-participating FFI, is statutorily exempt from FATCA, or is
an NFFE.
 USFIs, in their capacity as withholding agents, must determine the status of payees for FATCA
purposes under due diligence rules that are similar to those applicable to FFIs.
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IRS Notice 2010-60
 Reporting Requirements

 The IRS is developing a new form for reporting information about U.S. account holders
(electronic)

 Forthcoming regulations will coordinate the reporting provisions under FATCA with other U.S.
tax reporting obligations, with the intent to minimize duplicate reporting.

 FATCA requires a participating FFI to report the account balance of each account. The IRS is
considering requiring this amount to be the highest value of such account during the year and is
requesting comments on potential approaches to this requirement.

 IRS will require reporting on the number and aggregate value of recalcitrant account holders,
including those that have U.S. indicia, and the number and aggregate value of financial
accounts held by related or unrelated non-participating FFIs.

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IRS Notice 2010-60
 Entities potentially exempted from FATCA
 Entities that are excluded from being FFIs:
– Holding companies of a group of non-financial entities
– Start-up companies (only for the first two years of operation) that will operate a
business other that that of a financial institution
– Non-financial entities that are liquidating or emerging from reorganization / bankruptcy
– Hedging/financing centers of non-financial groups
– Insurance companies that do not issue cash value insurance and reinsurance
contracts (i.e., companies that issue property, casualty, and term life contracts)
 Deemed-compliant FFIs
– Investment funds that have only a small number of accounts holders, all of whom are
individuals, and for which the withholding agent obtains documentation (e.g., a family
trust)
 Financial institutions organized in U.S. territories
 Classes of persons posing a low risk of tax evasion
– Foreign retirement plans, but only if the retirement plan
i. Qualifies as a retirement plan under the law of the country in which it is
established
ii. Is sponsored by a foreign employer, and
iii. Does not allow U.S. participants or beneficiaries other than employees that
worked in the country in which that retirement plan is established
 Collective investment vehicles that prohibit U.S. ownership – potential carve (IRS has
requested comments)

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IRS Notice 2010-60
 Electronic Filing Requirements for Financial Institutions

 All or most financial institutions would be required to electronically file their returns with
respect to tax liabilities under Chapter 3 (NRA withholding) and Chapter 4 (FATCA
withholding).
 The electronic filing requirement would be effective for returns filed for taxable years ending
after December 31, 2012.

 IRS Request for Comments

 The IRS’s requests for comments represents a significant opportunity for the financial
industry to influence forthcoming regulations.
 The IRS requested specific comments on the following topics:
– Verification requirements for FFI’s entering into an FFI Agreement
– Treatment of Passthru Payments
– Election to be Withheld Upon
– Sanctions With respect to recalcitrant account holders
– Collective investment vehicles with legal restrictions that prohibit the sale of their
interests to U.S. persons

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J.P. Morgan Lobbying
 U.S. Governmental Institutions

J.P. Morgan is directly and actively participating and discussing the FATCA legislation with various
U.S. governmental institutions, in particular, with the U.S. Treasury, the Internal Revenue Service,
the Joint Committee on Taxation, the U.S. Senate Committee on Finance and the Committee on
Ways and Means.

 Financial Industry Associations

J.P. Morgan T&SS is also participating, liaising and closely monitoring comments and
recommendations to the FATCA legislation from various financial industry associations to protect
and represent the interests of J.P. Morgan T&SS clients.

 In particular, J.P. Morgan T&SS is actively participating and leading in the British Bankers’
Association (BBA), the European Banking Federation (EBF), the Institute of International
Bankers (IIB) and the Association of Global Custodians (AGC).

 J.P. Morgan T&SS is also liaising with and closely monitoring the Investment Management
Association (IMA), the Investment Company Institute (ICI), the European Fund and Asset
Management Association (EFAMA), the Association of the Luxembourg Fund Industry (ALFI),
the Irish Funds Industry Association (IFIA), the International Swaps and Derivatives Association
(ISDA), the New York State Bar Association, the Association of Global Custodians U.S. (AGC),
the European Private Equity and Venture Capital Association (EVCA), the Alternative
Investment Management Association (AIMA), the International Securities Lending Association
(ISLA), PASLA & RMA.

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Next Steps – Timeline
 Development of Legislation Process:

 FATCA legislation enacted into U.S. law: March 18, 2010.

 Certain “Dividend Equivalent” payments subject to U.S. withholding tax: September 14, 2010.
 Guidance notes: August 2010.
 Proposed regulations expected beginning of 2011.
 More Guidance notes expected mid-2011 and in phases.
 All “Dividend Equivalent” payments subject to U.S. withholding tax: March18, 2012.
 General FATCA provisions effective date on January 1st, 2013.

Clients interested in additional discussions with J.P. Morgan about the FATCA legislation, please contact your Relationship
Manager. Clients should contact their tax advisors to analyse FATCA implications in their businesses.
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