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Part 5: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons") – The FATCA IGA and the "Entity Inquisition"

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Introduction …
The difference between “Individual” and “Entity” accounts
FATCA-eng
If you read Annex 1 of the IGA (starting on page 20) you will that it distinguishes between “Individual Accounts” (held by a living breathing individual person) and “Entity Accounts” (an account held NOT by an individual), but by something that is NOT an individual. An example of an “Entity” would be a corporation. An account held in the name of a corporation will NOT reveal who the shareholders are. As Robert Wood recently wrote:

A key element in many tax prosecutions is the use of shell entities and hidden names. Although celebrities have their own reasons to make their financial affairs opaque, some governments now want to infer tax avoidance. In that sense, secrecy itself is under attack. For example, the U.K. has moved to make company ownership entirely transparent. The topic of company ownership transparency is being discussed in Brussels too.
Nominee ownership used to be common. Nominees are straw-men listed as owners or directors of a company, but who are acting on behalf of someone else. This once common device is now often seen as a problem that triggers others. From Spanish and other authorities, the message has been a stern one. Whatever happens in Spain, secrecy and willfulness may be linked like never before.

To put it simply: in order to know who are the real owners of an “Entity” (for example corporations in Delaware, Nevada and South Dakota and other noted tax havens) one must take specific steps to learn who the real owners are. (Yes, one of the effects of FATCA is to protect the United States from competition in the “Tax Haven Industry”.)
Following the IGA …
Annex 1 of the IGA describes exactly what needs to be done to search for “USness” for both “individual” and “entity” accounts.
The rules are found as follows (you may want to keep the IGA in front of this while you read):
Pre-existing Individual Accounts – page 20
New Individual Accounts – page 26
Pre-existing Entity Accounts – page 28
New Entity Accounts – page 31
In the case of “Individual Accounts” the named individual is presumed to be the owner. In the case of “Entity Accounts” further inquiries must be made (“smoking them out”) to determine who the beneficial/real owners are.
When it comes to an “Entity Account”, the question is:
Q. Are or have the “real/beneficial” owners ever been U.S. persons?
A. Only the accountants, lawyers and shareholders know for sure.
These inquires are made by the bank, to a representative of the “Entity”. The representative of the “Entity” will respond by obtaining the requested information and THEN informing the bank.
The Worldwide “FATCA Rollout” began with “The Great Hunt For USness In Individual Accounts” search.
The Worldwide “FATCA Rollout” continues with the “The Great Hunt For USness In Entity Accounts” search. This will be a FAR MORE intrusive search than the search for individual accounts ever was. From the U.K. PTA, to the New Zealand law firm, to the Canadian Controlled Private Corporation ALL the world is now being asked to identify “USness” associated with its entities. A “U.S. Person” in Canada is far more likely to receive a “FATCA Letter” because he is associated with an “entity”, than because he is suspected of being a “U.S. Person”.
The “FATCA Entity Hunt” is such that, that ordinary people have been deputized to assist the United States in its relentless “Hunt” for “U.S. Persons”.

FATCA Inquisition Stage 1 – Review, Identify and Report – “Individual Accounts”
Canada Day 2014 – “FATCA Hunt” Officially Began …
On July 1, 2014 “FATCA Hunt” – the hunt for those with a U.S. birthplace officially began. “FATCA Hunt” is an important initiative in the 21st century. It was a small step for man, but a large step for mankind.
That said, the rollout is coming in different stages.


The focus has been on the possible U.S. status of the individual who was named on the account. The banks have been focusing their attention on the person whose name was on the account.
In the beginning, the banks, brokerage companies, financial managers and the rest of the Foreign Financial Institutions (“FFIs”) focused (and continue to) on their existing customer base of “Individual Accounts”. In addition, all those who opened new accounts were asked about their “U.S. status”. Most of the pain has been felt in relation to the “pre-existing accounts”. Large numbers of people have been forced to “Self-certify” that they are NOT “U.S. persons”. Canadians (with only a small number of exceptions) have not been subject to “account closures”. Canadians have been able (in contrast to their European counterparts) to retain access to bank accounts in general and their bank accounts in particular.
The situation in Europe has been different. There has been evidence of bank account closures. Their is evidence of banks that are unwilling to deal with “U.S. persons” (do you blame them?).
FATCA Inquisition Stage 2 – Review, Identify and Report on Entity Accounts – The search for the owners of “Entity Accounts” – Are they or have they ever been a U.S. person?
The focus is on the possible U.S. status of the individual, who is a beneficial owner, but who is NOT named on an Entity account. The bank is focusing its attention on the “Entity” whose name was on the account. The bank will require an individual who is the representative of the “Entity” to inform the bank of the “U.S. status” (or not) of the beneficial owner(s). To put it another way: In Stage 2 of the FATCA Inquisition, some Canadians are being asked to disclose any “U.S. person” ownership to the bank. This is a clear escalation of FATCA Hunt. Your business partners are now clearly part of the FATCA Inquisition.
You probably think that this is all an exaggeration …
What follows is a “FATCA Letter” from TD Waterhouse sent to the address on file for an “Entity Brokerage Account”. In other words, imagine that a corporation has a brokerage account. Imagine that the names of the shareholders are not in the file. It’s important for TD Waterhouse to know whether the beneficial owners are “U.S. persons”.
Take a moment to read this letter. Take a moment to read the forms (if you can understand it all). But, of above all else:
take note of the requirement to make inquiries about the possible “USness” of those associated with the entity.
FATCATDEntitySearch
Leaving aside its intent. Leaving aside its intrusiveness. Leaving aside the immorality of “Hunting” people based on the immutable characteristic of “place of birth”, consider the following question:
How could anybody even begin to understand this letter without the benefit of specialized counselling? It’s simply not possible. Therefore, the first thing one must do is bring the  “Entity Inquisition Letter” to an adviser. Expect to pay and expect to pay dearly.
What the adviser must determine is:
1. Does the beneficial ownership of the “Entity” include “U.S. Persons”. On this point I note that the definition of “U.S. person” is determined in accordance with the Internal Revenue Code. Note also that this is a “shifting definition”. That said, “Congress has spoken”.
2. What kind of “Entity” is it anyway? Is it an “FI” or a “NFFE”Remember that the U.S. Internal Revenue Code punishes: (1) all things foreign and (2) all things that involve deferral.
3. If the “Entity” is a “NFFE”, is it “active” or is it “passive”?
If it is either a “FI” or a “passive NFFE”, any U.S. beneficial owners MUST be reported. Those Canadians who use Canadian Controlled Private Corporations (which is one of the primary purposes of the CCPC) to accumulate earnings need to be particularly careful. The investment income in the corporation is reportable on your U.S. tax return

Think of it! It’s bad enough having the banks hunting for “U.S. persons”. The “FATCA Entity Inquisition” means that one group of Canadians will now hunt another group of Canadians to uncover those with a “U.S. place of birth”.
Note that the “FATCA Entity Letter” is sent regardless of whether THERE IS ANY REASON WHATSOEVER TO SUSPECT “USness”. The United States is requiring or reserving the right to make inquiries of ANY entity in the world:
Are you, or have you ever been or associated with a U.S. Person?
It is just an example of the how the United States of American is hunting the world for “U.S. persons”.
The FATCA Entity Inquisition is NOT being carried on directly by governments. The FATCA Entity Inquisition IS being carried by one group of Canadians searching for another group of Canadians that happen to (for the most part) been born in the USA!
To put it simply:
In the new world order, “If you are a “U.S. Person”, you are reportable! You lost the “birth lottery”.
Now, that’s change you can believe in.

Related articles

Part 3: What God Hath Wrought – The #FATCA Inquisition (Review, Identify and Report on “U.S. Persons”) – “Active or passive NFFE”?

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In Part 2 of this series I concluded that:

The FATCA IGAs are now being used AROUND THE WORLD to hunt for people with “US indicica. The purpose of FATCA is clearly to:
Review non-U.S. “Entity Accounts”; to
Identify those beneficial owners who are “U.S. Persons”; to
Report those “U.S. owners” to the banks who will report them to the IRS
It’s the “RIR” principle! Understand that pursuant to the “RIR” principle, the United States is using FATCA to force disclosure of beneficial ownership of “Entity Accounts” in the whole wide world. The goal is to locate “U.S. Persons”. “U.S. Persons” are composed primarily of those with a U.S. place of birth.
When it comes to the hunt for those with a “U.S. place of birth”, FATCA is being used to “smoke em out“.

Part 1 of this series described how the FATCA inquisition has impacted impacted “entities” in general and a U.K. PTA in particular. A principal purpose of the inquisition is to identify what is called (in FATCASpeak) a “passive NFFE”. The search extends to the trust accounts maintained by lawyers. This includes lawyers in New Zealand.
Let’s let the New Zealand Law Society explain what a “NFFE” is and what makes a “NFFE” passive. Their description does NOT explain why the New Zealand Government “passively” acquiesced to FATCA. That said …


 
Understanding the importance of the Non-Financial Foreign Entity (“NFFE”)
In order to understand how the FATCA IGA applies to “non-DNA persons”, one must distinguish between:

  1. Financial Institutions (think your bank) – “FI”
  2. Non-Financial Foreign Entities (think active businesses, trusts, etc.) – “NFFE”

Furthermore, Non-Financial Foreign Entities” (“NFFE”) must be categorized as either “passive” or not passive. The following explanation from the New Zealand Law Society (how should laywers’ trust accounts be categorized?) is very interesting.
In June of 2014, the Government of New Zealand entered into an IGA with the United States
The “RIR” principle applies to all business bank accounts in every country that has signed a FATCA IGA. What follows is a fascinating discussion of how the New Zealand Law Society understands FATCA to apply to law firm trust accounts. (For an extensive discussion of how FATCA and FBAR apply to Canadian law firm trust accounts read here.)
FATCA-and-New-Zealand-Law-Firms

Are you an FI or an NFFE?
Under FATCA your firm will either be a “financial institution” (FI) or a “non-financial foreign entity” (NFFE).
All non-US entitles are classified either as FIs or NFFEs. For the purposes of FATCA, entities include legal persons and legal arrangements such as joint ventures, associations, corporations, partnerships and trusts, but not natural persons.
A FI law firm will have greater obligations under FATCA (registration, due diligence and reporting) than a NFFE law firm.
Active and passive NFFEs
NFFEs are either active or passive. An NFFE is a passive NFFE if it is not an active NFFE. FATCA is concerned with passive NFFEs, not active NFFEs because active NFFEs do not give rise to US reportable accounts.
For present purposes, an active NFFE means an NFFE where less than 50% of the NFFE’s gross income for the preceding calendar year or other reporting period is passive income (under New Zealand tax law) and less than 50% of the assets held during such period produce or are held for the production of passive income.
Passive NFFEs are of interest to the IRS (and therefore the law firm’s bank and the IRD) if they have “controlling persons” who are US citizens or tax residents. Controlling persons would be the client if an individual or, for an entity, the natural persons exercising control over the entity.
For example, In the case of a trust client, the controlling persons would include a settlor, trustees, protector, beneficiaries or class of beneficiaries and any other natural person exercising ultimate effective control over the trust.
An NFFE law firm’s “trust account relationship entity” is likely to be a passive NFFE because none of the criteria for an active NFFE is likely to apply. This will be a question of fact in each case. If clients’ funds are held on interest bearing deposit, all income is likely to be passive income and it is likely that the clients’ funds would be assets that produce or are held for the production of passive income. Likewise if moneys are not placed on interest bearing deposit then it is likely that none of the criteria for an active NFFE would apply – with the
result that the trust account relationship entity will be a passive NFFE.
Bank requirements
When a law firm notifies its bank of an election it has made and that it is not an FI, but an NFFE, and that its trust account relationship entity is a passive NFFE, its bank will request the law firm to provide a self-certification. This is to be made by the law firm or controlling persons and must state whether the controlling persons of the passive NFFE “trust account relationship entity” are US citizens or US tax residents.
Effectively the information required is whether the client is a US citizen or US tax resident, or whether the client entity has any controlling person who is a US citizen or US tax resident.

Q. Why the hunt for U.S. citizens or tax residents associated with passive “NFFEs”?
Two answers:
A 1. To find U.S. citizens who are hiding taxable income behind “entities”.
A 2. To attribute the income of the passive “NFFE” to the individual U.S. citizen or tax resident. In the case of a corporation, this would mean that the individual would pay tax on income earned by the corporation even though that income was not paid to the individual. See SubPart F income.