Agefi Luxembourg Janvier 2020 PAGES GRATUITES

AGEFI Luxembourg 6 Janvier 2020 Banques & Finance By Jean KIZITO, Associate Partner at KPMG Luxembourg* V ariousAutomatic Ex- change of Information regimes arematuring now. Financial institutions have gone through gap analy- sis, impact assessment projects and actual implementation, and the first annual reports have been submitted to the tax autho- rities. At present, the financial industry is seeking to achieve enhanced compliance ahead of upcoming audits or compliance reviews by the tax authorities. This article outlines the audit require- ments under various Automatic Exchange of Information regimes. Qualified intermediary Background The U.S. Qualified Intermediary (QI) regimewas in- troduced by the Internal Revenue Services (IRS) and became effective as of 1 January 2001. On 27 June 2014, the IRS released the Rev. Proc. 2014-39 with the revised QI Agreement to reflect the FATCA regime (defined below). On 30December 2016, the IRS released a new version of the QI Agreement entitled Rev. Proc. 2017-15. The revision was nec- essary to reflect the Qualified Derivative Dealer (QDD) regime as well as to provide more details on the FATCA regime and the requirement to es- tablish a QI compliance program . The first aim of the QI regulations is to identify U.S. persons investing in U.S. securities through foreign intermediaries. The second aim is to en- sure the correct application of the double taxation treaties concluded by theU.S. and, more generally, of the U.S. withholding tax to be applied to non- U.S. persons. AQI is a foreign financial institution — such as a bank, broker or asset manager — that pays U.S. source income to its customers andhas signed aQI Agreement with the IRS. QIs are subject to a set of responsibilities, including customer identification, withholding, and annual reporting. Periodic review AQI that is bound by the updated QI Agreement (Revenue Procedure 2017-15) concluded with the IRS, is to perform a periodic review to verify its compliance with the updated QI Agree- ment (Revenue Procedure 2017-15). The updated QI Agreement replaced the previous external audit requirements applicable to a QI with an internal com- pliance and review program . A compliance program is split into seven parts: i.e. written policies and procedures; training; systems; monitoring of busi- ness changes; QDD tax liability deter- minations; periodic review ; and certification of internal controls. As part of theQI compliance program , the re- sponsible officer is required to make peri- odic compliance certifications to the IRS and provide, with certifications, cer- tain factual information to the IRS based, in part, on the re- sults of a periodic review. The periodic review of the QI compliance program may be performedwith the help of an external reviewer and should be conducted based on the guidance issued by the IRS in the QI Agreement. The scope of the review consists of basic fact-find- ing by the external reviewer. This phase generally requires (1) a sampling of accounts covered by the QI Agreement, (2) reviewing documentation for those accounts, (3) verifying that the proper with- holding was performed, and (4) checking that the QI fulfilled its reporting obligations and other ob- ligations, including the FATCA requirements as a registered deemed-compliant Model 1 IGAFFI. Thus, there is an important interaction betweenQI and FATCA. Specifically, as a condition for main- taining QI status, a QI should comply with its FATCA requirements as applicable to its FATCA status — including any applicable compliance procedure —with respect to each branch operat- ing under the QI Agreement. Consequently, a QI should, as a part of the compliance procedures, de- termine whether it is compliant with its FATCA requirements as a reporting financial institution, with respect to its QI designated accounts. Non-compliance with the QI compliance program and/or the periodic review may result in substantial financial and commercial risks for a QI by IRS as- sessment of tax, interest and penalties up to the termination of the QI Agreement. This, in turn, could have a serious adverse impact on the pri- vacy of the entity’s clientele and complicate its business practices, including having to disclose customer information to the IRS (and U.S. with- holding agents) aswell as recipient-specific report- ing on those customers annually. As the procedures of the QI regime are grounded in complex U.S. tax requirements, a thorough un- derstanding of the QI rules, together with a com- prehensive knowledge of the nature of the business conducted by a QI, ensures a successful and smooth periodic review . FATCA and CRS Background Enacted inMarch 2010, the goal of the Foreign Ac- count Tax Compliance Act ( FATCA) is to obtain in- formation relating to U.S. persons who have offshore accounts or investments to combat off- shore tax evasion by such persons. Luxembourg signed a FATCAModel 1 IGAwith the U.S. for the exchange of tax information. With the IGA, the Luxembourg government set up a legal framework compelling all Luxembourg fi- nancial institutions to comply with a set of due diligence, withholding and reporting require- ments. Pursuant to the IGA, FATCA rules apply to all Luxembourg financial and non-financial en- tities. This is irrespective of whether they haveU.S. investors or no U.S. investors and whether they have U.S. or only non-U.S. investments. As the challenge posed by cross-border tax fraud and tax evasionhas increased considerably andhas become amajor focus of concernwithin the EUand globally, subsequent to FATCA, the OECD devel- oped a global standard for automatic exchange of financial account information in tax matters. Indeed, in parallel to the EU process, the OECD pushed forward its own initiative on Automatic Exchange of Information and released on 13 Febru- ary 2014 its global standard for automatic ex- change of financial account information (the “Global Standard”). The Global Standard consists of two components: (1) the Common Reporting Standard (CRS), which contains the reporting and due diligence rules to be imposed on financial in- stitutions and (2) the Model Competent Authority Agreement (CAA), pursuant to which many gov- ernments have agreed to exchange the informa- tion reported. The CAAand the CRS drawheavily from the U.S. Model 1 IGA. The scope of the CRS is largely the same as theU.S. Model 1 IGAacross three key dimensions: - Financial information to be reported with respect to reportable accounts includes all types of invest- ment income — including interest, dividends, in- come from certain insurance contracts and other similar types of income — but also account bal- ances and sales proceeds from financial assets. - Financial institutions that are required to report under the CRS include not only banks and custo- dians, but also other financial institutions such as brokers, certain collective investment vehicles and certain insurance companies. - Reportable accounts include accounts held by in- dividuals and entities (which includes trusts and foundations). The CRS includes the requirement to look through passive entities to report on the in- dividuals that ultimately control these entities. On 9 December 2014, the Council adopted the Directive amending Directive 2011/16/EU of 15 February 2011 on administrative cooperation in the field of taxation (DAC 2). The DAC 2 pro- vided for EU Member States to require their FIs to implement reporting and due diligence rules, which are fully consistent with those set out in the CRS developed by the OECD. In Luxem- bourg, the law of 18 December 2015 (the “CRS Law”) on automatic exchange of financial ac- count information in the field of taxation trans- posed the DAC 2 into national law. Audits Luxembourg — or any other jurisdiction imple- menting FATCA and CRS — should ensure that the financial institutions resident in its territory are FATCA and CRS compliant. According to the OECD’s CRS implementation handbook, a juris- diction hasmany optionswhen designing and im- plementing a compliance review procedure. A logical starting point for any compliance review would be to review the internal control framework maintained by the FIs to comply with their obli- gations under FATCA and CRS. Another ap- proach could be to review a sample of accounts . In this respect, in Q4 of 2019, the Luxembourg tax authorities issued the first letters to some financial institutions aiming to verify the due diligence pro- cedures and reporting processes put in place for FATCA/CRS purposes. At this point, theLuxembourg tax authorities’ focus seems to be on the following elements: - Written procedures enabling the performance of due diligence and reporting obligations under FATCA/CRS. -Detailed technical descriptionof the ITsystemused to complywith the aforementioned obligations. - Template of auto-certifications used for FATCA/ CRS. - Description of the potential internal/external con- trols put inplace to identify and address the risks of non-compliance. - Description of the potential other measures put in place to ensure the accurate executionof these rules. Please note that the authorities typically provide financial institutions with rather tight deadlines —perhaps one month— to comply with their re- quests. Don’t be caught by surprise! You can prepare for audits by making sure that the appropriate pro- cedures, training and pre-audit reviews (i.e. health checks) are organized in advance of tax authorities’ requests. * Jean Kizito is an Associate Partner at KPMG Luxembourg in the financial services tax department. He specializes in operational taxes in the asset management and banking sector, specifically in Automatic Exchange of Information (including the CRS, FATCA, QI and DAC6 regimes). He can be contacted via jean.kizito@kpmg.lu or +352 225 151 5492. QI, FATCAand CRSAudits I n linewith its 2020 strategy, lea- ding b2b communications agency Farvest has decided to create an international event dea- lingwith finance topics, fromFin- tech andpayments to sustainable investments and the changing fi- nancial landscape. The European Finance Summit will take place on March 5th, 2020, andwill be held at the EuropeanConventionCenter Luxembourg (ECCL). The event will be composed of several confe- rences featuring local and interna- tional experts aswell as an exhibition area, the traditional net- working cocktail and the 11th edi- tion of the Luxembourg Finance Awards ceremony. The European Finance Summit aims at giving participants the opportunity to build strategic roadmaps in terms of tax, treasury and compliance reporting, go in depthwith current asset manage- ment, funds, (private) banking, treas- ury, regulation topics, and much more. Todiscussthelatesttrendsofthefinancial sector – namely PSD2 and green invest- ments – and to have a look at the future landscape, the organizers have already confirmed the participation of several guest speakers and renowned experts. They will notably welcome Nicolas Mackel (CEO, Luxembourg for Fi- nance), Gilbert Fridgen (PayPal-FNR PEARL Chair in Digital Financial Serv- ices, SnT, University of Luxembourg), Bertrand Perez (Managing Director & COO, Libra Association), Nasir Zubairi (CEO, The LHoFT), Jonathan Prince (Co-founder, Finologee), Benjamin Be- lais (VPInternational, Lydia) and Florian Graillot (Co-founder & Partner, Asto- rya.vc ). A new session of Pitch Your Startup This year and for the first time, the startup pitching session is organized as a yearlong competition: the semi-finals of the different categories will take place during the four seasonal events organized by Farvest, with thewinners of each category entering the Grand Fi- nale to take place in September 2020. The overall cross-category winner will be granted 50.000 € . During the Euro- pean Finance Summit, Pitch Your Startup competition focuses on three categories, namely Fintech , Regtech and Insurtech . The Luxembourg Finance Awards 2020 This year, a total of 7 awards will be dis- tributedafter an insightful sessionof con- ferences. These prizes aim at rewarding the best local solutions and initiatives. Luxembourgish companies and profes- sionals canapplyuntil February5 th , 2020 . - Finance Teamof the Year: it rewards a Finance Team for its outstanding results on a specific project (implementation of anewfinancial system, compliancewith new regulations etc.) - Treasury Manager of the Year: a prize supported by ATEL: this title rewards a leader in treasury and finance, who has helped the company to benefit fromnew insights, achieve improvements in effi- ciency,spreadingbestpracticesandestab- lishingsolidaswellasviablerelationships with banks and company partners. - Inspirational Woman in Finance: this prize is dedicated to recognizing an out- standingwomanshapingandinfluencing the financial industry in Luxembourg. - Fintech Solution of the Year: this prize aims to reward a company, which has decided to offer a new, creative, in- novative, efficient service or product. This company works to improve cus- tomer experience and demonstrates this through its solution. - Financial Software provider of the Year: it rewards a company for a soft- ware providing effective solutions to store, analyze, manage or deal with fi- nancial data, transactions, records. It contributes to facilitate the work of fi- nancial teams. - Best Marketing Campaign in Fi- nance: this prize is devoted to a com- pany that has delivered a great and impactful marketing campaign over the past 12 months on the financial market. - OutstandingContribution to Luxem- bourg Financial Centre: this award is quintessential to the Finance commu- nity and rewards a company for its commitment to developing the finan- cial place of Luxembourg and promot- ing the country worldwide. Applications for the Luxembourg Fi- nance Awards are subject to adminis- tration fees of 100 € excl. VAT per prize except for the Finance Teamof theYear, Treasury Manager of the Year, Woman in Finance and Outstanding Contribu- tion to Luxembourg Financial Centre for which participation is free of charge. European Finance Summit 2020: the place where financial key players meet up