Germany signs FATCA intergovernmental agreement with the ... - PwC

www.pwc.comGlobal IRWNewsbriefInformation reporting and withholding (IRW)12 June 2013BMF announces the release of theGerman IntergovernmentalAgreement for implementing FATCAOn 31 May 2013, the German Ministry of Finance, Bundesfinanzministerium (BMF),announced the release of the FATCA Intergovernmental Agreement between theFederal Republic of Germany and the United States (German-U.S. IGA) forimplementing the broad ranging provisions of the Foreign Account Tax ComplianceAct (“FATCA”). The BMF had issued a news release on 21 February 2013, announcingthat it had initialed the German-U.S. IGA without releasing the contents of theagreement, and the industry has been eagerly awaiting this release of the signedversion. On 31 May 2013, the German-U.S. IGA was finally signed and published inthe English and German languages, with both texts being equally authentic.The German-U.S IGA was not accompanied by draft implementation guidance.However, it was accompanied by a brief Declaration of Understanding regarding theIGA, which provided some additional information.Although the Articles and Annexes in the German-U.S. IGA follow a consistentformat with similar content as the reciprocal version of the Model 1 IGA, somedifferences do exist.This Newsbrief provides an overview of the key elements of the German-U.S. IGA andhow it compares to the Model 1 IGA.Key ConsiderationsThe German-U.S. IGA seems to be based almost exclusively on the reciprocal versionof the Model 1 IGA released in November, with very limited changes. Accordingly,only a few of the changes from the updated Model 1 IGA released on 9 May 2013 wereincorporated.Further, the revisions to Annex II which were released on 28 May 2013, are notreflected in the German-U.S. IGA. One update it does, however, incorporate is thatArt. 4 no. 7 of the IGA states that Germany may permit its financial institutions to usePwC Global IRW Newsbrief 1

www.pwc.comdefinitions in relevant U.S. Treasury Regulations in lieu of corresponding definitionsin the German-U.S. IGA, “provided that such application would not frustrate thepurpose of” the German-U.S. IGA. Overall, Annex II seems to fall short of industryexpectations, providing a limited number of additional exceptions specific toGermany.PwC Observation: Given the “more favorable terms” clause in the German-U.S. IGA, the impact of the German-U.S. IGA not incorporating many of thechanges from the Model 1 IGA as updated on 9 May 2013, remain to be seen.These changes may subsequently be incorporated into German law as aresult of the inclusion of more favorable terms in subsequent IGAs. It shouldbe noted that this clause addresses the Federal Republic of Germany and notthe individual institutions within Germany. Thus, prior to applying a morefavorable term, details should be included in the relevant implementationguidance on how this will function, which is expected in the form of a BMFCircular (BMF-Schreiben), and does not constitute an option eligible at thelevel of the individual FFI.Further, it is thought that U.S. Treasury officials would like to eliminate thetailoring of Annex II since they believe the final FATCA regulations providesufficient clarity on the types of institutions, and products which should beexempt or deemed compliant. Nonetheless, Annex II still contains languagestating that it may be updated to reflect mutual agreement between theCompetent Authorities in Germany and the United States “… to includeadditional entities, accounts, and products that present a low risk of beingused by U.S. persons to evade U.S. tax …” though the practical application ofsuch provision also remains to be seen.Impact on Scope and ComplianceThe German-U.S. IGA does not provide significant additional clarification relating toscope and compliance. However, the Declaration of Understanding provides someclarification related to the registration requirements as well as the compliance statusfor German financial institutions.Registration ProcessAs with all Model 1 IGA jurisdictions, financial institutions resident in Germany,including any German branches of non-German financial institutions, will not berequired to enter into FFI Agreements with the IRS. However, the German-U.S. IGAstates that German financial institutions will be required to comply with registrationrequirements applicable to financial institutions in IGA jurisdictions.The Declaration of Understanding confirms that the current understanding betweenGermany and the U.S. is that the registration requirements applicable to IGAjurisdiction financial institutions include registering with the IRS and obtaining aGlobal Intermediary Identification Number (“GIIN”), as each Reporting Germanfinancial institution will use it’s GIIN as the identifying number referenced in theGerman-U.S. IGA.PwC Observation: With this information, and subject to further guidance,it is clear that German Reporting Financial Institutions will be required toregister with the IRS and obtain a GIIN. It remains, however, unclearwhether certain deemed-compliant German financial institutions must alsoregister with the IRS. The declaration does not state whether institutions orPwC Global IRW Newsbrief 2

www.pwc.comentities which are not required to register may do so, even if only to obtain aGIIN in an effort to minimise administrative burdens when sharing theirwithholding status in the market.Registration guidance is expected in the coming weeks from the IRS.ComplianceArticle 10 of the German-U.S. IGA states that the agreement will go into force onceGermany has provided written notification to the United States that it has completedthe necessary legislative and internal procedures for the agreement to be effective.The Declaration of Understanding comments on this point by stating that the U.S.intends to treat each German financial institution as compliant with the German-U.S.IGA, and, thus, not subject to withholding during the time period when Germany ispursuing the necessary procedures required for the German-U.S. IGA and locallegislation to enter into force, no later than 30 September 2015.Should there be a delay beyond 30 September 2015, for entry into force, anyinformation that should have been reported on 2013 and 2014 accounts in 2015 willbe due on 30 September of the year following the entry into force.PwC Observation: This provision alleviates the risk that German financialinstitutions may be treated as non-compliant and subject to withholdingbeginning on 1 January 2014, if local guidance is not in place. However, itremains to be seen how this will be applied practically, as it is unclear if theIRS will publish a list of all jurisdictions deemed to be compliant, or if theGIIN will be the primary indicator of compliance for individual financialinstitutions. Alternatively, FFIs may be required to document and proveresidency as well as compliance with respect to their counterpartiesindividually.Financial InstitutionsThough the implementation guidance for the United Kingdom intends to include thedefinition of investment entity from the U.S. Treasury Regulations, the German-U.S.IGA made no indication of changing the definition, and currently includes the samedefinitions for all types of financial institutions, including investment entity, as theModel 1 IGA.Annex IIAnnex II, which is customised to identify the local entities that present a low risk ofbeing used by U.S. persons to evade U.S. tax, identifies only a limited number oftypes of financial institutions that may qualify as non-reporting German FIs.The German-U.S. IGA provides the same categories of exempt beneficial owners asthe Model 1 IGA (i.e. governmental entities, central banks, internationalorganizations, and certain pension funds) while adding only a few German-specificinstitutions related to these four categories.Under the deemed-compliant category, the German-U.S. IGA generally retains thecategories and requirements as provided in the Model 1 IGA, namely, financialinstitutions with a local client base and certain collective investment vehicles.PwC Global IRW Newsbrief 3

www.pwc.comPwC Observation: Annex II seems to fall short of industry expectationsand does not contain significant differences to the general categoriesprovided in the Model 1 IGA for financial institutions that may qualify asnon-reporting German FIs. The industry expected German-specific situationsto have been addressed directly, including the treatment of special funds(Spezialfonds), among others. The German-U.S. IGA did address contractswith a Housing Savings Institution (Bausparkassen), however this type ofspecificity was expected more broadly for the German market. The level ofdetail that the industry previously expected from the German-U.S. IGA willnow be expected in the German implementation guidance, namely the BMFCircular.Impact on Customer Due Diligence ObligationsThe due diligence procedures on holders of financial accounts and NPFFIs providedin Annex I of the German-U.S. IGA does not provide any additional definitions orclarifications from the Model 1 IGA, while Annex II does provide some Germanspecificaccounts and products to be excluded from the definition of financialaccounts.Due Diligence ProceduresWhile the German-U.S. IGA retains the provision that Germany may allow itsfinancial institutions to rely on the due diligence procedures as provided in the U.S.Treasury Regulations in lieu of the procedures provided in Annex I, it does notcontain the additional clarification that was provided in the updated version of theModel 1 IGA. This provision clarifies that a FATCA Partner may permit financialinstitutions to make such election separately for each section of Annex I, and suchelection could be made with respect to any clearly identified group of such accounts(such as by line of business or the location of where accounts are maintained).Annex IIPwC Observation: Clarity as to the method of applying the due diligenceprocedures must now come through the BMF Circular. Further, additionalguidance on the requirements and form of the self-certification were eagerlyexpected with the release of the German-U.S. IGA; however, no suchadditional information was provided, and the limited guidance related to theself-certification remains the same as previously provided in the Model 1 IGA.Annex II identifies the following as categories of accounts and products established inGermany and maintained by a German financial institution that shall not beconsidered financial accounts:• Certain retirement accounts/pension schemes meeting specified restrictions• Certain escrow accounts• Contracts with certain Housing Savings InstitutionsPwC Observation: Exempting such accounts from the scope of the IGAresults in these account holders not being subject to customer due diligence bythe FFI nor are they subject to reporting.PwC Global IRW Newsbrief 4

www.pwc.comImpact on Reporting ObligationsUnder the German-U.S. IGA, financial institutions located in Germany, including anyGerman branches of non-German financial institutions, must obtain and reportaccount holder information annually in a manner similar to what is required underthe Model 1 IGA. This reporting will be performed through local channels to theGerman Competent Authority, which is identified in the German-U.S. IGA as theFederal Ministry of Finance or the agency to which it has delegated its powers, whowill then exchange the information with the IRS.The initial exchange date of 30 September 2015, has been retained, along with therequirement that such reporting must include information related to both calendaryears 2013 and 2014.PwC Observation: As with other IGAs that have been released, theGerman-U.S. IGA does not provide dates by which German FIs must report tothe German Authority. We expect these dates to be provided in subsequentGerman BMF Circular. No clarification has been provided around the term“payments” with respect to the transitional reporting to nonparticipatingfinancial institutions. The term used in the German version of the German-U.S. IGA has a very broad meaning, and could potentially include allpayments, and may not be limited to “income-type” payments. Theexpectation is that additional clarity and confirmation will be provided by theBMF in the coming weeks as to what types of payments should be included inthis reporting.The German-U.S. IGA and its accompanying Declaration of Understandingboth reference Art. 26 of the US / German Treaty Convention for theAvoidance of Double Taxation, under which information obtained by therespective other party must, in principle, only be used for tax proceedings. Inparticular, this should preclude the IRS from sharing information with theSecurities and Exchange Commission, or other such regulatory agency, forsupervisory law enforcement against the respective financial institutions.Nonetheless, given that U.S. law also contains rigid rules with respect to thegiving of advice to U.S. persons (being defined with reference to U.S.residency under the 1940 Investment Adviser Act / Regulation S), it may, inmany cases, continue to be recommended to review "U.S. clients" and thepermissibility of existing service offerings to them from various tax, legal andcommercial aspects.Impact on WithholdingThe withholding obligations for German financial institutions are the same as thoseobligations provided in the Model 1 IGA.For financial institutions other than those identified below, when makingwithholdable payments to nonparticipating FIs, in lieu of withholding, they mustprovide information required for withholding and reporting to occur directly to anyimmediate payor of such payment.Though the German-U.S. IGA expresses the commitment of the governments tocontinue efforts to develop a practical approach to achieve the policy objectives offoreign passthru payments and gross proceeds withholding, no additional indicationwas given on how this will be achieved. It does state, however, that prior to 31PwC Global IRW Newsbrief 5

www.pwc.comDecember 2016, the governments will consult in good faith to amend the German-U.S. IGA as necessary to reflect the progress on certain commitments made in theAgreement, including foreign passthru payments and gross proceeds withholding.Financial institutions qualifying as certain withholding agents for other U.S. taxpurposes (i.e. withholding qualified intermediaries, withholding foreignpartnerships, and withholding foreign trusts) will be required to withhold 30% onany U.S. source withholdable payments paid to any non-participating financialinstitution. What is included in the concept of "payments" still requires further clarityby the Ministry of Finance (see above).PwC Observation:It remains unclear as of when and in what format the additional reportingobligations in Art. 4 no. 1 e) of the IGA become due. In case this would be inline with the start date for withholding (i.e. 1 January 2014) certain reportingobligations will already have to be in place in 2014 and additional guidanceis urgently needed.ConclusionThough the guidance provided in the German-U.S. IGA may fall short of industryexpectations, the Declaration of Understanding that was released does provide somemuch needed clarification related to how financial institutions will be treated if locallaw is not enacted by 1 January 2014. The most immediate requirement from astatutory deadline perspective remains to be registration, with the Declaration ofUnderstanding confirming that Reporting FIs will be required to register with theIRS and obtain a GIIN. The question still remains: Will the GIIN become an industrystandard for withholding purposes, thus driving even those entities without aregistration requirement to want to register?Further details addressing remaining issues and areas of uncertainty are nowexpected to be provided in the expected BMF Circular. A first draft of suchimplementation guidance is expected in the coming months, and subsequent to therelease of any such guidance, we will be provide further analysis in futureNewsbriefs.Additional ReferencesFor more information related to FATCA, please visit our website athttp://www.pwc.com/us/fatcaIncluded below are links to the Press Release, the German-U.S. IGA, and theaccompanying Declaration of Understanding.Links to Documents in English:• Press Release from the German Ministry of Finance• Agreement between the Federal Republic of Germany and the United States ofAmerica to Improve International Tax Compliance and with respect to theUnited States Information and Reporting Provisions Commonly Known as thePwC Global IRW Newsbrief 6

www.pwc.comForeign Account Tax Compliance Act• Declaration of Understanding Regarding the Agreement between the FederalRepublic of Germany and the United States of America to ImproveInternational Tax Compliance and with respect to the United StatesInformation and Reporting Provisions Commonly Known as the ForeignAccount Tax Compliance ActLinks to Documents in German:• Pressemitteilung• Abkommen zwischen der Bundesrepublik Deutschland und den VereinigtenStaaten von Amerika zur Förderung der Steuerehrlichkeit bei internationalenSachverhalten und hinsichtlich der als Gesetz über die Steuerehrlichkeitbezüglich Auslandskonten bekannten US-amerikanischen Informations- undMeldebestimmungen• Einvernehmenserklärung zum Abkommen zwischen der BundesrepublikDeutschland und den Vereinigten Staaten von Amerika zur Förderung derSteuerehrlichkeit bei internationalen Sachverhalten und hinsichtlich der alsGesetz über die Steuerehrlichkeit bezüglich Auslandskonten bekannten USamerikanischenInformations-und MeldebestimmungenFor more information, please do not hesitate to contact:PwC IrelandJohn O’Leary +353 1 792 8569 john.oleary@ie.pwc.comPat Wall +353 1 792 8602 pat.wall@ie.pwc.comEnda Faughnan +353 1 792 6359 enda.faughnan@ie.pwc.comJim McDonnell +353 1 792 6836 jim.mcdonnell@ie.pwc.comYvonne Thompson +353 1 792 7147 yvonne.thompson@ie.pwc.comPat Convery +353 1 792 8687 pat.convery@ie.pwc.comRebecca Maher +353 1 792 8634 rebecca.maher@ie.pwc.comSéamus Kennedy +353 1 792 6840 seamus.kennedy@ie.pwc.comEoin Fallon +353 1 792 5045 eoin.fallon@ie.pwc.comPwC GermanyDr. Karl Küpper+49 69 9585 5708 karl.kuepper@de.pwc.comAchim Obermann +49 211 981 7358 achim.obermann@de.pwc.comMarkus Zillner+49 89 5790 5205 markus.zillner@de.pwc.comMark D. Orlic+49 69 9585 5038 mark.dinko.orlic@de.pwc.comDr. Oliver von Schweinitz +49 40 6378 2935 oliver.von.schweinitz@de.pwc.comDr. Einiko Franz+49 221 2084 343 einiko.franz@de.pwc.comChristian Auge+49 69 9585 3005 christian.auge@de.pwc.comPwC Global IRW Newsbrief 7

www.pwc.comTo view PwC FATCA contacts in each countryhttp://www.pwc.com/us/en/financial-services/fatca-contacts.jhtmlPwC Global IRW Newsbrief 8

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