[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]


 
           FOREIGN BANK ACCOUNT REPORTING AND TAX COMPLIANCE 

=======================================================================

                                HEARING

                               before the

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 5, 2009

                               __________

                           Serial No. 111-35

                               __________

         Printed for the use of the Committee on Ways and Means

                               ----------
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                           COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       DANNY K. DAVIS, Illinois
SANDER M. LEVIN, Michigan            BOB ETHERIDGE, North Carolina
JIM MCDERMOTT, Washington            LINDA T. SANCHEZ, California
JOHN LEWIS, Georgia                  BRIAN HIGGINS, New York
RICHARD E. NEAL, Massachusetts       JOHN A. YARMUTH, Kentucky
JOHN S. TANNER, Tennessee            DAVE CAMP, Michigan
XAVIER BECERRA, California           WALLY HERGER, California
LLOYD DOGGETT, Texas                 SAM JOHNSON, Texas
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
EARL BLUMENAUER, Oregon              JOHN LINDER, Georgia
RON KIND, Wisconsin                  DEVIN NUNES, California
BILL PASCRELL, Jr., New Jersey       PATRICK J. TIBERI, Ohio
SHELLEY BERKLEY, Nevada              GINNY BROWN-WAITE, Florida
JOSEPH CROWLEY, New York             GEOFF DAVIS, Kentucky
CHRIS VAN HOLLEN, Maryland           DAVID G. REICHERT, Washington
KENDRICK B. MEEK, Florida            CHARLES W. BOUSTANY, JR., 
ALLYSON Y. SCHWARTZ, Pennsylvania    Louisiana
ARTUR DAVIS, Alabama                 DEAN HELLER, NEVADA
                                     PETER J. ROSKAM, ILLINOIS

             Janice Mays, Chief Counsel and Staff Director

                   Jon Traub, Minority Staff Director

                                   ____

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                RICHARD E. NEAL, Massachusetts, Chairman

MIKE THOMPSON, California            JOHN A. YARMUTH, Kentucky
JOHN B. LARSON, Connecticut          PATRICK J. TIBERI, Ohio, Ranking 
ALLYSON Y. SCHWARTZ, Pennsylvania    Member
EARL BLUMENAUER, Oregon              JOHN LINDER, Georgia
JOSEPH CROWLEY, New York             DEAN HELLER, Nevada
KENDRICK B. MEEK, Florida            PETER J. ROSKAM, Illinois
BRIAN HIGGINS, New York              GEOFF DAVIS, Kentucky

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also, published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.























                            C O N T E N T S

                                 ________
                                                                   Page

Advisory of October 29, 2009 announcing the hearing..............     2

                               WITNESSES

Stephen E. Shay, Deputy Assistant Secretary for International Tax 
  Affairs, United States Department of the Treasury..............     6
William J. Wilkins, Chief Counsel, Internal Revenue Service......    12
Thomas Prevost, Americas' Tax Director, Credit Suisse, New York, 
  New York.......................................................    34
Charles I. Kingson, Adjunct Professor, New York University Law 
  School, New York, New York.....................................    51
Dirk J.J. Suringa, Partner, Covington & Burling LLP, Washington, 
  D.C............................................................    58

                       SUBMISSIONS FOR THE RECORD

American Citizens Abroad, Statement..............................    69
Chamber of Commerce of the United States of America, Statement...    72
Managed Funds Association, Statement.............................    75
American Bankers Association, Statement..........................    80
American Citizens Abroad, Letter.................................    82
American Institute of Certified Public Accountants, Statement....    84
Jo Van de Velde, Letter..........................................    88
The Securities Industry and Financial Markets Association, Letter    90
Financial Services Roundtable, Statement.........................   101
Graham Cox, International Capital Markets Services Association, 
  Letter.........................................................   105
Martin Egan and Kate Craven, International Capital Market 
  Association, Letter............................................   107
Investment Fund Institute of Canada, Statement...................   108
Investment Industry Association of Canada, Statement.............   109
Organization for International Investment, Statement.............   112
Clearing House Association, L.L.C., Letter.......................   118
European Banking Federation, Letter..............................   119
U.S. Public Interest Research Group, Statement...................   126
Swiss Bankers Association, Statement.............................   129
State Street Bank and Trust, Letter..............................   134
EFAMA, Statement.................................................   138
Australian Bankers' Association, Inc., Statement.................   144


                   FOREIGN BANK ACCOUNT REPORTING AND
                             TAX COMPLIANCE

                              ----------                                



                       THURSDAY, NOVEMBER 5, 2009

             U.S. House of Representatives,
                       Committee on Ways and Means,
                   Subcommittee on Select Revenue Measures,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
Room B-318, Rayburn House Office Building, the Honorable 
Richard E. Neal [chairman of the subcommittee] presiding.
    [The advisory of the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

November 5, 2009
By (202)225-5522

                   Neal Announces Hearing on Foreign

               Bank Account Reporting and Tax Compliance

    House Ways and Means Select Revenue Measures Subcommittee Chairman 
Richard E. Neal (D-M(A) announced today that the Subcommittee on Select 
Revenue Measures will hold a hearing on foreign bank account reporting 
and related tax compliance issues. The hearing will take place on 
Thursday, November 5, 2009, in the main Committee hearing room, B-318 
Rayburn House Office Building, beginning at 10:00 a.m.
      
    Oral testimony at this hearing will be limited to invited 
witnesses. However, any individual or organization not scheduled for an 
oral appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

FOCUS OF THE HEARING:

      
    The hearing will focus on non-compliance by U.S. taxpayers with 
foreign bank accounts, rules regarding foreign trusts with U.S. 
beneficiaries, and certain U.S. dividend equivalent payments to foreign 
persons to avoid U.S. taxes. The hearing will also focus on recently 
introduced legislation, HR 3933, the Foreign Account Tax Compliance Act 
of 2009.
      

BACKGROUND:

      
    According to the most recent tax year data available (2003), more 
than $293 billion in U.S. source income was sent to individuals and 
businesses residing abroad. The United States imposes withholding taxes 
when U.S. source investment earnings are paid to a foreign person. 
Those withholding taxes were largely designed to collect tax on income 
earned in the United States even though the income is earned by a 
foreign person not subject to the jurisdiction of our laws. Those 
withholding taxes also play a role in preventing non-compliance by U.S. 
persons holding investment assets in accounts overseas.
      
    The Internal Revenue Service (IRS) has established the Qualified 
Intermediary (QI) program that authorizes foreign financial 
institutions to collect withholding taxes on behalf of the U.S. 
government. The program was implemented to improve compliance for tax 
withholding and reporting on U.S. source income that flows offshore 
through foreign financial institutions. The recent UBS case revealed 
problems with the QI program that permitted tax evasion by U.S. 
persons. Further, even with jurisdictions in which the United States 
has a tax treaty, effective information exchange used by tax 
enforcement agencies may sometimes be undermined by local laws 
providing for banking secrecy that conflict with U.S. law.
      
    In March of this year, this Subcommittee held a hearing on bank 
secrecy and tax evasion at which the Commissioner of the Internal 
Revenue Service testified (Ways and Means Committee Hearing Print, 
Serial 111-12, Hearing on Banking Secrecy Practices and Wealthy 
American Taxpayers). In May, the President released a fiscal 2010 
budget proposal including a number of new requirements on taxpayers 
with foreign bank accounts and foreign financial institutions holding 
those accounts. Last week, Representative Charles B. Rangel filed HR 
3933, the Foreign Account Tax Compliance Act of 2009 containing, among 
other proposals, many of the proposals from the Administration's 
budget, including a mandatory 30 percent withholding on payments to 
foreign financial institutions unless they disclose information to the 
IRS on accounts owned by U.S. individuals or close the accounts, and a 
requirement on individuals and entities to report offshore accounts 
with values of $50,000 or more on their tax returns (see Joint 
Committee on Taxation Technical Explanation, JCX-42-09).
      
    In announcing the hearing, Chairman Neal stated, ``For many years, 
I have sought to crackdown on individuals and corporations that are 
abusing overseas tax havens. With billions of dollars in revenue being 
lost each year, strengthening our tax compliance efforts is essential. 
I strongly believe the Foreign Account Tax Compliance Act of 2009, 
introduced this week in the House by Chairman Rangel and myself, gives 
the Treasury Department the necessary tools it needs to get tough with 
those Americans hiding their assets overseas. I welcome the support for 
this bill offered by President Obama and Treasury Secretary Geithner, 
and look forward to working with them to turn this proposal into law. 
It is my hope that this hearing marks the beginning of a vigorous 
campaign by Congress and the Obama administration to end the practice 
of offshore tax avoidance by U.S. citizens.''
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
      Please Note: Any person(s) and/or organization(s) wishing to 
submit for the hearing record must follow the appropriate link on the 
hearing page of the Committee website and complete the informational 
forms. From the Committee homepage, http://
democrats.waysandmeans.house.gov, select ``Committee Hearings.'' Select 
the hearing for which you would like to submit, and click on the link 
entitled, ``Click here to provide a submission for the record.'' Once 
you have followed the online instructions, complete all informational 
forms and click ``submit'' on the final page. ATTACH your submission as 
a Word or WordPerfect document, in compliance with the formatting 
requirements listed below, by close of business November 19, 2009. 
Finally, please note that due to the change in House mail policy, the 
U.S. Capitol Police will refuse sealed-package deliveries to all House 
Office Buildings. For questions, or if you encounter technical 
problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies on electronic submissions for printing the official 
hearing record.
      
     2. Copies of whole documents submitted as exhibit material will 
not be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
     3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://democrats.waysandmeans.house.gov.

                                 

    Chairman NEAL. Let me call this hearing to order. I 
apologize for just being a couple of minutes late. Governor 
Patrick was here, and the mass delegation had breakfast with 
him this morning. And based on the attendance, I won't be 
calling the question on any----
    [Laughter.]
    Chairman NEAL. Let me welcome everyone to this hearing of 
the Select Revenue Measures Subcommittee on tax avoidance in 
foreign bank account reporting.
    When we last met on this issue, in March of this year, we 
were seeking legislative options to handle the weaknesses 
exposed by the UBS case. The IRS and the Justice Department 
were struggling to get the names of U.S. account holders from a 
bank that had already admitted complicity in a tax avoidance 
scheme for which they agreed to pay $780 million, in terms of a 
fine.
    The treaty would only provide tax enforcement information 
if it was a crime under local law, and if you had a name. 
Negotiations, however, produced a break-through, and more than 
4,500 names were to be divulged.
    The IRS announced an amnesty program which has thus far 
netted 7,500 taxpayers with previously hidden overseas accounts 
seeking to avoid the worst penalties. I congratulate the IRS 
and the Department of Justice on this hard-fought victory.
    Of course, the story does not end there. We never knew that 
the tax information exchange would be virtually meaningless 
because we didn't have the names. We didn't know bank secrecy 
would prove such an effective shield for evaders, even when we 
knew a crime had been committed.
    Following our March hearing, President Obama announced a 
number of new enforcement provisions as part of his budget 
proposal. Under the leadership of Chairman Rangel, we have 
spent months sorting through these issues. And last week Mr. 
Rangel and I filed the Foreign Account Tax Compliance Act of 
2009.
    This bill creates a new reporting regime for foreign 
financial institutions with U.S. account holders, whether they 
are participants in the existing qualified intermediary program 
or not. This legislation casts a wide net in search of 
undisclosed accounts and hidden income. It is carefully 
balanced. And, as we will hear from one foreign bank today, it 
is actually supported by one who will bear the brunt of this 
new disclosure.
    The boxer, Joe Lewis, once told an opponent who proceeded 
to outrun him for 12 rounds, ``You can run, but you can't 
hide.'' Lewis knocked him out in the 13th round. And I believe 
we are entering that 13th round, and it will not be long before 
those individuals seeking to hide money overseas will be 
caught. This bill could be enacted by the year-end.
    And just before I recognize Mr. Tiberi, it has become a 
priority issue for the G20, as well as the G7. And I think 
that, in terms of the economic confrontation that America 
currently is experiencing, that it makes good sense, before we 
talk about raising revenue elsewhere, that we begin talking 
about closing down these tax havens and these loopholes that 
the American people have justly come to see being patently 
unfair.
    And with that, I would like to recognize my friend, Mr. 
Tiberi, for his opening statement.
    Mr. TIBERI. Thank you, Mr. Chairman. Early this year the 
subcommittee met to examine issues surrounding banking secrecy 
and illegal tax evasion. At that hearing we all agreed that 
criminal tax evasion should be aggressively pursued and 
punished.
    I also said that I hoped our efforts in the area would 
remain focused on compliance, that the line between illegal tax 
evasion and legal tax practices used by U.S. taxpayers around 
the world is distinct. And to blur that line may only make our 
compliance efforts more difficult.
    I am pleased, Mr. Chairman, that you have called this 
hearing to discuss legislation recently introduced by Chairman 
Rangel and you that seeks to address the issue of illegal tax 
evasion. During this--these challenging economic times, honest, 
hardworking taxpayers who play by the rules expect others to do 
the same.
    I am anxious to hear from our witnesses about some of the 
details of the bill, and certainly hope it is a workable 
solution to the problem of offshore tax evasion that avoids 
unintended consequences.
    I will note, however, that I am very pleased the bill does 
not blur the issues of tax evasion and legal tax practices, and 
does not include the most controversial international tax 
policy changes proposed by the Administration. We have heard a 
lot of rhetoric in recent months from the Administration and 
others designed to confuse the issues, and characterize them as 
one and the same. I am pleased to see, Mr. Chairman, that you 
have cut through that, and drawn a bright line separating the 
two.
    I look forward to continued work with you on all these 
issues in the days and weeks and months ahead. Thank you to our 
witnesses. I look forward to your testimony today.
    With that, Mr. Chairman, I will yield back.
    Chairman NEAL. Thank you, Mr. Tiberi. Let me welcome our 
witnesses today. On our first panel, we will hear from Stephen 
Shay, the Deputy Assistant Secretary for International Tax 
Affairs at the Treasury Department. We were fortunate to have 
Mr. Shay as a private sector expert in our March hearing, but 
even more pleased to have him today in his official capacity.
    We will next hear from William Wilkins, the chief counsel 
for the Internal Revenue Service. The legislation we are 
discussing today could not have been possible without the 
thoughtful commentary from both Treasury and IRS. And we are 
very appreciative of your contribution.
    Our second panel will allow us to hear from Mr. Thomas 
Prevost, a managing director and America's head of tax for 
Credit Suisse. In his position, he is responsible for all tax 
matters in the Americas for the Swiss-owned bank.
    Next we will hear from Professor Charles Kingson, from New 
York University.
    And, finally, we will hear from Dick Suringa, a partner at 
Covington & Burling, specializing in international tax matters.
    I will note for the record that all of these witnesses have 
put in their time, either at Treasury or IRS. And we look 
forward to their unique perspectives.
    Without any objection, any other Members wishing to insert 
statements as part of the record may do so. All written 
statements offered by our witnesses will be inserted into the 
record, as well. With that, let me recognize Mr. Shay for his 
opening statement.

 STATEMENT OF STEPHEN E. SHAY, DEPUTY ASSISTANT SECRETARY FOR 
  INTERNATIONAL TAX AFFAIRS, UNITED STATES DEPARTMENT OF THE 
                            TREASURY

    Mr. SHAY. Thank you, Mr. Chairman. Chairman Neal, Ranking 
Member Tiberi, and Members of the Subcommittee, I appreciate 
the opportunity to testify today about foreign bank account 
reporting and tax compliance. With the permission of the 
chairman, I will ask that my statement be put in the record, 
and just summarize a few remarks.
    Chairman NEAL. Without objection.
    Mr. SHAY. For too long, some Americans have taken advantage 
of the system by hiding unreported income in a foreign 
financial account, trust, or corporation. When Americans evade 
their tax-paying responsibilities, the millions of workers and 
businesses who do pay their taxes are forced to pay the price.
    The Foreign Account Tax Compliance Act of 2009--I will 
refer to it on occasion as H.R. 3933--and its companion bill in 
the Senate, S. 1934, represents an important step toward 
reducing the amount of taxes lost through illegal use of hidden 
accounts, and making sure that everyone pays their fair share.
    Before talking about the act itself, I would like to 
discuss more broadly how the Administration is addressing the 
problem of offshore tax evasion. Because offshore evasion has 
many facets, the Treasury Department has developed a multi-
pronged approach to it. This comprehensive approach includes 
legislative proposals, a focus on bilateral information 
exchange agreements, multilateral initiatives to improve 
transparency and information exchange in tax matters, and IRS 
enforcement actions.
    This approach is intended to provide the IRS with the 
information from taxpayers, third parties, and other countries, 
and the tools needed to tackle offshore evasion. The 
Administration's fiscal year 2010 budget includes a series of 
legislative proposals to curb the abuse of offshore accounts 
and entities. The proposals are directed at enhancing 
information reporting, strengthening penalties, and making it 
harder for foreign account holders to evade U.S. taxes.
    Some information that the IRS needs to enforce U.S. tax law 
can be obtained only through foreign countries. Accordingly, 
the Administration has placed a high priority on concluding tax 
information exchange agreements. In the last year alone, we 
have signed agreements to exchange tax information with 
Switzerland, Luxembourg, Liechtenstein, Gibraltar, and Monaco.
    The Administration also seeks to improve international tax 
cooperation. Thus, we are working on a multi-lateral basis to 
make sure that countries meet international standards on tax 
transparency and information exchange. We are committed to 
preventing the facilitation of offshore tax evasion.
    To further the IRS's enforcement capacity, the President's 
budget proposes new enforcement tools to crack down on evasion 
through offshore accounts and entities, and provides funds to 
add nearly 800 new IRS employees to combat offshore evasion, 
and to improve compliance with U.S. international tax laws by 
businesses and wealthy individuals.
    The Foreign Account Tax Compliance Act represents an 
important step forward in correcting problems within U.S. tax 
law that have allowed taxpayers to shirk their 
responsibilities.
    Like the Administration's proposals, H.R. 3933 would make 
it more difficult for U.S. persons to hide assets abroad in 
foreign financial accounts by: Enhancing information reporting; 
increasing withholding taxes for foreign financial institutions 
that do not engage in information reporting; and strengthening 
the penalties for taxpayers who do not adequately report their 
income.
    It will also make it more difficult for taxpayers to hide 
behind foreign trusts. And it will prevent taxpayers who 
receive the benefit of U.S.-sourced dividend payments from 
avoiding U.S. withholding taxes.
    Mr. Chairman, we applaud the leadership role taken by you 
and Chairman Rangel in the House, and by Chairman Baucus and 
Senator Kerry in the Senate, in introducing this legislation. 
And, additionally, the work of Senator Levin and Congressman 
Doggett, in supporting a strong international tax enforcement 
agenda.
    Mr. Chairman, Ranking Member Tiberi, and Members of the 
Subcommittee, the Foreign Tax Compliance Act fits well into the 
Administration's multi-pronged strategy of improving our 
domestic tax laws, while increasing global cooperation on tax 
information exchange to help narrow the tax gap, and create the 
fairer tax system we need.
    We look forward to working with you and Members of this 
Subcommittee on this important subject. I would be pleased to 
answer questions when the time is appropriate.
    Thank you.
    [The statement of Mr. Shay follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

    Chairman NEAL. Thank you, Mr. Shay.
    Let me recognize Mr. Wilkins to offer testimony.

 STATEMENT OF STATEMENT OF WILLIAM J. WILKINS, CHIEF COUNSEL, 
                    INTERNAL REVENUE SERVICE

    Mr. WILKINS. Thank you, Chairman Neal, Ranking Member 
Tiberi, Members of the Subcommittee. I the opportunity to 
present the Internal Revenue Service's views on H.R. 3933. Like 
Mr. Shay, I would like to summarize the key points of my 
written testimony.
    The IRS does support this legislation, because we feel it 
will provide significant new tools for our international tax 
compliance strategy. Our strategy is a multi-year effort. It is 
tailored for both individual and corporate taxpayers. For the 
strategy to be successful, it requires guidance for taxpayers 
and their advisors, legislative support, adequate resources, 
more enforcement activities, more and better information 
reporting, and stronger international cooperation.
    We believe that this strategy is already producing results. 
Part of our approach was the initiative that ended October 15th 
to provide clear rules for imposing severe civil penalties, 
back taxes, and interest, but not imposing criminal penalties 
on qualifying taxpayers who came forward to disclose previously 
undisclosed offshore accounts.
    The successes of the IRS and the Department of Justice in 
their investigation of UBS created a setting under which this 
kind of initiative could succeed. Just before the October 15th 
closing date of that program, the IRS announced that it 
expected at least 7,500 people to come forward. I have been 
told that the final numbers will be well over that initial 
estimate. The IRS hopes to be able to provide additional data 
later in November.
    There will be significant taxes and penalties paid as a 
direct result of these disclosures. But just as importantly, 
these taxpayers are now back in the U.S. tax system, and will 
be paying taxes on their offshore income in the years to come.
    In addition, publicity regarding the obligations of U.S. 
citizens and residents to report worldwide income and assets 
has, for a practical matter, made it impossible for U.S. 
taxpayers to ignore the clear mandate of our tax laws, even if 
they may reside abroad, or even if they may have derived their 
wealth from foreign sources.
    The IRS will also develop leads that we obtain from 
voluntary disclosures. We will be scouring this information to 
identify financial institutions, advisors, and others who 
promoted or otherwise helped U.S. taxpayers hide assets and 
income offshore, and skirt their tax responsibilities at home.
    Some weakness in our reporting systems have come to light, 
as a result of this enforcement activity, and the valuable 
investigative work carried out by Congress. H.R. 3933 would 
repair these weaknesses.
    The particular problem being addressed here is the 
deliberate and illegal hiding of assets and income from the IRS 
by U.S. citizens and residents. It is true that such law 
breakers now face significant civil and criminal penalties. 
H.R. 3933, however, is still needed to help the U.S. government 
detect such activities, and to enforce applicable penalties.
    The problems being addressed fall into certain categories. 
One category is the limited scope of current requirements, 
whether for qualified or non-qualified foreign intermediaries 
to report on their U.S. customers' investments. There is a 
limitation on reporting on investment and foreign securities, 
because of source rules.
    Another category of problem is that intermediaries may be 
able to avoid reporting their U.S. customers' indirect 
investments that are made through foreign entities.
    Another category of problem is the lack of diligence 
required for non-qualified intermediaries to detect a U.S. 
customer's false certification of foreign status, even when 
investing in U.S. securities.
    Another category of problems involves features of the FBAR 
rules that create obstacles to enforce penalties for failures 
and violations.
    Finally, the bill would tighten certain existing rules 
involving trust, bearer bonds, and dividend withholding, and 
would require certain advisors to become part of the diligence 
and reporting system when they assist a U.S. person to avail 
himself of a foreign legal entity.
    On the topic of qualified intermediaries, most 
international financial institutions have entered into 
agreements with the IRS to be qualified intermediaries, because 
that status helps them to more efficiently serve their non-U.S. 
clients who want to invest in U.S. securities.
    However, the obligations of qualified intermediaries to 
provide the IRS with reports on their U.S. customers is 
currently inadequate in two important respects. First, as I 
mentioned, there is generally no obligation to report the non-
U.S. source income of a U.S. customer that's not paid within 
the United States, or to report the gross disposition proceeds 
of a U.S. customer who does not communicate with the 
institution from within the United States.
    Second, a foreign corporation or other foreign entity is 
normally not subject to Form 1099 and back-up reporting and 
withholding rules that apply to U.S. persons, even if that 
foreign entity is owned by a U.S. taxpayer who does have the 
obligation to pay tax on the entity's income.
    H.R. 3933 would repair both of these inadequacies, and 
would require a qualified intermediary to provide reporting to 
the IRS and to the customer broadly on financial activities 
through foreign financial accounts, including non-U.S. 
securities activities, and including activity of foreign 
entities owned by U.S. persons.
    In the area of non-qualified intermediaries, another 
problem that we have faced is that a U.S. person who invests in 
U.S. securities through a non-QI can falsely claim to be a non-
U.S. person. And there is probably too little that the payer of 
the securities income must do to check the certification, and 
too little that the intermediary must do.
    Further, we do not have the ability to verify the 
information provided by the non-QI. And this increases the risk 
that false claims will remain undetected. To address this 
problem, the bill would generally apply a new U.S. withholding 
tax to U.S. securities proceeds, dividends, and interest that 
are paid to a non-qualified intermediary, unless the 
intermediary agrees to due diligence and reporting obligations 
on its U.S. customers' worldwide investments, including 
indirect U.S. customers who invest through foreign entities.
    A customer who is subject to withholding could apply to the 
IRS for a refund of withholding that was in excess of its U.S. 
tax obligation.
    It is our expectation that most, if not all, significant 
international institutions would undertake the due diligence 
and reporting obligations necessary to avoid U.S. withholding 
on U.S. securities proceeds of their customers and on their own 
proprietary U.S. securities activity.
    On the FBAR topic, under current law the penalties 
applicable to persons who fail to file an FBAR, a foreign bank 
account report, are not imposed through the Internal Revenue 
Code. They are, instead, imposed through the Bank Secrecy Act, 
which is in Title 31 of the U.S. Code.
    If an individual fails to report income held in a foreign 
financial account, on the one hand, the IRS could use 
traditional tools such as assessments, liens, and garnishments 
to collect the taxes and the tax penalties. However, the 
traditional IRS enforcement tools may not be used to collect 
the Title 31 FBAR penalties that apply if the foreign account 
is not reported. The FBAR penalty must instead be referred to 
the Justice Department for separate prosecution and collection.
    H.R. 3933 amends the Internal Revenue Code to create an 
FBAR-like reporting obligation as part of the filing of a tax 
return, and a separate penalty regime for failure to report the 
foreign financial account. This would allow the IRS to enforce 
the new Internal Revenue Code penalty by applying traditional 
IRS enforcement tools.
    There would be a new 40 percent penalty that would apply to 
income tax deficiencies attributable to unreported assets. And 
this would apply not only to unreported foreign investment 
income, but also to business and other income that was hidden 
through the use of foreign accounts.
    The bill would address an important detection issue by 
amending the statute of limitations in the case of income 
admissions attributable to foreign assets, importantly 
including a suspension of the statute, until the asset was 
properly reported.
    Other provisions of the bill--clarifying foreign trust 
rules would be helpful in addressing some forms of tax 
avoidance involving those entities. There are also provisions 
affecting use of derivatives to avoid dividend withholding. 
And, finally, the withholding exception for foreign targeted 
bearer bonds should eliminate the kind of investment that may 
have been used for tax avoidance in the past.
    To conclude, we believe this bill will be of significant 
assistance to the IRS in assuring greater compliance with U.S. 
tax rules. The deliberate and illegal hiding of income and 
assets from the IRS should not be tolerated, and we believe the 
bill will help make this activity easier to detect and punish, 
and will help deter future such illegal activity. Thank you.
    [The statement of Mr. Wilkins follows:] 
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             Statement of William J. Wilkins, Chief Counsel
                        Internal Revenue Service
    Chairman Neal, Ranking Member Tiberi and Members of the 
Subcommittee, thank you for this opportunity to testify on H.R. 3933, 
the ``Foreign Account Tax Compliance Act of 2009.''
    We strongly support this important legislation that, if enacted, 
would provide the IRS with additional tools to address offshore tax 
evasion by U.S. persons who hide unreported income and assets in 
offshore accounts. The Foreign Account Tax Compliance Act would aid the 
IRS in its mission to ensure that all businesses and individuals are 
playing by the rules and paying their fair share of taxes.
    H.R. 3933 is a far-reaching and comprehensive bill that brings 
together most of the strong international reporting and disclosure 
proposals outlined earlier by President Obama--and subsequently 
incorporated in the FY 2010 Budget--and those contained in other 
proposed legislation designed to combat offshore tax evasion.
    In this regard, we applaud not only Chairmen Baucus and Rangel and 
you, Mr. Chairman, but also Senator Levin and Representative Doggett 
for their significant and important contributions to the ``Foreign 
Account Tax Compliance Act of 2009.''
IRS International Compliance Program
    To meet the broad array of challenges that we face in the 
international arena, the IRS has focused its efforts on a multi-year 
international tax compliance strategy that is tailored for both 
individual and corporate taxpayers. For this strategy to be successful 
it requires guidance for taxpayers and their advisors, legislative 
support, adequate resources, more enforcement activities, more and 
better information reporting, and stronger international cooperation.
    So far, we believe that this strategy is already producing results. 
The IRS recently announced that over 7,500 people came forward under 
its special offshore voluntary compliance program that ended in mid-
October. It is too early to say how much tax will be collected from 
this effort. However, I can tell you that account sizes ranged from 
just over $10,000 to more than $100 million. Just as importantly, these 
taxpayers are now back in the U.S. tax system and will be paying taxes 
on their offshore income in the years to come.
    A key aspect of our future international offshore work will be 
mining the voluntary disclosure information from people who have come 
forward. We will be scouring this information to identify financial 
institutions, advisors, and others who promoted or otherwise helped 
U.S. taxpayers hide assets and income offshore and skirt their tax 
responsibilities at home.
    In addition, we are increasing our scrutiny of annual foreign bank 
and financial account reports (Treasury Department Form TD F90-22.1, 
``Report of Foreign Bank and Financial Accounts,'' or ``FBAR''). 
Current law requires that U.S. taxpayers file an FBAR if their foreign 
financial accounts total more than $10,000. But current rules make it 
difficult to catch taxpayers who do not file a required FBAR.
    Our focus today is on ending offshore noncompliance by U.S. 
individuals. The bill will provide the IRS welcome tools toward that 
goal.
The Problem: Secret Offshore Accounts
    Recent experience has provided a wake up call for the United 
States, and tax administrations worldwide, on the problem of taxpayers 
hiding assets and income in offshore financial institutions. We have 
more insight about the manner in which U.S. persons hide their income 
offshore and conceal their identities from the IRS. The use of secret 
offshore accounts, often in the name of offshore entities, like trusts 
or corporations--sometimes with the assistance of advisors--makes it 
increasingly difficult for the IRS to gather the information it needs 
to enforce our tax laws.
Strengthening the QI System
    The bill will build upon the network of foreign financial 
institutions the IRS has established as the foundation for its 
nonresident withholding tax system for U.S. portfolio investments, 
known as the Qualified Intermediary (QI) system. A QI's main task has 
been to check the qualification of nonresident investors in U.S. 
securities, and report their income entitled to reduced withholding 
rates under treaties or the Code. The system has managed this job well, 
and regularly processes billions of dollars in U.S. portfolio 
investment income flows and associated withholding taxes. QIs also 
directly report to the IRS information on the U.S. source income and 
certain gross proceeds of their U.S. individual account holders. We 
know that some U.S. taxpayers have exploited this framework by failing 
to report income associated with 1) non-U.S. securities held in QIs or 
affiliates, or even 2) U.S. securities with a shell foreign entity 
interposed as the technical account owner. The bill would prevent this 
kind of exploitation of today's rules for reporting and withholding.
    The potential for U.S. taxpayers to evade U.S. tax through the use 
of offshore accounts maintained by nonqualified foreign intermediaries 
(NQIs) also poses a serious problem. Because NQIs have little incentive 
to report information to the IRS, the IRS is at a disadvantage in 
verifying compliance by these financial intermediaries. Under the bill, 
an NQI would be subject to withholding unless it enters into an 
agreement with IRS and complies with the associated reporting, due 
diligence, and verification obligations with regard to its direct and 
indirect U.S. customers. The bill would, therefore, create a strong 
incentive for global foreign financial institutions to provide the IRS 
with the information it needs to ensure that U.S. account holders are 
complying with U.S. tax laws.
    Similar provisions are included in the FY2010 Budget.
Repeal of Bearer Bond Eligibility for Portfolio Interest Exemption
    Along similar transparency lines, the bill would repeal the 
remaining exceptions to the ability to issue bearer bonds eligible for 
the portfolio interest exemption.
    This provision is not included in the FY2010 Budget.
Assisting the Examination of Individual Offshore Accounts
    The bill would fill gaps in the current reporting requirements with 
regard to the foreign financial assets and income of U.S. individual 
taxpayers or their domestic entities formed to hold foreign financial 
assets. Individuals or entities that have an interest in foreign 
financial assets or accounts with an aggregate value over $50,000 
during the taxable year must disclose their holdings of foreign 
financial assets or accounts with their income tax return.
    Regular penalties in increments of $10,000, up to a maximum penalty 
of $50,000 for one taxable period, apply for failures to comply with 
this new information reporting obligation, as well as an elevated 40% 
accuracy-related penalty for understatements attributable to a 
transaction involving a foreign financial asset.
    Individuals also would face an extended 6-year statute of 
limitations in the event of significant omissions of income 
attributable to foreign financial assets.
    In addition to enhanced reporting of foreign financial interests by 
taxpayers and an extended statute of limitations, material advisors 
also would be required to report assistance they provide to U.S. 
persons acquiring or forming a foreign entity.
    Similar provisions are included in the FY2010 Budget.
Transactions with Foreign Trusts
    U.S. grantors of foreign trusts have taken aggressive positions by 
failing to report income of foreign trusts that afford a U.S. person 
with effective enjoyment of the trust assets and income. The bill would 
clarify and enhance the grantor trust rules in regards to when a 
foreign trust may have a U.S. beneficiary. The bill would treat 
uncompensated use of foreign trust property as a distribution equal to 
the value of the use. The foreign trust reporting provisions and 
applicable penalty are also strengthened to help prevent U.S. persons 
from concealing income or assets offshore in foreign trusts.
    A similar foreign trust penalty provision is included in the FY2010 
Budget.
Avoidance of the Dividend Withholding Tax
    Foreign persons seek to avoid the 30% withholding tax imposed on 
U.S. source dividends by temporarily converting U.S. stock into an 
economically equivalent derivative investments such as total return 
swaps. The IRS is actively pursuing these schemes under existing law.
    The bill would prevent this abuse by treating dividend equivalent 
amounts as generally U.S. source, thereby subjecting them to the 
withholding tax.
    Regulation authority is provided to provide exceptions in cases 
where the contract or other arrangement does not have the potential for 
avoidance of tax.
    A similar provision is included in the FY2010 Budget.
International Consistency and Cooperation
    As I noted at the outset, IRS is not alone in facing the 
enforcement challenge posed by secret offshore accounts. Other tax 
administrations across the globe share a similarly problematic 
experience. The bill will help, but international cooperation and 
coordination is also key. It is fundamentally important to achieve 
consistent international standards of transparency that support 
compliance without overly burdening the efficiency of cross border 
portfolio investment flows. Financial institutions obviously also have 
a strong interest in international consistency in this area. There is 
an obvious link to the ongoing efforts to promote better mechanisms for 
exchange of information under treaties, TIEAS, and other international 
agreements. The IRS will continue to seek a consensus on transparency 
with its counterpart tax administrations in bilateral competent 
authority discussions, as well as in multilateral forums such as JITSIC 
and OECD. The Commissioner and I are committed to this effort.
Conclusion
    In conclusion, the ``Foreign Account Tax Compliance Act of 2009'' 
would provide the IRS with enhanced tools it needs to continue its 
expansion of international tax enforcement and make it even more 
difficult for U.S. taxpayers to avoid paying their faire share of taxes 
by unlawfully hiding money overseas.
    Thank you Mr. Chairman. The Internal Revenue Service looks forward 
to working with the Subcommittee on this important legislative 
initiative.

                                 

    Chairman NEAL. Thank you, Mr. Wilkins. Mr. Shay, we will 
hear testimony today that some are concerned that if this bill 
becomes law, that other countries could use it as a model for 
reporting, as well. Great Britain, perhaps, the most notable 
example.
    How would Treasury treat such an international effort for 
greater information exchange, even if it meant greater 
reporting for our financial institutions?
    Mr. SHAY. Thank you, Mr. Chairman. We can't--I can't 
anticipate what other countries will do. Countries that operate 
in the markets of another country are going to have to be 
responsible to the--for the compliance with the laws of that 
country.
    Let me comment a little bit about this bill in relation to 
other countries and, you know, multi-lateral activity. This 
bill is intended to increase reporting.
    And so, what it does is uses the incentive of not having to 
suffer a withholding tax to provide for a foreign financial 
institution to assist the IRS with respect to providing 
information to the IRS regarding U.S. accounts. If other 
countries were to do the same, it would be a legitimate action 
on their part, as I think it's legitimate on our part.
    What this approach reflects is an effort to use the tools 
that are available outside of a multi-lateral context. If at 
some point in the future there is an ability to reach multi-
lateral agreements to achieve the same thing, then you would 
have the potential to calibrate the nature of the incentive 
that's involved.
    Chairman NEAL. Okay. Mr. Wilkins, we will hear suggestions 
today that the effective date under this bill is too soon, that 
the amount of the work that the IRS will need to do in 
renegotiating with QIs in establishing relationships with non-
QIs will simply take too much time.
    How ready, or how prepared is the IRS for something as bold 
as this proposal?
    Mr. WILKINS. Well, we are prepared to devote the resources 
necessary to implement the legislation. I do think it will be 
important for us to continue to work with you on being sure 
that there is--the flexibility is there to not impose 
withholding taxes because a reporting system is not ready to go 
yet.
    As Mr. Shay said, the idea here is to collect the 
information, more than to collect the withholding tax. The 
withholding tax is really an incentive to collect the 
information. So, I do think we need the flexibility to face--
you know, to face realities that may occur, given the--what's 
going to be imposed.
    That may be partly recalibrating parts of the effective 
dates. It may be providing flexibility for us to address 
important issues first, and have the flexibility to address the 
secondary and tertiary issues after the--you know, the primary 
issues of the major international financial institutions are 
first addressed.
    Chairman NEAL. And let me ask you, Mr. Wilkins. Your 
amnesty program sounds as though it's been quite successful. 
And I must tell you I have not received one letter from one 
constituent opposing my position on this issue.
    And I wonder if the threat of disclosure by UBS made 
taxpayers more nervous and more willing to come forward 
voluntarily. And can you tell me how this initiative fared, 
compared to prior amnesties?
    Mr. WILKINS. Well, thank you for that opportunity, and 
including for the opportunity to point out that it's really not 
an amnesty. There are severe penalties involved. It does 
provide relief from criminal prosecution for qualifying 
applicants.
    There is no question that the enforcement activity 
surrounding UBS was an extremely important part of the 
atmosphere that made this initiative work. We have--there has 
been a voluntary disclosure policy within IRS for a very long 
time. It typically only produces a handful of disclosures each 
year. Getting disclosures in the thousands, like we were 
getting with this one, is really something new and different. 
And I don't think there is any question, but that the 
enforcement activity and the surrounding publicity was really 
responsible for making that happen.
    Chairman NEAL. Thank you. And, Mr. Shay, some of the 
criticism that we will hear today is that this initiative is 
too bold, and that we should rely on multi-lateral negotiations 
for our information exchange. Might you comment on that?
    Mr. SHAY. Well, I don't think this initiative is too bold. 
I think there are great responsibilities, if it's adopted, on 
the administration and on the Internal Revenue Service, to be 
sure it's implemented in a way that the United States gets the 
information it wants, that we only have withholding on any 
circumstances where there are essentially non-compliant 
financial institutions--or, if not, withholding final tax, 
because there is the ability to reclaim the tax--and that we do 
it in a manner that is as respectful of the burdens on the 
financial institutions and--but still gets us the information 
as we can make it.
    We want this to work, and hopefully a win-win for good tax 
administration and good, efficient capital markets. It simply 
is doing something that cannot be done through a multi-lateral 
arrangement. And it certainly reflects, I think, the urgency of 
this issue and--by bringing this powerful incentive to move 
forward. And I think that actually will probably advance the 
time when there are multi-lateral arrangements--get to this and 
process it.
    But as I think we all know, that's a very, very long 
process, and I think this legislation will increase the 
likelihood of it, but will assure that information is provided 
to the IRS before that ultimately happens.
    Chairman NEAL. Thank you. With that, I would like to 
recognize Mr. Tiberi to inquire.
    Mr. TIBERI. Thank you, Mr. Chairman. Mr. Wilkins, can you 
assure us and the hard-working, law-abiding taxpayers that we 
all represent that the IRS is doing everything in its power to 
collect and aggressively go after tax cheats?
    Mr. WILKINS. Yes, this is a priority for the commissioner, 
and it's a priority for the whole IRS. There is particular 
focus on international tax compliance, which is the subject 
matter of this bill. And we are focused on it. That is where 
our deployment of additional resources is focused, and we need 
to balance service and enforcement.
    But there is no question that enforcement is key, and 
bringing taxpayers into compliance is important. We will likely 
need assistance of the congress from time to time in those 
efforts, such as the current example.
    Mr. TIBERI. Thank you. To further go on, with respect to 
international tax, would you agree that there is a distinction 
between individuals and corporations who are deliberately 
avoiding taxation, deliberately hiding assets, not following 
the Internal Revenue Code, and a distinction between American, 
U.S.-worldwide companies who are doing business 
internationally, who are working every day with the Internal 
Revenue Service on issues of deferral, and check the box, and 
other legal measures within the Internal Revenue Code?
    Mr. WILKINS. Yes. I definitely agree with that statement. 
What we are dealing with in this bill is deliberate and illegal 
hiding of income and assets, and non-compliance with what the 
law is today.
    Issues of tax policy surrounding multi-national 
corporations whose returns are audited every year is a 
different question, and requires different strategies.
    Mr. TIBERI. And there are IRS officials that are working 
with U.S. companies, literally, every day on those issues, 
correct?
    Mr. WILKINS. Yes, that is correct. Most large, multi-
national corporations are constantly under audit, and they 
frequently have IRS auditors on site.
    Mr. TIBERI. To continuing questioning on just a slightly 
different issue, most people seem to agree that international 
exchanges of information in particular are key elements of our 
ongoing effort to fight tax evasion.
    Do you agree that excluding black-listing from the 
legislation that Chairman Rangel and Chairman Neal have 
introduced makes countries around the world more willing to 
continue providing the Internal Revenue Service the critical 
information needed to combat tax evasion effectively?
    Mr. WILKINS. Well, Mr. Shay may want to comment on this, 
too.
    Mr. TIBERI. I was going to ask him next.
    Mr. WILKINS. I think the approach in this bill was focused 
more on institutions than countries. I think the institutions 
is really where the activity is, and where the money is, and I 
think that was a good choice.
    I think, obviously, you need to have the flexibility to go 
around country by country and work on information exchange. And 
that kind of negotiation and treaty activity is an important 
part of an overall strategy. But, as Mr. Shay says, that 
doesn't get you all the way there. I think using this kind of 
approach to obtain information directly from institutions is an 
important part of it, too.
    Mr. TIBERI. Mr. Shay.
    Mr. SHAY. I think Bill said it all. No, I think we 
certainly like the approach in this legislation. It has--it 
reflects--it is in common with the approach that was taken by 
the administration's budget proposals, and we're very hopeful 
that it, combined with information exchange together, will be 
successful.
    I want to add one comment, and that is in--during the 
course of the--the legislation includes a possibility that the 
foreign financial institution will provide not just information 
on the U.S. person's account, but information in the form 
that's traditional for a U.S. bank, what's called 1099 
reporting.
    And my understanding is that was actually requested by a 
financial institution that had had conversations with relevant 
staffs, so that not only does this legislation have the 
potential to help or address the evader, help us--help the IRS 
find the evader, but it also has the potential, frankly, to 
make compliance easier and more effective by the U.S. person 
with a foreign account that wants to comply with their tax.
    And, frankly, I think for most of us, getting a 1099 from a 
bank is a huge help. And we do know, on the compliance side, 
that we have the highest rates of compliance where we have 1099 
reporting. Thank you, sir.
    Mr. TIBERI. Thank you. Mr. Chairman, on a final note, I 
think Congresswoman Schwartz would agree Saturday is a big day 
in Happy Valley, where my Ohio State Buckeyes are taking on the 
Penn State and Nittany Lions.
    I just want to thank--I understand, and I wasn't going to 
bring up the World Series. But, Mr. Shay, I just want to thank 
you. I don't know if it's subliminal or not, but you are 
wearing scarlet and gray. That tie is very nice. I want to 
thank you for that. I yield back.
    Mr. BLUMENAUER. He needs a bow tie.
    Chairman NEAL. It was part of our strategy to disarm you.
    Let me recognize the gentleman from Georgia, Mr. Linder, to 
inquire.
    Mr. LINDER. Thank you, Mr. Chairman. I would ask each of 
you, how many dollars are offshore in dollar denominated 
deposits?
    Mr. WILKINS. I don't have that data.
    Mr. LINDER. Why don't you have that data?
    Mr. WILKINS. I wasn't prepared to answer that question. I 
apologize.
    Mr. LINDER. Mr. Shay, do you have any idea?
    Mr. SHAY. I also don't have that data. I think just to fine 
tune it, I assume that the question would be not just dollar 
accounts, but dollar accounts by U.S. persons with respect to 
accounts held outside the United States.
    Mr. LINDER. The answer is $13 trillion. Three groups, 
including McKinsey & Company, did studies in early 2005, and 
came up with $10 trillion, growing by about $800 billion a year 
in dollar denominated deposits.
    Can you give me any idea how much of that is legitimately 
there for reasons other than hiding it?
    Mr. SHAY. Thank you for that. And I would be very 
interested in seeing those studies.
    Mr. LINDER. I'm surprised you haven't.
    Mr. SHAY. I'm not sure we're--I would have to make sure we 
are talking about the same--you know, I haven't seen what you 
are referring to, but I would be very interested in it.
    And I am not in a position to answer today the question of 
how much of whatever that denominator is would be reported or 
not. I think it would be--I think we will know a lot more, and 
have a lot more confidence in our ability to answer that 
question, if this legislation is adopted. I----
    Mr. LINDER. The number is available. This legislation is 
simply not going to change it.
    Mr. SHAY. Was your question whether it was reported, or 
whether--I am sorry. Maybe I misunderstood your question.
    Mr. LINDER. There are about $13 trillion in offshore 
financial centers in dollar denominated deposits. My question 
is, do you have any idea how much of that is there legitimately 
for purposes other than evasion?
    Mr. SHAY. It seems to me the answer to that question would 
depend on whether the--not the account itself, but the income 
from the account that is owned by U.S. taxpayers has been fully 
and adequately reported on the U.S. tax returns. And I--if 
people know the answer to that today, I would be very 
interested in the data source for that. Thank you.
    Mr. LINDER. Mr. Chairman, I have no further questions.
    Chairman NEAL. Thank you, Mr. Linder. Let me recognize the 
gentleman from Illinois, Mr. Roskam, to inquire.
    Let me recognize--it looks like we're going to recognize 
the gentleman from Nevada, Mr. Heller, to inquire.
    Mr. HELLER. Thank you, Mr. Chairman. And I apologize for 
running a little late. I had another hearing, testifying on 
another bill in another committee, so I didn't get to hear all 
the testimony, and I apologize. So if my questions overlap a 
little bit, please bear with me.
    But based on the comments of Mr. Linder, and the amount of 
money that we're talking about, a large number of accounts that 
obviously are at stake here, Mr. Shays, can you give us or 
explain to us what your specific methodology is to determine 
U.S. ownership of these accounts?
    Mr. SHAY. Under the legislation, there are--there is a 
provision that the foreign financial institution would identify 
U.S. owners of accounts, and substantial U.S. owners of foreign 
entities that have accounts. And there is a great--there is 
leeway given to the Treasury Department and to the IRS to 
specify further.
    But there is provision in there to look to certifications 
from the account owners, and then such additional requirements 
as may be required by regulations, I believe, is the approach.
    Mr. HELLER. Are these known as know-your-customer rules?
    Mr. SHAY. Well, if there is a certification that is in 
addition to a know-your-customer rule--the know-your-customer 
rule refers to banking practices which vary in different 
jurisdictions, which are the standards by which the banks in 
those jurisdictions are expected to obtain information about 
their account holders. And that, of course, is very helpful and 
important as a base on which to identify whether there would be 
an account holder by a U.S. person.
    But this legislation would seek that information in 
particular, and would--as I said, there is some regulatory 
authority to further elucidate what the requirements would be. 
And there is a provision in circumstances for self-
certification.
    Mr. HELLER. Okay. So I understand you're prepared to allow 
KYC rules in--for this purpose?
    Mr. SHAY. I think when the legislation is passed, that 
would be part of the analysis. As I said earlier, I think it's 
in everybody's interest to try and come up with rules that 
are--work as well as possible with existing financial 
institution practices.
    So, I think that while that's a determination that should 
be made after we see the final legislation, that certainly is 
an objective to get the information, but to do it in a way that 
is as least burdensome, but that that achieves the task, as is 
possible.
    Mr. HELLER. Thank you, Mr. Shay. Mr. Wilkins, your time 
frame for implementing the FFI agreements, what do they call 
for in this particular bill?
    Mr. WILKINS. Under this bill, the effective date is at the 
beginning of 2011. I think, as I mentioned in response to an 
earlier question, we would devote resources needed to at least 
address the most important aspects of these rules dealing with 
major financial institutions.
    We will continue to work with the committee, and we would 
continue to work in the regulatory process, to try to roll this 
out in such a way that it--if certain pieces of it couldn't be 
fully implemented by the beginning of 2011, we would hope to 
have the flexibility to have preliminary measures that maybe 
were not full implementation, but didn't impose withholding 
taxes in areas where we really didn't want to get the 
withholding tax; what we really want to get is the information.
    Mr. HELLER. Will these side agreements be made public?
    Mr. WILKINS. Typically not, but they are--they would, if 
they follow current practices in the QI area, they would follow 
a particular form that is a public document.
    Mr. HELLER. Okay. Thank you. Thank both of you for being 
here. Thank you, Mr. Chairman.
    Chairman NEAL. Thank you, Mr. Heller. Let me recognize the 
gentleman from Oregon, Mr. Blumenauer, to inquire.
    Mr. BLUMENAUER. Thank you, Mr. Chairman. And I deeply 
appreciate both the work you're doing and the course of this 
hearing, the thrust and direction. It seems to me, for years, 
Congress--and sadly, this committee--has been less interested 
in actually moving forward aggressively with compliance. And, 
at times, it almost seemed like it was tying your hands, 
denying resources. And I love the fact that we are now making 
it a legitimate force of activity to help you do your job.
    I want to say that I too am interested in the answer to Mr. 
Linder's question. I didn't quite fully understand the grasp--
or grasp, I guess, the nature of it. 2005 data on, for example, 
volume of money might have changed pretty radically in the 
course of the last----
    Mr. LINDER. Would the gentleman yield?
    Mr. BLUMENAUER. I would be happy to yield.
    Mr. LINDER. Three companies, including McKinsey & Company, 
and a Boston group, and a third one I don't recall now, studied 
MasterCard and Visa transactions, and extrapolated that into a 
$9 trillion to $11 trillion figure, and they said it was 
growing by about $800 billion a year, probably growing more 
than that right now.
    The question that it seems to me these gentlemen should 
have thought about is how much is there. But a significant part 
of that is there for legitimate reasons, and not evasive 
reasons. And that's the number we really ought to know about. 
Thank you.
    Mr. BLUMENAUER. I appreciate the clarification. My point is 
I think there has been a--you mentioned the year 2005 for the 
study. I think in the last four years there has been a wild 
roller coaster, in terms of activity overseas. I know some of 
us had 401(k)'s that are now 201(k)'s. There have been changes, 
in terms of the value of currency and the velocity of it. So I 
am guessing that finding current data, I think we would all be 
interested in.
    The notion of what's there for legitimate or illegitimate 
purposes is also curious. I mean, how much of United States 
deposits are there for legitimate business purposes, or to help 
facilitate meth lab activity? I think there is an issue of 
intent and activity that is curious. And I would look forward 
to finding out how those studies determined intent, and what 
you would do to determine intent.
    I think the purpose of our hearing is one of compliance 
with the law. I would put, I guess, two questions before you--I 
see my time is rapidly getting away.
    One is whether or not we, in Congress, are doing enough to 
give you the tools to actually implement this and other 
elements of compliance. Because, in times past, we have talked 
one story and then cut back on your resources while we have 
done things that make it difficult to do your job.
    And I am very interested at getting a sense from you--not 
necessarily at this point, but getting a sense of whether or 
not Congress is on your side, in terms of things in the budget, 
and if there are items that we could employ that would make it 
easier to more directly use the resources that you might 
uncover to make sure that it's self-financing.
    I hear from tax professionals that there are certain audit 
functions where the people earn $5,000 or $10,000 an hour for 
their undertakings, in terms of what specific things they do. 
And not that I am suggesting that we put them on commission, 
but if there is a way to make sure that areas that are 
generating more money because it is dealing with compliance, if 
there is a way to target money back to that, to be--make sure 
that we are doing it adequately. And your help from--to help me 
think that through would be appreciated.
    The second piece I would put on the table seeking your 
guidance is whether or not we are doing enough in terms of the 
actual penalties against businesses and professionals who are 
in the business of, frankly, aiding and abetting evasion. I am 
just as interested in the reporting. I am interested in making 
sure we understand what the appropriate penalties and sanctions 
are for people who are engaging in the facilitation.
    I think the evidence is that there are lots of people who 
can't do this alone. And, in some cases, they have been 
counseled to do this. And having an assessment from you about 
the adequacy of those provisions, and where they might be 
enhanced, both for individuals and for organizations, would be 
of great interest to me.
    Thank you very much, Mr. Chairman.
    Chairman NEAL. Thank you, Mr. Blumenauer. Let me recognize 
the gentleman from Kentucky, Mr. Yarmuth, to inquire.
    Mr. YARMUTH. Thank you. I want to expand a little bit on 
the questions that Mr. Linder raised. And I recall the 
statement made by a former Secretary of Defense who said, 
``There are things we know, things we don't know, things we 
know that we don't know,'' and all of that continuum.
    How much of what--the question that Mr. Linder phrased, how 
much of this--these amounts do we know that we know--know that 
we don't know, and how much do we don't know that we don't 
know?
    Mr. WILKINS. Well, you are putting your finger on an issue, 
in terms of assessing levels of tax evasion and the tax gap, 
and so forth. And part of the problem is that, for example, 
many, if not most, of the previously undisclosed foreign 
accounts that are coming in through our voluntary disclosure 
initiative we did not know about before.
    And so, part of the issue is because of the efforts to hide 
offshore assets, we don't know what the total number of hidden 
offshore assets is.
    Mr. YARMUTH. Has the voluntary program given you clues as 
to how you might detect things that you don't know that you 
didn't know?
    Mr. WILKINS. The data is still quite fresh. And I am not 
sure we are ready to answer that question yet.
    Mr. YARMUTH. So you don't know?
    Mr. WILKINS. We will be looking at it to see what it 
teaches us, and to see if--first, for enforcement reasons--to 
see--to go out and detect additional accounts that didn't come 
in voluntarily. But it is possible that it will be helpful to 
us for data analysis and projection reasons, as well.
    Mr. YARMUTH. Mr. Shay, a question about the relevance of 
tax rates to this whole problem.
    I suspect that if the corporate tax rate in the United 
States or income tax rate were zero, we wouldn't have this 
problem. People would be happy disclosing everything they made.
    Have you done an analysis of how tax rates, relative tax 
rates in this country, have affected the non-disclosure rate? 
Is that something that would be valuable? I mean, it's an 
intuitive response to it, but I don't know whether it is a 
practical response.
    Mr. SHAY. Well, actually, I think one needs to be cautious 
about the intuitive response, in that, you know, if one viewed 
tax evaders as rational, then you would correlate it very 
closely to how much you're making by evading taxes, which would 
correlate to the size of the rate.
    The literature on non-compliance is still, I think, in my 
judgement, fairly weak. In other words, there has not been as 
much resource devoted to it academically and otherwise as we 
would like, sitting here today, in order to be addressing all 
the questions we're hearing. But I do think there is some 
evidence in the literature that non-compliance is not directly 
correlated to tax rates.
    And that may be counter-intuitive, but there are a lot of 
emotional and other aspects that go into non-compliance. Now, 
that is an anecdotal response. So I think we would all like to 
have more work done in that area. And maybe, Bill, if you want 
to comment?
    Mr. WILKINS. I guess the only thing I would add is the 
anecdotal observation that many of the most aggressively 
promoted individual tax shelters in the tax shelter heyday were 
devised to shelter 15 percent capital gains income. So it's--
the rate at which the incentive stops, at least for some 
people, has got to be lower than that.
    Mr. YARMUTH. I yield back, Mr. Chairman. Thank you.
    Chairman NEAL. Thank you, Mr. Yarmuth. Let me recognize the 
gentleman from California, Mr. Thompson, to inquire.
    Mr. THOMPSON. Thank you, Mr. Chairman, and thank you for 
holding this hearing. I would be interested, Mr. Shay, in 
hearing if you believe that we are doing enough in this bill to 
get at the issue of evasion. And I want to--I guess we have 
already established the fact that--the difference between 
evasion and avoidance.
    But on the evasion part, are we doing enough? Are there 
other proposals that are out there that we should be including 
in this to be able to get a better handle on it?
    Mr. SHAY. Thank you. One way to approach that question is 
to observe that this bill adopts in a legislative form--in 
substance, not in every respect the same way--substantially all 
of the anti-evasion proposals that were in this 
administration's budget.
    I would note there is one proposal in our budget that is 
not in the legislation, and that we have been working on, the 
Internal Revenue Service, and the Treasury, to develop further. 
And we think it does need further work before we bring it back 
as a proposal. And that involves reporting on cross-border 
transfers of cash. And the reason----
    Mr. THOMPSON. Cross-border transfers----
    Mr. SHAY. Transfers of cash, cross-border wire transfers 
from bank to bank. And the reason for that, and the work we are 
trying to do, is the volume is extremely high.
    And one of the things that we are working toward is trying 
to identify a way that we could take that volume of information 
and sort of--if you think of it as a sieve, whittle it down to 
the information that will not overburden the Internal Revenue 
Service, and allow us to target it to enforcement, so that our 
use of resources is efficient and focused.
    Do you want to comment any further on that?
    Mr. WILKINS. I think that is----
    Mr. THOMPSON. Before you do, how long before you have this 
thing run out, or able to make a proposal as to what it should 
look like?
    Mr. SHAY. We've been working--we've actually been working 
on it very actively. I can't give you a precise answer to that. 
But one part of our next step is we also--we do want to be 
talking to the elements of the business community that would be 
the companion to the IRS in having it implement something.
    So, I can't give you a precise answer, but we are working 
on it very actively.
    Mr. THOMPSON. Mr. Wilkins, anything to add?
    Mr. WILKINS. I think Mr. Shay said it. I mean, the shaping 
that needs to be done is one to identify that kind of 
information to tax obligations and taxpayers, and that's where 
the work is being done, to try to shape it that way.
    Mr. THOMPSON. Thank you. I yield back.
    Chairman NEAL. I thank the gentleman. The gentlelady from 
Pennsylvania, Ms. Schwartz, is recognized to inquire.
    Ms. SCHWARTZ. Thank you, Mr. Chairman, and thank you for 
your efforts in taking action on, you know, the legislation 
you've introduced to be able to move forward on what I think 
all of us are outraged about.
    I guess we all might have imagined that, you know, there is 
tax evasion. And the amount of money that is overseas, I think, 
actually--whether the amounts we know about--almost $1 
trillion, I guess, is something that has been talked about, now 
maybe much more than that. It's outrageous that it's actually 
out there and we're not collecting taxes on it.
    So, I actually appreciate the work the legislation would 
do, and the work you have already done in trying to get these 
dollars back for the taxpayers and for the Treasury. We could 
use it, as you know.
    So, I really--you made a couple of comments about ways 
you're moving forward. And I think, Mr. Wilkins, you even used 
the word ``urgency,'' in your sense of what needs to be done. 
So--and I think we share that.
    So, while we want to see movement on this legislation, I 
did want to ask what else you could be doing, or are doing now, 
in two ways. One is in making sure that other banks, other 
institutions--you were sort of suggesting that this is country-
to-country and it's, you know, the issue of these kind of 
agreements between nations. It's really also getting to the 
banks.
    I mean, UBS, that agreement settlement really did change 
the atmosphere. And I am assuming that--a question for Mr. 
Shay--how many other banks have--are you--or institutions are 
you engaging with, in terms of having similar agreements about 
reporting voluntarily? And how much do you think is out there? 
Do you have any sense of that?
    And, secondly, Mr. Wilkins, whether--you talked about the 
amnesty, or people coming through voluntarily now. What else do 
you need to be doing, or are you doing, to actually make sure 
that taxpayers know that this is no longer acceptable, that 
we're going to go after folks and we have legislation coming 
down the pike, but in the meantime we have--we know the money 
is there, we know that there are--you say thousands and 
thousands of accounts? Tens of thousands of accounts? I mean 
what kind of volume are we talking about? And what kind of 
dollars are we talking about? And how quickly can you move 
without additional tools, is sort of my question.
    So, Mr. Shay, if you could, speak to how aggressively you 
are moving to engage other financial institutions to give us 
voluntary agreements, as we move--so we can move forward more 
quickly. Similar reporting to what UBS is doing.
    And, Mr. Wilkins, if you could, speak to the kind of volume 
and urgency of what you can do, given the information--given 
the tools that you will have before we give you extra tools.
    Mr. SHAY. The activities of the Treasury that involve 
expanding agreements are largely with other countries. And I am 
going to turn it back to Bill for the----
    Ms. SCHWARTZ. Okay. And I apologize if I'm not asking the 
right people the right questions. You can decide who answers 
them this time.
    Mr. SHAY. Yes, I will give that piece to Bill. But let me--
as I mentioned in my testimony, we have recently expanded the 
range of countries with whom we have agreements. But I think, 
as Secretary Geithner has observed in connection with this 
broader effort at the G20 more generally, the number of 
information exchange agreements that have been signed 
internationally in the last 12 months exceeds the number of 
agreements that was signed in the prior decade.
    And I was in the Treasury Department in the 1980s. I can 
tell you that the atmosphere internationally--I was the 
international tax counsel--the atmosphere internationally has 
been transformed, and a great deal of credit for that goes to 
the Liechtenstein bank case and, very importantly, the case 
that the IRS and the Justice Department have brought with UBS. 
It has had, I think, a transformative effect. Bill, do you 
want----
    Mr. WILKINS. In terms of going forward, investigations are 
continuing. I can't comment on ongoing investigations, but they 
are ongoing. I would not be surprised to see additional 
investigations be generated from the information that we are 
collecting this year.
    Characterizing the agreement with UBS as voluntary needs to 
be--you need to think about how voluntary it was.
    Ms. SCHWARTZ. Right.
    Mr. WILKINS. It was under pain of indictment.
    Ms. SCHWARTZ. Yes.
    Mr. WILKINS. That is how these agreements get obtained.
    Ms. SCHWARTZ. Yes, right.
    Mr. WILKINS. And so we are continuing----
    Ms. SCHWARTZ. You're pursuing that----
    Mr. WILKINS. We are pursuing that in other cases.
    Ms. SCHWARTZ. Okay. In terms of the--just to follow up on 
the international agreements, that's good to know how many more 
are happening.
    One of the concerns I suppose we would have is that new 
countries that have not engaged in this behavior who have been 
off sort of the radar screen now may actually become new tax 
havens. Do you have any sense of how you anticipate--maybe sort 
of the opportunity to actually anticipate where else we might 
go?
    And this is not actually--rather than--there are some 
obvious countries, I assume, but then there might be some less 
obvious that might actually promote this. Is there more that 
we're doing in that regard, too?
    Mr. SHAY. The international process that is currently 
undergoing has actually targeted, or looking for or monitoring 
new countries attempting to become offshore financial centers. 
That is one of the very hopeful aspects of the multi-lateral 
work that is going on under the overall oversight of the G20.
    And recalling that G20 includes, really, not just 
European--I mean the major countries of the world. And the work 
that's being done in what's called the global forum on tax 
transparency and information exchange includes somewhere 
between 80 and 90 countries. There are very few jurisdictions 
left. And they have all agreed back in this last fall in 
Mexico, one of their--to monitor and look for jurisdictions 
that attempt to become tax havens.
    Ms. SCHWARTZ. Thank you. Thank you, Mr. Chairman.
    Chairman NEAL. Thank you, Ms. Schwartz. The gentleman from 
New York, Mr. Crowley, is recognized to inquire.
    Mr. CROWLEY. Thank you, Mr. Chairman. I did arrive a little 
late. So, a couple of questions that may have been answered 
before, and so you can just say that and I can get the record.
    In terms of the number of potential accounts that we're 
looking at, we're looking at possibly millions of accounts 
overseas. Is that correct?
    Mr. WILKINS. We don't have that kind of data. As I said, 
the voluntary disclosure program was projected at around 
October 14th to bring in about 7,500 new accounts. I have been 
told that the number is significantly in excess of that. But, 
again, that is that range of numbers. And for the voluntary 
disclosures the millions number would not be right.
    Mr. CROWLEY. There are some measurements in place, for 
instance a customer--an anti-money laundering legislation in 
place already. Are those the tools by which--or the 
methodologies by which we use to account for these particular 
accounts? Or are you looking at other methodologies to do that?
    Mr. WILKINS. I think the answer is both, and Mr. Shay 
discussed it earlier. Certainly for banks that are subject to 
robust know-your-customer regimes, that information would 
produce the data that is needed for them to provide the reports 
that the legislation seeks on U.S. investors.
    For banks that did not have as robust KYC regimes, they 
would need to adopt, you know, additional measures to be sure 
that they complied with their diligence obligations for being 
either a qualified intermediary or a foreign financial 
institution that entered into one of these disclosure 
agreements.
    Mr. CROWLEY. Mr. Shay, do you want to comment, or--it's 
covered.
    How many FFI agreements do you anticipate you will have to 
enter into agreement here?
    Mr. WILKINS. I am not sure we know a number to expect. We 
do expect the existing qualified intermediaries to, for the 
most part, amend their agreements in the ways that are 
contemplated here.
    Mr. CROWLEY. Prior to having to formally enter into, you 
mean, or----
    Mr. WILKINS. Well, no. I mean there are existing qualified 
intermediary agreements with a number of foreign financial 
institutions. Really, most of the major international ones.
    This legislation would seek to impose some new obligations 
on QI's, with respect to U.S. account holders. And we would 
expect, for the most part, those existing agreements to be 
amended, and we would look to efficient ways to accomplishing 
those amendments, rather than, you know, retail level, one-by-
one negotiations.
    Mr. CROWLEY. Is it the intent to publicize those--the--when 
those agreements are entered into? I guess following a little 
bit on Ms. Schwartz's question before.
    Mr. WILKINS. I think individual agreements typically have 
not been the subject of press releases, unless the banks decide 
to do that on their own, for their own----
    Mr. CROWLEY. So the government itself will not----
    Mr. SHAY. But the fact that a bank is a party to an 
agreement will be public, because it will be necessary 
information for the U.S. withholding agent that is dealing with 
that bank to know that they have an agreement, and therefore, 
they will not withhold on payments to that institution.
    Mr. CROWLEY. Okay. The U.S. is the world's largest market 
for foreign portfolio investment. And foreign investment in the 
U.S. is good for our economy. I think, Chairman, you would 
agree with that.
    I have some concerns that the real cost of investment in 
the U.S. for non-U.S. investors has increased significantly, as 
foreign financial firms complied with the IRC Section 1441, the 
QI regs. While I welcome the IRS and Treasury's goal of 
identifying U.S. persons, there is concern in the financial 
services community that the U.S. has and could further create 
an invasive administrative burden that applies to all 
recipients of the U.S. income, not just Americans, by 
discouraging our shared goal of increased U.S. investment.
    Could you just comment on this issue, on the complexity, 
the cost of implementing this program, and do you believe it is 
easier and less costly than the current system we have in 
place?
    Mr. SHAY. Let me comment, if I may, first. We share the 
view that foreign portfolio investment in the United States is 
important, and we want to be sure that it is--it continues 
unabated.
    And, as I said in my earlier remarks, part of our 
objective--and a very important objective of ours in 
implementing legislation, should this legislation be passed--
will be to do--work closely with the affected financial 
institutions, business community, and to come out with rules 
that will balance and achieve the information reporting that we 
seek, but at the least burden and cost as possible to the 
affected intermediaries.
    I--our view is it is going to be possible to do this, to 
allow Americans to comply with their tax obligations, and not 
interfere in an inappropriate way with cross-border investment, 
which we view as very important.
    Mr. CROWLEY. Thank you. I agree with the intent of the 
legislation. With that, I yield back, Mr. Chairman.
    Chairman NEAL. Thank you very much, Mr. Crowley. Let me 
recognize the gentleman from Texas. While not a member of the 
subcommittee, he has certainly demonstrated a consistent 
interest in this issue. Mr. Doggett.
    Mr. DOGGETT. Thank you, Mr. Chairman, and thank you for 
your efforts in this area, those addressed through your most 
recent legislation with Chairman Rangel, and those in this 
general area. I thank both of you for your testimony and your 
public service.
    Mr. Shay, you have--or Secretary Shay--you have testified 
before us over the years on a number of occasions. And I 
realize that the views you express now in this new position are 
not necessarily those that you have written about in the past. 
But I would just say, as a general matter, that I think a good 
place for Treasury to start on many of these problems, 
particularly with reference to international corporate tax 
avoidance, would be to go back and read what you have written 
in the past, and adopt it as policy in the main.
    My interest today in this, as you know, stems from my 
having filed with Senator Carl Levin--and I appreciate your 
reference to it--the Stop Tax Haven Abuse Act. I appreciate the 
fact that Secretary Geithner, when he was before the full 
committee in March, indicated that the administration fully 
supports that legislation.
    And while the primary focus of the hearing today, and the 
sole focus of the recent legislation that's been introduced is 
tax evasion by individuals, I believe that much more costly tax 
evasion is occurring from corporate individuals, and that that 
must also be considered.
    As I noted when this subcommittee convened on March the 
31st considering these matters, the use of international tax 
games by corporations in these offshore tax havens is 
widespread, and it drains billions of dollars from the 
treasury.
    I don't believe that there is any justification for having 
one standard for individual taxpayers and another, more 
permissive approach, to corporate individual taxpayers. One 
rule for Wall Street corporations and one rule for individuals? 
I think that's indefensible.
    And after years, if not decades of delay in this committee, 
there is also no justification for failing to address 
international tax abuse, or insisting that this has to be done 
in a two-step approach, one for individuals now, and another 
for corporations some day. We need a comprehensive approach, 
not just a vague promise that corporate evasion will eventually 
be addressed.
    In fact, while some may try to draw a distinction, as has 
occurred here today, between illegal tax evasion and tax 
avoidance, the real difference primarily is--between 
individuals illegally hiding their cash overseas and 
corporations manipulating the tax does--the main difference is 
that the corporations have better lobbyists to obtain the--
legitimacy for some of these questionable transactions than do 
some of the individuals.
    With reference to some of the ideas that are advanced here 
by Professor Kingson today, I hope you will review those. I 
understand you can't take a position on them formally this 
morning, but I think he advances a number of ideas about how to 
handle those.
    The whole idea of the stock tax haven approach was to 
prompt other legislative response and discussion. And I am 
pleased that it has prompted what I think are some improvements 
on our approach as it relates to individuals, but a concern 
that it does not address the issue of corporate tax abuse.
    Let me ask you specifically about one matter, just as an 
example of these problems. As you know, we finally, a while 
back, addressed this issue of corporate inversions, of 
companies that are American but claim, by putting up a post 
office box somewhere, that they are no longer American, except 
to receive all the benefits, and not pay for them.
    In addition to the companies that have done that, and the 
law that was passed to try to discourage that in the future, 
does the current law cover corporations that are formed here in 
the United States, or that choose not to be formed here 
initially in the United States, to be formed abroad, even 
though all their management, most of their operations in the 
United States--can they simply incorporate in a tax haven and 
develop their intangibles from this foreign corporation, even 
though doing so may cause them to yield other tax benefits? And 
is that occurring with some corporations?
    Mr. SHAY. It is permissible under current law to establish 
a foreign corporation at the outset. Section 7874, which is the 
anti-inversion proposal you were referring to, does not address 
corporate formation at the outset.
    As you observed, if one is then going to be investing in 
R&D, then assuming that they're not carrying on business in the 
United States such that they would be taxed currently, then 
they would be losing or deferring the benefit of those 
deductions. And so that is one pretty significant drag on doing 
that from the outset.
    Mr. DOGGETT. But there are--that has occurred. And the 
current inversion law does not cover that, does it?
    Mr. SHAY. That is correct. The current inversion law does 
not cover corporate formations.
    Mr. DOGGETT. Is there any justification for an American 
corporation with a foreign subsidiary retaining passive assets 
in that foreign subsidiary that exceed the resources that it 
needs to compete abroad?
    Mr. SHAY. There----
    Mr. DOGGETT. Any competitive justification. I'm not talking 
about tax dodging as justification----
    Mr. SHAY. Well, I think without the--certainly a foreign 
corporation that, under today's law, is permitted to accumulate 
earnings and retains it in passive form, there are some limits 
on that. But they are not very great.
    But certainly one would, I think, think that an amount that 
would permit what--normal working capital amounts would be 
acceptable. To the extent that amounts are accumulated beyond 
that, then that's a question--that's really a policy question 
that I think you're alluding to. And current law would permit 
that.
    Mr. DOGGETT. Right. Well, I believe that the chairman, Mr. 
Neal, got it right at the outset, that we shouldn't be looking 
to raise taxes, to seek revenue from people that are playing by 
the rules here at home, working hard, if there are others who 
are engaged in tax avoidance, through manipulating 
international rules and the Tax Code, and that he also got it 
right with the famous Joe Lewis, ``You can run, but you can't 
hide.''
    Unfortunately, even if we adopted, just as it has been 
proposed, the legislation that he and Mr. Rangel and Chairman 
Baucus have introduced, corporate tax avoidance will still be 
hiding, and some Americans will be asked to pay more because 
those multi-nationals are not paying their fair share. Thank 
you very much.
    Chairman NEAL. Thank you, Mr. Doggett. The gentleman from 
Louisiana, Dr. Boustany, is recognized to inquire.
    Mr. BOUSTANY. I thank the chairman for this courtesy. I 
think the ranking member, at the outset, made the--I think the 
clear distinction between tax evasion and legitimate tax 
planning on the part of corporations, based on current policy 
and law. And, gentlemen, I believe you acknowledged that there 
is that clear distinction. Am I correct in----
    Mr. WILKINS. Yes, that's right.
    Mr. BOUSTANY. Thank you. I want to focus on a couple of 
issues in the bill that's proposed. Very important to ensure 
that dividend withholding rules are not abused. But equally 
important is clarity with this.
    And the scope of the bill's proposal on this issue seems to 
me to be unclear, because it applies to a broad range of 
payments that may be economically similar to a dividend, but 
excludes any payment pursuant to any contract which the 
Secretary determines does not have the potential for tax 
avoidance. The statute then lays out several general factors to 
use in determining whether a payment has the potential for tax 
avoidance.
    So, can you explain what types of payments Treasury regards 
as having the potential for tax avoidance, or what types of 
payments Treasury regards as not having that potential? We need 
a little clarity on where you are going with this.
    Mr. SHAY. Thank you for that question. This is an important 
and highly technical area. And the work of the permanent 
subcommittee on investigations clearly brought out that there 
were transactions being entered into where--I don't think there 
would be much disagreement--inappropriately avoided dividend 
withholding tax.
    Our task, should this legislation be adopted--and it was--
it is a provision that we also had in the administration's 
budget, a very comparable provision, I should say--will be to 
identify that dividing line between the transactions which are 
dividend avoidance, and the transactions which do not have 
that--are part of everyday commercial activity, which we do not 
want to interfere with.
    I don't think it--today, particularly before--that will be 
our objective during the regulation-writing process, to achieve 
that. And we will work with the industry participants, to learn 
what they are doing. And then we will make a judgement as to 
how to draw that line. It's not something I think we can do in 
testimony. Thank you.
    Mr. BOUSTANY. I hope we can explore this further as time 
goes on, because it is a critically important issue.
    My other question pertains to the QI program. And current 
law already provides for QI agreements between foreign banks 
and the IRS. Can you elaborate on the overlap, if any, between 
the QI program and the bill's proposal to require banks to 
enter into certain agreements with the IRS to avoid a 30 
percent withholding tax?
    Mr. WILKINS. Well, I think there would be two alternative 
ways for a bank to avoid that. One would be to enter into a 
full-blown QI agreement. The other would be to enter into sort 
of a QI light, or a modified agreement with the IRS which would 
impose information sharing obligations on the bank, but not 
imposing the obligation on the bank to do the work for non-U.S. 
investors investing in U.S. securities market that happens with 
a QI.
    Mr. BOUSTANY. Are you looking at a streamlining process?
    Mr. WILKINS. Yes. We will be interested in coming up with 
processes that are efficient, and are not sort of onesies, if--
--
    Mr. BOUSTANY. Okay. And for banks already part of the QI 
regime, might there be a way of bootstrapping into the new 
regime, by using practices they have already developed for the 
QI program?
    Mr. WILKINS. Yes. I mean, we do hope to work with the 
industry, and learn from our QI experience, in order to make 
this transition as effective as possible.
    Mr. BOUSTANY. Thank you. I yield back, Mr. Chairman.
    Chairman NEAL. Thank you, Doctor. And let me thank our 
witnesses. I thought it was most helpful. Always impressed with 
the caliber of witnesses that are sent here by Treasury and 
IRS. And I must say left, right, or center, I think it's always 
well informed information that they pass on to us.
    And, with that, let me call up our second panel. Thank you.
    Mr. SHAY. Thank you, Mr. Chairman.
    Mr. WILKINS. Thank you.
    Chairman NEAL. We are anticipating a vote in the next few 
minutes, and I believe that there will be two additional votes 
after that.
    So--but I would like to proceed with the witness testimony. 
And I think that it would be helpful, as we go along, just 
anticipating that we might be interrupted.
    With that, let me recognize Mr. Prevost.

  STATEMENT OF THOMAS PREVOST, AMERICAS' TAX DIRECTOR, CREDIT 
                   SUISSE, NEW YORK, NEW YORK

    Mr. PREVOST. Thank you, Chairman Neal. Good morning. My 
name is Tom Prevost, and I am an Americas tax director for 
Credit Suisse. I would like to thank you for allowing us to 
offer testimony today.
    Credit Suisse has always been an active participant in the 
qualified intermediary program. The bill makes broad changes 
that will have implications for the QI regime, and impact how 
financial institutions will deal with both U.S. and non-U.S. 
customers with foreign accounts.
    Our comments are not intended to be unique to Credit 
Suisse, and will be relevant to tax reporting for all non-U.S. 
financial institutions, with the majority of the comments also 
being relevant to U.S. financial institutions.
    We would like to make three basic points today. First, 
Credit Suisse supports the proposed framework for simplified 
reporting of accounts under control by U.S. taxpayers. The 
measure is very comprehensive, and represents a meaningful 
improvement over the administration's initial greenbook 
proposal, and previously proposed measures, which would have 
been considerably more difficult to implement, from an 
operational basis.
    We appreciate the committee's diligence in working through 
these issues in its effort to eliminate problematic 
requirements.
    Second, while we support the framework proposed in the 
bill, we have concerns about some of the specific details 
related to FFI tax reporting, and in certain areas we would 
like to work with the committee to garner greater clarity. We 
express these concerns in an attempt to ensure that the stated 
aims of the legislation are met, rather than falling short due 
to complications associated with unintended consequences.
    In considering operational details, we believe that the 
current QI program has been a success in allowing U.S. 
securities to be held by both U.S. and non-U.S. taxpayers 
overseas, and suggest that as new requirements are put in place 
to deal with U.S. taxpayers, there needs to be a careful 
balance struck between the amount of information that the IRS 
would like to collect, and the compliance burden placed on 
institutions so that the qualified intermediary program remains 
attractive to institutions participating outside of the U.S.
    Rightly or wrongly, there are significant fears in the 
international banking community that being a QI may lose its 
appeal and simply carry too much compliance burden, which could 
have negative ramifications for foreign investment into the 
U.S. We recommend a practical focus in the implementation stage 
to ensure the legislation fulfills its worthy aims.
    Finally, Credit Suisse has some concerns and comments 
relating to two other provisions of the bills, bearer bonds and 
equity swaps, and we would like to offer constructive ideas to 
ensure the responsible participants in these markets are not 
unnecessarily penalized.
    With respect to the simplified information reporting 
approach in the bill, it is a meaningful improvement over the 
greenbook and other proposals, because it eliminates the 
requirements for foreign financial institutions to do full 1099 
reporting, and a requirement that all related foreign financial 
institutions be qualified intermediaries.
    We appreciate the tremendous effort made by the committee 
and the Treasury Department to thoughtfully address the 
concerns raised by financial institutions with respect to the 
previous proposals.
    Regarding the technical issues on reporting, in the 
interest of time I will not fully detail the technical 
implementation issues we have with the bill, but instead, 
summarize our concerns. We have provided considerably more 
detail in our written testimony.
    First, there are effective date issues with a number of 
provisions in the bill. The rules have to be fully known and 
foreign financial institution agreements have to be executed 
before systems and procedures can be established. And it takes 
time to implement after the rules are established--probably 18 
to 24 months, depending on the specific provision.
    Second, the method of determining U.S. status of financial 
accounts is critical. We believe that most foreign financial 
institutions will not choose to obtain customer certifications 
from their entire customer base, as permitted by the bill. So, 
the bill should clarify that foreign financial institutions 
may, as an alternative, rely on their existing know-your-
customer, anti-money laundering procedures.
    Third, the verification process should not be so burdensome 
that it dissuades foreign financial institutions from signing 
an agreement with the IRS. The concern is that you're dealing 
with the FFI's entire customer base, versus their much smaller 
QI customer base, so the cost could be prohibitively expensive.
    Fourth, in an effort to ensure that reporting will always 
occur, the bill has created a number of situations where 
reporting of the same information happens more than once. We 
should strive to eliminate these redundant reporting 
situations.
    With respect to the bearer bond provisions, there is an 
economic issue, in that the bill limits access to certain 
capital markets for U.S. issuers. For example, the Swiss market 
and the Japanese retail market.
    With regard to equity swaps, we appreciate the committee's 
efforts to recognize that equity swaps are primarily used for 
legitimate business purposes, by having the bill only target 
abusive equity swaps. We welcome the opportunity to assist the 
Treasury Department in defining non-abusive equity swaps.
    Besides an effective date concern, there is also a double-
withholding issue for internal hedging swaps, which is 
described in our written testimony.
    To close my testimony, I would like to restate our three 
primary points. First, Credit Suisse supports the new framework 
for foreign account reporting as a thoughtful improvement on 
earlier proposals. Second, we would like to see consideration 
given to certain technical and implementation issues. Third, we 
would like to ensure that responsible parties are not 
unnecessarily harmed by restrictions on bearer bonds and equity 
swaps.
    Thank you for the opportunity to appear today, and I will 
be happy to answer any questions you may have.
    [The statement of Mr. Prevost follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

    Chairman NEAL. Thank you, Mr. Prevost.
    Professor Kingson is recognized to offer testimony.

 STATEMENT OF CHARLES I. KINGSON, ADJUNCT PROFESSOR, NEW YORK 
           UNIVERSITY LAW SCHOOL, NEW YORK, NEW YORK

    Mr. KINGSON. I've been invited here to discuss avoidance of 
U.S. tax by using companies and by--incorporated in tax havens. 
And, of course, you know, tax--they are called tax havens, but 
they are only tax havens to the extent that we let them be tax 
havens. And my comments really concentrate on publicly held 
companies where the money is.
    And they avoid U.S. tax in two ways. One, they transfer 
intangibles to their foreign subsidiaries, and the foreign 
subsidiaries make them, and they're not taxable until the money 
is brought back into the U.S. And in the case of U.S. parents 
that become subs of foreign parents, the foreign parents are 
not taxed on any non-U.S. income ever, and including interest 
on capital gains.
    Now, this can be countered by reasonably effective 
measures. One would repeal an obscure provision that was 
enacted in 1997 in the name of alleviating complexity. And the 
second would be, really, Representative Doggett's suggestion 
that we say that a company that is managed, controlled in the 
United States is a resident of the United States, and fully 
subject to U.S. tax.
    The--although the former has--the subsidiaries have more 
revenue loss, I am going to take up the parent's technique 
first, because it's more visible and it's more resented, and 
also because it's the only thing on the table because of 
Representative Doggett's bill.
    Now, the use of--for both parents and subsidiaries, what is 
important is intangibles. We have changed from a world of steel 
where Andrew Carnegie was the richest man to a world where Bill 
Gates is the richest man, and the wealth is intangibles.
    And the United States, too, has intangibles. It has a 
government--I mean a great government--it has shared ideals, it 
has sacrifices. And we have commercial intangibles. We have 
great educational institutions, a skilled workforce, and we 
have maybe the best scientific community that ever was. And 
these U.S. corporations take advantage of these to make their 
fortunes, and they then want to really say, ``Well, you know, I 
have made mine, and now I don't have any more obligations.''
    And as for the parents, they very often want to incorporate 
abroad and still live here, and we don't allow individuals to 
do that. If you live here and you want the benefits of 
civilization, I mean, you have to pay what Justice Holmes 
called the price of civilization. I mean taxes.
    And the stuff to deter inversions, I mean, that's very long 
and complex, and I don't know how well it works. It certainly 
doesn't work, as Mr. Shay said, in the case of start-ups.
    But even if you have a U.S. sub of a foreign parent, they 
can take the intangibles out of the U.S., and have them forever 
outside U.S. tax jurisdiction. Now, you can't do that with 
something that's legal, because you know, a patent you have to 
transfer out, and that's a realization event. The corporation 
gets taxes on its value, and so does the foreign parent on the 
dividend.
    But other things are easier to get out of U.S. tax 
jurisdiction, and that's stuff like know-how, and goodwill, and 
the workforce. You can't put your hand on them. And that's 
why--and that gives an incentive to get these--this stuff that 
has been done forever.
    Now, I would like to say about the foreign subs, they 
transfer these intangibles to the foreign subs, and they build 
up incredible, incredible amounts of money. The table prepared 
by the Democratic House Ways and Means Committee staff said 
that in 2003 alone, 9 pharmaceutical companies reinvested $26 
billion abroad, and this was in low-tax jurisdictions. And they 
did it because they syphoned the intangibles off to their 
subsidiaries, and so they had $26 billion, mostly in passive 
assets they didn't need in the business.
    And if you--the way to combat this really is to, I think, 
to repeal an exemption they had, they got in 1997. It said, 
basically, if you're an investment company you have to--a 
foreign investment company--you have to economically repatriate 
all your earnings. And these companies were going to become 
investment companies because more than 50 percent of their 
assets became--they didn't know what to do with them. They had 
no business reason. And they were stocks and bonds and bank 
deposits.
    So, the--they got an exemption in 1997 from foreign 
subsidiaries of U.S. companies being called investment 
companies, and characterized as investment companies. And then, 
in 1997, the real accumulation began, because there were no tax 
penalties.
    And then, starting in 2002, they said, ``Well, you know, we 
really have to get this stuff back, because this stuff we 
siphoned abroad, we have to bring it back tax-free, so we can 
recreate U.S. jobs.'' And they got it back. And, you know, to 
show what happens, a company like Intel, which brought back $6 
billion, as soon as--you're supposed to have a plan to create 
more jobs--and the next year they cut 10,500 jobs. And Pfizer, 
which had $38 billion abroad, the next year they fired 10 
percent of their domestic sales force.
    And so, I characterize this as really one of the most 
brilliant, far-sighted, and ingenious rip-offs of the U.S. tax 
base ever accomplished. And to counter this, Congressman 
Rangel's bill would say, ``Well, you can't just bring back your 
high-tax earnings and use them to wipe out tax on your exports. 
You have to allocate part of that against the income that you 
keep abroad in low-tax earnings.''
    But I think that what would be much more effective would be 
to repeal the exemption that these companies got from foreign 
investment companies. It wouldn't hurt their competitive 
position at all. Because, by definition, you only count as 
passive assets, assets that you don't need in the business as 
working capital. So there is no real justification for this.
    And, you know, you have legitimate reasons for doing 
business in a foreign country, and a tax haven. Avis can't rent 
cars in Florida and send them--I mean, can't send them to the 
Bahamas every time somebody wants to rent a car, so you have to 
have a business there. And if it's untaxed, it's untaxed. But 
that doesn't mean that Avis should be--Avis Bahamas should be 
able to get a huge mutual fund there going with untaxed income.
    And this would--my second thing would be--because, I mean, 
I have had experience with what companies do, and they value 
earnings much more than they do saving taxes. And if you 
required that published income statements couldn't say that 
there is no U.S. tax on these accumulated earnings because 
you're never going to bring it back, that would deter them very 
substantially. Instead of showing $100 of income on their 
balance sheet in Bermuda, they would show $65 of income. And 
without earnings per share being increased, which is the, you 
know, the summum bonum, I mean, you don't really have any--you 
don't have that much of an incentive. It doesn't show up in 
your performance to do these tax havens.
    And the final thing is really just--I think you--I think 
one of the things--although these foreign information things 
are, I think, valuable. I haven't had much experience in the 
area, but I think it should be--I think the focus of my 
testimony has been that you concentrate on the U.S. activities. 
If a company has U.S. activities, and you measure it by where 
the executives live--because they're not going to live in the 
Cayman Islands, and you don't do it by their officers, because 
they can fool around with titles, you just say, ``Who are the 
highest paid people,'' and that's it.
    And when you focus on U.S. activities, and focus on the 
consequences to the U.S. parents when they're--with their 
foreign subsidiaries, I think you will--it will do very well.
    And, as a coda, I just want to say that I would do the same 
thing for--focus on U.S. people with respect to tax evasion. I 
mean, if a person--instead of chasing the crooks and the tax 
evaders, I would also go after their beneficiaries, because in 
my experience everybody who wanted to give up a citizenship, he 
would never have his children give up their citizenship.
    And so, if you just said if everybody who got more than $10 
million in gifts and bequests had to show that it had been 
reported in the Internal Revenue Service--and with $10 billion 
or some 8-figure number, you couldn't say, ``Well, we just 
forgot to keep records''--I mean, if you said that that was 
income and subject to an excise tax, you would make law-abiding 
people--you would--people would lose the incentive to give 
money--to take tax evasion, if they couldn't give money to the 
next generation. And that wouldn't be involving chasing 
foreigners.
    [The statement of Mr. Kingson follows:]

                                 

 
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    *****************  deg.Statement of Charles I. Kingson, Adjunct 
                               Professor
           New York University Law School, New York, New York
Testimony
    My name is Charles Kingson. The subcommittee has invited me here to 
discuss avoidance of United States tax by using companies set up in 
low-tax foreign jurisdictions. These countries are often called tax 
havens, but of course they are only tax havens to the extent we let 
them be. My comments and suggestions concentrate on publicly held U.S. 
companies, which is where the real money is.\1\
---------------------------------------------------------------------------
    \1\ The views expressed are personal.
---------------------------------------------------------------------------
    U.S. corporations use tax-haven companies in two ways. One is by 
U.S. parent corporations establishing a tax-haven subsidiary, to which 
is allocated income not taxed by the United States (or anyone else) 
until assets representing that income are brought back as dividends. 
The other is by the top U.S. company reincorporating as a tax-haven 
parent in, say, Bermuda. This removes foreign operations, and the 
income they produce, from the United States ability to tax them now or 
later.\2\
---------------------------------------------------------------------------
    \2\ A former tax chief of Intel Corp. suggested to the Senate 
Finance Committee that had he known at Intel's founding in 1968 about 
the present international tax rules, he would have suggested 
incorporating in a lower-tax jurisdiction. Senator Moynihan then asked 
the tax officer ``if he expected the Marines to show up in the Caymans 
in case of trouble.'' Hal Lux, Nationalities of Convenience, Inst. 
Investor, Feb. 2002 (paraphrasing Moynihan's question).
---------------------------------------------------------------------------
    The first, use of tax-haven subsidiaries to deflect United States 
tax, can be countered by repealing an unpublicized provision enacted in 
1997 in the name of alleviating complexity. The second, reincorporating 
as a foreign parent, can be countered by doing what almost all other 
industrialized nations do: treating a corporation managed and 
controlled in their country as a resident subject to full tax.\3\ 
Although the former problem involves more revenue loss, I will begin 
with the latter, because it is more visible (and resented); and because 
it is the only one on the table owing to Representative Doggett's bill.
---------------------------------------------------------------------------
    \3\ Tax commentary by the Organization for Economic Cooperation and 
Development (OECD) states that in determining the residence of a 
company, ``It would not be an adequate solution to attack importance to 
a purely formal criterion like registration. Therefore, paragraph 3 
attaches importance to the place where the company, etc. is actually 
managed.'' Paragraph 22 of the Commentary on Article 3 of the OECD 
Model Tax Convention.
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    A. The Use of Tax Haven Parents
    United States corporations benefit from perhaps the greatest 
intangibles that have ever existed; a system of government, a fairness 
of law, and a defense made possible by sacrifice. As a commercial 
matter, they benefit from other U.S. intangibles as well: great 
educational institutions; a skilled workforce; perhaps the best 
scientific community ever; the most universal language; and a culture--
or several cultures--that are both inclusive and admired.
    Having benefited from those intangibles in making their fortunes, 
some want to escape tax on them while retaining the benefits. We do not 
allow individuals to do this; we consider those who live here 
``residents'' of the United States and tax them on all their income. 
Accordingly, a person cannot avoid U.S. taxation by giving up 
citizenship. If you get the benefits of our intangibles, you pay what 
Justice Holmes called the price of civilization.
    By contrast, we consider a corporation to be resident in the 
country in which it is incorporated--say, Bermuda. This has led some 
United States parent companies to reincorporate in jurisdictions like 
Bermuda. The procedure, known as corporate inversion, involves the 
domestic parent of a multinational corporation becoming the subsidiary 
of a tax-haven foreign parent with the same stockholders. The United 
States continues to tax all earnings of the domestic company, now a 
subsidiary; but earnings from foreign operations that can be shifted to 
or started by the tax-haven parent, as well as interest and capital 
gain, will fall outside what we define as our residence jurisdiction.
    Section 7874, intended by the 2004 Jobs Act to deter inversions 
occupies over two pages of the Internal Revenue Code of 1986, as 
amended (the ``Code''). But these complex provisions, although often a 
deterrent, do not deal with the fact that our definition of resident is 
wrong; a corporation, like an individual, lives where it is present. 
Therefore, once the price of Section 7874 is paid (and for a loss or 
start-up corporation it might be small), there is a substantial 
incentive for the new foreign parent to transfer the valuable U.S. 
intangibles of its U.S. subsidiary to foreign companies--that is, 
outside what we define as residence jurisdiction. This is easy to 
monitor and tax with items such as patents: their transfer will be 
treated as a taxable sale by the U.S. corporation followed by a taxable 
dividend to its foreign parent. But a transfer is harder to ascertain 
with items like goodwill, workforce and know-how: opportunities to make 
money can be funneled elsewhere. (A colleague refers to this as a 
``slurp'' reorganization.)
    A report by the Joint Committee on Taxation, contemporaneous with 
the original enactment of Section 7874, suggested a residency test 
similar to that used by most other countries. The report suggests that 
a company incorporated abroad should be considered a U.S. corporation 
if its day-to-day management is located here. As the report says, that 
factor ``is more difficult to manipulate. Moving the management of a 
company generally requires the physical relocation of top executives 
and their families to an office in a foreign jurisdiction.'' The United 
States in fact has adopted this standard through tax treaties. A treaty 
often grants a corporation that is a ``resident'' of the other country 
either reduction of or exemption from U.S. source tax.\4\ The 
definition of resident includes a corporation that is managed and 
controlled, or has its effective place of management, in the other 
country.\5\ In deciding whether a foreign corporation is entitled to 
treaty benefits, the United States is--perhaps unknowingly--determining 
what those terms mean under its own law. Since domestic law does not 
use those concepts, an opinion that a foreign corporation is a resident 
on the basis of its place of management is resting on foreign rather 
than domestic concepts.\6\
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    \4\ See Model Treaty, art. 23(2).
    \5\ Id., art. 4(1).
    \6\ Concern exists that a managed-and-controlled test might sweep 
legitimately foreign corporations--for example, Swiss pharmaceutical 
companies with substantial U.S. research and marketing activities--into 
full U.S. jurisdiction. But the scope can be mostly limited to tax-
haven companies. For countries with which the United States has an 
income tax treaty (such as with Switzerland, see Income Tax Treaty, 
U.S.-Switz. Art. IV, Oct. 2, 1996, 4 Tax Treaties (CCH) para.9101.04, 
but not Bermuda), the United States could cede residence jurisdiction 
to the country in which an entity is incorporated. Special 
consideration might apply to low-tax treaty partners such as Ireland 
and Barbados.
---------------------------------------------------------------------------
    The landmark British case on management and control, involving De 
Beers Consolidated Mines Ltd., was fairly straightforward: the 
directors met primarily in London. Since then, as a subsequent British 
case noted, communications allow meetings to be held without physical 
presence. Moreover, management and control of public companies resides 
substantially with their executives. Representative Doggett's provision 
treats certain foreign corporations as domestic corporations for U.S. 
federal income tax purposes if the management and control of the 
corporation occurs primarily within the United States. That concept 
gets it right, and I would suggest that it be made more specific by 
using a criterion of where the most highly compensated employees live. 
They will be reluctant to give up the intangibles this country offers, 
as well as their personal ties. Where a company is incorporated might 
determine its taxes, but where an executive has to live determines his 
life.
    In addition to U.S.-based start-up corporations incorporated in tax 
havens, a corporate residence test based on management and control 
would affect previously expatriated corporations. These would become 
domestic companies, bringing earnings from their foreign operations 
back into U.S. corporate tax jurisdiction. This puts the companies in 
the same position as if they had not inverted, yet allows them to pay 
U.S. tax later. Any complaint can be met by paraphrasing John F. 
Kennedy: Ask not what your country can do to you: ask what you did to 
your country.

    B. The Use of Tax-Haven Subsidiaries
1. Avoidance of U.S. Tax: The Transfer of Intangibles and Portfolio 
        Investment Abroad
    Wealth has changed from physical to intangible, from Andrew 
Carnegie to Bill Gates. Therefore, although companies will not 
replicate U.S. Steel mills in the Caymans, they find it relatively easy 
to transfer intangible assets to a tax-haven subsidiary.\7\ Congress' 
response, the statutory commensurate-with-income test, works; but only 
if you get caught.
---------------------------------------------------------------------------
    \7\ Those assets are listed in Code section 936(h), part of a 
section intended to prevent their value (and the resulting income) from 
being shifted to subsidiaries exempt from U.S. tax because they operate 
in Puerto Rico. Two significant assets not listed are goodwill 
(reputation) and going concern value (skilled workforce).
---------------------------------------------------------------------------
    A table prepared by the Democratic staff of the Ways and Means 
Committee \8\ shows that during 2003 the foreign reinvested earnings of 
nine pharmaceutical companies totaled more than $26 billion. Like 
Intel, these companies have intangibles of immense value; and their 
foreign subsidiaries' income is attributable to those intangibles. When 
the 2004 Jobs Act permitted low-taxed foreign earnings to be 
repatriated to United States parent corporations with virtually no U.S. 
tax, companies that took most advantage of this were those in high-tech 
industries.
---------------------------------------------------------------------------
    \8\ The table is reproduced on page 358, Summer 2005 issue of the 
Tax Law Review, vol. 58, number 4.
---------------------------------------------------------------------------
    In a sense, then, the high-tech industries have pulled off a hat 
trick. First, they beat the intercompany pricing rules. They have been 
able, despite all the work on 482 and 367, to transfer intangibles to 
Ireland and Singapore. Next, those companies beat back the passive 
foreign investment company (PFIC) rules, which would have stopped them 
investing the income from those intangibles abroad in non-productive 
portfolio assets without incurring U.S. tax. Before 1998, once more 
than 50% of a foreign subsidiary's assets were bank deposits and bonds, 
all the income of that subsidiary would therefore in effect be taxed 
currently in the U.S. But in 1997, the PFIC rules were changed to 
exempt a foreign subsidiary. Subsidiaries of high-tech companies could 
therefore keep their intangibles profits abroad in passive assets. They 
did not use them to compete, which is the justification for encouraging 
low-taxed profits abroad.
    By 2002, the high-tech companies were beginning to say, although 
not in these words, that ``We need this money that we siphoned abroad 
to recreate U.S. jobs.'' Under that rationale, the 2004 American Jobs 
Creation Act allowed them to replace the money they had paid out in 
dividends by bringing their foreign bank deposits back to the U.S. tax-
free.\9\
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    \9\ Intel, which repatriated $6.2 billion under the Jobs Act, 
shortly thereafter announced that it was cutting 10,000 jobs, about 10 
percent of its workforce. (Editorial, ``Cashing their Chips,'' N.Y. 
Times. Sept. 8, 2006, p. A28.) Pfizer, which had $38 billion 
indefinitely reinvested abroad at the end of 2003, drastically cut its 
domestic sales force in 2006.
---------------------------------------------------------------------------
    In short, by taking advantage of the U.S. tax system: outfoxing 
intercompany pricing rules; justifying the accumulation of bank 
deposits abroad in the name of tax simplicity; and claiming that those 
bank deposits would replace lost jobs, companies have succeeded in 
exempting U.S. profits from U.S. tax.
    I think this has been one of the most brilliant, farsighted and 
ingenious rip-offs of the U.S. tax base ever accomplished. To counter 
this, Chairman Rangel's tax reform bill rightly proposes that foreign 
tax credits be allocated fungibly among high-taxed repatriated earnings 
and unrepatriated low-taxed earnings. The stiffness of the opposition 
implies how effective it would be.
    Perhaps even more effective would be repeal of Code section 
1297(d), which exempts tax-haven subsidiaries from PFIC status. Its 
repeal would force the distribution of tax-haven earnings not needed in 
the business, and thus should not hurt their competitive position. 
Companies do have legitimate reasons for doing business in tax havens. 
Avis, for example, cannot rent cars in the Bahamas by shuttling them 
back and forth from Florida. But that should not mean that Avis Bahamas 
Ltd. can become a giant mutual fund, making portfolio investments with 
untaxed income.
    Two related recommendations to deter the use of tax havens:
          Require that, on their published income statements, 
        companies reflect United States tax on foreign earnings even if 
        considered permanently reinvested. Corporations value earnings 
        even more than saving taxes; and taking away the earnings 
        incentive would lessen the attraction of tax havens.
          Require companies whose foreign subsidiaries show 
        more than, say, a 25 percent return on tangible assets to 
        describe (consistent with keeping trade secrets) the 
        intangibles of the subsidiary and how it obtained them. This 
        would reinforce the intercompany pricing rules of sections 367 
        and 482 and show if the parent was materially assisting the 
        subsidiary in earning amounts that could be subpart F income.

2. Avoidance of Non-U.S. Tax Repatriation of Business Profits from 
        High-Taxed to Low-Taxed Foreign Subsidiaries
    The proper U.S. response to the avoidance of non-U.S. taxes is not 
the topic of this testimony. Because it is related, Appendix I 
discusses the issue with respect to U.S. multinationals.
CODA
    A theme of this testimony is to deter avoidance by focus on the 
United States. A similar focus might be applied to deter individual 
evasion, even though evasion--unlike avoidance--is criminal. In 
addition to the anti-abuse measures proposed in Congressman Doggett's 
bill and the Rangel-Baucus bill, I would add an additional suggestion. 
As a complement to the foreign information, tax law might elicit 
compliance by enlisting beneficiaries. Gifts and bequests to Americans 
in excess of, say $10 million--or some other eight figure number--could 
be characterized as income and subjected to an excise tax unless it 
could be shown that the assets and income from which they were derived 
had been reported on tax returns.\10\
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    \10\ This was prompted by a call to me from a Swiss lawyer, 
concerned about what would happen to his U.S. client's large secret 
Swiss account when he died. ``Money grows faster when you don't pay 
tax,'' he explained.
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APPENDIX I:
Avoidance of Non U.S. Tax: Repatriation of Business Profits from High-
        Taxed to Low-Taxed Foreign Subsidiaries
    A. Dividends, Interest and Royalties
    For 70 years the United States has considered there to be no 
legitimate reason for its taxpayers to earn passive portfolio income--
dividends, interest and royalties--outside its immediate taxing 
jurisdiction. When the investment was not part of an active business 
(like banking or insurance), taxing the income immediately was 
considered not to affect the ability of U.S. persons to compete abroad.
    The Revenue Act of 1962 extended the scope of that principle to 
undistributed passive investment income earned by foreign subsidiaries 
(controlled foreign corporations) of U.S. widely held multinationals. 
Foreign personal holding company income became a type of subpart F 
income taxed as if earned directly by its United States shareholders.
    For subpart F purposes, passive income includes not only portfolio 
investment like bank deposits but also what is essentially the 
distribution of business profits from one foreign subsidiary to 
another. Those distributions could take the form of low-taxed 
dividends, interest or royalties paid by one foreign subsidiary to 
another; or in the most complete realization of business profits, it 
would take the form of gain from sale of all the stock owned in one 
foreign subsidiary by another. Unlike interest from liquid bank 
deposits, which a foreign subsidiary rather than the U.S. parent had 
little reason to receive except to defer U.S. tax, realization of one 
foreign subsidiary's business profits by another generally was intended 
to save foreign tax.
    The inclusion of business profits distributed from one foreign 
subsidiary to another as subpart F income, despite the motivation to 
save foreign rather than U.S. tax, has provoked fierce attack since 
(and during) its original enactment in 1962. Yet, however correct that 
position was, circumstances have changed. Once, after World War II, the 
United States had all the money there was; and now it does not.
    The Tax Reform Act of 1986 reflected this sea change. For purposes 
of the foreign tax credit, the act treated deductible payments of 
interest and royalties from foreign subsidiaries to U.S. parents--which 
eroded foreign tax bases--in the same way as dividends. Legislative 
background described this as an incentive for U.S. multinationals to 
reduce their foreign taxes.\11\ The 2006 enactment of section 954(c)(6) 
was therefore extending that logic when it exempted foreign-to-foreign 
interest and royalties from subpart F. Although such logic may not have 
motivated the provision, it remains valid. Distributing business 
profits with the least foreign tax cost should not be considered 
avoidance for U.S. tax purposes.\12\
---------------------------------------------------------------------------
    \11\ The 1986 Blue Book description of section 904(d)(3) at p. 866.
    \12\ We try to prevent United States subsidiaries of foreign 
companies from distributing profits with the least U.S. tax cost, even 
when it entails discrimination, Code 163(j), aimed at what is called 
earnings stripping. By contrast, U.S. private equity funds depend on 
this technique.
---------------------------------------------------------------------------
    Accordingly, section 954(c)(6) should be continued and be extended 
to include gain from sales of stock in foreign subsidiaries. There 
would be no income for U.S. tax purposes--and thus no subpart F 
income--if instead the transferred foreign subsidiary sold its assets 
and distributed the cash to its foreign parent in liquidation. It is 
foreign rather than U.S. tax that generally makes an asset sale 
prohibitive.
    B. Artificial Intercompany pricing: Sales and Services Income
    Section 482 gives the IRS authority to prevent erosion of the U.S. 
income tax base by artificial intercompany pricing. To illustrate, a 
domestic corporation may charge too little for goods sold to, or 
services performed for, a foreign subsidiary. This inflates the 
subsidiary's profit (which the United States does not tax) while 
decreasing that of the parent (which the United States does tax).
    But enforcement of intercompany pricing requires enormous effort. 
To combat what President Kennedy termed ``the shifting of management 
fees and similar practices which maximize the accumulation of profits 
in a tax haven,'' subpart F income included profit from sales and 
services between foreign subsidiaries and related corporations. In 
significant part, this was intended to make Section 482 attribution of 
subsidiary sales and services income to a U.S. parent corporation 
unnecessary. Whether the transaction resulted in the parent earning $20 
and the subsidiary $80, or the parent $80 and the subsidiary $20, the 
entire $100 would be taxed to the parent.
    Again, however, subpart F income includes sales and services income 
intended to erode a foreign as well as a U.S. tax base; and the same 
considerations that should exclude from subpart F income the 
distribution of business profits among related foreign companies should 
likewise exclude income from sales and services transactions among 
them. We are not the world's tax policeman of intercompany pricing: we 
can hardly police our own.\13\
---------------------------------------------------------------------------
    \13\ One subpart F provision, known as the branch rule, even 
polices alternative ways of avoiding foreign tax. Code section 
954(d)(2).
---------------------------------------------------------------------------
    Without too much detail, some suggestions follow:

          In view of encouragement of U.S. multinationals to 
        reduce their foreign taxes, restrict subpart F to transactions 
        that erode the U.S. tax base. This would entail at least repeal 
        of the section 954(d)(2) branch rule, and might well go further 
        and limit subpart F sales and services income to transactions 
        that reduce U.S. taxable income.
          Concomitant with having subpart F sales and services 
        income limited to the U.S. tax base, ensure preservation of 
        that base in two ways: ending the avoidance of subpart F sales 
        income by contract manufacturing with its complex and vague 
        rules; and stopping the avoidance of subpart F services income 
        when foreign subsidiaries perform services with substantial 
        assistance from a United States parent in the form of sub rosa 
        expatriated intangibles.

    The central issue of the U.S. international tax system has become 
the expatriation of U.S. intangibles abroad. In the case of services 
income, the proposals intend to mitigate the result of that 
expatriation. Repeal of the passive foreign investment company 
exception for foreign subsidiaries (proposed in the testimony above) 
also intends to mitigate the effect of those intangibles.

                                 

    Chairman NEAL. Thank you. Mr. Suringa, it's up to you. Do 
you want to offer testimony in the next five minutes, or do you 
wish to have us reconvene here at approximately noon time, and 
then it would give you a better chance? I want to make sure 
we're fair.
    Mr. SURINGA. Whatever the committee would like. I am happy 
to stay within the five minutes, or----
    Chairman NEAL. Then do it.
    Mr. SURINGA. Okay.
    Chairman NEAL. So are we.
    Mr. SURINGA. Thank you, sir.

 STATEMENT OF DIRK J.J. SURINGA, PARTNER, COVINGTON & BURLING 
                     LLP, WASHINGTON, D.C.

    Mr. SURINGA. Chairman Neal, Ranking Member Tiberi, and 
Members of the Committee, my name is Dirk Suringa. I am a 
partner with the law firm of Covington & Burling. From 2000 to 
2003, I was an attorney advisor in the office of international 
tax counsel at the Treasury Department. I appreciate very much 
the opportunity to testify before the committee today.
    Although I regularly advise clients on how best to comply 
with U.S. information reporting requirements, my testimony 
today is on my own behalf, and not on behalf of any of my 
clients.
    I would like to make, briefly, three basic points 
summarizing my written testimony. First, offshore tax evasion 
remains a significant problem, and the committee is right to be 
concerned about it, and focused on efforts to stop it.
    Although it's difficult to establish with precision the 
extent of offshore tax evasion, it clearly represents a 
substantial cost to the U.S., and undermines the basic fairness 
of our tax system. Put simply, the IRS needs effective 
enforcement tools to ferret out and stop U.S. tax evasion 
abroad.
    Second, the conceptual approach effect, in my view, 
increased information reporting and disclosure, gives the IRS 
exactly the right type of tool to deal with offshore tax 
evasion. Disclosure enables the IRS to bring cases to recover 
revenue otherwise lost to tax evasion, and it discourages 
evasion in the first place, by raising the risk of detection.
    Equally as important, properly structured information 
disclosure need not interfere with legitimate business 
transactions, which is as essential to our economic recovery as 
it is to generating tax revenue for our government.
    While the objectives and overall approach of the bill, 
FATCA, are clearly correct, my third point is that the 
legislation may give rise to certain unintended consequences, 
largely because it's a unilateral measure.
    The sanction that FATCA uses to obtain foreign bank account 
information is a withholding tax imposed on U.S. source 
investment income. So, a foreign financial institution or 
foreign entity can avoid the sting of FATCA simply by divesting 
from the United States. This type of a divestment would be 
troubling, not only because it would deprive the IRS of the 
opportunity to obtain actionable information, but also because 
of its potential harmful effect on the U.S. dollar and on in-
bound U.S. investment, and the ability of U.S. companies to 
raise capital.
    FATCA also could encourage foreign countries to impose a 
withholding tax on payments to U.S. financial institutions and 
U.S. entities, unless they disclose ownership by those 
countries' citizens and residents. A proliferation of country-
by-country reporting and requirements of withholding taxes 
would raise, in my view, barriers to trade that should be 
avoided.
    Last point is that FATCA, as drafted, may have the 
unintended consequence of overriding existing U.S. tax 
treaties. U.S. tax treaties typically require, as a condition 
for obtaining benefits, that the foreign person provide--
demonstrate ownership, or demonstrate qualified treaty 
residence. In other words, they have to show that they are a 
good foreign country resident. Under existing treaties, that 
does not depend on whether they demonstrate that they have a 
U.S. ownership or now.
    Thus, even if a foreign entity satisfies all the 
requirements of a treaty, FATCA could deny it the reduced rate 
of withholding tax provided by the treaty. In my view, a multi-
lateral agreement on the sharing of taxpayer financial 
information would better serve the enforcement objectives of 
FATCA without these unintended consequences.
    The more jurisdictions that would join such an agreement, 
the less of an incentive foreign financial institutions and 
foreign investors would have to divest from the United States, 
because they would know that wherever they invest their money 
in major markets, they would face the same problem.
    At the same time, the less likely foreign governments would 
be to adopt conflicting unilateral measures that could end up 
putting information about taxpayers in the hands of governments 
that do not protect it to the same degree that we protect it 
under Code Section 6103.
    Finally, an agreement among our major treaty partners would 
reduce the risk of the treaty override effect of the bill.
    My written testimony has a couple of technical points on 
other aspects of the bill. I am happy to answer questions about 
that. Thank you very much for the opportunity.
    [The statement of Mr. Suringa follows:]


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

    Chairman NEAL. Thank you, Mr. Suringa. We have three votes 
on the floor. So we will recess until after the last vote. I 
anticipate being back here right after noon time. And then we 
will have an opportunity to not only resume testimony, but have 
some questions answered. The committee stands in recess.
    [Recess.]
    Chairman NEAL. Let me call this meeting back to order. And 
we have finished testimony from the witnesses, so there will be 
now an opportunity to raise questions with our very good 
panelists.
    Mr. Prevost, let me congratulate you, first of all, on your 
willingness to come and testify today. I know it was not an 
easy decision, given the strong objections that we have heard 
to this bill from some in the international banking community. 
But you seem to think, overall, it is a responsible approach to 
the enforcement problem.
    You mentioned that this bill is an improvement over the 
budget submission from earlier this year. Would you be 
specific?
    Mr. PREVOST. Sure, Chairman Neal. You know, there were a 
couple very fundamental concerns with the greenbook proposal 
that this bill fixed, and I think this is going to be helpful 
to the banking community.
    The first is the elimination of the requirement to do full 
1099 reporting. That was a major concern by a number of foreign 
financial institutions. And the other was the requirement that 
every qualified intermediary--all of their affiliates had to be 
qualified intermediaries, as well. It's a very big sort of 
compliance issue to be a qualified intermediary. So, to have to 
make every entity be forced to be one was a concern that a lot 
of people had.
    Chairman NEAL. I was also interested in your comments about 
potential duplicative reporting. Maybe you can suggest some 
ways for us that Treasury and the IRS limit the potential for 
this use?
    Mr. PREVOST. Sure. I mean, some of this is described in our 
written testimony, but you know, there is fundamental things.
    Like, if a hedge fund is already providing K1s to the 
Internal Revenue Service, to ask them to do this reporting as 
well, which actually doesn't even give you as much information 
that's already on the K1, that seems to us to be unnecessary.
    If you have got a bank that has a hedge fund account and 
the hedge fund has also got the FFI agreement to have the bank 
do the reporting and then have the hedge fund do the reporting 
as well, you--basically you're giving the same information to 
the IRS twice. And, if anything, it has the potential to 
confuse them, because they're getting more information than 
actually what's really out there in dollar terms, because they 
get the same information more than once.
    So, it is things like that that they need to work on.
    Chairman NEAL. And, Professor Kingson, I was interested in 
your suggestion that companies be required to disclose the U.S. 
tax on their foreign earnings that are permanently reinvested. 
Can you explain why that would make tax havens less attractive?
    Mr. KINGSON. It would not result in their increasing 
earnings per share.
    I can give two examples of this. I went to a conference at 
Merrill Lynch years ago where the Internal Revenue Service had 
offered to say that they would give a bigger--an interest 
factor on convertible bonds, increasing your deductions, if the 
companies did the same thing for book purposes. And there were 
tax lawyers and investment bankers there, and the tax lawyers 
said, ``This is great, you will save a lot of taxes,'' and the 
bankers said, ``It will hurt earnings,'' and they did not 
agree.
    And you take something like the HealthSouth Corporation. To 
support their billion dollars of earnings, they overpaid 
$300,000 of taxes. And when they went bankrupt, the trustee got 
it back. They were willing to pay taxes in order to really 
inflate their earning.
    Chairman NEAL. And Mr. Suringa, I appreciate the fact that, 
in your testimony, you acknowledged that this was a legitimate 
problem that we are examining here, and I thought that was very 
helpful.
    Mr. SURINGA. Yes.
    Chairman NEAL. You would note that there is very little 
rancor here on the subcommittee today. I think much of it has 
to do with the fact that this is a serious issue----
    Mr. SURINGA. Yes.
    Chairman Neal.--and that the American people are focused on 
it.
    Mr. SURINGA. I agree completely. I think it is an important 
issue. Individual tax evasion has a corrosive effect on the 
willingness of law-abiding taxpayers to pay their fair share. 
So I think it's a very important problem.
    Chairman NEAL. Thank you. And let me yield to Mr. Tiberi.
    Mr. TIBERI. Thank you. Thank you, Mr. Chairman. First, Mr. 
Prevost, thank you for being here. Question to you.
    You mentioned the issue of bearer bonds. If I can ask you a 
question related to that, I understand that bearer bonds have 
sometimes enabled dishonest people to cheat on their taxes. And 
it's important to address that problem. On the other hand, I 
think that it's also important that these--in these troubled 
economic times, to broaden the U.S.--the access to U.S. 
companies and the Treasury to sources of capital, not to 
restrict such access, in this particular case.
    Wouldn't the bill's bearer bond provision make it harder 
for the Treasury Department and American companies to raise 
capital in some markets around the world, and wouldn't the 
resulting implications--and what would the resulting 
implications be for the economy right now, the U.S. economy 
right now?
    Mr. PREVOST. Oh, you know, I am not an expert on bearer 
bonds, but yes, I am aware of the fact that there are some 
markets where U.S. companies can only raise money through 
bearer bond activity.
    For example, in Switzerland, we understand that, you know, 
$40 billion was raised in the 2004 through 2007 period by U.S. 
companies. And, you know, if they wanted to tap that market, if 
they couldn't do bearer bonds they wouldn't be able to raise 
the money. So I don't know what the alternative would be. But 
there is an issue that needs to be thought about.
    Mr. TIBERI. Mr. Suringa, have you thought about the issue 
at all?
    Mr. SURINGA. I have. I mean, I think in terms of--we would 
be in sort of uncharted territory, if we were to repeal the 
ability of issuers to include the TEFRA disclaimer language, 
and the reason is that the issuer sanctions, for example, 
apply, in essence, to all issuances of debt. So it's sort of 
drafted in a way that is an extra-territorial application of 
U.S. law.
    And the way that foreign issuers, as well as U.S. issuers, 
deal with that problem or that potential problem is to include 
the TEFRA disclaimer language in all debt issuances. So they 
basically can avoid the issue by just putting the foreign 
targeting requirements into their issuances of debt. And so we 
don't have to encounter the problem about whether or not, if 
that language weren't in there, if it weren't effective, that 
issuance would be subject to a one percent excise tax, 
multiplied by the number of years of the issuance.
    If we take away the ability of companies to be able to do 
that, then I think we have to confront the extra-territorial 
application of the bill--of the law, as it stands now. And that 
could have a negative effect on the ability of U.S. companies 
to raise capital, and on foreign companies, as well.
    Mr. TIBERI. Taking a step further, as I understand it--and 
please correct me if I'm wrong--the legislation would not 
prevent a foreign company, my understanding, from using bearer 
bonds, which then would put U.S. companies, potentially, at a 
competitive disadvantage, while not meeting the objective, I 
believe, the objective of removing bearer bonds from the 
markets entirely.
    So, instead of unilaterally--a unilateral U.S. action on 
the issue, wouldn't it maybe be more effective, if we're trying 
to get this more--at it from a global perspective, attempt to 
address the bearer bond issues cooperatively, through multi-
lateral negotiations with other countries?
    Mr. SURINGA. Well, I do think--I mean, the tenor of my 
testimony is that I think a multi-lateral approach is the best 
way to avoid the issues that kind of rise----
    Mr. TIBERI. If we don't do that, wouldn't it put us at a 
disadvantage, our folks at a disadvantage?
    Mr. SURINGA. Oh, I think that's right, in terms of where 
can we raise capital, where can our companies raise capital----
    Mr. TIBERI. Right.
    Mr. Suringa [continuing]. If we have this disincentive, or 
this sanction. I mean, other companies are going to be able to 
raise capital without having to deal with that sanction, I 
mean, assuming that they can work out the extra-territorial 
application----
    Mr. TIBERI. Mr. Kingson, you agree?
    [No response.]
    Mr. TIBERI. Do you agree?
    Mr. KINGSON. I'm sorry, I am not--really not qualified to--
--
    Mr. TIBERI. Okay. Mr. Prevost?
    Mr. PREVOST. I do agree that that is an issue that has to 
be addressed.
    Mr. TIBERI. Want to take a stab at it, Mr. Kingson, even 
though you're not--we're not experts, either.
    No? All right. Mr. Chairman, I will yield back.
    Chairman NEAL. Thanks for giving up the disguise.
    Let me yield to Mr. Doggett to inquire.
    Mr. DOGGETT. Thank you very much, and thanks to each of our 
witnesses. I will have some questions for Mr. Kingson.
    Doesn't the revenue loss from corporate manipulation of the 
Tax Code far exceed even the very substantial revenue loss from 
individual tax evasion?
    Mr. KINGSON. I think it does.
    Mr. DOGGETT. And, given the magnitude of that problem, and 
the loss to the treasury from international tax misconduct, do 
you agree that a comprehensive approach to international tax 
abuse should include proposals that you have advanced, along 
with managed and controlled provisions of the stock tax havens, 
in order to really deal with the whole problem?
    Mr. KINGSON. Yes.
    Mr. DOGGETT. And as far as this whole term ``managed and 
controlled,'' I know you talk about it in your testimony. But 
all we're really saying is if you look like an American 
corporation, you sound like an American corporation, you're 
here as--physically, as an American corporation with your 
directors and your management, maybe you ought to pay taxes 
like an American corporation?
    Mr. KINGSON. That's--what an individual does, a corporation 
should do, too.
    Mr. DOGGETT. As I discussed with Mr. Shay, one category of 
corporate entities that would be affected by this provision for 
management and control are newly formed corporations that start 
out by filing a piece of paper somewhere in the Caribbean 
entitling them under current law to be treated as a foreign 
corporation, even though the company is being run here, from 
America.
    Is it correct that our current inversion provisions do not 
reach those companies?
    Mr. KINGSON. I think they don't, no.
    Mr. DOGGETT. And is there a substantial problem in that 
area that needs to be corrected, legislatively?
    Mr. KINGSON. It depends on how good the idea is. I mean, if 
they're going to be successful, obviously they would get a lot 
of stuff offshore.
    Mr. DOGGETT. All right. And I will take that as a yes, is 
that right?
    Mr. KINGSON. Yes.
    Mr. DOGGETT. Some have argued that a managed and controlled 
provision would conflict with our tax treaties. Because, under 
the treaty, the corporation is considered a resident of the 
contracting state, and liable for tax there. Is there any 
legitimacy to the argument that the managed and controlled 
provision from Stop Tax Havens would lead to double taxation 
for some corporations?
    Mr. KINGSON. I don't think there should be--title of every 
tax treaty says it is a convention for the prevention--for the 
avoidance of double taxation. And almost all of our treaty 
partners use the management and control test.
    And, what's more, the OECD commentary said it would not be 
proper to use the function of just registration. You should use 
a management and control test. And that's the OECD commentary 
on their model treaty.
    Mr. DOGGETT. And the management and control provision, I 
believe, has been used in the Netherlands tax treaty in a 
little different form, and it is a factor in the conduct of 
many other countries, that we're just asking the same standard 
apply here.
    Mr. KINGSON. Yes.
    Mr. DOGGETT. I will pose one more question to you, and that 
is that corporate tax avoidance, as substantial as it is, is 
usually defended as just being essential to maintaining 
American competitiveness.
    In fact, don't these avoidance provisions that are usually 
available only to a multi-national with a fleet of lobbyists 
and CPAs, aren't those provisions actually providing a 
competitive advantage over small businesses across America who 
don't have those opportunities?
    Mr. KINGSON. Yes. I think the competitiveness cry is really 
sort of the second-to-last refuge of a scoundrel. I mean, I 
think there is very little basis in it. I usually don't believe 
it. You cannot ascertain effective rates very, very precisely.
    And, for example, years ago, if we exempted real estate 
from income tax, there would have been a revenue gain.
    Mr. DOGGETT. And as multi-national shenanigans that aren't 
available on Main Street, but are available on Wall Street, I 
know you feel they need to be addressed in this legislation, 
and that they are not.
    But let me ask you whether, if we address and try to 
provide a level playing field and real competitiveness for all 
businesses here within the United States, if we will be--based 
on your experience, having worked as international tax counsel 
for the Treasury, and having taught this at a number--the whole 
question of international tax law--at a number of prestigious 
law schools--if there will be any adverse effect, versus 
foreign companies that we compete with that are real foreign 
companies, rather than just made-to-look-like a foreign company 
to dodge our tax burden?
    Mr. KINGSON. Well, if companies have no tax at all, I 
think, obviously, they are getting a free ride. And I think 
that you raise a very important issue, that when they're 
talking about competitiveness, there is some significant 
competitiveness of people who keep jobs in the United States 
and who export, from those who say, ``Well, we need to compete 
abroad by not having any tax.''
    Mr. DOGGETT. Thank you. Thank you, Mr. Chairman.
    Chairman NEAL. Thank you, Mr. Doggett. And I want to thank 
our panelists today for their informed testimony. You may 
receive some written follow-up questions from Members, and I 
hope that you will respond promptly, so that we might include 
your comments in the record.
    Being no further business before the subcommittee, then the 
hearing is adjourned.
    [Whereupon, at 12:49 p.m., the subcommittee was adjourned.]
    [Submissions for the Record follow:]

                  American Citizens Abroad, statement

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

     Chamber of Commerce of the United States of America, statement

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

                  Managed Funds Association, statement

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

           Prepared Statement of American Bankers Association
    Chairman Neal, Ranking Member Tiberi, and Members of the 
Subcommittee, the American Bankers Association (``ABA'') appreciates 
having this opportunity to submit a written statement for the record of 
the Subcommittee on Select Revenue Measures' November 5, 2009 hearing 
on H.R. 3933--the Foreign Account Tax Compliance Act of 2009 (the 
``H.R. 3933'').
    The American Bankers Association brings together banks of all sizes 
and charters into one association. ABA works to enhance the 
competitiveness of the nation's banking industry and strengthen 
America's economy and communities. Its members--the majority of which 
are banks with less than $125 million in assets--represent over 95 
percent of the industry's $13.3 trillion in assets and employ over 2 
million men and women.
    The ABA commends the government's efforts to combat offshore tax 
evasion and ensure that all U.S citizens, whether at home or abroad, 
are in compliance with the U.S. tax rules. We would be glad to work 
with the Committee on Ways & Means (the ``Committee'') in its efforts 
to achieve these goals through clear and targeted rules that do not 
unintentionally place undue and unnecessary burdens on any particular 
sector(s).
    The ABA supports legislation that will ensure that all U.S. 
citizens and residents pay their fair share of taxes, and thus, prevent 
loss of millions of dollars by the U.S. because of taxpayers that 
engage in illegal use of offshore accounts to hide taxable income. It 
is important that the IRS has the tools necessary to investigate and 
prosecute U.S. taxpayers that take advantage of the system to evade 
their tax obligations, thereby shifting the cost of their actions to 
law-abiding taxpayers who pay their taxes. On its face, H.R. 3933 
appears to give the government the necessary tools for improving 
compliance and achieving the stated goal of ensuring that U.S taxpayers 
are not able to hide income abroad. However, as drafted, the 
legislation raises a number of issues that must be addressed in order 
to avoid unintended negative consequences, and we strongly urge the 
Committee to focus on those negative consequences as it continues to 
examine the issue of offshore tax evasion. With respect to H.R. 3933, 
we specifically urge the Committee to focus on the following:

          the effective date of the legislation is very 
        unrealistic, both from an industry compliance perspective and 
        an IRS enforcement perspective;
          the legislation is so broad in scope and application 
        that it pulls in entities and activities that are not the 
        intended target of the legislation; and,
          IRS/Treasury should be given significant latitude and 
        flexibility in the administration of these rules, especially 
        with respect to clarification of terms and definitions included 
        in H.R. 3933 and the imposition or waiver of penalties under 
        certain circumstances.

    It is important to point out that this statement does not attempt 
to cover H.R 3933 or the topic of offshore tax evasion in a 
comprehensive manner. Instead, we are providing very broad and general 
comments on the logistics of the legislation from an industry 
perspective.
Effective Date is Unrealistic
    Payments made to a foreign financial institution or foreign 
nonfinancial entity after December 31, 2010 will be subject to these 
rules. The rules relating to offshore bank account tax reporting and 
compliance are already very broad and complex. H.R. 3933 would add 
significant complexity to existing rules that U.S. withholding agents 
would be expected to be able to implement within an insufficient period 
of time. In addition to the fact that U.S. withholding agents cannot 
realistically be expected to fully comply on such short notice with 
rules that would need to be further clarified and fine-tuned, there is 
no question that the proposed effective date does not provide 
sufficient time for the IRS to issue the required regulations, forms, 
or guidance that would be necessary for implementing the rules and for 
withholding agents to understand and implement them by the effective 
date.
    The legislation would require foreign payees to enter into 
agreements with the IRS and, presumably, a list of foreign payees that 
have entered into such agreements would be made available to U.S. 
payors in advance of the effective date. For many foreign financial 
institutions, much of the information that may be needed to comply with 
the proposal may not currently be collected or retained in their 
customer files--for instance, some institutions do not ask (because 
they are not required to ask) the questions necessary to determine 
whether a customer is a U.S. citizen. Thus, an entity that has decided 
to participate in the program would have to set up a process for 
collecting such information, and there is no assurance that it will be 
able to obtain all the information (for maybe hundreds or thousands of 
customers) and have systems and controls ready in order to enter into 
an agreement with the IRS by December 31, 2010. Nevertheless, according 
to the legislation, payors would be obligated to withhold on every 
payment that is made to a foreign financial institution after the 
effective date in order to avoid penalties, without regard to whether 
the IRS list is completed within sufficient time for the payors to work 
with the information from the IRS. This would create a significant 
amount of confusion, including the possibility of a huge interruption 
in services and activities, particularly when payees that should not 
have been subject to withholding challenge the U.S withholding agent on 
numerous transactions.
    Further, H.R. 3933 would require U.S. withholding agents to engage 
in operational and technological overhauls, because their current 
systems do not collect all of the information needed to comply with the 
proposal. For instance, U.S. withholding agents do not currently track 
gross proceeds payments or payments of portfolio interests on foreign-
targeted bearer instruments made to foreign financial institutions or 
foreign nonfinancial entities. Since this legislation would require 
that they track and withhold on such payments, they would need 
sufficient lead time to update their systems. Hence, the proposed 
effective date is not realistic. In fact, an effective date cannot be 
realistically set until Treasury has promulgated the necessary rules or 
other guidance that would clearly be needed for the implementation of 
the Legislation.
Scope and Application Too Broad_Results in Unintended Consequences
    The scope and application of H.R. 3933 is overly broad and will 
lead to certain unintended consequences. Clearly, the U.S. does not 
intend to enact legislation that would disturb legitimate cross-border 
business activities, impair liquidity and access to vital capital, or 
interfere with existing treaty provisions. The permissible goal of 
enhancing information reporting that will help identify tax cheats can 
be attained without undesirable results that will negatively impact the 
U.S. economy. This could be done through legislation that clearly 
targets the areas of concern rather than broadly scoping in so many 
unrelated activities and taxpayers, thereby creating unworkable rules 
that result in significant costs to the industry and the economy as a 
whole. For instance, the legislation defines ``withholdable payment'' 
to include U.S. source short-term interest, which is treated as 
original issue discount under current law and not subject to 
withholding. Requiring foreign payees to enter into an agreement with 
the IRS or provide additional documentation may limit the sources of 
short-term funding, which banks and other U.S. companies depend on to 
conduct their business. ABA recommends that any final legislation 
include a provision exempting U.S. source short-term interests from the 
definition of withholdable payments.
    The legislation would impose unnecessary burdens on foreign 
affiliates of U.S. withholding agents. Such entities should be exempt 
from the application of the rules if they are already subject to the 
1099 filing requirements. The legislation would require a foreign 
financial institution to enter into an agreement with the Treasury to 
provide certain information on U.S. account holders. Such an entity may 
also elect to be subject to the same information reporting requirements 
as a U.S financial institution (i.e., the 1099 reporting rules). Thus, 
a foreign financial institution that is already subject to the 1099 
reporting rules (because it is a Qualified Intermediary or a subsidiary 
of a U.S. financial institution) and files information returns for its 
U.S. customers would still be required to go through this onerous 
exercise.
    In addition, the scope of the material advisor reporting 
requirement is so broad that it tends to capture all types of services, 
rather than just advisory services. For instance, would a U.S. 
withholding agent that provides a prospectus at a client's request be 
considered a ``material advisor?'' Unless the rules are clear and 
specifically targeted, they would extend beyond the scope of the 
problem and pull in unintended activities that have no direct 
relationship with the goal of combating offshore tax evasion.
    Furthermore, H.R. 3933 would repeal current law foreign-targeted 
bearer bond provision. This provision, which allows U.S. issuers to 
issue debt obligations in bearer form as long as they are foreign-
targeted, will negatively impact U.S borrowers because it will cause 
serious disruptions in their access to non-U.S. bond markets. The ABA 
suggests that the impact of this provision be given a lot of scrutiny 
and any reasonable alternatives be seriously explored before it is 
enacted in order to avoid unnecessary disruptions in the business 
activities of U.S. bond issuers.
    The legislation would also require the U.S. withholding agent to 
pierce the corporate veil, i.e., look through a foreign corporation to 
its underlying owners. Thus, a foreign corporation (except for a 
publicly traded corporation) that provides a W-8BEN would be withheld 
on (at the 30% rate) until and unless the corporation certifies that it 
has no substantial U.S. beneficial owners. Clear guidance needs to be 
provided addressing, among other things, rules on how the U.S. 
withholding agent should go about verifying this certification or how 
often this certification would have to be made. For example, would the 
verification be based on a form provided by the foreign company on 
which the U.S. withholding agent would be allowed to rely without 
further investigation? If ownership changed, or the percentage of 
ownership changed, is the full responsibility on the company to provide 
an updated form to the U.S withholding agent, or will this provision 
require re-solicitation similar to the current W-8 rules? In addition 
to the fact that current systems will have to be changed significantly 
in order to apply withholding based on more than one criterion (foreign 
status based on a W-8) as required under current law, obtaining this 
information will initially be very difficult for U.S withholding 
agents. The information that is required by the legislation is not 
information that is used or needed by financial institutions. Thus, 
Congress must allow sufficient time for the industry to understand the 
implications, the staffing resources needed, the systems changes 
needed, the data to be collected, the internal controls to be 
implemented, etc., so that the burdens on withholding agents to 
identify U.S. ownership in foreign companies can reasonably be 
accomplished within a reasonable time frame at reasonable costs.
Treasury/IRS Should be Given Flexibility in Administering the Rules
    As noted above, H.R. 3933 is too broad and does not clearly define 
some terms. Furthermore, the effective date of the Legislation would be 
incredibly difficult for the industry to accomplish. As the Treasury 
and IRS are aware, it took a significant amount of time for the current 
Qualified Intermediary rules to be developed and put in place by the 
IRS. We believe that it will take a significant amount of time for the 
Treasury to get this program in place, and because many issues and 
terms still have to be further addressed and clarified, it is important 
that Treasury be given a significant amount of flexibility in the 
administration of the new rules. For instance, as mentioned above, the 
requirement that payments made to a foreign corporation (that is not 
publicly traded) be subject to the 30% withholding unless such entity 
provides information on its U.S. owners requires clarifying guidance 
from the Treasury--which could include the development of a new form 
for this withholding provision. As the details are developed, Treasury 
may uncover problems that it will need to resolve, and additional 
flexibility will be important.
Conclusion
    Mr. Chairman and Members of the Subcommittee, the ABA supports the 
purpose and goal of H.R. 3933. However, unless it is properly and 
correctly administered, the intended purpose and goal may not be 
achieved without undue burdens, significant costs, unnecessary 
confusion and possible interruptions or impairment of some of the 
business activities of U.S. financial institutions and their foreign 
counterparties. The ABA applauds the Committee's efforts to combat 
offshore tax evasion and looks forward to working with the Committee on 
this important issue through rules that are targeted and specifically 
geared toward achieving the stated purpose and goal without undue 
burdens and costs to the industry.

                                 
              Letter of the American Citizens Abroad (ACA)

Dear Sirs:

    American Citizens Abroad (ACA), the voice of Americans overseas, is 
a non-profit, non-partisan all-volunteer organization that represents 
the interests of Americans living and working outside the U.S. to the 
Executive Branch of the U.S. Government, the U.S. Congress, and the 
U.S. Federal Judiciary to insure that Americans overseas are treated 
with equality and fairness. ACA keeps Americans overseas informed and 
supports their role as informal representatives of the United States. 
More can be learned about ACA through our Web site, 
www.americansabroad.org.
    We are submitting this written comment to the hearings on HR 3933 
which will take place on November 5, 2009 and request that this 
submission be included in the record. These comments are addressed to 
the four members of Congress who jointly issued the Congressional press 
release of October 27, 2009 supporting HR 3933, as the close 
coordination between the Senate Finance Committee and the Ways and 
Means Committee on this issue is apparent.
    American Citizens Abroad is dismayed to see the contents of the 
proposed Foreign Account Tax Compliance Act which, if passed, will 
create a backlash from foreign governments in response to what is 
openly referred to overseas as the financial imperialism of the United 
States. This legislation aims to significantly expand the reach of the 
Qualified Intermediary (QI) regulations. Whereas the current QI 
regulations are concerned principally with investment accounts, the 
Foreign Account Tax Compliance Act would apparently cover all bank 
activity, including current accounts. As stated in the joint press 
release, ``The Foreign Account Tax Compliance Act would force foreign 
financial institutions, foreign trusts, and foreign corporations to 
provide information about their U.S. accountholders, grantors, and 
owners, respectively. The nonpartisan Joint Committee on Taxation has 
estimated the provisions of the Foreign Account Tax Compliance Act 
would prevent U.S. individuals from evading $8.5 billion in U.S. tax 
over the next ten years.'' This legislation would significantly enhance 
the authority of the Treasury in imposing the QI regulations and, in 
fact, requires foreign financial institutions to become policemen for 
the IRS. The administrative burden and costs associated with compliance 
will be significant for foreign financial institutions. And the 
associated legal risk is perceived as high.
    As stated by Chairman Rangel in the Congressional press release, 
``This bill offers foreign banks a simple choice--if you wish to access 
our capital markets, you have to report on U.S. account holders. I am 
confident that most banks will do the right thing and help to make bank 
secrecy practices a thing of the past.'' In the same press release, 
Ways and Means Select Revenue Subcommittee Chairman Neal stated: ``I 
believe this bill provides the Treasury Department with the tools it 
needs to crack down on those Americans hiding assets overseas.''
    This legislation assumes that banks will submit passively to the 
U.S. rules and that business will go on as usual. But this will not be 
the case. UBS in Switzerland has already announced that it will no 
longer accept as a client any American person residing in the United 
States. Many other foreign banks are adopting the same policy in a more 
discrete way.
    With regard to American citizens residing abroad, a group of major 
UK banks has already stated that they will close accounts of American 
citizens if the proposed QI regulations of January 1, 2010 become 
effective. We know for a fact that Swiss, Dutch and Spanish banks are 
refusing American citizens residing in their countries as clients and 
are closing accounts. Do not forget that there are over 5 million 
American citizens residing abroad. These people need to maintain 
foreign bank accounts in the country where they reside to make current 
payments receive salaries and hold their investments. The proposed 
legislation and reinforced QI regulations will make it all the more 
difficult for overseas Americans to maintain a bank account where they 
reside.
    Although ACA understands and sympathizes with the efforts of the 
U.S. Congress to close the door to tax cheats, you must remember that 
most Americans working and living overseas are not tax cheats but are 
performing significant services for the United States in representing 
American companies and products. The proposed legislation specifically 
discriminates against one category of U.S. citizens--those residing 
overseas. Imagine the uproar if Congress passed a law that all 
residents of New York would have their bank accounts submitted to 
special investigation, including the total of debits and credits in a 
year and the maximum balance in the account.
    Closing accounts is just one reaction to the U.S. overreach. The 
United States imposing its laws on foreign countries is creating a 
poisoned atmosphere which will hinder the positive development of 
international trade and finance. One Swiss bank has already publicly 
announced that it will no longer invest in any American securities for 
any of its clients. Since that announcement, which received substantial 
press coverage, and the explanation of U.S. tax legislation behind that 
statement, foreigners are already beginning to divest of U.S. stocks. 
The U.S. Tax Code states that if a foreigner owns more than $60,000 of 
U.S. securities at the time of his death, his estate becomes subject to 
U.S. inheritance laws. At a time when the United States should aim to 
attract foreign capital, its legislation will discourage investment in 
the United States. As the United States government depends on foreign 
investors to purchase a large share of Treasury bills, the threat of a 
significant divestment out of the United States is not to be taken 
lightly.
    While there is no doubt that the United States remains a financial 
powerhouse, it is no longer the only option for investment purposes. 
With the U.S. dollar devaluing against other currencies, many 
individuals are focusing investments in currencies other than the U.S. 
dollar. The United States risks losing investment flows into the 
country and compromising free flow of trade if people located outside 
of the United States view compliance as administratively too 
burdensome. Furthermore, the probable restriction on access to bank 
accounts overseas by American citizens and corporations will put a 
restrainer on the free development of trade. The new movement away from 
the U.S. stock market is just one form of backlash on American 
policies, and all of the publicity linked to the bank secrecy issue has 
made foreigners sensitive to the implications of any relationship with 
the United States.
    The United States also risks facing measures of reciprocity from 
foreign governments. In fact, the perspective of the United States on 
bank secrecy and fiscal paradises is very hypocritical. On November 2, 
2009, a Financial Secrecy Index was been published for the first time 
by the International network for fiscal justice, co-founded by the 
South Alliance and the Declaration of Bern. Ranking number one in the 
overall index of secrecy is Delaware in the United States with a heavy 
weight in international transactions. In terms of secrecy, Delaware 
ranks on a par with the Cayman Islands, Bermuda and Dubai.
    The U.S. one way approach has also been illustrated by the fact 
that when Mexico asked for United States assistance in providing the 
names of Mexican citizens with money hidden in the United States, the 
United States refused to collaborate. The OECD countries are also 
building up forces to obtain transparency of their nationals. This 
movement will extend to money held in the United States as well as to 
other foreign banks.
    American Citizens Abroad fears that the current Congressional 
approach to stop the few thousand American citizens that evade taxes by 
imposing its laws on other nations risks to open up Pandora's box, to 
create suspicion and friction with many other governments and to have a 
long-term negative impact on U.S. trade and commerce in general. The 
costs to the United States could far exceed the $850 million annual 
revenue projected to be collected by the Joint Committee on Taxation 
due to the proposed HR 3933. Right now the United States should be 
encouraging more foreign trade to increase the nation's exports, not 
develop legislation reaching beyond its borders, which will hinder that 
free movement of trade.
    American Citizens Abroad supports Congress in its efforts to 
eliminate tax evasion, but asks that the current legislation be revised 
and rewritten so as not to discriminate against Americans living and 
working abroad and not to negatively impact continued foreign 
investment in the US. ACA feels it imperative to warn Congress of the 
serious risks for the United States related to the current drafting of 
the Foreign Account Tax Compliance Act.
    We thank you for your attention.
    Sincerely yours,
  Marylouise Serrato                   Jacqueline Bugnion
Executive Director                   Director
    cc: Americans Abroad Caucus
    The Honorable Timothy F. Geithner, Secretary of the Treasury
    The Honorable Paul Volcker, Chairman, Presidential Task Force on 
Tax-Code
Review

                                 
  Statement of the American Institute of Certified Public Accountants
    The American Institute of Certified Public Accountants thanks the 
House Ways and Means Committee for the opportunity to submit this 
statement for the hearing on November 5, 2009, on foreign bank account 
(Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts 
(FBAR)) reporting and related tax compliance issues.
    The AICPA is the national professional organization of certified 
public accountants comprised of approximately 360,000 members. Our 
members advise clients of federal, state and international tax matters, 
and prepare income and other tax returns for millions of Americans. Our 
members provide services to individuals, not-for-profit organizations, 
small and medium-sized business, as well as America's largest 
businesses.
General Comments
    We thank the Internal Revenue Service (IRS) and the Department of 
Treasury (Treasury) for the various announcements \1\ this year, 
providing FBAR form filing relief and extending the 2008 (and prior 
years) FBAR form due date for certain persons. We also appreciate the 
continuing dialogue we have had over the past several years with 
various government officials responsible for the FBAR form and the 
Voluntary Disclosure Initiative.
---------------------------------------------------------------------------
    \1\ Announcement 2009-51 and IR-2009-58, released June 5, 2009; 
Notice 2009-62, released August 7, 2009; IR-2009-84, released September 
21, 2009; ``Frequently Asked Questions'' (FAQs) on the Voluntary 
Disclosure Initiative, posted on the IRS website May 6, 2009, and 
modified July 31, 2009; additional FAQs added June 24, 2009, and August 
25, 2009, FAQs on the FBAR form, posted on the IRS website March 13, 
2009, and modified July 1, 2009; and the Voluntary Disclosure 
Initiative, announced March 26, 2009.
---------------------------------------------------------------------------
    However, many of our members remain concerned about the potential 
breadth of the newly revised form, effective for the 2008 calendar year 
(i.e., filed starting on January 1, 2009), and are confused as to the 
specific application of the filing requirements to their clients' 
circumstances. Because of the substantial penalties potentially 
applicable to taxpayers who do not comply with the FBAR form filing 
requirements and the lack of regulations and written guidance (other 
than the form instructions), we request written guidance addressing the 
issues discussed below.
Specific Comments
    Based on member feedback on the FBAR form over the past few years, 
the AICPA suggests the following (elaborations on each are contained 
later in the letter):

    1.  Taxpayers should be assured that until definitive FBAR 
regulations and rulings are issued, they can rely upon information on 
the IRS website, including FAQs and similar information, and Internal 
Revenue Code (IRC) definitions in complying with the FBAR form 
requirements.
    2.  The FBAR form should be considered timely filed when timely 
mailed (or e-filed), rather than when timely ``received,'' similar to 
the ``mailbox'' rule for filing all tax and information returns.
    3.  The FBAR form due date should be changed from June 30 to 
October 15, or an automatic extension should be available for October 
15 filing.
    4.  The FBAR form should continue to apply only to U.S. persons, 
but if it is decided that non-U.S. persons must file FBAR forms, such 
requirement should be adopted prospectively and with clear definitions.
    5.  An FBAR form filing requirement with respect to foreign 
accounts held by a trust should be imposed only on U.S. settlors/
transferors and U.S. trustees of the trust. Also, any U.S. person who 
is considered to have control of the trust as a grantor under IRC 
Section 679 should be required to file an FBAR form if the trust has a 
foreign account. If it is nonetheless decided that additional reporting 
is required by foreign trust beneficiaries, only trust beneficiaries 
who receive a distribution from a foreign trust should be required to 
file an FBAR form, reporting the receipt of the distribution.
    6.  When Treasury and IRS clarify the rules regarding a comingled 
account for FBAR form filing purposes, we recommend the FBAR form 
filing requirement, if any, be limited to the current year and applied 
prospectively, rather than retroactively, and that no FBAR form 
reporting be required for foreign financial accounts owned by any 
comingled account that is itself an entity and a reportable financial 
account.
    7.  When Treasury and IRS clarify the rules regarding which 
taxpayers are considered to have signature authority over a foreign 
bank or financial account for FBAR form filing purposes, we recommend 
that the FBAR form filing requirement, if any, be limited to the 
current year and applied prospectively, rather than retroactively.
    8.  Regarding delinquent FBAR forms, Treasury and IRS should 
provide guidance and relief regarding their filing, including 
reasonable cause for waiver of penalties. Guidance and relief are 
needed (consistent with FAQ# 9, posted on the IRS website on May 6, 
2009) for those who reported all their income and paid all their taxes 
on the foreign accounts, but did not file FBAR forms, as well as for 
those with unreported income and taxes due who also did not file FBAR 
forms.
    9.  The IRS Office of Professional Responsibility (OPR) should work 
with the tax practitioner community in formulating more comprehensive 
guidance for FBAR form purposes before the practitioner due diligence 
guidance under Circular 230 goes into effect.

    Each of the above comments is explained in further detail below.

    1.  Taxpayers should be assured that, until definitive FBAR 
regulations and rulings are issued, they can rely upon information on 
the IRS website, including FAQs and similar information, and IRC 
definitions in complying with the FBAR form requirements.
    If information on the IRS website is deleted or superseded prior to 
the issuance of more formal guidance, taxpayers should not be penalized 
for relying on information on the IRS website at the time they, or 
their advisors, access it.
    IRS and Treasury should establish a clear procedure for requesting 
FBAR form rulings (authorized by 31 C.F.R. Section 103.56(g)) that is 
similar to the existing ruling process/procedures for requesting tax 
private letter rulings (PLRs) from the IRS, and the IRS should release 
sanitized FBAR form rulings similar to what is done with tax PLRs.
    Also, IRS and Treasury should use terms and definitions from the 
IRC with which taxpayers and practitioners already are familiar rather 
than developing a new set of definitions for FBAR form purposes.
    2.  The FBAR form should be considered timely filed when timely 
mailed (or e-filed), rather than when timely ``received,'' similar to 
the ``mailbox'' rule for filing all tax and information returns.
    If the ``mailbox'' rule is not adopted for FBAR form purposes, all 
IRS websites (and websites of U.S. embassies and consulates), 
publications, instructions, responses, and references to the filing of 
an FBAR form should be clarified to say ``received by'' rather than 
``filed by'' or ``mailed by.'' The ``received by'' rule, as it 
currently stands, is a trap for the unwary since it differs from the 
filing requirements that apply to all tax and information return filing 
rules.
    IRS and Treasury should allow and encourage taxpayers to efile the 
FBAR form.
    A grace period of at least 10 days should continue to apply for 
FBAR form filings because there is no tax due.
    We recommend proof of timely filing include: (1) hand-delivery of 
the FBAR form with receipt of a date stamp at an IRS district office, 
and (2) use of USPS certified receipts or other proof of mailing 
alternatives available for tax forms.
    We also suggest that a street address and phone number (rather than 
just the current P.O. Box) be added to the instructions to enable a 
taxpayer (including a non-resident of the U.S.) to use an overnight 
delivery service to deliver the FBAR form to the IRS.
    3.  The FBAR form due date should be changed from June 30 to 
October 15, or an automatic extension should be available for October 
15 filing.
    Taxpayers with the financial resources to purchase offshore 
investments or business interests are very likely to request an 
extension of time to file their income tax returns. Complete filing 
information from foreign sources is rarely available until mid-summer 
or later. As a result, the amount and details of offshore accounts are 
often not known until after June 30.
    Taxpayers often do not have all the information (such as Schedules 
K-1 and footnotes thereto) that may be needed to complete the FBAR form 
by June 30. Many investors do not receive their Schedules K-1 until 
well after June 30 (many are received in September). Furthermore, if a 
taxpayer's investment advisor purchases a foreign investment, such as a 
hedge fund, on behalf of the taxpayer, the investor may not be aware of 
this except to the extent that a short entry is included on a monthly 
statement. People who utilize investment advisors typically have 
multiple accounts, and each account has a monthly statement that can 
run tens of pages. The investor may, therefore, have no idea of the new 
investment in the foreign hedge fund and the taxpayer's tax preparer 
may not be made aware of this until receipt of the Schedule K-1 for the 
initial year of investment, which will in many cases be well after June 
30.
    Few taxpayers understand the full scope of the phrase ``foreign 
financial account'' or the concept of indirect (constructive) 
ownership. Thus, they are unlikely to inform their tax preparer of 
their need to file the FBAR form or to provide all information 
necessary to file by June 30. Because the definition of a foreign 
financial account is a complex determination, especially if indirect 
ownership is involved, preparers are more likely to discover that there 
is indirect ownership of a foreign financial account when they are 
preparing the income tax return for the individual later in the year. 
For example, an individual may own a controlled foreign corporation 
(CFC) that might have a foreign bank account; however, the individual 
generally files the Form 1040 after June 30 because of Schedules K-1 
that are not yet received or the inability to obtain the CFC 
information for the individual's Form 5471 by June 30. The tax 
practitioner might not even be aware of the CFC or be in a position to 
inform the client of the need to file an FBAR form until well after 
June 30.
    No other tax form is due on June 30, so many taxpayers are not 
aware of, or accustomed to, the need to provide their tax preparers 
with information by this June 30 due date. In addition, taxpayers are 
not accustomed to having a filing requirement for which there is no 
extension. It also takes a lot of time for many taxpayers to gather the 
information required to prepare the FBAR form. For the above reasons, 
and in light of the potentially significant penalties involved, the 
FBAR form due date should be on or after October 15 to conform to the 
extended due date for the vast majority of individuals. This would also 
ensure that the FBAR form due date is after the extended filing 
deadline for calendar year-end entities, so most taxpayers will have 
reviewed their prior calendar year filing requirements and disclosures 
to ensure that complete and accurate FBAR forms are filed rather than 
having to file late or amended FBAR forms due to Schedules K-1 received 
after June 30.
    4.  The FBAR form should continue to apply only to U.S. persons, 
but if it is decided that non-U.S. persons must file FBAR forms, such 
requirement should be adopted prospectively and with clear definitions.
    The policy provided in Announcement 2009-51, adopting for 2008 and 
prior-year FBAR form filings the definition of ``in and doing business 
in the U.S.'' that was provided in the pre-October 2008 instructions 
for the FBAR form, should be adopted for 2009 FBAR form filings and all 
future years. The FBAR form should not apply to those meeting the IRC 
section 7701(b) definition of a non-U.S. person. Special elections to 
be treated as a U.S. person for non-FBAR form purposes and treaty-based 
return filings should not require an FBAR form filing.
    Despite our urging to restrict FBAR forms to U.S. persons, if 
Treasury and IRS decide to require non-U.S. persons to file FBAR forms, 
we encourage careful thought and clear definitions, and that such 
treatment be adopted only prospectively.
    5.  An FBAR form filing requirement with respect to foreign 
accounts held by a trust should be imposed only on U.S. settlors/
transferors and U.S. trustees of the trust. Also, any U.S. person who 
is considered to have control of the trust as a grantor under IRC 
Section 679 should be required to file an FBAR form if the trust has a 
foreign account. If it is nonetheless decided that additional reporting 
is required by foreign trust beneficiaries, only trust beneficiaries 
who receive a distribution from a foreign trust should be required to 
file an FBAR form, reporting the receipt of the distribution.
    Beneficiaries of a foreign or domestic trust should not be required 
to file an FBAR form. Beneficiaries will in most cases not have access 
to a trust's foreign account information. Beneficiaries often are not 
aware of, or able to calculate, their percent interest in trust current 
income and assets (and the trustees may not share that information) so 
it is often difficult or impossible for many beneficiaries to complete 
an accurate, timely, and complete FBAR form. In some instances, a U.S. 
person may not even be aware he or she is a beneficiary of a trust 
until a distribution is made. Form 3520 is required to be filed by U.S. 
persons receiving distributions from foreign trusts. Likewise, 
beneficiaries who receive a distribution from a domestic trust will 
receive a Form 1041, Schedule K-1 and are required to include any 
income arising from the distribution on their individual income tax 
return. Therefore, beneficiaries already are required to report any 
distributions, and income included in such distributions, from trusts. 
A U.S. settlor or transferor or a U.S. trustee to a trust which owns a 
foreign bank account is much more likely to have access to and 
knowledge of the trust's assets than the beneficiary.
    If it is nonetheless decided that additional reporting is required 
by foreign trust beneficiaries, despite our recommendation and concerns 
mentioned above, only beneficiaries who receive a distribution from a 
foreign trust should be required to file an FBAR form, reporting the 
receipt of the distribution. This provides reporting when there is 
income involved and is easier and simpler to administer and with which 
to comply. If there is no distribution from the trust, an FBAR form 
should not be required unless the person is considered to have control 
of the trust as a grantor under IRC Section 679.
    In all cases, U.S. settlers/transferors, and trustees of trusts 
with a foreign account should be required to file an FBAR form.
    6.  When Treasury and IRS clarify the rules regarding a comingled 
account for FBAR form filing purposes, we recommend the FBAR form 
filing requirement, if any, be limited to the current year and applied 
prospectively, rather than retroactively, and that no FBAR form 
reporting be required for foreign financial accounts owned by any 
comingled account that is itself an entity and a reportable financial 
account.
    We appreciate the IRS Notice 2009-62 delay until June 30, 2010, for 
the FBAR form filing for the 2008 and prior-year calendar year FBAR 
form filings for persons with signature authority over, but no 
financial interest in, a foreign financial account, and for persons 
with a financial interest in, or signature authority over, a foreign 
comingled fund. We note that both issues continue to concern our 
members.
    It would be extremely difficult and an administrative burden for 
taxpayers to go back multiple years and research whether an account 
would have required an FBAR form filing and gather the information 
required. The new definitions and clarifications should apply only 
prospectively.
    We also suggest that when taxpayers own an interest in a foreign 
pooled investment account that is an entity, such as a mutual fund or 
hedge fund that is itself a reportable financial account for FBAR form 
purposes, guidance clarify that FBAR form reporting is not required 
with respect to any financial accounts owned by the foreign pooled 
investment account.
    7.  When Treasury and IRS clarify the rules regarding which 
taxpayers are considered to have signature authority over a foreign 
bank or financial account for FBAR form filing purposes, we recommend 
that the FBAR form filing requirement, if any, be limited to the 
current year and applied prospectively, rather than retroactively.
    The signature authority requirement has created significant 
uncertainty and concern for entities who have assigned various rights 
over customers' accounts to employees within their organizations. 
Guidance on this should be limited to the current year and applied 
prospectively, rather than retroactively.
    8.  Regarding delinquent FBAR forms, Treasury and IRS should 
provide guidance and relief regarding their filing, including 
reasonable cause for waiver of penalties. Guidance and relief are 
needed (consistent with FAQ# 9, posted on the IRS website on May 6, 
2009) for those who reported all their income and paid all their taxes 
on the foreign accounts, but did not file FBAR forms, as well as for 
those with unreported income and taxes due who also did not file FBAR 
forms.
    The Voluntary Disclosure Initiative served its purpose in bringing 
more taxpayers into the system. We encourage IRS and Treasury to 
continue that program and work with taxpayers to increase compliance in 
this area without unnecessarily harsh civil or criminal penalties for 
coming forward. We also request an extension of the relief provided by 
the IRS in FAQ #9 regarding delinquent FBAR forms when all income was 
reported and taxes paid. Finally, we urge the IRS and Treasury to 
provide an adjustment of the penalty when the amount of unpaid tax on 
the previously unreported income from the foreign bank account is less 
than the penalty.
    9.  The IRS Office of Professional Responsibility (OPR) should work 
with the tax practitioner community in formulating more comprehensive 
guidance for FBAR form purposes before the practitioner due diligence 
guidance under Circular 230 goes into effect.
    Although we appreciate the importance of due diligence in preparing 
tax and information returns, in view of the significant open questions 
and lack of clear definitions in the FBAR form context, in combination 
with the potentially onerous penalties involved, we recommend that OPR 
work with the tax practitioner community in formulating more 
comprehensive guidance before the due diligence guidance goes into 
effect.

    * * * * *
    We welcome the opportunity to discuss our comments further with you 
or others at the House Ways and Means Committee Select Revenue 
Subcommittee.

                                 
                        Jo Van de Velde, letter

Dear Chairman Rangel and Chairman Neal,

    We, Euroclear Bank, welcome the opportunity to comment on the 
proposed Foreign Account Tax Compliance Act of 2009 (``the Bill'').
    Euroclear Bank is an International Central Securities Depositary 
(ICSD), and the world's largest clearance and settlement system for 
internationally traded securities. We serve close to 1,500 major 
financial institutions located in more than 80 countries across the 
globe. Securities are accepted for deposit into Euroclear Bank if they 
are, or are expected to be, actively traded in the international 
markets or held in quantity by our clients. We have provided settlement 
and related securities services for cross-border transactions involving 
Eurobonds for more than 40 years. Over this time, we have acquired 
considerable experience in dealing with international products, 
financial institutions, and investors. The provision of an efficient 
withholding tax relief service is an important part of our extensive 
range of custody services: we are a therefore a Qualified Intermediary 
(QI) for U.S. tax purposes and have assumed primary Non-Resident Alien 
and backup withholding responsibility.
    We have seen the representations on the proposed new reporting and 
withholding obligations for Foreign Financial Institutions (FFIs) and 
the TEFRA repeal \1\ made by market associations such as the 
International Capital Market Association (ICMA), the International 
Capital Market Services Association (ICMSA), the European Banking 
Federation (EBF) and the Securities Industry and Financial Markets 
Association (SIFMA). We confirm the prevailing sentiment that the Bill 
addresses valid concerns but may be overlooking both the implementation 
complexity and the market impacts of the proposed changes.
---------------------------------------------------------------------------
    \1\ i.e. the repeal of the rules permitting the issuance of 
foreign-targeted bearer bonds in compliance with the requirements of 
the Tax Equity and Fiscal Responsibility Act of 1982.
---------------------------------------------------------------------------
Section 101, Information Reporting and Withholding by Foreign Financial 
        Institutions
    The proposed new reporting and withholding regime for FFIs 
contemplated by Section 101 of the Bill is of some concern to us (and 
indeed the other entities of the Euroclear group). Our detailed formal 
submissions on this point are being made through the European Banking 
Federation, but on a high level we would ask you to take the following 
considerations into account:

          Timeframe: Implementing Section 101 will be very 
        complex and thus very resource-consuming for industry players. 
        We urge you to give the Treasury Department the necessary 
        powers and time to propose a workable implementation plan. We 
        consider that at least two years will be required from the time 
        that definitive Treasury regulations are adopted;
          Proportionality: Even those already acting as QIs 
        today will face significant additional system developments, 
        running and compliance costs, which may discourage them from 
        entering an FFI agreement if the Bill is not carefully 
        implemented in order to limit the additional burden to the 
        smallest extent necessary to capture U.S. account information. 
        On this note we would:

        (i)  ask you to consider removing gross proceeds from the 
        definition of ``withholdable payment'' in proposed Sec.1473(1). 
        Most FFIs simply do not have the systems in place to withhold 
        on such payments (even QIs are not currently required to 
        withhold on such payments). The inclusion of ``gross proceeds'' 
        thus renders the FFI agreement more onerous than the existing 
        QI agreement. This makes it less likely that FFIs will sign an 
        FFI agreement, which we understand to be contrary to the aim of 
        the legislation. Moreover, under the proposed information 
        reporting requirements the IRS/Treasury will obtain the 
        requisite information on U.S. accounts (and persons): we 
        consider therefore the burden created by the inclusion of gross 
        proceeds to be disproportionate to the aim of the Bill;

            and
        (ii)  propose that the Treasury Department be given the 
        necessary flexibility to craft regulations which exclude 
        certain payments and entities from the scope of the Act where 
        there is a low risk of tax avoidance.

Section 102, Repeal of Certain Foreign Exceptions to Registered Bond 
        Requirements
    Our standpoint as ICSD gives us a unique overview of bond issuances 
in the international capital markets. We can see that the market has 
overwhelmingly adopted the bearer legal form as the preferred form for 
security issuance, moving from definitive bearer instruments at the 
market's inception to a custody structure where global bearer notes are 
now immobilised with ICSDs such as Euroclear Bank and settle through a 
book-entry system. Approximately 80% of the securities held in 
Euroclear Bank have been issued in global immobilised bearer form under 
the TEFRA D rule, regardless of the nationality of the issuer (U.S. or 
non-U.S.).
    In the period from 2008-2009, admittedly a very difficult time for 
both the markets and the issuers, it may be of interest for you to note 
that as much as 85% of all Eurobond issues brought to the market was in 
immobilised bearer form.
    The issuance of global immobilised bearer bonds is thus the norm in 
the market and represents a very important and efficient funding 
vehicle for all issuers, U.S. or non-U.S.
    The proposed elimination of the foreign-targeted bearer bond 
exceptions, on which the market currently is based, would inevitably 
lead to wide-spread market disruption and would impose substantial 
costs and additional complexities on market actors in order to comply 
with the new requirements (different legal documentation, additional 
registration services, additional tax certification and tax processing 
procedures, etc).
    Given that these bond issues are foreign-targeted, that they are 
only bearer in a very technical sense, that the mechanisms in place 
under the TEFRA rules already provide safeguards against offering to 
U.S. persons, and that under the proposed Section 101 regime the 
Treasury/IRS should obtain enhanced information on investments held by 
U.S. persons, we consider that the TEFRA repeal may produce marginal 
benefits in terms of reducing U.S. tax avoidance compared with the 
disruption it may cause to the =8 trillion Eurobond market.
    In light of these considerations, we recommend that you reconsider 
the repeal of the foreign-targeted bearer bond exceptions (which 
exceptions appear to have helped maintain a level-playing field in 
terms of access to the international capital markets).
    Should the repeal of these exceptions be nevertheless adopted, 
Euroclear Bank supports the recommendation made by other industry 
groups that Congress requests a report regarding the potential 
consequences of the repeal of the foreign-targeted bearer bond 
exceptions. We also recommend that the final legislative provision 
limits clearly the repeal to securities issued by U.S.-incorporated 
entities, in order to avoid uncertainty over the extra-territorial 
application of U.S. tax laws and to avoid extending market disruption 
to non-U.S. issuers. If it were felt necessary to cater for the needs 
of U.S. issuers (while also recognising the global immobilised form in 
which most bearer bonds are now held), you might consider granting the 
Treasury Department discretion to issue regulations to determine the 
circumstances in which bearer debt held in a clearing system may be 
considered registered for U.S. tax purposes.
    We thank you for the opportunity to voice our concerns on the 
proposed legislation if it were to be passed in its current form. We 
hope the comments and the recommendations presented above will be 
considered and provide useful guidance in the drafting of the 
definitive Bill.
    Yours sincerely,

    Jo Van de Velde
    Managing Director, Head of Product Management
    Euroclear SA/NV

                                 
   The Securities Industry and Financial Markets Association, letter

Dear Chairman Neal and Ranking Member Tiberi,

    The Securities Industry and Financial Markets Association (SIFMA) 
\1\ welcomes the opportunity to submit comments on the Foreign Account 
Tax Compliance Act of 2009, H.R. 3933 (the Bill), which was introduced 
on October 27, 2009, by House Ways and Means Committee Chairman Charles 
B. Rangel (D-NY) and House Ways and Means Select Revenue Measures 
Subcommittee Chairman Richard E. Neal (D-MA).\2\
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    \1\ SIFMA brings together the shared interests of securities firms, 
banks, and asset managers. SIFMA's mission is to promote policies and 
practices that work to expand and perfect markets, foster the 
development of new products and services, and create efficiencies for 
member firms, while preserving and enhancing the public's trust and 
confidence in the markets and the industry. SIFMA works to represent 
its members' interests locally and globally. It has offices in New 
York, Washington D.C., and London and its associated firm, the Asia 
Securities Industry and Financial Markets Association, is based in Hong 
Kong.
    \2\ A companion bill, S. 1934, was introduced on the same day by 
Senate Finance Committee Chairman Max Baucus (D-MT) and Senator John 
Kerry (D-MA). Also on October 27, an accompanying technical explanation 
prepared by the Staff of the Joint Committee on Taxation (the JCT 
Report) was released.
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    SIFMA shares the objectives of the bill's sponsors, and the Obama 
Administration, in improving offshore tax compliance. SIFMA also 
welcomes the fact that the Bill is responsive to a number of important 
concerns that were expressed in its earlier comment letter, dated 
August 31, 2009, regarding the related offshore tax compliance 
proposals included in the General Explanation of the Administration's 
Fiscal Year 2010 Revenue Proposals.
    This letter comments on several aspects of the Bill primarily 
relating to the expansive new information reporting and withholding 
regimes that it would impose. These regimes would create a broad new 
definition of foreign financial institution (FFI) and require that 
these FFIs enter into agreements with the IRS and provide annual 
information reporting in order to avoid a new U.S. withholding tax on 
U.S. source dividends, interest, and other FDAP income, as well as 
U.S.-related gross proceeds. They would also impose related information 
reporting and withholding requirements in respect of payments made to 
non-financial foreign entities (FEs).
    In evaluating the Bill, SIFMA has proceeded on the basis of five 
core observations:

          The principal goal of the Bill, which SIFMA supports, 
        is to collect tax from U.S. taxpayers who have been evading 
        their responsibilities by investing through FFIs and FEs that 
        have thus far been generally free of reporting obligations to 
        the IRS.
          To achieve this goal, the Bill would impose the risk 
        of a punitive withholding tax on a very broad class of U.S.-
        related payments (including gross proceeds) to a broad class of 
        foreign investors, unless relevant FFIs and FEs agree to 
        provide information to the IRS regarding their U.S. account 
        holders and owners. Accordingly, the withholding tax would 
        function as a hammer to encourage information reporting.
          Although the withholding tax would hopefully not need 
        to be utilized, if it were actually collected, it could cause a 
        decline in inbound investment that would significantly increase 
        the global financing costs of U.S. issuers (as described in 
        more detail below).
          Even if the Bill functioned as planned, and the 
        withholding tax were not actually collected, the new 
        information reporting and withholding regimes would require the 
        development and implementation of extensive new compliance 
        systems by FFIs, FEs, and withholding agents.
          In order to achieve the Bill's goals without causing 
        market disruption, financial institutions and other market 
        participants will need clear statutory rules as well as 
        supporting legislative history that explains the rules' context 
        and intended meaning. They will also need precise regulatory 
        guidance that is published in advance of the time that both the 
        information reporting and withholding requirements of the Bill 
        would take effect.

    SIFMA looks forward to working with the Congress and the Treasury 
Department in crafting the details of the Bill and its accompanying 
regulatory implementation. In the remainder of this letter, SIFMA 
proposes the following specific comments on the Bill, which are 
intended to assist the Congress and the Treasury Department in this 
effort:

        (1)   Delay the effective date of the information reporting and 
        withholding requirements.
        (2)   Exclude short-term obligations from the withholding tax.
        (3)   Defer repeal of the foreign-targeted bearer bond 
        exception until it can be studied further.
        (4)   Simplify and extend the grandfather rule for existing 
        registered debt.
        (5)   Provide a grandfather rule for existing securitization 
        vehicles.
        (6)   Exclude U.S. payors and Schedule K-1 filers from the FFI 
        definition.
        (7)   Provide workable procedures for reliance on 
        certifications by FFIs.
        (8)   Establish commercially reasonable standards for 
        identifying U.S. accounts and foreign entities with substantial 
        U.S. ownership.
        (9)   Provide a uniform 10 percent test for substantial U.S. 
        owner status.
        (10)  Revise carve-outs for corporations and tax-exempt 
        entities.
        (11)  Exempt separate depository accounts not exceeding 
        $50,000.
        (12)  Allow simplified Form 1099 reporting by FFIs.
        (13)  Allow FFIs to receive refunds or credits of the 
        withholding tax in additional cases.
        (14)  Coordinate with other withholding and information 
        reporting provisions.
        (15)  Provide for further limits to the definition of 
        withholdable payment.
        (16)  Address tiering issues.

    Comment 1: Delay the Effective Date of the Information Reporting 
and Withholding Requirements.
    The Bill should provide adequate time for the development of the 
extensive regulatory guidance and compliance systems that will be 
necessary to implement the new information reporting and withholding 
regimes.\3\
---------------------------------------------------------------------------
    \3\ Section 101(d) of the Bill.
---------------------------------------------------------------------------
    The information reporting and withholding provisions of the Bill 
applicable to FFIs and FEs are proposed to be effective for payments 
made after December 31, 2010. SIFMA believes that this proposed 
effective date should be substantially delayed. These provisions of the 
Bill are by their nature not self-implementing, and will require the 
Treasury Department and the IRS to develop detailed and complex 
regulations, reporting agreements, certification forms, and other 
guidance. Based on recent experience, it is reasonable to expect that 
it will take more than one year for a proposed version of the 
implementing regulations to be produced and that substantial comments 
will be submitted on the proposed regulations by the affected 
parties.\4\ In this regard, the regulatory process will need to take 
into account the large number of FFIs, FEs, and withholding agents who 
will be directly affected by the regulations (including a significant 
number of entities that have not previously had occasion to deal with 
U.S. tax compliance rules), as well as the many companies, investors, 
and depositors who will be indirectly affected. Moreover, once a 
substantial comment process has run its course and implementing 
regulations are finalized, it is reasonable to expect that the IRS will 
need a substantial amount of time to draft and then enter into the 
required reporting agreements with FFIs.\5\ Finally, but most 
importantly if the goals of the Bill are to be achieved, FFIs, FEs, and 
withholding agents will need a substantial amount of time to develop 
and implement the necessary compliance systems to perform their duties 
under the agreements and the Bill.
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    \4\ For example, the new basis reporting rules of sections 6045(g) 
& (h), 6045A, and 6045B were first proposed by the Joint Committee on 
Taxation in its August 3, 2006, report on Additional Options to Improve 
Tax Compliance. They were eventually enacted into law in October 2008. 
Thus far, the Treasury Department and the IRS have not issued proposed 
versions of any of the regulations that will be necessary to implement 
the rules. Unless otherwise indicated, section references herein are to 
the Internal Revenue Code of 1986, as amended (the Code).
    \5\ We note, for example, that the IRS did not provide a first 
draft of the much needed Model Qualified Intermediary Agreement until 
January 1999, despite the fact that the qualified intermediary (QI) 
regime was first introduced in proposed regulations issued in April 
1996 and that final regulations were issued in October 1997. The 
absence of this Model Qualified Intermediary Agreement and the fact 
that necessary refinements to certain critical sections of the final 
regulations occurred after 1997 caused the effective date of the final 
regulations to be postponed multiple times to, eventually, January 
2001. As another example, we note that the IRS introduced temporary 
regulations in November 1987 that required payors to send backup 
withholding notices (B-Notices) to payees informing them that they had 
provided an incorrect taxpayer identification number and that they 
would be subject to backup withholding tax if this failure were not 
timely rectified. The IRS did not provide payors with a model B-Notice, 
however, until August 1989.
---------------------------------------------------------------------------
    The Bill will require an unprecedented level of U.S. tax 
information gathering and reporting by foreign entities that have not 
traditionally engaged in such efforts. Even for a seasoned U.S. 
financial institution, expanding existing U.S. tax information 
reporting systems to satisfy the requirements of the Bill would be time 
consuming and expensive. For an FFI that has no existing U.S. tax 
information reporting systems, complying with the requirements of the 
Bill will be a monumental task, which will require the hiring of 
numerous additional employees, the creation of extensive new 
information technology systems, and the training of large numbers of 
current workers. The ability of FFIs to engage in such efforts on a 
short time frame (or, indeed, at all) cannot be presumed.
    SIFMA believes that the implementation of the necessary compliance 
systems for the information reporting and withholding regimes will take 
at least two years from the date that all applicable regulatory 
guidance is finalized (including the publication of a model reporting 
agreement). Therefore, SIFMA recommends that the new information 
reporting and withholding regimes not enter into force until at least 
three years after the date of enactment of the Bill. In order to plan 
for unforeseen issues and avoid market disruption, SIFMA also believes 
that it is critical that the Bill authorize the Secretary of the 
Treasury to postpone the effective date of the information reporting 
and/or withholding regimes as needed. The delay in the effective date 
of the withholding provisions will also benefit the IRS, which will be 
required to establish and implement a system to provide refunds and 
credits for the withholding tax.
    Comment 2: Exclude Short-Term Obligations from the Withholding Tax.
    An exception from the withholding provisions of the Bill should be 
provided for short-term obligations, in order not to disrupt the 
ability of U.S. issuers to obtain funding from foreign investors that 
have historically invested in the United States for short-term 
liquidity purposes.\6\
---------------------------------------------------------------------------
    \6\ Proposed section 1473(1).
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    Many large U.S. financial institutions and other U.S. issuers 
derive billions of dollars of funding through the issuance of short-
term debt instruments (such as commercial paper) in foreign markets, to 
entities that would be treated as FFIs. These funding sources are 
relied on, in part, to support substantial domestic lending to large 
and small businesses, as well as to mortgagors and credit card holders. 
To the extent that these foreign lenders receive little or no other 
U.S. source income, they will likely not be willing to enter into 
information reporting agreements with the IRS. It can also be expected 
that they will be unwilling to incur any risk of a 30 percent 
withholding tax on the principal amount of their investment, which the 
Bill would create. As a consequence, such investors could substantially 
decline as a funding source for U.S. financial institutions and other 
U.S. issuers.
    SIFMA believes that the Bill should carefully balance its tax 
compliance objectives against the need for U.S. financial institutions 
and other U.S. issuers to readily finance themselves. Although many 
U.S. issuers may be able to replace the affected borrowings with funds 
from other sources (at possibly higher rates), the weaker or less 
creditworthy U.S. issuers may suffer funding shortfalls. In the case of 
U.S. financial institutions, such shortfalls could significantly limit 
their lending into the domestic market or even challenge their 
viability. For this reason, SIFMA suggests that the definition of a 
withholdable payment contain an exclusion for interest and gross 
proceeds payments made in respect of obligations of U.S. issuers with a 
term not exceeding 183 days. Such an exclusion would be consistent with 
longstanding exemptions for short-term debt instruments in other 
provisions of the Code's exemptions which reflect a long-held belief 
that such instruments do not lend themselves to tax evasion.\7\ In this 
regard, SIFMA believes that FFIs and FEs will be powerfully motivated 
to comply with the information reporting provisions of the Bill because 
the potential withholding tax would still apply to longer term 
obligations, Treasury securities, U.S. equity securities, and other 
obligations that pay U.S. source income. To allay any concerns that 
FFIs or FEs could abuse a short-term obligation exception by 
continuously rolling over short-term obligations, SIFMA would suggest 
that the Bill provide that a debt instrument would be considered short-
term only if payments thereon would qualify under section 871(g) as 
exempt from nonresident gross income and withholding tax (for which the 
same abuse considerations apply). As an alternative, and at a minimum, 
SIFMA believes that the Secretary of the Treasury should be given 
authority to identify situations where short-term obligations may be 
exempted from the withholding tax because they do not create a 
significant opportunity for abuse.
---------------------------------------------------------------------------
    \7\ For example, interest and original issue discount on an 
obligation with a term of 183 days or less are generally exempt from 
current nonresident gross income and withholding tax. See section 
871(g)(1)(B)(i).
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    Comment 3: Defer Repeal of the Foreign-Targeted Bearer Bond 
Exception Until It Can Be Studied Further.
    The consequences of the repeal of the foreign-targeted bearer bond 
exception should be subjected to further study before such exception is 
repealed, in order to prevent restricting U.S. issuers' access to non-
U.S. markets. Additionally, the disparity between the repeal's 
effective date and the effective date of the new information reporting 
and withholding rules should be eliminated. \8\
---------------------------------------------------------------------------
    \8\ Sections 102(d) and 101(d)(2)(A) of the Bill.
---------------------------------------------------------------------------
    Since 1982, the TEFRA rules generally have allowed U.S. issuers to 
issue debt obligations in bearer form, so long as the obligations are 
issued under arrangements reasonably designed to ensure their sale to 
non-U.S. persons (the foreign-targeted bearer bond exception). The Bill 
would repeal this exception to the registration requirement.
    SIFMA believes that the repeal of the foreign-targeted bearer bond 
exception may restrict access to a number of non-U.S. markets in a 
manner that would adversely affect U.S. borrowers. In a number of 
markets, securities traditionally have been issued in bearer form. In 
some of those markets (e.g., Japan), it may not be feasible to issue 
securities in registered form, or there may not be sufficiently well 
developed mechanisms in place to permit the effective collection of 
Form W-8s. Thus, U.S. issuers would be unable to issue debt in such 
markets under the Bill, or would be able to do so only in a manner that 
causes interest on the obligations to be subject to withholding tax at 
a 30 percent rate, effectively precluding them from raising funds in 
these markets. In addition, even in markets in which it is feasible to 
issue securities in registered form, the transition to such issuances 
may create substantial market disruptions if it is not the current 
market norm.
    In this regard, it is worth noting that most bearer bonds are 
currently bearer in only a very technical sense, since most beneficial 
interests in such bonds are held through Euroclear or other book-entry 
clearing systems. As a consequence, it seems unlikely that such 
instruments would pose any special risks of tax evasion under the Bill, 
since the information reporting and withholding provisions of the Bill 
could generally be applied to payments in respect of such securities in 
the same manner as for payments in respect of registered bonds (in each 
case for bonds issued after the applicable grandfather date).
    In order to prevent unwarranted disruption to the borrowing ability 
of U.S. issuers in situations where the risk of U.S. tax evasion seems 
miniscule, SIFMA recommends that the Congress direct the Treasury 
Department to study the potential consequences of the repeal of the 
foreign-targeted bearer bond exception and prepare a report regarding 
such a repeal before any action is taken. In this regard, one 
alternative to a complete repeal that the Treasury Department might 
wish to consider would be a more limited prohibition that focused 
solely on bearer bonds in definitive form (i.e., those not held through 
Euroclear or other book-entry clearing systems).
    In addition to the foregoing considerations, there appears to be an 
inadvertent glitch in the effective date provisions of the Bill 
relating to the repeal of the foreign-targeted bearer bond exception. 
In general, the repeal of the foreign-targeted bearer bond exception 
would be effective for obligations issued more than 180-days after the 
date of the Bill's enactment. The new information reporting and 
withholding rules, however, would apply to any bearer-form obligation 
that is issued by a U.S. issuer after the date of first Committee 
action. As a consequence, the Bill would create two categories of U.S.-
issued bearer bonds, one that is subject to the new information 
reporting and withholding regimes and one that is not. SIFMA believes 
that this result was not intended, and suggests that, if the repeal of 
the foreign-targeted bearer bond exception is retained, the effective 
date of the information reporting and withholding rules should be 
conformed, by grandfathering bearer-form obligations issued prior to 
the effective date of the repeal of the foreign-targeted bearer bond 
exception.
    Comment 4: Simplify and Extend the Grandfather Rule for Existing 
Registered Debt.
    To avoid market confusion and disruption, the grandfather rule for 
existing registered debt should be simplified and extended to exempt 
all registered debt instruments that are outstanding on the effective 
date of the new information reporting and withholding regimes and that 
contain an issuer gross-up provision. \9\
---------------------------------------------------------------------------
    \9\ Section 101(d)(2)(B) of the Bill.
---------------------------------------------------------------------------
    The FFI and FE information reporting and withholding regimes are 
proposed to be effective for all registered form debt instruments of 
U.S. issuers, unless the debt is outstanding on the date of first 
Committee action and includes a provision under which the issuer would 
be obligated to make gross-up payments by reason of the Bill. This 
grandfather provision has already led to substantial market uncertainty 
as to whether many instruments will or will not be eligible for its 
protection, and would be very difficult for withholding agents to 
apply. As one example, gross-up provisions frequently allow an issuer 
to elect either to make a required gross-up payment or to redeem a debt 
instrument early. In such a case, it may be questioned whether the 
issuer is obligated to make gross-up payments for purposes of the 
grandfather provision. As another example, gross-up provisions 
frequently contain carve-outs for withholding taxes that would not be 
imposed but for a failure by a holder or beneficial owner of an 
instrument to make a certification or comply with information reporting 
requirements. In such a case, because the information reporting 
obligations contemplated by the Bill would apply to intermediaries in a 
chain of ownership that may not be holders or beneficial owners for 
purposes of the gross-up provision, it may be questioned in some 
instances whether a failure to enter into an information reporting 
agreement with the IRS under the Bill constitutes such a failure, and 
whether the issuer would be required to make gross-up payments for 
purposes of the grandfather provision.
    More generally, SIFMA notes that many large U.S. financial 
institutions and other U.S. issuers derive billions of dollars of 
funding through debt issuances to foreign investors. In some cases 
(e.g., debt issuances to foreign retail investors), it may be 
impossible to effect issuances while the application of the new 
information reporting and withholding provisions of the Bill remain 
uncertain, because the issuance structures will not tolerate the 
uncertainty neither as a reputational matter for the issuer and 
underwriters or oftentimes as a local securities law matter that an 
intermediary in a chain of payments could fail to comply with the 
information reporting provisions of the Bill with the result that a 
foreign investor would suffer a withholding tax through no fault of its 
own. If the grandfather rule for registered debt contained in the Bill 
continues to apply only up to the date of first Committee action, U.S. 
issuers may accordingly be required to cease some or all of their 
registered debt issuances in foreign markets after that date until 
uncertainties regarding the application of the information reporting 
and withholding provisions of the Bill are resolved.
    If retained in its current form, SIFMA anticipates that the 
grandfather rule for existing registered debt could lead to substantial 
market confusion and disruption. In order to minimize such confusion 
and disruption, and the legal and other disputes between issuers, 
holders, and withholding agents that could result, SIFMA recommends 
that the grandfather rule for existing registered debt be simplified 
and extended to exempt all registered debt instruments that are 
outstanding on the effective date of the new information reporting and 
withholding regimes and that contain an issuer gross-up provision, 
regardless of whether that gross-up provision would in fact be 
triggered by the Bill. Because even this simplified grandfather rule 
would place substantial compliance burdens on withholding agents 
needing to determine the status of numerous debt instruments, SIFMA 
further recommends that withholding agents be permitted to presume that 
a registered debt instrument outstanding on the grandfather date 
qualifies for the grandfather rule, unless the withholding agent knows 
or has reason to know that it does not qualify.
    Comment 5: Provide a Grandfather Rule for Existing Securitization
Vehicles.
The Bill should provide a grandfather rule for existing offshore 
        securitization vehicles, under which such vehicles would be 
        excluded from the FFI definition and exempt from the FE 
        information reporting and withholding regime.
    A typical offshore securitization vehicle that holds U.S assets and 
issues its own equity and/or debt securities (such as a CDO issuer) 
would be considered an FFI under the Bill.\10\ As a result, such a 
securitization vehicle would be required to enter into an information 
reporting agreement with the IRS and report on U.S. holders of non-
publicly traded debt and equity that it had issued, or otherwise be 
subject to the withholding tax on its U.S. investments. Foreign 
securitization vehicles currently in existence have invested billions 
of dollars in the United States, particularly in loans and other debt 
instruments issued by U.S. companies.
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    \10\ A typical CDO is structured as an offshore corporation that 
invests in loans and other debt instruments issued by U.S. companies. 
Such CDOs in turn issue several classes of non-publicly traded debt and 
equity securities themselves, which divide up the cash flows on the 
underlying U.S. investments. Another example of a typical 
securitization vehicle is a grantor trust that invests in U.S. debt or 
equity investments and in turn issues pass-through certificates that 
represent the cash flows on those investments. Pass-through interests 
in U.S. investments could also be structured as shares of an offshore 
cell company.
---------------------------------------------------------------------------
    Unfortunately, it is quite likely that many offshore securitization 
vehicles will simply be unable to enter into and comply with the 
required reporting agreement, which could lead to large scale 
disruptions in the markets. Offshore securitization vehicles have no 
employees and, in most cases, their activities are strictly controlled 
by a trust indenture. The trust indentures for existing securitization 
vehicles predate the Bill, and accordingly do not authorize or require 
any party on behalf of the securitization vehicle to perform the 
actions required of FFIs under the Bill. The trust indentures also do 
not provide a means of paying for such activities. Although it might in 
theory be possible for the trust indenture of a securitization vehicle 
to be amended by a vote of the investors in the vehicle to permit the 
vehicle to enter into an FFI information reporting agreement, no party 
is likely to be designated to initiate such an amendment process. In 
addition, different investors may have conflicting interests in 
permitting such an amendment. Some investors may in particular prefer 
for the vehicle to be prematurely wound up, which would be required in 
many cases if the investments of the vehicle became subject to the 
withholding tax imposed by the Bill. Finally, even if it were possible 
to amend a trust indenture to permit a securitization vehicle to enter 
into an information reporting agreement with the IRS and hire 
contractors to perform the required actions, there can be no guarantee 
that the vehicle would be able to force holders of its outstanding debt 
and equity interests to comply with applicable identification and 
documentation requirements that were not contemplated at the time the 
trust indenture was executed and the securities were issued.
    Taking these considerations into account, it appears very likely 
that many typical offshore securitization vehicles that have invested 
in U.S. assets would become subject to the withholding tax imposed by 
the Bill, which could lead to their required liquidation. A large scale 
liquidation of U.S. debt instruments by offshore securitization 
vehicles could result in a very significant disruption of the U.S. 
credit markets. Therefore, SIFMA believes that the Bill should provide 
a grandfather rule for securitization vehicles in existence on the date 
of first Committee action. The grandfather rule should provide that 
existing securitization vehicles are (i) excluded from the FFI 
definition; and (ii) exempt from the FE information reporting and 
withholding regime in respect of their U.S. assets.\11\
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    \11\ Note that there is precedent for a targeted exception from 
otherwise applicable rules for securitization vehicles, including an 
appropriate limiting definition, in section 743(f).
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    Comment 6: Exclude U.S. Payors and Schedule K-1 Filers from the FFI
Definition.
    In order to avoid unnecessary duplication and confusion, the FFI 
definition should exclude certain foreign entities and branches that 
are considered U.S. payors required to file Form 1099 reports as well 
as certain foreign partnerships that are required to file Schedule K-1 
reports.\12\
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    \12\ Proposed section 1471(d)(4).
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    The FFI definition is extraordinarily broad, and there are a great 
many entities that could need to enter into information reporting 
agreements with the IRS under the terms of the Bill. SIFMA believes 
that it would be beneficial to market participants and the IRS to limit 
the scope of the FFI definition in the case of certain foreign entities 
that already have robust U.S. tax information reporting 
responsibilities, in order to reduce the potential for a flood of 
information reporting agreements. For example, foreign entities and 
branches that are considered U.S. payors under the current information 
reporting rules (e.g., U.S. branches of foreign banks and controlled 
foreign corporations) are already required to file full Form 1099 
reports with respect to income paid to U.S. persons.\13\ In addition, 
foreign partnerships that derive gross income that is either U.S. 
source or effectively connected with the conduct of a U.S. trade or 
business are already required to file Form 1065 and accompanying 
Schedule K-1 reports, which include extensive information regarding 
both U.S. and foreign source income allocable to all partners. SIFMA 
believes that the Form 1099 and Schedule K-1 information reporting 
regimes generally provide the IRS with sufficient tax information where 
they apply. Keeping such foreign entities within their existing 
information reporting regimes would also reduce the very substantial 
burden that the IRS will bear as it enters into the new information 
reporting agreements with FFIs. As a consequence, SIFMA recommends that 
U.S. payors and Schedule K-1 filers be excluded from the FFI 
definition.
    Comment 7: Provide Workable Procedures for Reliance on 
Certifications by FFIs.
    The proposed standard for knowledge of an incorrect certification 
is unworkable in the context of global financial institutions. Instead, 
FFIs should be permitted to rely on certifications from account holders 
so long as they implement procedures reasonably designed to identify 
incorrect certifications. \14\
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    \13\ See Treasury regulations Section 1.6049-5(c)(5) for the 
complete list of entities that are considered U.S. payors for Form 1099 
information reporting purposes.
    \14\ Proposed section 1471(c)(3).
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    The Bill provides that, in fulfilling its information reporting 
obligations, an FFI may rely on a certification from an account holder 
only if neither the FFI nor any entity which is a member of the same 
expanded affiliated group knows, or has reason to know, that any 
information provided in such certification is incorrect. The expanded 
affiliated group of a large FFI may include tens of thousands of 
employees in hundreds of different branches, business entities, and 
segments, located in numerous jurisdictions. FFIs do not currently 
maintain systems that can monitor and compare the knowledge of these 
vast numbers of employees across such branches, business entities, and 
segments. The creation of such systems would be extremely expensive and 
difficult to implement and, even if the construction of such systems 
were practically achievable, their use may be impermissible under U.S. 
and non-U.S. securities, data protection, and other laws.\15\
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    \15\ For example, the sharing of relevant information may be 
prohibited under the so-called Chinese Walls required under U.S. 
securities laws. See, e.g., 15 U.S.C. 78o(f) (2006) (requiring broker-
dealers to adopt policies and procedures designed to prevent insider 
trading and tipping); 15 U.S.C. 80b-4a (2006) (requiring investment 
advisors to establish policies and procedures reasonable designed to 
prevent insider trading and tipping).
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    In order to make the certification reliance provision workable in 
the context of global financial institutions, SIFMA recommends that the 
Bill provide that an FFI may rely on a certification from an account 
holder so long as the FFI has implemented procedures reasonably 
designed to identify incorrect certifications. The Treasury Department 
and the IRS would then be expected to craft safe harbors that are 
deemed to satisfy the requirements. In general, SIFMA believes that the 
development of these safe harbors is best left to the regulatory 
process, in which SIFMA would be pleased to participate. It would be 
helpful, however, if the Treasury Department and the IRS could be 
directed in legislative history to focus the safe harbor procedures on 
the knowledge of employees of an FFI that directly establish an account 
or perform direct client-facing services in respect of the account, 
together with any information actually contained in a universal account 
system,\16\ and to avoid any procedures that could be in conflict with 
U.S. and non-U.S. securities, data protection, or other laws. Potential 
abuse concerns could then be addressed with a targeted anti-abuse rule 
to prevent an FFI from structuring an account relationship in a manner 
that avoids the purposes of the Bill.
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    \16\ Cf. Treasury regulations Section 1.1441-1(e)(4)(ix)(A).
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    Comment 8: Establish Commercially Reasonable Standards for 
Identifying U.S. Accounts and Foreign Entities with Substantial U.S. 
Ownership.
    The Bill and its legislative history should direct the Treasury 
Department and the IRS to establish commercially reasonable standards 
for identifying U.S. accounts and foreign entities with substantial 
U.S. ownership, and should confirm that, until such standards are 
adopted, FFIs and U.S. withholding agents may rely on existing 
documentation, account information, and KYC and AML procedures for such 
purposes. \17\
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    \17\ Proposed section 1471(d)(1).
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    SIFMA understands that the Bill does not mandate any particular 
method or procedure to identify U.S. accounts, and welcomes the JCT 
Report's reference to the use of existing know-your-customer (KYC) and 
anti-money-laundering (AML) procedures as a method of account 
identification.\18\ Nevertheless, it is important that the Treasury 
Department and the IRS be directed to adopt identification and 
documentation standards that are commercially feasible and utilize 
existing documentation and account information wherever possible. Until 
more complete guidance is issued, the Bill and its legislative history 
should also confirm that FFIs and U.S. withholding agents may rely on 
existing documentation, account information, and KYC and AML procedures 
for purposes of identifying U.S. accounts and foreign entities with 
substantial U.S. ownership. SIFMA believes that confirmation of this 
intended result will be particularly critical in the case of certain 
investment fund FFIs (e.g., foreign mutual funds) that hold U.S. 
securities and that have beneficial owners that hold their interests in 
the investment fund through other entities (e.g., a mutual fund 
distributor), where such other entities are not themselves reporting 
FFIs (see additional discussion of foreign mutual funds under Comment 
16).\19\ SIFMA also believes that, in all cases, the applicable 
identification and documentation standards should apply equally to FFIs 
(whether or not U.S. controlled) and U.S. withholding agents (e.g., for 
purposes of determining whether a foreign entity has substantial U.S. 
ownership under the FE information reporting and withholding regime), 
and regardless of whether the account is on-shore or offshore, in order 
not to put either U.S. or non-U.S. financial institutions at a 
competitive advantage. Furthermore, in utilizing existing documentation 
and account information, FFIs and U.S. withholding agents should not be 
required to perform due diligence that would require aggregating the 
knowledge of all members of their expanded affiliated groups, for the 
same reasons noted above with respect to aggregating knowledge that 
could potentially cause an FFI to question the correctness of a 
certification. SIFMA looks forward to assisting the Treasury Department 
and the IRS in adopting more complete guidance in this area during the 
regulatory process.
---------------------------------------------------------------------------
    \18\ Under the current QI program, QIs have long been able to rely 
on KYC documentation in lieu of obtaining certifications in appropriate 
cases. See Revenue Procedure 2000-12.
    \19\ Such investment fund FFIs have invested billions of dollars in 
the United States, and it will be very important to their decision to 
continue such investments that they have a clear idea from the outset 
as to how the new information reporting and withholding regimes will 
apply to them.
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    Comment 9: Provide a Uniform 10 Percent Test for Substantial U.S. 
Owner Status.
    The substantial United States owner definition should apply a 
uniform 10 percent test.\20\
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    \20\ Proposed section 1473(2).
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    The Bill provides that an FFI must report on substantial United 
States owners of foreign entities that hold financial accounts with the 
FFI. The Bill also requires FEs to provide information regarding their 
own substantial United States owners to withholding agents for 
provision by such withholding agents to the IRS. For these purposes, 
the Bill defines substantial U.S. ownership to be 10 percent or more 
with respect to foreign corporations and foreign partnerships that are 
not foreign investment entities, but any U.S. ownership with respect to 
a foreign investment entity. SIFMA does not believe that any currently 
existing or contemplated KYC or AML procedures investigate entity 
ownership below a 10 percent level (and, indeed, only the more advanced 
KYC and AML procedures investigate entity ownership at that level). In 
addition, the proposed dual standard would be extremely difficult to 
implement in practice, particularly as the determination of the correct 
percentage test would require an FFI to study and identify the business 
of each such account holder to determine whether it is a foreign 
investment entity. SIFMA accordingly believes that the Bill should 
adopt a uniform 10 percent test for substantial United States ownership 
for all foreign entities.
    Comment 10: Revise Carve-outs for Corporations and Tax-Exempt 
Entities.
    The carve-out for corporations whose stock is regularly traded on 
established securities markets should be replaced with a carve-out for 
foreign entities that are per se corporations under Treasury 
regulations Section 301.7701-2(b)(8). In addition, certain foreign tax-
exempt entities should be fully carved out from the FFI and FE 
information reporting and withholding regimes. \21\
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    \21\ Proposed sections 1472(c)(1)(A) and 1473(3)(A) & (C).
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    The Bill provides carve-outs from the account holders that are 
subject to FFI information reporting and from the entities that are 
subject to FE information reporting and withholding in the case of 
corporations whose stock is regularly traded on an established 
securities market, presumably because the risk of tax evasion in 
connection with a publicly traded corporation is low. It would be 
extremely difficult and expensive, however, for an information 
reporting or withholding agent to determine whether the stock of large 
numbers of corporations is regularly traded. Accordingly, SIFMA 
recommends that the Bill instead provide a carve-out for foreign 
entities that are per se corporations under Treasury regulations 
Section 301.7701-2(b)(8), subject to such exceptions as the Secretary 
of the Treasury determines are necessary to prevent avoidance of the 
purposes of the Bill. Per se corporations (e.g., U.K. public limited 
companies) generally present a low risk of being used to facilitate 
U.S. tax evasion, because they are generally subject to tax filing 
requirements and/or more extensive corporate regulation, and because 
they are not eligible to be flow-through entities for U.S. tax 
purposes. Moreover, although there may be certain situations where a 
particular per se corporation presents greater risks, SIFMA believes 
that the Treasury Department and the IRS should be able to identify 
relevant abuse factors and provide exceptions for this purpose in 
regulations.
    The Bill also provides a carve-out from the account holders that 
are subject to FFI information reporting (but not from the entities 
that are subject to FE information reporting and withholding) in the 
case of an organization that is exempt from tax under section 501(a), 
again presumably because such entities pose a low risk of being used to 
facilitate U.S. tax evasion. As such, and in order to preserve a level 
playing field between U.S. financial institutions dealing with foreign 
entities through the FE regime, on the one hand, and FFIs dealing with 
foreign entity account holders through the FFI regime, on the other, 
the exception should be expanded to apply equally to the FE information 
reporting and withholding regime. (Otherwise, FFIs would have a 
competitive advantage over U.S. withholding agents in providing account 
services to such entities.) This could be done by adding such entities 
to the list, in Proposed section 1472(c), of the entities that are 
exempt from the requirements of Proposed section 1472(a). In addition, 
however, SIFMA believes that there are many additional foreign pension 
funds and other tax-exempt entities that similarly pose a low risk of 
being used to facilitate U.S. tax evasion, but that may not meet the 
definition of section 501(a) (or have any idea whether they do or do 
not meet that definition). Accordingly, SIFMA would recommend that the 
carve-outs for foreign tax-exempt entities be expanded to include all 
foreign tax-exempt entities that are entitled to treaty benefits under 
a comprehensive income tax treaty with the United States.
    Comment 11: Exempt Separate Depository Accounts Not Exceeding 
$50,000.
    Depository accounts that do not exceed $50,000 on a non-aggregated 
basis and that have not been structured to avoid the purposes of the 
Bill should be excluded from the definition of United States account. 
\22\
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    \22\ Proposed section 1471(d)(1).
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    The Bill provides two de minimis thresholds, one at $10,000 for new 
accounts and one at $50,000 for existing accounts, to determine whether 
a depositary account held by an individual may be exempt from FFI 
information reporting. In applying the thresholds, all accounts 
throughout an FFIOs expanded affiliated group must be aggregated. SIFMA 
believes that it would not be practical or perhaps legal for FFIs to 
collect the information necessary to aggregate the value of all 
depositary accounts across their expanded affiliated groups for 
purposes of applying the de minimis test, for the same reasons noted 
above with respect to aggregating knowledge that could potentially 
cause an FFI to question the correctness of a certification. In 
addition, having two tests would make compliance substantially more 
difficult, since an FFI would have to implement two different tracking 
mechanisms in addition to the many other compliance systems that it 
would be required to develop to comply with the Bill. As a consequence, 
SIFMA would suggest that the de minimis threshold be revised to a 
uniform level of $50,000, applied on a non-aggregated basis, and that 
potential abuse concerns be addressed with a targeted anti-abuse rule 
that aggregates accounts that have been structured to avoid the 
purposes of the Bill.
    Comment 12: Allow Simplified Form 1099 Reporting by FFIs.
    The alternative reporting election available to FFIs should allow 
simplified Form 1099 reporting, rather than full Form 1099 reporting, 
in order to induce more FFIs to elect this more useful reporting 
alternative. \23\
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    \23\ Proposed section 1471(c)(2).
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    The Bill is responsive to many of the concerns expressed in SIFMA's 
prior comment letter on the Obama Administration's offshore tax 
compliance proposals. SIFMA in particular welcomes the Bill's 
simplified reporting regime for FFIs that would apply as a default 
matter (the default reporting regime). SIFMA also welcomes the 
flexibility provided by the election to opt for full Form 1099 
reporting if an FFI so desires. The latter election would be much 
easier for FFIs to implement, however, and thus much more likely to be 
adopted, if it provided for simplified Form 1099 reporting that 
contains more information than the default reporting regime, but less 
than full Form 1099 reporting would require. SIFMA would be pleased to 
work with the Treasury Department and the IRS to develop a process for 
such simplified Form 1099 reporting. In general, SIFMA contemplates 
that such reporting would be limited to cash payments, and would not 
require an FFI to, e.g., report any income on an accrual basis, deemed 
income, adjusted tax basis, or any supplemental information that might 
otherwise be required. This would mean that an FFI would report cash 
payments of dividends, interest, royalties, and gross proceeds from the 
sales of securities, but would not be required to report accruals of 
original issue discount on long-term obligations, foreign tax withheld, 
deducted investment expenses, adjusted issue price, market discount 
information on REMICs or CDOs, imputed income or supplemental 
information on a widely held fixed income trust, or similar tax 
information. This would obviate the need, among other things, to 
reclassify income paid, track holding periods, make complicated tax 
calculations to determine income amounts, or perform tax lot accounting 
for securities sold in order to prepare Form 1099s. SIFMA believes that 
these simplifications would not significantly impair the IRS's ability 
to combat offshore tax evasion, and that the simplified Form 1099 
information would indeed be substantially more useful to the IRS than 
the information that it would receive under the default reporting 
regime. As a consequence, SIFMA believes that the goals of the Bill 
would be advanced by providing for a simplified Form 1099 reporting 
alternative.
    Comment 13: Allow FFIs to Receive Refunds or Credits of the 
Withholding Tax in Additional Cases.
    As a matter of fundamental fairness, an FFI should be allowed to 
receive a refund or credit with respect to amounts withheld in the same 
circumstances as other investors. \24\
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    \24\ Proposed section 1474(b).
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    The Bill provides that, except to the extent required by a treaty, 
no refund or credit of the withholding tax imposed by the Bill will be 
available if the beneficial owner of a withholdable payment is an FFI. 
This rule is punitive in nature (since other beneficial owners are 
permitted to receive such refunds and credits where they disclose their 
beneficial ownership). Its purpose is presumably to induce FFIs to 
enter into reporting agreements with the IRS, in order to avoid the 
withholding tax in the first instance. As a matter of fundamental 
fairness, SIFMA believes that FFIs should be allowed the same refund 
and credit possibilities as other investors if they disclose their 
beneficial ownership of a withholdable payment. At a minimum, the 
Treasury Department and the IRS should be authorized and directed to 
provide such refunds where the withholding tax results from an 
inadvertent or temporary disqualification of an FFI that is otherwise 
compliant, and where an FFI subsequently enters into or reestablishes 
an information reporting agreement with the IRS within a certain period 
after the withholding.
    Comment 14: Coordinate with Other Withholding and Information 
Reporting Provisions.\25\
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    \25\ Section 101(b) of the Bill.
---------------------------------------------------------------------------
    Although the Bill provides appropriate coordination language with 
respect to the existing withholding provisions of Section 1441 
(withholding tax on nonresident aliens) and Section 1445 (withholding 
tax on dispositions of U.S. real property interests), additional 
coordination language should be added with respect to other sections, 
including but not limited to Section 1442 (withholding tax on foreign 
corporations), Section 1446 (withholding tax on foreign partnersO share 
of effectively connected income), Section 3402 (wage withholding), 
Section 3405 (withholding tax on pension, annuities, and other deferred 
income), Section 3406 (backup withholding tax), and Section 4371 
(foreign insurance excise tax).
    In addition, the Bill should provide for appropriate coordination 
language with respect to existing information reporting provisions, 
including but not limited to Section 6041 (information at the source), 
section 6041A (returns regarding payments of remuneration for services 
and direct sales), Section 6042 (returns regarding payment of 
dividends), Section 6045 (returns of brokers), and Section 6049 
(returns regarding payment of interest).
    Comment 15: Provide for Further Limits to the Definition of 
Withholdable Payment. \26\
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    \26\ Proposed section 1473(1).
---------------------------------------------------------------------------
    The definition of withholdable payment is extremely broad, and 
appears to include many items that pose a very low risk of facilitating 
U.S. tax evasion (including, e.g., payments for services performed in 
the United States; adjustments required under section 482; issuances of 
stock in tax-free reorganizations; and intercompany payments between a 
U.S. company and a foreign affiliate). Although the FE information 
reporting and withholding regime provides a mechanism for the Secretary 
of the Treasury to exclude certain payments from the withholding tax, 
the FFI information reporting and withholding regime does not contain a 
similar payment-based carve-out mechanism.\27\
---------------------------------------------------------------------------
    \27\ Compare proposed section 1472(c)(2) with proposed section 
1471(f)(4).
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    SIFMA recommends that the Bill authorize the Secretary of the 
Treasury to exclude from the entire definition of withholdable payment 
any payments that pose a low risk of tax evasion, and that the Treasury 
Department and the IRS be directed to consider the exclusion of the 
above-noted payments (and others) under this authority.
    Comment 16: Address Tiering Issues.
The Bill or its legislative history should provide guidance to the 
        Treasury Department and the IRS regarding tiered ownership 
        issues.
    In addition to the points raised in the foregoing comments, there 
are a number of other more mechanical issues raised by the Bill. For 
the most part, a discussion of these issues would be beyond the scope 
of this letter, and is better left to the regulatory process. One 
particular area of concern, however, will be the application of the new 
information reporting and withholding rules in the case of tiered FFIs 
and withholding agents. SIFMA believes that it would be helpful if the 
Treasury Department and the IRS could be given some direction, in 
either the text of the Bill or legislative history, regarding the way 
that certain tiered ownership situations are intended to be addressed.
    One important situation that will need to be addressed concerns a 
payment made by one FFI to another FFI. In this case, SIFMA would 
suggest that primary information reporting responsibility should be 
placed on the recipient FFI, since that FFI will have the closer 
relationship to the beneficial owner (or will be the beneficial owner), 
and will accordingly be in the best position to provide appropriate 
information to the IRS. As a consequence, the payor FFI should be 
exempted from any information reporting or withholding requirements in 
respect of the payment so long as the recipient FFI confirms that it 
has entered into an information reporting agreement with the IRS. SIFMA 
believes that clarification of this intended result will be 
particularly critical in the case of certain investment fund FFIs 
(e.g., foreign mutual funds) that hold U.S. securities and that have 
beneficial owners that hold their interests in the investment fund FFI 
through other entities (e.g., a mutual fund distributor), where such 
other entities are themselves reporting FFIs.
    Another tiering issue that will need to be addressed concerns the 
case where an FFI establishes an account on behalf of a customer 
directly with a U.S. payor that files Form 1099 reports. In that case, 
SIFMA would recommend that the U.S. payor be given primary information 
reporting responsibility with respect to the account, and that the FFI 
should be exempted from any information reporting or withholding 
requirements in respect of the account so long as the U.S. payor 
confirms that it will undertake that responsibility.
    We appreciate the opportunity to comment on the Bill and to provide 
our recommendations for improving offshore tax compliance. We would 
welcome the opportunity to discuss our recommendations in more detail 
and hope to provide further comments and suggestions as the legislation 
progresses. If you have any questions or need more information, please 
do not hesitate to contact Ellen McCarthy, or Scott DeFife.
    Best Regards,

    Kenneth E. Bentsen, Jr.
    Executive Vice President, Public Policy and Advocacy

                                 
             Statement of The Financial Services Roundtable
Overview
    Both Congress and the Administration are focusing considerable 
attention on addressing the potential for U.S. tax evasion through the 
inappropriate exploitation of foreign financial accounts. This is part 
of an overall effort aimed at ensuring that the IRS has the tools 
needed to enforce the U.S. tax laws fully and fairly. We are committed 
to working with lawmakers to assist in the accomplishment of these 
important compliance goals.
    The recent introduction of The Foreign Account Tax Compliance Act 
of 2009 (the ``Bill'') is an element of this effort. One major focus of 
the Bill is tax compliance by U.S. persons that have accounts with 
foreign financial institutions. The Bill would impose substantial new 
reporting and tax withholding obligations on a very broad range of 
foreign financial institutions that could potentially hold accounts of 
U.S. persons. The reporting and withholding obligations imposed on the 
foreign financial institutions would serve as a backstop to the 
existing obligations of the U.S. persons themselves, who have a duty to 
report and pay U.S. tax on the income they earn through any financial 
account, foreign or domestic. These new reporting and withholding 
obligations for financial institutions would be enforced through the 
imposition of a 30 percent U.S. withholding tax on a very broad range 
of U.S. payments to foreign financial institutions that do not (or 
cannot) satisfy the reporting obligations. This withholding tax would 
apply without regard to whether the payment relates to a U.S. 
customer's account, a foreign customer's account, or the institution's 
own account.
    This proposed new reporting and withholding tax regime would be in 
addition to the vital role many foreign financial institutions 
currently play in contributing to U.S. tax compliance and enforcement 
through their participation in the Qualified Intermediary (``QI'') 
program. Foreign financial institutions that are part of the QI program 
take on responsibility for ensuring the proper imposition of U.S. 
withholding tax with respect to the foreign persons that hold accounts 
with such institutions. The additional obligations under this proposed 
new regime would substantially increase the U.S. reporting and 
withholding responsibilities of those foreign financial institutions 
that currently participate in the QI program. Specifically, it would 
require the determination of the tax status of all customers in order 
to identify any U.S. persons and the reporting of all payments to, or 
activity in the accounts of, any U.S. customers. In addition, the 
proposed new regime would extend to thousands of foreign financial 
institutions, including very small institutions, which are not within 
the coverage of the QI program either because they do not handle the 
kinds of U.S. investments that are covered by the QI rules or because 
they have not entered into a QI agreement.
    Given the high priority of this Bill for both Congress and the 
Administration, we are limiting our comments to the foreign financial 
institution provisions (and to how such provisions apply to banks and 
other traditional financial institutions). Within those provisions, we 
focus on five key areas as described in more detail below. In addition, 
we include two further suggestions regarding issues related to 
particular aspects of the operation of the proposed provisions. 
However, we would stress that the burden and uncertainty of obligations 
that would be imposed under the Bill could lead some foreign financial 
institutions to conclude that they have no choice but to divest 
themselves of all their U.S. investments, to the severe detriment of 
the U.S. financial markets and the U.S. economy. Therefore, we urge 
policymakers to work closely with the financial services industry to 
ensure that the proposed new regime operates in a way that is clear and 
workable and that will ensure that it accomplishes the objective of 
improving U.S. tax compliance by U.S. persons while not inappropriately 
discouraging U.S. investment.
Additional Time Needed for Development and Implementation of the
        Proposed New Reporting and Withholding Regime
    The Bill provides that the new regime would take effect for 
payments made after December 31, 2010. However, development and 
implementation of the new regime will require a tremendous amount of 
work by the foreign financial institutions that will be subject to the 
regime (in terms of customer investigation and information gathering, 
as well as systems and process changes), by U.S. persons that make 
covered payments to foreign financial institutions (in terms of systems 
modifications and implementation of new processes), and by the Treasury 
Department and IRS (in terms of detailed substantive and procedural 
guidance, development and implementation of agreements, and development 
and implementation of internal review processes). Therefore, in order 
to give sufficient time to accomplish all the necessary preliminary 
work, we believe that the effective date of the new regime should be 
delayed by at least three years so that the regime would apply no 
earlier than for payments made after December 31, 2013, and then phased 
in as discussed in more detail below. We also believe it is important 
to authorize the Secretary of the Treasury to delay the effective date 
to avoid unforeseen issues that may disrupt financial markets.
    The statutory provisions in the Bill delegate substantial 
responsibility to the Treasury Department to develop detailed rules for 
the operation of the regime, to establish compliance thresholds and 
mechanisms, and to provide exceptions and special rules for appropriate 
situations. Treasury and the IRS will need time to develop the required 
overall guidance with respect to the regime and to address the specific 
areas where Treasury action is explicitly contemplated in the statutory 
language. Treasury and the IRS should work closely with the industry in 
developing this guidance. Moreover, the guidance should be issued in 
proposed form in order to provide an opportunity for public comment.
    The Bill also contemplates that Treasury and the IRS will develop 
an agreement to be executed by foreign financial institutions to 
reflect their commitment to accept information reporting 
responsibilities in lieu of being subjected to the U.S. 30 percent 
withholding tax on U.S. payments received. The government will need 
time to develop this agreement, the specifics of which likely will need 
to be coordinated with the detailed guidance developed with respect to 
the new regime. Again, it is important that Treasury and the IRS work 
with the industry in developing this agreement. In addition, once the 
form of agreement is finalized, the government will need to execute 
agreements with the many thousands of foreign financial institutions 
affected by the new regime. As a practical matter, this process will 
take time and resources for the government to complete. It should be 
noted that it took multiple years to introduce and implement the QI 
program, which involved vastly fewer foreign financial institutions.
    When the detailed guidance specifying the applicable operational 
rules is issued and the required agreements are executed, foreign 
financial institutions will need to put in place numerous new systems 
to ensure compliance with the new reporting obligations. For those 
financial institutions that are part of the QI program currently, this 
will require a complete overhaul of existing systems to capture the new 
information required to be tracked and reported. For many such 
institutions, new systems also will need to be put in place in order to 
cover all the accounts that are not covered by the QI program. In all 
cases, the number of additional accounts to be covered will be many 
multiples of the number of accounts covered by the QI program. For 
those foreign financial institutions that are not currently part of the 
QI program, the required systems development and implementation work 
will be a new undertaking to be started from scratch.
    For these reasons, we respectfully urge the further delay of the 
effective date of the new regime (so that the regime would not apply 
any earlier than payments made after December 31, 2013) and then the 
phase in of the new regime over time.
A Phased-In Approach Should be Used for Implementation of the New
        Reporting and Withholding Regime
    The burdens involved in implementation of the new regime, and the 
processes that will be required in order to obtain the information 
needed to comply with the reporting requirements, will be very 
different for different types of financial accounts. In particular, the 
burdens associated with compliance with respect to deposit accounts 
will be disproportionately high. Therefore, a phased-in approach should 
be used for implementation of the new regime.
    The QI program covers custodial accounts in which the foreign 
financial institution holds U.S. securities for its account holders and 
receives payments with respect to those securities. Those foreign 
financial institutions that are part of the QI program have processes 
in place for obtaining and reporting information with respect to the 
holders of these accounts. While the new regime would require 
significant additional information, existing processes potentially 
could be overhauled and expanded to gather this additional information. 
Moreover, the relationship between the financial institution and the 
account holder is particularly close in the case of a custodial account 
due to the required interaction between the institution and the account 
holder regarding investment instructions and other matters. Thus, even 
for those foreign financial institutions that are not in the QI 
program, the relationship and regular interaction with the account 
holder should help facilitate the obtaining of the required information 
in order to implement the new regime.
    In contrast, the QI program does not cover deposit accounts held by 
foreign financial institutions, such as checking or savings accounts. 
Foreign financial institutions that are part of the QI program will not 
have processes in place to gather the required customer information or 
to report under the new regime with respect to their deposit accounts. 
The number of such accounts in most cases will be many multiples higher 
than the number of custodial accounts currently covered by the QI 
program. The tax status of every checking and savings account holder 
would need to be determined in the manner required by the Treasury 
Department and then would need to be input into the foreign financial 
institution's deposit and customer information systems. In addition, 
there are many foreign financial institutions that do not have 
custodial accounts but that do have large numbers of deposit accounts. 
Finally, the interactions between the financial institution and the 
deposit account holder are much more limited--often to ATM or on-line 
transactions only. Therefore, obtaining the required information would 
be much more difficult, particularly given the natural caution (due to 
concern about identity theft) about providing detailed personal 
information in response to unexpected inquiries that purport to be from 
a financial institution.
    For these reasons, we respectfully urge that the new regime be 
phased in so that it applies initially only to custodial accounts and 
that the regime be extended to apply also to deposit accounts over a 
period of years (such as over a four year period). This will allow 
additional time for the necessary groundwork with respect to the huge 
number of deposit accounts that would be affected. It also will allow 
foreign financial institutions and the government to gain experience 
with respect to the new regime, and to make any necessary refinements 
in the implementation requirements, before the regime is vastly 
expanded in its application.
    In addition, we respectfully urge that the requirements of the 
regime be phased in over this additional period of years so that the 
customer documentation requirements apply first to newly-opened 
accounts and then over time to pre-existing accounts so that financial 
institutions have additional time to obtain this documentation with 
respect to such accounts. Given the often limited interaction between 
the institution and its deposit account holders, the gathering of this 
information with respect to pre-existing accounts likely would require 
multiple mailings and repeated follow up by telephone. In contrast, in 
the case of new accounts, once the necessary forms, systems and 
processes are developed for reporting the information, the customer 
documentation could be requested as part of the account opening 
procedure.
The New Reporting and Withholding Regime Should be Coordinated with the 
        QI Program
    Under the proposed new regime, a foreign financial institution that 
cannot enter into an agreement with Treasury regarding compliance with 
the new reporting and withholding requirements would be subjected to 30 
percent U.S. withholding tax on U.S. payments received, without regard 
to whether those payments relate to U.S. customers' accounts, foreign 
customers' accounts, or the financial institution's own account. Thus, 
a financial institution that is a participant in good standing in the 
QI program could be subjected to this withholding tax on payments with 
respect to its foreign accounts for which it properly satisfied all the 
required reporting obligations under the QI program. Thus, this Bill 
would essentially abrogate the QI program.
    The QI program is critically important to ensuring that the United 
States collects the proper amount of withholding tax with respect to 
payments on U.S. investments held by foreign persons through foreign 
financial accounts. Thus, foreign financial institutions in the QI 
program serve a vital role with respect to U.S. tax compliance by 
foreign persons. The government should not risk sacrificing this 
important aspect of tax compliance in the interest of shoring up tax 
compliance by U.S. persons.
    In order to avoid that potential conflict and to maximize the 
beneficial impact on tax compliance across the board, the Bill should 
be modified to provide for coordination between the proposed new regime 
and the existing QI program. Under this coordination, a foreign 
financial institution that is a participant in good standing in the QI 
program should not be subject to 30 percent U.S. withholding tax with 
respect to payments it receives on behalf of foreign accounts properly 
reported under the QI rules.
    Therefore, we respectfully urge that the new regime be fully 
coordinated with the existing QI program.
The New Withholding Tax Rules Should Not Apply to Payments Made for the 
        Foreign Financial Institution's Own Account
    Under the proposed new regime, foreign financial institutions that 
cannot enter into an agreement with Treasury regarding compliance with 
the new reporting requirements with respect to potential U.S. accounts 
would be subjected to 30 percent U.S. withholding tax even on payments 
that are received with respect to its own account. Such payments are 
income of the foreign financial institution and are subject to 
withholding tax or reporting on a tax return as required under existing 
provisions of the tax law (or are excluded from income and are exempt 
from U.S. tax under applicable provisions).
    By definition, payments received for the foreign financial 
institution's own account cannot relate to any possible account of a 
U.S. person. Therefore, there is no direct compliance goal served by 
subjecting these payments to this 30 percent withholding tax. Such tax 
serves solely as an unrelated penalty to try to force foreign financial 
institutions to comply with the reporting obligations with respect to 
any unrelated accounts of U.S. persons. Moreover, this penalty will 
force those foreign financial institutions that simply cannot comply 
with the new reporting obligations to divest all their U.S. 
investments.
    The imposition of a 30 percent withholding tax on payments received 
for a foreign financial institution's own account would be 
confiscatory. The amount of such withholding tax would bear no relation 
to the amount of tax actually owed by the institution with respect to 
such payments. The amount of such withholding tax also would bear no 
relation to the amount of tax that might be owed by U.S. persons that 
have accounts with the institution (which accounts would be unrelated 
to these particular payments). The burden of this imposition of the 
withholding tax on payments for the foreign financial institution's own 
account would far outweigh any compliance benefits to be achieved 
through this penalty.
    Therefore, we respectfully urge that payments received by a foreign 
financial institution for its own account not be subjected to the 30 
percent U.S. withholding tax as contemplated by the Bill.
The New Withholding Tax Rules Should Not Apply to Tax-Exempt Payments
    Under the proposed new regime, foreign financial institutions that 
cannot enter into an agreement with Treasury would be subjected to 30 
percent U.S. withholding tax even on payments that are of a type that 
otherwise are exempt from U.S. withholding tax under long-standing 
substantive provisions of the U.S. tax law.
    Specifically, the proposed new withholding tax would apply to 
payments to foreign persons that qualify as portfolio interest, short-
term original issue discount, and interest on bank deposits. In 
addition, the proposed new withholding tax would apply to payments that 
are considered effectively connected with a U.S. business and that 
therefore would be subject to net-basis income taxation and otherwise 
would be exempt from withholding tax. (In each case, the foreign person 
is required under existing law to provide the appropriate Form W-8 to 
obtain the exemption.) Finally, the proposed new withholding tax would 
apply to payments of interest on tax-exempt bonds that otherwise would 
be exempt from any U.S. tax, even if the beneficial owner is a U.S. 
person.
    Application of the withholding tax with respect to payments 
received for the account of a foreign person that are of a type that 
otherwise would be exempt from withholding tax should not be subjected 
to the new 30 percent withholding tax regime. Such application of the 
regime would impose an unnecessary burden on the foreign account 
holders, who would be required to file a claim for refund simply to 
obtain the statutory tax exemption. Similarly, application of the 
withholding tax with respect to any payments of tax-exempt interest 
would be particularly inappropriate as such amounts are never taxable 
regardless of the identity of the beneficial owner.
    In addition, in the case of payments received by a foreign 
financial institution for its own account, the limited credit/refund 
rules contained in the Bill mean that the potential application of this 
30 percent withholding tax would effectively eliminate the tax 
exemption provided by statute. The refund process under the Bill 
applies only to the extent that an applicable tax treaty gives the 
institution the benefit of reduction in the withholding tax and does 
not apply to allow the benefit of a statutory exemption. Moreover, a 
foreign financial institution from a country with which the United 
States has not concluded a tax treaty cannot obtain any refund or 
credit with respect to amounts withheld. At a minimum, foreign 
financial institutions (wherever located) should be entitled to file 
claims for refund or credit with respect to amounts that are over-
withheld because the underlying payment is tax-exempt under applicable 
statutory provisions.
    If the new regime continues to be structured to apply a 30 percent 
withholding tax to payments received by a foreign financial institution 
for its own account and to payments received for the accounts of 
foreign customers properly reported under the QI program, we 
respectfully urge that an exception from such withholding tax be 
provided for amounts that are exempt from withholding tax under other 
existing provision of the U.S. tax law.
Additional Suggestions Regarding the Operation of the Proposed New 
        Reporting and Withholding Regime
    In addition to the foregoing comments relating to the overall 
structure and implementation of the proposed new reporting and 
withholding regime, we would like to make suggestions with respect to 
two aspects of the operation of the new regime.
Compliance Under the Proposed New Reporting and Withholding Regime
    The Bill would provide the Treasury Department with broad authority 
to establish verification and due diligence procedures with respect to 
a foreign financial institution's identification of any U.S. accounts 
(or its determination that it has no U.S. accounts). We believe it is 
critically important that Treasury and the IRS work with the industry 
in designing these requirements and in establishing the approach for 
assessing compliance with such requirements.
    In this regard, we believe that the compliance assessment approach 
should focus on the establishment of proper procedures by each foreign 
financial institution and its implementation of such procedures on an 
ongoing basis. The IRS should work with foreign financial institutions 
to establish the agreed procedures the institution will follow on a day 
to day basis. Once these procedures are in place, the institution 
should be able to make periodic representations to the IRS that the 
procedures have been followed and that there have been no breaches. 
Moreover, it would be appropriate to establish a further streamlined 
representation approach in the case of a foreign financial institution 
that has determined it has no U.S. accounts and that has put in place 
procedures to prevent any U.S. accounts from being created.
Interaction of Proposed New Reporting and Withholding Regime with 
        Proposed Changes to the Foreign Trust Rules
    In addition to the foreign financial institution provisions that 
are the focus of this submission, the Bill includes a proposed 
modification to the rules with respect to foreign trusts. This section 
of the Bill would create a new presumption rule that could have the 
effect of causing a U.S. person that makes a transfer of property to a 
foreign trust to be deemed to be an owner of the trust if under the 
thrust instruments a U.S. person could ever receive a distribution from 
the trust. If this occurs, a foreign financial institution that holds 
an account for such trust could suddenly be subject to reporting and 
withholding obligations with respect to that trust.
    As a result of the potential interaction of this provision with the 
new reporting and withholding regime, a foreign financial institution 
could be required to continuously monitor all activity with respect to 
the foreign trusts that are account holders to determine if any U.S. 
person makes any transfer to a trust and then to further analyze the 
trust instruments themselves to determine if that transfer would 
trigger the application of these presumption rules that would treat the 
U.S. transferor as an owner of the trust. It would be virtually 
impossible for a foreign financial institution, which may have 
thousands of trust accounts, to undertake such efforts.
    Therefore, we respectfully request that the Bill be modified so 
that the proposed modification to the foreign trust rules does not 
interact with the proposed new reporting and withholding regime in a 
manner that would subject a foreign financial institution to this 
onerous and impractical additional responsibility with respect to its 
trust accounts.

                                 
                           Graham Cox, letter

Dear Mr. Buckley and Ms. Mueller,

Comments on the Foreign Account Tax Compliance Act of 2009 (H.R. 3933, 
        S. 1934)
    On behalf of the members of the International Capital Markets 
Services Association (``ICMSA''), we thank you for the opportunity to 
comment on the proposed Foreign Account Tax Compliance Act of 2009 
(``the Bill'').
    ICMSA \1\ is a London-based self regulatory organization 
representing international financial and non-financial institutions 
active in the provision of services to the International Capital 
Markets. Our membership includes universal banks, registrars, stock 
exchanges, law firms, International Central Securities Depositories 
(``ICSD''s) and other service providers specialised in specific product 
segments such as the processing of tax reclaims. The primary purpose of 
the association is to foster the highest standards in the practice and 
management of international capital market services, thereby 
facilitating the efficient functioning of the market. In its day-to-day 
activities, the ICMSA is predominantly focusing on the operation of the 
International Securities Market,\2\ which has outstanding issuance 
levels exceeding U.S. Dollar (USD) 13 trillions, i.e. about half of the 
overall international debt securities outstanding volumes reported by 
the Bank for International settlements.\3\
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    \1\ More information on the association can be found on 
www.capmktserv.com.
    \2\ i.e. securities primarily issued and deposited with the ICSDs, 
Clearstream Banking and Euroclear Bank.
    \3\ BIS Quarterly Review, September 2009
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    We wish first to confirm our full support to the overall objective 
of the Bill which we understand is intended to prevent the avoidance of 
tax by U.S. persons. We however would like to express our serious 
concerns regarding Section 102 of the proposed Bill (Repeal of Certain 
Foreign Exceptions to Registered Bond Requirements) which, we fear, 
could result in a severe disruption of the international capital 
markets' current economic fundamentals and operating practices at a 
time when global access to cost-efficient funding is pivotal to achieve 
economic recovery. Please note that many of our members have also 
expressed serious concerns over other aspects of the Bill (for example 
the new ``foreign financial institution'' regime in Section 101, which 
will affect the financial community worldwide and may deter foreign 
investment from U.S. securities). These concerns have been and will be 
addressed by members either individually or through other industry 
groups.
    The International Securities Market has overwhelmingly adopted the 
bearer legal form as the preferred form for security issuance, moving 
from definitive bearer instruments at its inception to a custody 
structure where global bearer notes are now immobilized with the ICSDs 
and settle through a book-entry system. Approximately 80% of the 
securities in the International Securities Market have been issued in 
global immobilised bearer form under the TEFRA \4\ D rule, regardless 
of the nationality of the issuer (U.S. or non-U.S.), effectively 
becoming the norm in the market and representing therefore a very 
important and efficient funding vehicle for all issuers, U.S. or non-
U.S..
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    \4\ Tax Equity and Fiscal Responsibility Act, which requirements 
and procedures are designed to ensure that the concerned securities are 
not offered to or acquired by U.S. persons.
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    An elimination of the foreign-targeted bearer bond exemptions, as 
we understand the current draft of the bill is proposing, on which the 
market is based would inevitably lead to wide-spread market disruption 
and would impose substantial costs and additional complexities 
(different legal documentation, restricted placement opportunities due 
to a more limited investor base, additional registration services, 
additional certification and tax processing procedures, etc) to those 
actors, across the entire chain from issuers to investors, forced or 
willing to comply with the new requirements. This would ultimately 
translate into a higher cost of borrowing for those issuers forced to 
adopt the registered format for their international securities 
issuances and thus expose them to sub-optimal funding conditions. This 
could therefore put U.S. issuers seeking foreign funding at a 
disadvantage compared to their non-U.S. peers, who chose to continue 
issuing in the global bearer format.\5\
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    \5\ Whether or not these non-U.S. issuers would then be exposed to 
U.S. sanctions such as the Excise Tax is linked to the question of U.S. 
tax laws extra-territoriality.
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    U.S.-incorporated issuers represent today a significant portion of 
the International Securities Market. These entities mostly tap this 
market to raise funds in Euros and British Pounds (i.e. alternative 
funding to USD) with European- and Asian-based investors, thereby 
diversifying their funding base, and they do so very efficiently and 
effectively through the issuance of global bearer notes immobilized 
with the ICSDs. Because these transactions are foreign-targeted and 
that the mechanisms in place under the TEFRA rules already provide 
appropriate safeguards against offering to U.S. persons, we believe 
that the measures proposed in Section 102 will produce marginal 
benefits in terms of reducing U.S. tax evasion compared to the 
disruption they will provoke.
    Moreover, we note that, in some markets, it is simply not feasible 
to issue obligations in registered form, which would leave some foreign 
issuers with no choice but to be exposed (at least in principle) to a 
very significant excise tax.
    In light of these elements, we urge the U.S. House of 
Representatives and the U.S. Senate to re-consider the possibility to 
maintain the existing exceptions for foreign-targeted bearer bond until 
such time as the potential impact has been thoroughly investigated. 
Over time these exemptions have served issuers, intermediaries and 
investors worldwide very well and that have helped maintain a level-
playing field access to the international capital markets. In our view, 
the repeal of these exceptions needs to be carefully planned and 
considered to avoid a major disruption in a multi-trillion dollar 
market which would affect U.S. issuers, non-U.S. issuers, many market 
intermediaries including the major U.S. banks, and, ultimately, the 
investors. To this effect, the ICMSA supports the recommendation made 
by other industry groups that Congress requests a report regarding the 
potential consequences of the repeal of the foreign-targeted bearer 
bond exceptions.
    We thank you again for the opportunity to present our understanding 
of the proposed legislation and of its likely consequences should the 
current draft be adopted. We hope the arguments and recommendations we 
have put forward in this letter will be considered and will provide 
useful guidance in the elaboration of any proposed legislation.
    Yours Sincerely,
    Graham Cox
    Chairman
    ICMSA

                                 
                 Letter of Martin Egan and Kate Craven

Dear Sirs,

The Foreign Account Tax Compliance Act of 2009
    1.  We write in relation to the bill (the ``Bill'') currently 
before the U.S. Congress concerning the above.
    2.  The International Capital Market Association (``ICMA'') is a 
self regulatory organisation representing a broad range of capital 
market interests including global investment banks and smaller regional 
banks, as well as asset managers, exchanges, central banks, law firms 
and other professional advisers amongst its 400 member firms. ICMA's 
market conventions and standards have been the pillars of the 
international debt market for over 40 years, providing a self 
regulatory framework of rules governing market practice which have 
facilitated the orderly functioning of the market. ICMA's primary debt 
market committees \1\ gather the heads and senior members of the 
syndicate desks and legal transaction management teams of around 20 
ICMA member banks most active in lead-managing syndicated bond issues 
in Europe. Eurobond issuance so far this year has reached approximately 
USD 2.4 trillion (about half of total global debt issuance).
    3.  We understand the Bill is intended to clamp down on U.S. tax 
evasion and improve U.S. taxpayer compliance by giving the U.S Internal 
Revenue Service (``IRS'') new administrative tools to detect, deter and 
discourage offshore tax abuses. We fully support Congress in this 
respect. ICMA does, however, have concerns that the Bill in its current 
form may have some serious side effects not intended by Congress and 
regarding which we would like to assist Congress.
    4.  In particular, we understand that one of the Bill's provisions 
would end the practice of selling bearer bonds to foreign investors 
under the `TEFRA C' and `TEFRA D' exemptions pursuant to the Tax Equity 
and Fiscal Responsibility Act. This would inter alia purport to cause 
non-U.S. borrowers issuing bearer bonds outside the U.S. to non-U.S. 
persons to be subject to a U.S. excise tax equal to 1% of the principal 
amount of such bonds multiplied by the number of years to their 
maturity.
    5.  We fear some of the Bill's other provisions that impose 
substantial new compliance requirements on non-U.S. institutions might 
cause some such institutions to reconsider their involvement with U.S. 
securities and/or U.S. market participants.
    6.  Like other international markets, the Euromarket has developed 
along historically different lines to the U.S. market and ever since it 
became established in the 1960's it has been a bearer bond market. 
Since then, the Euromarket, through the various TEFRA exemptions, has 
co-existed successfully with the U.S. market.
    7.  The overwhelming majority of Euromarket securities are held 
through the Euroclear and Clearstream depositaries, which operate on a 
book-entry basis effectively similar to French, Italian and Spanish 
`dematerialised'/`immobilised' bonds that are deemed to be in 
registered form for U.S. tax purposes. We note IRS Notice 2006/99 in 
this respect. Congress's aim on tax evasion seems rather to primarily 
relate to bearer bonds in `definitive' form that are physically held by 
individual investors--we wish to assist Congress in this aim.
    8.  From the above, it seems the timeline for passing and 
implementing of the Bill needs to be revised to allow further 
evaluation of its potential impact. In particular, Congress may wish to 
consider:

          market stability (as mentioned above)--the proposed 
        changes may affect issuers' willingness to go to market and may 
        affect stability of bond markets generally;
          the increased compliance cost burden on the 
        international debt markets--aside from the above, there would 
        be consequential changes to clearing systems, tax treatments 
        (including impacts on many tax treaties), documentation etc.;
          potential fragmentation of markets and corresponding 
        lack of global liquidity;
          restricting U.S. borrowers' and investors' ability to 
        access international funding and investment;
          practicalities for transitional arrangements, 
        including re-financing and other transitional issues and, in 
        relation to U.S. issuers, allowing sufficient time for the 
        relevant markets to put systems in place to collect and deliver 
        the relevant IRS forms (failing which U.S. issuers may be at a 
        significant albeit temporary competitive disadvantage to non-
        U.S. multinational issuers); and
          the practicality of the Bill's stated 180 day 
        implementation timetable.

    9.  ICMA would be happy, at your convenience, to explain its 
concerns and suggestions (including possible clarification that book-
entry bearer bonds are not treated as bearer debt for the Bill's 
purposes) in more detail.

            Yours faithfully,

    Martin Egan, BNP Paribas--Chair, ICMA Primary Market Practices 
                                                          Committee
  Kate Craven, Barclays Capital--Chair, ICMA Legal & Documentation 
                                                          Committee
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    \1\http://www.icmagroup.org/about1/isma1/
legal_and_documentation.aspx and http://www.icmagroup.org/about1/isma1/
primary_market_practices.aspx.

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            Statement of Investment Fund Institute of Canada
    On behalf of The Investment Funds Institute of Canada (IFIC), I 
would like to provide some preliminary comments on the proposed Foreign 
Account Tax Compliance Act (the ``Bill''), published on October 27, 
2009. IFIC is the voice of Canada's investment funds industry, 
including fund managers, distributors and industry service 
organizations with assets under management of $471 billion ($US)--the 
eighth largest mutual fund market in the world after that of the United 
States. The U.S.-Canadian relationship is unique--as notes the U.S. 
Department of State: ``Since Canada is the largest export market for 
most States, the U.S.-Canada border is extremely important to the well-
being and livelihood of millions of Americans. . . . The U.S. is 
Canada's largest foreign investor . . . and Canada is the fifth largest 
foreign investor in the U.S.'' (November 2008).
    The following are general comments only as our members are 
currently reviewing the Bill to determine if there are other legal 
impediments to our members complying with the legislation. We will 
forward any such additional specific comments to you at a later date.
    1. In principle, we believe that matters addressed in the Bill 
(that is, the exchange of information and withholding tax issues) 
should be addressed under the Convention between The United States of 
America and Canada with respect to Taxes on Income and on Capital, 
signed at Washington on 26 September 1980 as Amended on 21 September 
2007. The latest Protocol to the Convention came into force on December 
15, 2008--less than 12 months ago.
    2. In terms of specifics, we would like to bring the following 
practical concerns to your immediate attention:

        a.  We believe that the effective date of the Bill--for years 
        beginning after December 31, 2010--is not feasible given the 
        lack of precision in certain aspects of the Bill, the 
        expectation of extensive new procedural requirements in as-yet-
        undrafted regulations and the global reach of the Bill. We 
        believe the effective date should be postponed to two years 
        following finalization of required regulations governing 
        procedural matters.

        b.  We have serious concerns with the requirement to share 
        personal client information between affiliated companies on a 
        worldwide basis as contemplated in the Bill, given that it may 
        be contrary to privacy legislation of countries that may, in 
        fact, have privacy laws similar to those enacted in the U.S. 
        Canada has a strong commitment to maintaining the privacy of 
        personal records, as exemplified by its Personal Information 
        Protection and Electronic Documents Act (PIPEDA) legislation. 
        Given the nature of the information that is required to be 
        disclosed, we believe that the Secretary should continue to 
        rely on longstanding formal bilateral agreements between the 
        U.S. and Canadian government agencies that provide for mutual 
        co-operation and the exchange of relevant information. The U.S. 
        government itself has extensive concerns about cybersecurity, 
        and the Bill's proposal for additional sharing of information 
        across countries presents risks that the confidentiality of 
        personal information will be breached. To address some of these 
        concerns, we recommend that consideration be devoted to giving 
        the Secretary of the Treasury the right to provide exceptions 
        and grant relief from disclosure in appropriate cases.

        c.  Gross proceeds, including invested capital, appear to be 
        caught in the ambit of the Bill and would be subject to the 30% 
        withholding tax. We believe that these amounts should be 
        grandfathered.

        d.  We believe that the legislation is unclear with regard to 
        third-party intermediaries in the case of entities acting for 
        clients holding their investments in nominee form. We think 
        that third-party intermediaries should be responsible for 
        reporting.
    We hope that the Bill will be amended as requested above to avoid 
negative repercussions on Canadians' investment in the U.S. As noted 
above, our members continue to review the documentation and seek 
guidance, after which point we may provide additional comments. We 
would appreciate being including in any further communications on this 
subject and would be pleased to elaborate on our comments at your 
convenience.
    Yours sincerely,
    Original signed by J. De Laurentiis
    President and CEO

                                 
       Statement of The Investment Industry Association of Canada
    The Investment Industry Association of Canada (IIAC) would like to 
take this opportunity to submit comments to the House Ways and Means 
Select Revenue Measures Subcommittee with regard to the draft 
legislation impacting foreign financial institutions (FFIs) contained 
in HR 3933, the Foreign Account Tax Compliance Act of 2009 (the Act) 
filed by Chairman Rangel on October 27, 2009. We would kindly ask that 
you consider these comments, and include them in the record for the 
hearing held on November 5, 2009.
BACKGROUND INFORMATION
    The IIAC is Canada's equivalent to the Securities Industry and 
Financial Markets Association (SIFMA) in the United States, and 
represents over 200 investment dealers across Canada.
    In June 2000, the Department of Finance Canada reported that there 
were 188 securities firms in Canada at the end of 1999 and that the 7 
largest firms accounted for approximately 70% of the industry's 
capital. At that time, all but one of Canada's large, full-service 
securities firms were bank owned. The landscape of the Canadian 
securities industry has not changed significantly since that time.
    In August 2001, the Department of Finance Canada estimated that 
banks accounted for approximately 70% of the total domestic assets held 
by the financial services sector, and that the six major domestic banks 
accounted for over 90% of the assets held in the banking industry.
GENERAL CONCERNS REGARDING THE ACT
    The IIAC understands the U.S. government's concerns regarding the 
use of offshore accounts and entities by certain persons to evade U.S. 
tax. This is a concern shared by the governments of many countries, and 
we have observed increased global efforts and inter-governmental 
cooperation through the inclusion of tax information exchange 
provisions in many new income tax treaties and protocols to existing 
treaties, as well as an increase in the number of tax information 
exchange agreements between countries that do not have income tax 
treaties in effect.
    We recognize that an opportunity exists for the Internal Revenue 
Service (IRS) to use its influence over FFIs in the U.S. government's 
efforts to identify U.S. persons that may be evading U.S. taxation of 
income earned, directly or indirectly, through offshore accounts. 
Implementing the Act as proposed would allow the IRS to receive 
information automatically from FFIs and avoid having to make requests 
to foreign governments under tax information exchange agreements or 
under exchange of information provisions contained in income tax 
treaties. However, we believe that a more appropriate means to address 
tax evasion is by the use of international solutions developed through 
negotiations between governments, not through negotiations and 
agreements between the IRS and private entities.
    We are extremely concerned that compliance with the Act will impose 
a significant level of additional cost and operational risk on FFIs 
that will be disproportionate to the amount of additional U.S. tax 
revenue generated. In particular, we are concerned that many FFIs will 
not find it economically feasible to enter into agreements with the IRS 
under proposed section 1471(b) (FFI Agreements) and to continue to 
operate as Qualified Intermediaries (QIs). It would be unfortunate to 
see foreign financial institutions forced to exit the QI regime into 
which they and the IRS have invested significant resources.
    Foreign financial institutions will also need to consider the 
impact on their clients. It will be difficult to justify additional 
burdens and costs being placed on non-U.S. account holders with no 
investment in U.S. securities. Ultimately, this will likely have a 
detrimental impact on U.S. capital markets generally by creating 
disincentives for Canadians and other foreign investors to invest in 
the U.S. The ``green shoots'' of economic recovery in the U.S. could be 
stunted by the disproportionately onerous provisions of the Act. It 
could also result in a loss of opportunity for American investors by 
creating disincentives for U.S. persons to open accounts in Canada and 
elsewhere, disrupting the flow of global capital markets.
    If the Act is enacted, it is critical that the Department of the 
Treasury (Treasury) and the IRS work closely with FFIs to ensure that 
the detailed requirements strike a reasonable balance between 
increasing U.S. tax revenue by identifying tax evasion by U.S. persons, 
and the additional financial burden and operational risks being imposed 
upon FFIs, in an effort to maximize the continued participation of such 
institutions in the QI regime and the number that enter into FFI 
Agreements with the IRS.
CONCERNS REGARDING SPECIFIC PROVISIONS OF THE ACT
    Below we have summarized our concerns regarding specific provisions 
of the Act. Our comments are limited to the proposed new Chapter 4 of 
the Internal Revenue Code.
        1.  Effective Date

    The Act provides that new Chapter 4 will generally apply to 
payments made after December 31, 2010.
    We strongly believe that the implementation of the Act's 
requirements with respect to the identification and reporting of 
certain foreign accounts will require a substantially longer timeframe, 
especially given that much of the detail about implementation will be 
contained within regulations to be developed by Treasury, and within 
the FFI Agreements to be negotiated between FFIs and the IRS.
    Once the Act is enacted, Treasury and the IRS will need to develop 
detailed regulations, model FFI Agreements, reporting forms, and other 
guidance. Until these details are finalized, an FFI will not be in a 
position to fully assess the costs and risks associated with 
compliance, and ensure that there are no legal or operational 
restrictions which would impede the FFI's ability to comply with the 
terms of the FFI Agreement.
    An FFI cannot make the business decision to enter into such an 
agreement without completing this internal review and analysis.
    Once an FFI has confirmed that it can and will enter into an FFI 
Agreement with the Secretary, it needs time to make the necessary 
systems and operational changes to gather and record the additional 
information required for the purposes of identifying United States 
accounts, as well as accounts that are excluded from the requirements, 
and to modify systems to be able to produce the necessary reporting 
information. For most large FFIs, the minimum period required to make 
the necessary changes will be at least two years.
    If FFIs are not given enough time to make the changes necessary to 
be able to comply with the terms of the FFI Agreement, there is a risk 
that they will delay entering into such agreements until they are able 
to comply, even if this is after the effective date. If this results in 
the application of the 30% withholding on payments to the FFI in the 
interim, it could be extremely disruptive to the flow of U.S. 
withholdable payments and investment in the U.S. market.
    Withholding agents will also need to identify their FFI clients and 
determine which ones have entered into FFI Agreements. Those FFIs that 
do not currently have the capability to withhold 30% tax on 
withholdable payments made to other FFIs or applicable non-financial 
foreign entities will need to implement the necessary changes. For many 
such FFIs, withholding on gross proceeds may present the greatest 
challenge.
    Significant IRS resources will also be needed to process large 
numbers of FFI Agreements in a very short time period. A large 
affiliated group of FFIs could easily be operating in more than 50 
countries and may have multiple legal entities within each of those 
countries that might enter into FFI Agreements. Whereas there are 
currently approximately 5,500 entities that have QI Agreements with the 
IRS, given the broad definition of FFI, there are potentially hundreds 
of thousands of entities that could be in position to enter into FFI 
Agreements with the IRS.
    We recommend that the effective date of December 31, 2010 be 
removed from the Act and replaced with a provision giving power to the 
Secretary to devise a flexible or staggered effective date under the 
accompanying regulations. The effective date should be determined with 
regard to finalization of regulations, guidance and agreements.
        2.  Authority of the Secretary of the Treasury

    The Act provides that the ``Secretary shall prescribe such 
regulations or other guidance as may be necessary or appropriate to 
carry out the purposes of this chapter.'' Throughout proposed new 
Chapter 4, there are numerous provisions that give the Secretary the 
authority to define exceptions and exclusions from the requirements, as 
well as the detailed requirements.
    However, there are certain additional areas where we would like to 
see greater authority given to the Secretary:

          Authority to define exceptions to the requirement in 
        section 1471(b)(1)(A) to obtain information from each holder of 
        each account maintained as is necessary to determine which 
        accounts are ``United States accounts''.

           For example, it may be appropriate for the Secretary to 
        provide exceptions for accounts existing on the effective date 
        or accounts that are regarded as posing a low risk of tax 
        evasion.

          Authority under section 1471(b)(1)(E)(ii) to provide 
        alternatives to closing United States accounts for which the 
        FFI is unable to obtain a valid and effective waiver under 
        section 1471(b)(1)(E)(i) where foreign law prohibits the 
        closing of such accounts.
          Authority to define the thresholds under which 
        depository accounts for individuals are excluded from the 
        definition of ``United States account''. See additional 
        comments under point 5 below.
        3.  Information to be reported on United States Accounts

    Section 1471(c)(1) sets out very specific requirements with respect 
to the information to be reported on United States accounts, including 
the following:

          Name, address and TIN of each account holder that is 
        a ``specified United States person,'' and in the case of an 
        account for a ``United States owned foreign entity,'' the name, 
        address and TIN of each ``substantial United States owner'' of 
        the entity.
          Account number.
          Account balance or value (determined at such time and 
        in such manner as the Secretary may provide).
          Gross receipts and gross withdrawals or payments from 
        the account (determined for such period and in such manner as 
        the Secretary may provide).

    With respect to account balance or value, and gross receipts, 
withdrawals or payments, our understanding is that the Secretary only 
has the authority to determine the time or reporting period, and the 
manner in which such information is to be provided, but not whether or 
not such information must be reported.
    There may be situations in which reporting such information may be 
extremely onerous and/or not particularly meaningful or useful to the 
IRS. For example, in some financial institutions, clients may have a 
depository account to hold cash and a custody account to hold 
securities. In such situations, purchases, sales and income 
transactions will be reported in both the depository account and the 
custody account. If both of these accounts report the proposed amounts, 
the information provided to the IRS will be overstated and misleading. 
We recommend that section 1471(c)(1) be amended to delete (D) and 
replace the current requirement under (C) with a more general 
requirement for such additional information and in such manner as the 
Secretary may provide.
        4.  Reliance on Certification from Account Holders

    Although the Act does not set out specific requirements regarding 
the methods that an FFI is to employ for purposes of identifying its 
United States accounts, there is a degree of protection provided to the 
FFI in section 1471(c)(3), allowing them to rely on a certification 
from an account holder ``if neither the financial institution nor any 
entity which is a member of the same expanded affiliated group as such 
financial institution knows, or has reason to know, that any 
information provided in such certification is incorrect.''
    Most FFIs that belong to an affiliated group will not be able to 
make use of the protection that this provision is intended to provide, 
primarily for the following reasons:

          Most affiliated groups of financial institutions do 
        not have common operating systems or systems that have the 
        ability to communicate with one another. In many cases, groups 
        have grown and expanded through acquisitions, with each new 
        acquisition bringing their legacy systems with them. Even 
        within a single legal entity, there are frequently a number of 
        different systems being used to support the diverse range of 
        products and services that the FFI offers.
          In most jurisdictions, there are legal restrictions 
        which prevent the sharing of information between separate legal 
        entities without explicit client consent.

    We recommend that section 1471(c)(3) be amended to limit the FFI's 
knowledge, or purported knowledge, that any information provided in a 
certification is incorrect to the information that the FFI has in its 
own electronic files. We understand the concern that an account holder 
could provide information to one entity within an affiliated group 
indicating that they are not a United States account holder, and they 
could also have an account with another member of the affiliated group 
that has information on file indicating that the account holder is a 
U.S. person. However, given that information about the account with the 
second affiliated entity would be reported to the IRS, the IRS is 
already being provided with adequate information regarding the U.S. 
person which could then be used to request additional information for 
this person under income tax treaties or tax information exchange 
agreements.
        5.  Exception for Certain Accounts Held by Individuals

    The definition of ``United States account'' provides an exception 
for depository accounts held by natural persons where the aggregate 
value of all depository accounts held does not exceed $10,000, or 
$50,000 where all such account were already in existence on the date of 
enactment.
    While we understand that this ``de minimis'' type exception was 
likely created with the intention of providing some relief to FFIs, the 
exception as currently drafted is operationally impractical, and would 
provide little or no relief to FFIs that would need to build the 
exception into their reporting systems. It would be extremely difficult 
and costly for an FFI to identify all accounts held by an individual, 
particularly where the individual only has a partial interest. In 
addition to the practical considerations, as discussed above under 
point 4, most jurisdictions impose legal restrictions which restrict 
the sharing of information between legal entities.
    We recommend that the provision be amended to apply on an account 
by account basis and that authority be given to the Secretary to define 
the thresholds.
        6.  Termination of the Agreement

    The Act provides that the FFI Agreement to be executed by the FFI 
and the Secretary may be terminated by the Secretary upon a 
determination that the FFI is out of compliance. A reciprocal provision 
should be added allowing the termination of the agreement by the FFI 
upon notice to the Secretary.
    The IIAC appreciates the opportunity to provide you with this 
submission and would very much like to meet with your committees and 
staff to discuss our position and recommendations. To arrange a 
meeting, please contact the undersigned or Andrea Taylor, Assistant 
Director.
    Yours sincerely,
    Ian Russell
    President

                                 
       Statement of the Organization for International Investment
    The Organization for International Investment (OFII) is a business 
association representing the U.S. subsidiaries of many of the world's 
largest international companies. The U.S. subsidiaries of companies 
based abroad directly employ over 5 million Americans and support an 
annual U.S. payroll of over $364 billion. As evidenced by the attached 
OFII membership list, many OFII members are household name companies 
with historic and substantial U.S. operations. On behalf of these 
companies, OFII advocates for the fair, non-discriminatory treatment of 
U.S. subsidiaries. We undertake these efforts with the goal of making 
the United States an increasingly attractive market for foreign 
investment, which will ultimately encourage international companies to 
conduct more business and employ more Americans within our borders. 
Given the recent global financial turmoil, as well as companies 
increasing ability to conduct worldwide operations through other 
jurisdictions, OFII's mission is more critical than ever to sustaining 
and rebuilding the American economy.
    On October 27, 2009, the Chairman of the Senate Finance Committee, 
Max Baucus, and Senator John Kerry, and the Chairman of the House Ways 
and Means Committee, Charles Rangel, and Representative Richard Neal, 
released proposed legislation titled the Foreign Account Tax Compliance 
Act of 2009 (FATCA). The proposed legislation adopts and revises many 
of the proposals set forth in President Obama's Administrative Proposal 
titled Leveling the Playing Field: Curbing Tax Havens and Removing Tax
    Incentives for Shifting Jobs Overseas that was released in May 
2009.
    OFII welcomes the initiative of Congressional leaders to enhance 
the ability of the Internal Revenue Service to police tax evasion 
perpetuated by U.S. persons through the use of offshore accounts and 
entities. All legitimate business enterprises benefit from a tax system 
that is respected by taxpayers and key to that respect is confidence 
that everyone is paying their fair share. Accordingly, OFII not only 
endorses the aims of the proposed legislation but is anxious to work 
with Congress to formulate rules that aid the Internal Revenue Service 
in the detection of tax evasion and increases the flow of information 
to the Internal Revenue Service while, at the same time, does not 
impede the orderly conduct of legitimate business commerce nor disrupt 
or discourage foreign investment into the United States.
    Our comments below are limited to those aspects of the proposed 
legislation that are most relevant to our members, the U.S. 
subsidiaries of foreign multinational corporations, and to their parent 
companies. We stand ready to offer our assistance in refining the 
legislation to achieve its important goals without disrupting 
legitimate business activities.
    We have organized are comments as follows:
    Section I--Limiting the Scope of New Chapter 4 to Target 
Circumstances in Which the Most Realistic Potential for Abuse Exists 
Without Unnecessarily Impeding International Commerce.
    Section II--Refining the New Rules to Maintain Equitable Treatment.
    Section III--Preserving the Ability of Multinational Corporations 
to Access the Eurobond Market.
    Section IV--Making the New Rules More Workable.
Section I
Limiting the Scope of New Chapter 4 to Target Circumstances In Which 
        the Most Realistic Potential for Abuse Exists Without 
        Unnecessarily Impeding International Commerce.
        1.  Targeting the Section 1472 Documentation Requirements to 
        Areas of Concern--Section 1472 imposes burdens on foreign 
        enterprises that can be difficult, and, in some cases, 
        impossible to meet. Determining the U.S. tax status of minority 
        owners and tracing indirect ownership through private equity 
        funds can place an impractical burden on business enterprises 
        that are not the logical targets for offshore tax evasion. Any 
        foreign corporation that does not qualify for the exception for 
        corporations publicly-traded on an established securities 
        market (or that could become non-public in the future) could be 
        seriously impacted by this part of the legislation.
              The category of foreign entities subject to the 
        increased documentation requirements should be narrowed--We 
        believe that the category of foreign entities subject to this 
        burden be narrowed as follows:

          The exclusion for publicly-traded companies should be 
        expanded. Many countries have not developed their capital 
        markets to the level of the United States. As a result, many 
        widely-held foreign enterprises may be within the spirit of the 
        exclusions in Section1472(c) but do not meet the requirement of 
        being traded on ``an established securities market.''
    OFII Recommendation: Section 1472(c) should be modified to address 
alternative markets, similar to Section 7704(b)(2), by adding at the 
end: ``or is readily tradable on a secondary market (or the substantial 
equivalent thereof).''

          Section 1472 can be further refined to exclude 
        companies that are unlikely to be candidates for utilization by 
        tax evaders. This can be best accomplished by using precedent 
        in the tax law to identify the appropriate category of 
        corporations that are most susceptible to improper use and can 
        most readily apply the operative rules.
    OFII Recommendation: An exception to the application of Section 
1472, patterned after the original Code section aimed at inappropriate 
use of offshore companies--the now-obsolete foreign personal holding 
company regime, should be added. Section 552(a) included an ownership 
test which was met if 5 or fewer individuals who are U.S. citizens or 
residents owned over 50% of the company, by vote or value, at any time 
during the taxable year. This test is appropriately aimed at the right 
class of companies and is a test that would be practical for foreign 
companies to apply. Utilizing an ownership test that is relatively easy 
for the company to apply is likely to be more effective than using a 
more expansive standard that may not be practical for many companies to 
apply.

          Foreign pension funds and sovereign wealth funds are 
        major sources of foreign investment in the United States and 
        generally are exempt from U.S. taxation on U.S. source 
        investment income under Section 892.
    OFII Recommendation: Foreign pension funds and sovereign wealth 
funds should be excepted from Section 1472.

          The category of payments to which expanded 
        documentation applies should be narrowed--Many foreign business 
        enterprises may have a high volume of payments receivable from 
        payors in the ordinary course of business that would be subject 
        to the increased documentation obligations, including broad 
        disclosure of ownership information to the payors. For example, 
        a UK company licensing software to U.S. users may have 
        thousands of customers making royalty payments. Section 1472(b) 
        would require the software company to provide every U.S. 
        customer with the name, address, and U.S. taxpayer 
        identification number of each of its U.S. substantial owners 
        (including indirect ownership) or certify that there is no U.S. 
        ownership.
    OFII Recommendation: The intent of Section 1472 can be achieved by 
limiting its application to payments of dividends and interest without 
disrupting the ordinary course of commerce.

        2.  Clarify That Internal Holding and Finance Companies Are Not 
        Financial Institutions Within the Scope of Section 1471--
        Section 1471(d)(5)(C) includes in the definition of a financial 
        institution any entity that is engaged in the business of 
        investing in securities. Many foreign multinational enterprises 
        have holding and finance companies within the corporate, whose 
        sole purpose is to hold shares of affiliates or to act as an 
        internal central financing vehicle for intercompany loans. 
        These internal special purpose entities may exclusively operate 
        to hold securities--equity of affiliates or notes from 
        affiliates. The Section 1471(d)(5)(C) definition could be read 
        to treat these internal holding and finance companies as 
        foreign financial institutions.
    OFII Recommendation: The Section 1471(d)(5)(C) definition of a 
``financial institution'' should be clarified to make clear that a 
holding or finance company (including the parent of an affiliated group 
that holds the shares of its subsidiaries) that predominantly holds 
securities of affiliates does not fall within this definition.
Section II
Refining the New Rules to Maintain Equitable Treatment
        1.  Maintain Parity of Treatment for U.S. Subsidiaries of 
        Foreign Multinationals
          The definition of ``specified U.S. person'' should 
        treat subsidiaries of publicly-traded foreign corporations 
        comparably to subsidiaries of publicly-traded U.S. 
        corporations--Section 1473(3) defines ``specified United States 
        person'' which defines the category of accounts subject to the 
        new proposed reporting rules of Chapter 4. The first exclusion 
        is any U.S. person that is a publicly-traded corporation. The 
        second exclusion is any corporation that is a member of the 
        same expanded affiliated group as the publicly-traded 
        corporation. This formulation could be read as not including 
        U.S. affiliates of foreign publicly-traded corporations. This 
        potential discrimination between a U.S. subsidiary of a U.S. 
        publicly-traded corporation and U.S. subsidiary of a foreign 
        publicly-traded corporation is not justified. It is not clear 
        this distinction is intended.
    OFII Recommendation: Section 1473(3) should be clarified to make 
clear that U.S. subsidiaries of foreign corporations are treated 
comparably to U.S. subsidiaries of U.S. corporations. This could be 
accomplished by adding to the end of Section 1473(3)(B) the following: 
``without regard to whether the corporation described in subparagraph 
(A) is domestic or foreign.''

        2.  Foreign Financial Institutions That Do Not Enter Into 
        Chapter 4 Agreements Should Not Be Denied Statutory Tax and 
        Treaty Benefits--In addition to requiring 30% withholding on 
        the expanded category of withholdable payments for financial 
        institutions that do not enter into an agreement with the IRS, 
        Section 1474(b)(2) would further burden these foreign financial 
        institutions with the denial of interest on refunds and the 
        denial of current statutory exemptions from tax with respect to 
        income beneficially owned by the institution. These additional 
        burdens imply that if a foreign financial institution does not 
        enter into a Chapter 4 agreement, it is unwilling to cooperate 
        on combating tax evasion. However, the Chapter 4 agreement can 
        be quite burdensome on a financial institution and some 
        institutions may make a business judgment, based on their 
        customer base and operations, that the benefits of entering 
        into an agreement with the IRS are outweighed by the burdens 
        that the agreement would impose on them. This is a ``benefits 
        and burdens'' business decision; not typically motivated by 
        willingness to aid in the perpetuation of tax evasion. The 
        burden of a 30% withholding tax on all withholdable payments to 
        the foreign financial institution achieves the basic compliance 
        goal of Section 1471. The additional burdens respecting 
        withhold-able payments made to a foreign financial institution 
        for its own account are punitive in nature, unjustified, and 
        set a dangerous precedent.
    OFII Recommendation 1 (No impairment of treaty benefits): The 
disallowance of interest with respect to a credit or refund of over 
withheld tax (under Section 1474(b)(2)(A)(i)) if the beneficial owner 
of the payment is entitled to a reduced rate of tax under a U.S. income 
tax treaty would impose an effective tax penalty on the treaty 
benefit--an unprecedented partial clawback of treaty benefits. This 
would be a dangerous precedent and should be eliminated.
    OFII Recommendation 2 (Reinstate statutory tax benefits): The 
denial (under Section 1474(b)(2)(A)(ii)) of the benefit of tax 
reductions for several types of payments that are currently statutorily 
exempt from tax, including the exemptions for bank deposit interest, 
short-term original issue discount, and portfolio interest, and 
payments representing effectively connected income that may otherwise 
be subject to a lower net income tax should be eliminated. Denial of 
any reduction from the 30% tax on gross proceeds, to account for return 
of basis, is particularly penal in nature. We are very concerned about 
the impact the denial of the portfolio interest exemption would have on 
the ability of issuers of portfolio debt instruments, as it would 
interfere with an important secondary market for the sale of these debt 
instruments within the banking community.

        3.  The Proposed Override of the existing Withholding Rules 
        Should Be Limited in Scope--The existing withholding rules 
        under Chapter 3 of the Code (Sections 1441-1446) have been 
        developed over a long period of time and contain numerous 
        exceptions, limitations, and coordination rules that further 
        the policies behind the withholding rules and assure their 
        proper interaction with other Code provisions. Section 101(b) 
        of the proposed legislation provides coordination rules that 
        would appear to override all the above limitations and 
        exceptions. For example, current law Section 1441 excludes from 
        its scope U.S. FDAP that is effectively connected with the 
        conduct of a U.S. trade or business (which must be evidenced by 
        the payee providing Form W-8ECI) whereas the proposed Chapter 4 
        definition of a withholdable payment appears to include FDAP 
        that is also effectively connected income. Other examples 
        include rules coordinating the interaction of Sections 1441, 
        1445, and 1446 and the waiver of interest and penalties for 
        underwithholding where the withholding agent establishes that 
        the full substantive tax liability has been satisfied.
    OFII Recommendation: The legislative history should make clear the 
expectation that Treasury will apply the exceptions, limitations, and 
other coordination rules that currently exist under Chapter 3 
withholding rules to the extent not in conflict with the purpose behind 
new proposed Chapter 4.
Section III
Preserving the Ability of Multinational Corporations to Access the 
        Eurobond Market
    We believe that Section 102, repealing tax benefits for foreign-
targeted bearer bonds should be stricken and Treasury be instructed to 
review the foreign targeting rules to determine whether they need to be 
revised to minimize the risk of these bonds being utilized as a vehicle 
for U.S. tax evasion. In today's market place, the distribution and 
transfer of bearer bonds is carried out through a regimented system in 
which these bonds typically are not physically transferred but are 
``immobilized'' by being physically held by the major clearing houses. 
Ownership interests are transferred through a largely book entry system 
maintained by clearing houses, brokers and dealers. The use of foreign-
targeted bearer bonds is the traditional means by which bonds are 
floated in the Eurobond market. The repeal of the U.S. tax benefits for 
issuers and holders of these bonds could be a major impediment to the 
ability of U.S. corporations to float debt in the Eurobond market. Any 
perceived concern about bearer bonds could be addressed by Treasury 
regulations treating immobilized obligations as either registered or as 
the only acceptable form of bearer bonds. We note that, in order to 
claim the portfolio interest exemption for registered bonds, the 
beneficial owners have to provide IRS Form W-8BEN to the payor of the 
interest. Requiring every holder of a Eurobond to submit a U.S. tax 
form would be a significant impediment to floating Eurobonds that would 
put U.S. corporations, and some foreign corporations (see immediately 
below), at a substantial disadvantage.
    In addition, foreign corporations that are entitled to the benefit 
of a U.S. income tax treaty typically are able to loan funds to their 
U.S. affiliates and obtain the benefit of the reduced rates of tax, or 
exemption from tax, on interest paid by the U.S. affiliate. However, if 
the lender of the funds (or a related party) to the U.S. affiliate has 
borrowed funds and the interest on the borrowed funds would not be 
entitled to a comparable U.S. tax reduction had the borrowed funds been 
lent directly to the U.S. affiliate, the treaty benefit may be denied 
under the U.S. anti-conduit regulations under certain circumstances. 
Currently, if the foreign affiliate borrowed funds in the Eurobond 
market by the common practice of issuing foreign-targeted bearer bonds, 
the anti-conduit rules would not be applicable because, had the U.S. 
affiliate issued the bearer bonds directly, the interest would have 
been exempt from tax under the portfolio interest exemption. The repeal 
of the exemption for foreign-targeted bearer bonds would mean that this 
protection from the application of the anti-conduit regulations would 
no longer be available.
Section IV
Making the New Rules More Workable
        1.  The Proposed Effective Date Rules Are Unrealistically 
        Short--The new proposed Chapter 4 withholding rules are 
        proposed to be effective for payments made after December 31, 
        2010. Neither the government nor taxpayers are likely to be 
        able to comply with this effective date. Most financial 
        institutions have sophisticated and complex systems in place, 
        many of which have been adapted over time to conform to U.S. 
        tax compliance requirements. A great deal of time, expense, and 
        energy will be required to alter, or replace, these systems and 
        operating procedures. Financial institutions with retail 
        banking operations that have documented their account holders 
        based on local identification cards or by employing know-your-
        customers procedures will have no reliable means of determining 
        whether account holders are U.S. citizens or residents without 
        requesting new documentation from every customer. New 
        procedures will be required to determine which foreign entity 
        account holders are themselves foreign financial institutions 
        under the expansive definition of a foreign financial 
        institution and, once that determination is made, which foreign 
        entities have substantial U.S. owners, which will require 
        determining both the direct and indirect U.S. ownership of the 
        foreign entity by both vote and value. The challenges foreign 
        financial institutions will face with regard to account holders 
        that are trusts is discussed in Paragraph 5, below. Similarly, 
        it will require time to educate foreign entities that are not 
        financial institutions to the new compliance requirements and 
        to put adequate procedures in place. Foreign financial and non-
        financial institutions that will want to become compliant with 
        the requirements of the new legislation, which is proposed to 
        become effective for payments made after December 31, 2010, 
        would not have sufficient time to ensure that their systems are 
        adequate to provide the required information.
    OFII Recommendation: The statute should delay the effective date of 
new proposed Chapter 4 for at least an additional year with express 
authority vested in the Secretary to delay the effective date to assure 
adequate time for both the government and taxpayers to adapt to the new 
rules.

        2.  The FATCA Provisions Should Not Apply to Transactions 
        Already in Place--Effective dates for many provisions of the 
        proposed legislation do not take into account existing 
        financial arrangements. For example, under Section 501, the 
        treatment of certain notional principal contract payments made 
        to foreign persons as U.S. source dividends for U.S. tax 
        purposes applies to payments made on or after a date that is 90 
        days after the date of enactment. Even if the scope of the rule 
        were specifically defined, which it is not, as the Secretary 
        would have broad authority to prescribe its scope, the 
        effective date is unrealistically short to permit the orderly 
        unwinding of existing contracts.
    OFII Recommendation: The effective date rules should be revisited 
with a view to a more equitable transition to the new rules. As in the 
case of the above recommendation with regard to the effective date of 
Chapter 4, the Secretary should be given the discretion to delay the 
prescribed effective dates.

        3.  Individual Reporting Requirements for Interests in Foreign 
        Financial Assets Should Not Be Duplicated--New Section 6038D 
        would add new information reporting by individuals that hold 
        any interest in a ``specified foreign financial asset.'' The 
        new reporting would overlap with the reporting of foreign 
        financial accounts under the TD F 90-22.1 (FBAR) reporting 
        regime.
    OFII Recommendation: One or the other regime, but not both, would 
allow filers to conform to a rational set of rules. If Section 6038D 
reporting is selected, care should be taken to ensure that individuals 
with only signature authority and no financial interest in the account 
are not considered to ``hold an interest in a foreign financial 
asset.'' As noted in the comments made by OFII in relation to FBAR 
reporting in the 2009 letter concerning Notice 2009-62, the 
administrative burden and complexity must be reduced as a matter of 
encouraging compliance.

        4.  Making Compliance by Foreign Financial Institutions 
        Workable--Chapter 4 impacts every foreign financial institution 
        that exists outside the United States, including a great many 
        entities that do not traditionally fall into the category of a 
        financial institution. Below we include two specific recommen-
        dations to make the rules more workable for these institutions 
        and entities, brought to our attention by OFII members. We 
        expect that many impacted entities and trade associations will 
        provide Congress with more extensive input on the practical 
        implications of Chapter 4 for foreign financial institutions. 
        The two recommendations below are not intended to be a 
        comprehensive identification of all the practical hurdles these 
        institutions may face.
          Workable due diligence and verification procedures 
        need to be established.--Section 1471(b)(1)(B) provides for 
        verification and due diligence procedures as the Secretary may 
        require with respect to the identification of United States 
        accounts. If such procedures include an external audit, it 
        would add a significant cost for foreign financial 
        institutions, especially if it required a regular audit process 
        rather than the existing QI agreed-upon procedures.
    OFII Recommendation: We suggest that the financial institutions 
should have the option to be able to make representations to the IRS 
concerning their verification and due diligence procedures and that 
there have been no breaches of such procedures under an internal 
rolling risk evaluation program that the institution has agreed with 
the IRS.

          Application of Chapter 4 rules to trusts needs to be 
        practical--There is a practical issue caused by the interaction 
        between Bill sections 101 and sec. 402, which introduces a new 
        presumption rule for foreign trusts under new sec. 679(d). The 
        new presumption rule states that if a U.S. person directly or 
        indirectly transfers property to a foreign trust (other than a 
        trust established for deferred compensation or a charitable 
        trust), the trust shall be presumed to have a U.S. beneficiary, 
        unless such person can demonstrate to the satisfaction of the 
        Secretary that pursuant to the trust deed: (1) no income or 
        corpus of the trust may be paid or accumulated during the tax 
        year to or for the benefit of a U.S. person; and (2) if the 
        trust were terminated during the taxable year, no part of the 
        income or corpus could be paid to or for the benefit of a U.S. 
        person. In addition, the U.S. transferor must submit all 
        information required by the Secretary to avoid the U.S. 
        beneficiary presumption.

    As a result of the U.S. beneficiary presumption, existing section 
679(a) would treat the U.S. transferor as an owner with respect to the 
portion of the trust attributable to such property and thus treat the 
trust as a grantor trust. Under new section 1473(2), a ``substantial 
United Sates owner'' is defined to include any specified United States 
person treated as an owner of any portion of a grantor trust. Hence, it 
will be necessary for a foreign entity to monitor all transfers to all 
trusts to determine if they were made by a U.S. person and examine the 
trust documentation to determine if no income could be paid to or for 
the benefit of a U.S. person, in order to see whether it must apply the 
presumption and be required to treat the trust as a grantor trust with 
a U.S. owner and thus a substantial United States owner. Accordingly, a 
foreign financial institution would be required to withhold or report, 
obtain the necessary certification, etc. and a non-financial foreign 
entity would be required to treat all trusts as a ``substantial U.S. 
owner.'' Such monitoring and review of trust documentation will be 
nearly impossible. Foreign financial institutions may have thousands of 
trust accounts, which would place the foreign financial institution at 
risk.
    OFII Recommendation: Either the presumption rule should be 
eliminated or section 1473(2)(iii) should be modified to exclude the 
applicability of the new presumption rule in determining whether a 
trust is a grantor trust (e.g., add to the end of clause (iii) the 
words ``without regard to section 679(d)'' or similar verbiage).
    We also note that the definition of substantial United States owner 
does not address other types of trusts such as complex and simple 
trusts, which perhaps implies that there is no requirement to look 
through such trusts.

                                 

Clearing House Association L.L.C., letter

Dear Chairman Neal and Ranking Member Tiberi:

    The Clearing House Association L.L.C. (``The Clearing House''), an 
association of major commercial banks,\1\ welcomes the opportunity to 
present comments on the Foreign Account Tax Compliance Act of 2009 
introduced by the Chairmen of the House Ways and Means and Senate 
Finance Committees on October 27, 2009 (the ``Bill''). We believe a 
detailed and thoughtful comment letter that represents the views of our 
members will be the most helpful to you. Therefore, we intend to submit 
a more detailed comment letter that will express our members' views and 
concerns once we have had the opportunity to fully review and discuss 
these matters. In recognition of the November 19th deadline for 
submitting written comments to be included in the record of the 
November 5th hearing on the Bill we wanted to inform you of the 
provisions of the Bill upon which we expect to comment, including: (i) 
the provisions in Section 101 of the Bill that impose a 30% withholding 
tax on all US-source payments received by a foreign financial 
institution unless that institution (and each of its foreign 
affiliates) enters into an agreement with the Treasury Department to 
report certain customer information; (ii) the provisions in Section 101 
of the Bill that require withholding on payments to foreign entities 
that have not identified their substantial U.S. owners; (iii) the 
provisions of Section 102 of the Bill, which would repeal the exception 
to registration for foreign targeted issuances (i.e., the bearer debt 
provisions); (iv) the provisions of Section 301 that would require a 
``material advisor'' to notify the IRS if they assist a U.S. individual 
in the direct or indirect acquisition of a foreign entity; (v) the 
provisions in Sections 201, 202 and 203 of the Bill that relate to 
newly proposed FBAR-like reporting by holders of foreign assets; and 
(vi) the provisions in Section 501 of the Bill that would impose a 
withholding tax on dividend equivalent amounts. Perhaps most 
importantly we expect to comment on, and suggest several changes to, 
the effective dates in the Bill as the Bill would impose substantial 
new reporting requirements that would take substantially more time to 
implement than the current effective dates contemplate. We expect that 
our comments will include suggestions that further the policies 
espoused by the Bill's sponsors while minimizing the burdens that would 
be placed upon financial institutions and others by the Bill as 
currently drafted.
    We would also like to express our concurrence and support of the 
views set forth in the November 19, 2009 letter sent to you by 
Securities Industry and Financial Markets Association.
    We appreciate your consideration of these comments and those to be 
set forth in our upcoming letter. If you have any questions or if the 
members of The Clearing House can assist you in considering these 
important issues, please contact me at (212) 612-9234.

            Sincerely,

                                                             JRA:kp
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    \1\ The members of The Clearing House are: ABN AMRO Bank N.V.; Bank 
of America, National Association; The Bank of New York Mellon; 
Citibank, N. A.; Deutsche Bank Trust Company Americas; HSBC Bank USA, 
National Association; JPMorgan Chase Bank, National Association; UBS 
AG; U.S. Bank National Association; and Wells Fargo Bank, National 
Association.

                                 
                  European Banking Federation's Letter

Dear Chairman Neal and Ranking Member Tiberi:

    The European Banking Federation (``EBF'') and the Institute of 
International Bankers (``IIB'') appreciate the opportunity to comment 
on the Bill's proposed new reporting and withholding tax system 
(Section 101 of the Bill, which would add new Chapter 4, containing 
Sections 1471-1474, to the Internal Revenue Code).\1\
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    \1\ Our membership's concerns and comments on other sections of the 
Bill have been expressed by other commenters.
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    The EBF is the voice of the European banking sector (EU and EFTA 
countries). The EBF represents the interests of some 5,000 European 
banks, and encompasses large and small, wholesale and retail, local and 
cross-border financial institutions. The IIB represents internationally 
headquartered financial institutions from over 30 countries, including 
Europe, the Americas and Asia, with banking and securities operations 
in the United States. Together, the EBF and IIB represent most of the 
non-U.S. banks and securities firms around the world that are affected 
by the Bill.
OVERVIEW
    We understand and support the Bill's goal of tackling offshore tax 
evasion by U.S. persons. We offer the recommendations herein to further 
that goal in a manner that takes account of the structure and 
operations of financial intermediaries and the markets that they serve, 
as well as compliance costs and burdens.
    We have worked closely with the Treasury Department and the 
Internal Revenue Service (the ``IRS'') for over a decade in seeking to 
improve the U.S. reporting and withholding tax rules, including the 
development and implementation of the qualified intermediary (``QI'') 
system. Our member banks have expended enormous amounts of money to 
implement the QI system and other reporting rules, and believe that 
overall the system works well and achieves its objectives.
    Nonetheless, it is evident that there are gaps in the existing 
rules that need to be addressed. The Bill builds on the Treasury's May 
2009 Green Book proposal for closing the perceived gaps, and we are 
grateful that the Bill takes into account a number of practical 
administrability and market impact concerns that we expressed regarding 
the Green Book proposal.
    In our discussions with the Congressional tax-writing staffs and 
the Treasury Department and IRS this past summer regarding the Green 
Book proposal, we focused on two very difficult issues--(i) how, as a 
practical matter, can a financial institution identify its U.S. 
accountholders within its vast number of worldwide accounts and 
business lines if the scope of U.S. tax reporting is expanded beyond 
the discrete custodial business involving investments in U.S. 
securities that is the realm of the existing QI and other U.S. tax 
reporting rules and (ii) how to address the problem of getting 
information regarding U.S. persons that hold accounts or other 
investments through a foreign entity or through multiple tiers of 
foreign entities, including investment vehicles and non-QIs (``NQIs'').
    The Bill's approaches to resolving these issues raise serious 
concerns regarding the practicality, feasibility, costs and burdens of 
implementation as well as their potential impact on capital flows into 
the United States. We accordingly provide below eight key 
recommendations of changes in the statutory language and legislative 
history of the Bill that are intended to improve the likelihood that it 
will succeed in achieving its objectives. Recommendation 1 deals with 
the effective date; recommendations 2 and 3 deal with the problem of 
identifying U.S. accountholders; recommendations 4 and 5 deal with the 
issue of indirect U.S. ownership through foreign entities; and 
recommendations 6, 7 and 8 deal with certain administrability and 
refund concerns.
    The Bill appropriately provides substantial flexibility to Treasury 
and the IRS to issue regulations to fill in the numerous details on how 
the new reporting and withholding tax rules will work. We stand ready 
to work closely with them to try to strike the delicate balance between 
the compliance goal of the Bill to combat U.S. tax evasion and the 
inevitable costs and burdens associated with that goal that could cause 
many non-U.S. institutions to opt out of the new system.
    The challenges in achieving that balance should not be 
underestimated. Indeed, one might reasonably conclude that the goals of 
the Bill are unattainable absent a multilateral agreement regarding 
uniform, universal identification and reporting standards that reflect 
an appropriate balance between implementation costs, the associated 
risks of such a system, and the compliance goal of providing taxpayer 
specific information to a variety of countries.
    In any event, the development and implementation of this new regime 
will require a substantial commitment of human resources and funding by 
both the financial and investment industries and the Government. We 
respectfully urge Congress to provide the IRS with sufficient funding 
to enable it to fulfill this challenging mandate in a timely and 
efficient manner.
RECOMMENDATIONS
1.  Effective Date
Recommendation:
    We recommend that new Chapter 4 (Sections 1471--1474) should be 
effective only when and to the extent provided in Treasury regulations. 
We understand that Congress may wish to express in legislative history 
an appropriate timetable for the Treasury Department to issue any such 
implementing regulations. In addition, it would be helpful if the 
legislative history encourages the Treasury Department to adopt 
regulatory effective dates that will allow for an orderly transition by 
the financial industry and the IRS to the new withholding tax regime 
envisioned by Chapter 4 after final regulations are issued.
    In particular, the legislative history should clarify that Congress 
anticipates that Treasury will adopt effective dates that enable 
financial institutions to put in place, or adapt, automated systems to 
effectuate the new rules, and to train personnel in applying the new 
rules. Likewise, the legislative history should encourage the Treasury 
Department to consider the time necessary for the IRS to publish a form 
of agreement with foreign financial institutions (``FFIs'') under 
Section 1471(b) (an ``FFI agreement'') and to finalize such agreement; 
to sign up those FFIs deciding to enter into such agreements and to 
publish a list of such qualifying FFIs; to revise Forms W-8 to better 
collect data related to the new rules; and to put in place streamlined 
refund and credit processes for any over-withholding that results from 
the new rules. (Based upon the financial industry's experience with the 
implementation of the QI regime, we believe it likely that three years 
from the time the implementing regulations are finalized will be 
required to accomplish the above tasks.)
Rationale:
    Proposed section 1474(d)(1) provides that new Chapter 4 will 
generally apply to payments made after December 31, 2010. Chapter 4, 
however, simply sets forth a framework that requires extensive guidance 
by the Treasury Department before it can be implemented, and grants to 
Treasury substantial flexibility in issuing regulations detailing how 
those rules will work in practice.
    We support the approach of providing Treasury with the flexibility 
to work with the financial industry and the IRS to find an appropriate 
balance between the compliance goal of the Bill to combat U.S. tax 
evasion and the inevitable costs and burdens associated with that goal. 
Such a balancing effort is crucial in order to try to minimize the 
disruptions to the U.S. capital markets if a critical number of FFIs 
were not to ``buy in'' to the new regime because the costs and risks 
associated with FFI status were disproportionate to the compliance 
goal.
    We believe that the sort of flexible approach envisioned by the 
Bill necessarily calls for an effective date that is tied to the 
issuance of regulations and a sufficient time period to permit their 
orderly implementation by the financial industry. No FFI will be in the 
position to determine if it should sign an FFI agreement without 
understanding what costs and risks are associated with that agreement 
as detailed in the implementing regulations. Furthermore, a failure to 
provide sufficient time for the financial industry to build the systems 
and processes to comply with any final regulations could lead to 
massive amounts of over-withholding, contrary to the intent of the 
Bill. Accordingly we strongly urge Congress to provide the Treasury 
Department with the authority to design an appropriate timetable for 
implementation and not tie its hands with a statutory effective date as 
of a date-certain.
2.  Identifying U.S. Accounts Through Available Databases
Recommendation:
    The legislative history should clarify that in issuing guidance as 
to how an FFI or other withholding agent may determine whether an 
account is a ``United States account,'' the Treasury Department should 
take into consideration the practical, political and commercial 
difficulties of obtaining certifications or other representations of 
non-U.S. tax status from a vast number of non-U.S. accountholders 
serviced by an FFI (and its affiliates) in order to identify a 
relatively small number of potential U.S. persons. Most of an FFI's 
non-U.S. customers will have no reason to provide such a certification 
or representation since they are not expecting to earn any material 
amounts of U.S. source FDAP income or gross proceeds from investments 
that give rise to U.S. source dividends or interest. Accordingly, an 
FFI or other withholding agent generally should be allowed to rely on 
its existing procedures, systems and electronic database entries to 
reasonably identify potential U.S. persons (for example, by conducting 
automated searches of residence or address fields or any applicable 
residency or citizenship codes that might indicate U.S. status), 
without a requirement that it solicit additional information, such as a 
Form W-9 or W-8 or an explicit statement of non-U.S. status, from the 
accountholder in the absence of indicia of a U.S connection. To reflect 
this intention, proposed Section 1471(b)(1)(A) should be revised to 
say, ``to obtain such information regarding each holder etc.'' instead 
of ``to obtain such information from each holder etc.'' (emphasis 
added).
Rationale:
    Proposed Sections 1471 and 1472 will apply to virtually every 
customer relationship of an FFI, including a bank's entire depositor 
base, as well as to many transactional or investment relationships that 
give rise to non-public debt or equity interests in the financial 
institution. In the case of many non-U.S. financial institutions, this 
may cover tens of millions of non-U.S. owned accounts per institution. 
It is untenable for an FFI to request confirmation of non-U.S. status 
from such a huge number of existing non-U.S. accounts in order to prove 
the negative presumption of U.S. status contained in the Bill.
    Moreover, even as to new accounts, it is commercially and 
politically impractical for a financial institution to request U.S. 
tax-specific information from an overwhelmingly non-U.S. client base 
that is not investing in U.S. securities. For example, a European bank 
wanting to comply with the FFI regime would likely find many of its 
accountholders refusing to provide a certification that they (and in 
the case of an entity, its owners) are not U.S. persons as a condition 
to opening a bank account at a local branch that has no connection with 
any U.S. investment or account.
    Under existing regulations, a certification (e.g., on IRS Form W-
8BEN) provides, in effect, a safe harbor for establishing that a person 
is not a U.S. person; in lieu of obtaining a certification, a 
withholding agent may rely on certain documentary evidence (see 
Treasury regulation Section 1.6049-5(c)). However, the Bill would 
require an FFI to obtain information that typically is not available 
under applicable KYC and AML rules or account opening procedures, 
including as to any substantial U.S. ownership of each accountholder 
that is a foreign entity (applying a 0 percent threshold for U.S. 
owners of foreign investment entities described in Section 
1471(d)(5)(C) and a 10 percent threshold for other entities).
    While it is generally feasible to obtain a certification or other 
documentation as to U.S. tax status from accountholders and investors 
that expect to invest, directly or indirectly, in U.S. securities, as 
noted above it is not practicable to do so from an overwhelmingly non-
U.S. client base that is not investing in U.S. securities. This problem 
will be greatly exacerbated under the new rules' requirement that the 
FFI identify substantial U.S. owners of foreign entities that are 
accountholders.
    Accordingly, many FFIs will not be able to comply with the new 
requirements unless the Treasury Department issues guidance--targeted 
especially to accounts that are not expected to invest, directly or 
indirectly, in material amounts of U.S. securities--that allows an FFI 
to rely on its existing procedures to capture relevant accountholder 
information (for example, address information or applicable residency 
or citizenship information) in the absence of indicia of a U.S 
connection. For those accountholders that do have such indicia of a 
U.S. connection, the FFI would solicit Forms W-9 or W-8 from them to 
establish either their U.S. or non-U.S. status and provide the 
information on any U.S. persons so identified in their annual report to 
the IRS.
3.  Due Diligence for Determining U.S. Accounts
Recommendation:
    In light of Comment 2 and the impracticality of collecting 
certifications from largely non-U.S. customer bases, we recommend that 
proposed Section 1471(c)(3) be removed from the Bill, and instead that 
Treasury issue appropriate identification rules under section 
1471(b)(1)(A) as revised per our recommendation. However, if proposed 
Section 1471(c)(3) remains, the clause ``if neither the financial 
institution nor any entity which is a member of the same expanded 
affiliated group as such financial institution knows, or has reason to 
know, that any information provided in such certification is 
incorrect'' should be replaced with ``if the financial institution does 
not know, or have reason to know, that any information provided in such 
certification is incorrect, applying the due diligence procedures 
required by the Secretary pursuant to paragraph (b)(1)B).'' The 
legislative history should clarify that in the absence of reckless 
disregard of information or a pattern of recording (or omitting to 
record) information in a manner designed to make it difficult to 
identify United States accounts, a financial institution generally will 
not be deemed to know or have reason to know that information provided 
in a certification is incorrect where any information to the contrary 
is contained on a database that is not readily accessible to the 
business unit in which the account is held or is contained in paper 
files.
Rationale:
    We discuss in Comment 2 above our view that a certification 
requirement that applies to an FFI's entire non-U.S. customer base will 
be so commercially, and even politically, impractical that few if any 
FFIs could ever make use of it. However, Section 1471(c)(3) 
additionally envisions that a financial institution collecting such a 
certification from an account holder to satisfy Section 1471(b)(1)(A) 
could only rely on that certification by determining that none of its 
worldwide affiliates or branches has information contradicting the 
certification. We believe that Section 1471(c)(3) likewise implies 
strongly that it would be appropriate for Treasury to issue due 
diligence and verification procedures under Section 1471(b)(1)(B) to 
provide for such ``worldwide due diligence'' even if a financial 
institution did not collect a certification but used other means to 
reasonably identify its U.S. customers.
    We do not believe that a ``worldwide due diligence'' standard is 
feasible. Few, if any, multinational financial institutions have 
integrated databases and automated systems that would allow a business 
unit servicing an account to determine if one of its related affiliates 
or branches--or even separate business units in the same location--had 
information contradicting its assessment that an account were non-U.S. 
Such a worldwide due diligence standard becomes even more impracticable 
if the business unit would also be charged with ``knowing'' the 
contents of paper files, especially (but not only) if they are held 
outside the business unit itself. Finally, in many jurisdictions, 
information on account holders simply may not be shared between 
entities or business lines due to relevant privacy, securities and 
other regulatory rules.
    Accordingly, a worldwide due diligence standard would present FFIs 
with potentially unacceptable systems integration costs, unmanageable 
risks for a business unit failing to know what information held by a 
related entity or business line might contradict its assessment of the 
U.S. status of an account, and legal impediments preventing it from 
being able to comply. Given these substantial problems, we believe that 
a worldwide due diligence approach would cause most FFIs, including 
even some large QIs, to opt out of the system envisioned by Chapter 4. 
Such FFIs would have little option, not because they would not want to 
comply, but because they could not comply.
4.  FFI Agreements with the IRS
Recommendation:
    The legislative history should clarify that Congress expects that 
the Treasury Department will issue guidance exempting categories or 
classes of FFIs from the requirement that they enter into FFI 
agreements with the IRS provided that such FFIs either comply with the 
requirements of proposed Section 1472 or present a sufficiently low 
risk of tax evasion that they should be totally exempted from the new 
Chapter 4 rules.
Rationale:
    Proposed Section 1471(b) would require the approximately 5,500 
financial institutions that currently are QIs, as well as the several 
tens of thousands of financial institutions that are eligible to become 
QIs but have not done so (i.e., NQIs), to enter into agreements with 
the IRS. In addition, hundreds of thousands of foreign investment 
entities--including hedge funds, private equity funds, mutual funds, 
securitization vehicles and other investment funds (whether publicly 
held or privately owned, and even if they have only a handful or fewer 
investors)--would be required to enter into agreements with the IRS.
    While the precise responsibilities of an FFI under an FFI agreement 
are unclear at this time, at a minimum an FFI would need to set up 
identification, reporting and withholding systems and procedures 
covering virtually every business line around the world, and may be 
subject to outside verification obligations. Even existing QIs (few of 
whom have today assumed primary withholding responsibility) would need 
to revise their systems to address potential withholding tax on gross 
sales proceeds from U.S. securities, which requires a transaction-based 
architecture that is completely different from the systems that have 
been developed to capture information regarding U.S. source interest, 
dividends and other FDAP income. The enormity of this task--both for 
individual FFIs and across the financial and investment industries--
cannot be overstated, nor can the risk of a broad application of the 
new 30% withholding tax on withholdable amounts, with potentially 
disruptive effects on the U.S. capital market.
    We would expect that most large international banks that are QIs 
and that have substantial U.S. operations, as well as large investment 
fund groups with significant U.S. investments, will enter into FFI 
agreements and make every effort to comply with these new requirements, 
despite the significant costs. We are very concerned, however, that 
many other QIs, NQIs and foreign investment entities will not be able 
and/or willing to enter into such agreements, either because of the 
costs and burdens of compliance, as well as the exposures from an 
inability to comply, or--especially in the case of smaller FFIs--
because of a concern about entering into an agreement with a distant 
tax authority.
    If, as we fear, more than an insubstantial number of FFIs do not 
enter into FFI agreements with the IRS, there is a risk of considerable 
shifts in capital flows, as many FFIs (including possibly some large 
institutions) move investments from the United States in order to avoid 
the withholding tax while investors that wish to continue to invest in 
the United States move their investments to qualifying FFIs.\2\ We are 
not in a position to quantify the potential extent of any disinvestment 
from the United States or other market disruptions, but we urge 
Congress and the Treasury Department to carefully evaluate these risks. 
In this regard, we note that these adverse results, were they to occur, 
would be very detrimental to the business of international financial 
institutions, and thus our memberships share a strong common interest 
with the U.S. Government in ensuring that the new rules do not produce 
material adverse consequences to financial markets and capital flows 
(in addition to our common commitment to combat tax evasion).
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    \2\ In practice, many investors may not take the affirmative steps 
to maintain their U.S. investments due to deference to the 
recommendations of their investment advisers, inertia or other reasons.
    One of the unfortunate consequences of this new regime, which may 
contribute to such capital flow shifts, is that it will result in 
withholding tax on payments to a beneficial owner who fully complies 
with the U.S. tax rules (e.g., by providing a W-8BEN to a QI in which 
he/she holds an account) if any entity in the chain of FFIs through 
which it invests in U.S. securities fails to enter into an FFI 
agreement. Many investors may regard the prospect of eventually 
receiving a refund if the investor files, and is able to substantiate, 
a claim as more theoretical than real.
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    Moreover, we are concerned that if more than an insubstantial 
number of FFIs do not ``buy into'' the new regime, a two-tier financial 
system will emerge, in which some financial institutions that are non-
qualifying FFIs may become a haven for U.S. tax evaders.
    In our experience, a very high percentage of NQIs are fully 
compliant with the existing reporting rules. These institutions have 
not become QIs not because they wish to facilitate U.S. tax evasion 
but, rather, because their U.S. investment base is too small to justify 
the costs and burdens of being QIs. We would expect that these NQIs 
would be prepared to comply with expanded requirements that they 
identify their direct U.S. accountholders as well as the substantial 
U.S. owners of their accountholder entities, if these requirements are 
properly and reasonably designed.
    As noted elsewhere in this letter, developing a workable system for 
identifying substantial U.S. owners is itself a very challenging task, 
particularly given that there are often multiple tiers of FFIs. 
However, we would expect that FFIs will more readily be able to obtain 
the necessary U.S. tax-specific information regarding substantial U.S. 
owners from accountholder entities that are investing in material 
amounts of U.S. securities, whereas in the case of accountholder 
entities that are invested in non-U.S. accounts and securities, the 
FFIs will necessarily need to rely on information that is already in 
their databases.\3\
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    \3\ Depending on the country, the applicable KYC and AML rules and 
account opening procedures do require that an FFI obtain information 
concerning an entity accountholder's substantial owners that would be 
useful for U.S. tax compliance, although typically the thresholds are 
above the 0 percent threshold for U.S. owners of foreign investment 
entities and a 10 percent threshold for other entities, and these rules 
and procedures generally are focused on the identity of the owner 
rather than the person's tax status.
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    We have no experiential basis to be able to determine whether 
foreign investment entities that are unable or unwilling to enter into 
FFI agreements would nonetheless be able and willing to comply with a 
Section 1472-type reporting regime. However, based on the fact that 
many NQIs and partnerships do comply with the requirements under 
existing law that they obtain and pass on certifications from their 
accountholders and beneficial owners, there is reason to believe that 
many such foreign investment entities would be prepared to comply with 
expanded requirements that they determine substantial U.S. owners of 
their accountholder entities, if these requirements are properly and 
reasonably designed (as discussed above). In any event, we believe that 
a significantly higher percentage of such foreign investment entities 
will be able to comply with the rules (and will therefore remain 
invested in U.S. securities) if they are given the choice of a Section 
1471 or 1472 regime (which is similar to the choice that financial 
institutions have today to either become a QI or to report under the 
NQI rules) than if they are forced to enter into FFI agreements in 
order to avoid withholding tax.\4\
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    \4\ We acknowledge that one potential challenge in successfully 
applying a Section 1472 regime to tiers of FFIs may be a reluctance of 
one FFI to disclose its customer (or investor) base to another; similar 
concerns contributed to the development of the QI system. Giving FFIs a 
choice between a Section 1471 or 1472 regime may mitigate this 
challenge.
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    We also stand ready to work with Treasury and the IRS to identify 
those foreign entities that should be exempted from both the Section 
1471 and 1472 requirements on the basis that they do not present the 
United States with a substantial risk of tax evasion activity.
5.  Adjusting the Threshold for Determining Substantial United States 
        Owners
Recommendation:
    The statute should give the Treasury Department the flexibility to 
set the appropriate threshold (or thresholds) for determining whether a 
foreign entity has a ``substantial United States owner,'' which is now 
set at ``more than 0%'' in the case of foreign investment entities and 
``more than 10%'' in the case of most other foreign entities.
Rationale:
    We understand the rationale behind the Bill's requirement that FFIs 
and other withholding agents obtain information regarding substantial 
U.S. owners of foreign entities, and we agree that the failure of the 
existing rules to look behind corporate entities and certain trusts 
present unacceptable opportunities for tax evasion by U.S. persons.
    However, as indicated above, the requirements of the Bill relating 
to the identification of U.S. accounts and FFI agreements raise 
extraordinarily complicated implementation issues, which may dissuade 
FFIs from entering into FFI agreements. To a great extent, these issues 
are magnified by the requirement that FFIs and other withholding agents 
obtain information regarding substantial U.S. owners of foreign 
entities. We are very concerned that, in many cases, FFIs simply will 
not be able to apply the 0%/10% thresholds, because such information is 
not required to be gathered for AML/KYC purposes and is impractical to 
secure otherwise. Also, having separate thresholds for foreign 
investment entities and other foreign entities introduces an additional 
complication of having to distinguish between those two categories of 
entities.
    Striking a balance between the important objective of combating tax 
avoidance and practical administrability considerations in this context 
is best done by Treasury after due evaluation of the relevant factors. 
In view of the reported cases of U.S. individuals setting up foreign 
shell companies to hold offshore accounts, we respectfully submit that 
perhaps a threshold that requires, say, at least 50% ownership would 
better target the tax compliance objective of the United States to 
identify U.S. persons controlling offshore entities for tax evasion 
purposes.
6.  Add an Exclusion for U.S. Branches of Foreign Banks and Clarify 
        Treasury Authority to Provide Other Exclusions
Recommendation:
    The definition of ``withholdable payment'' for purposes of Section 
1471 should be amended to exclude payments to a U.S. branch (or agency) 
of a foreign bank. In addition, the statute and/or legislative history 
should clarify that the Treasury Department has the authority to 
exclude other payments.\5\
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    \5\ More generally, in order to allay any concerns regarding the 
scope of Treasury's authority to provide guidance regarding Chapter 4, 
it may be advisable for Section 1474(d) (granting authority to Treasury 
to ``prescribe such regulations or other guidance as may be necessary 
or appropriate to carry out the purposes of this chapter'') or its 
legislative history to explicitly state that the grant of authority 
includes the authority to provide such exclusions from the terms of 
Chapter 4 as Treasury deems appropriate.
---------------------------------------------------------------------------
Rationale:
    U.S. branches (and agencies) of foreign banks conduct extensive 
operations in the United States and engage in hundreds of millions of 
financial services and other transactions each year. Unless payments to 
such branches are excluded from the definition of ``withholdable 
payments,'' each payor of a withholdable payment to such a branch would 
need to ensure that the bank has entered into an FFI agreement before 
making payments to the branch. Such a requirement would place U.S. 
branches of foreign banks at a competitive disadvantage compared to 
U.S. banks. Moreover, U.S. branches of foreign banks are treated as 
U.S. persons for most information reporting rules and thus, for 
example, file IRS Forms 1099 with respect to payments to non-exempt 
recipients. Consequently, they should be treated as U.S. withholding 
agents that are not FFIs for purposes of Sections 1471 and 1472.
7.  Contents of an FFI's Annual Report
Recommendation:
    Section 1471(c)(1) requires that an FFI that has entered into an 
FFI agreement must provide the IRS with an annual report providing 
details about accounts owned by its direct and indirect U.S. customers 
and lists the items that must be provided in the report with respect to 
such U.S. accounts. We recommend either that section 1471(c)(1)(D) be 
removed from the Bill (our preferred approach), or that the phrase ``To 
the extent required by the Secretary'' be added as a modifier at the 
beginning of section 1471(c)(1)(D), which requires the FFI to provide 
the ``gross receipts and gross withdrawals or payments from the account 
(determined for such period and in such manner as the Secretary may 
provide).''
Rationale:
    New chapter 4 presents many operational challenges and expenses for 
financial institutions. We believe that such expenses should be 
minimized in those instances where the compliance goal of the IRS would 
not be adversely affected and each data element that must be captured 
and reported necessarily increases the cost of compliance. With respect 
to the annual report, most of the account details required in the 
annual report are ``static'' in nature, such as name, address, TIN, 
account number and account balance at a specified time (presumably 
year-end). An FFI should be able to capture such data elements even if 
it must prepare an ``exceptions'' report to do so. However, tracking 
flows into and out of accounts is a much different matter and for some 
FFIs (or some business lines thereof) would require potentially far 
greater systems changes. We also question whether this information is 
necessary in all instances to provide the IRS with the necessary tools 
to identify potential U.S. tax evaders, given that the annual report 
will otherwise identify U.S. persons invested in non-U.S. accounts and 
securities and which of those U.S. persons have accounts large enough 
to merit closer IRS examination. Accordingly, we suggest either that 
section 1471(c)(1)(D) be removed from the Bill or, at a minimum, that 
the Treasury Department be granted flexibility to determine the 
circumstances in which this information must be provided.
8.  Expand Availability of Credits and Refunds to FFIs
Recommendation:
    Proposed Section 1474(b)(2) denies a credit or refund to an FFI 
that is the beneficial owner of a payment except if and to the extent 
that the FFI is eligible to a reduced treaty rate of withholding. We 
recommend that the statute be amended to permit the Treasury to provide 
for credits and refunds in appropriate circumstances. The legislative 
history should indicate Congress' intention that such credits and 
refunds be available where the withholding was done inadvertently or as 
a result of a technical ``footfault'' on the part of the FFI or the 
withholding agent, where the FFI has acted in good faith, or where the 
Treasury concludes that permitting such credit or refund is in the best 
interest of fostering compliance with Chapter 4. The legislative 
history should also indicate Congress' intention that Treasury set up 
procedures permitting FFIs and other withholding agents to obtain 
refunds on behalf of their direct or indirect account holders.
Rationale:
    We understand that the intention of the new rules under Chapter 4 
is to encourage FFIs to disclose their U.S. accounts, not to collect 
additional withholding tax. However, we are concerned that due to the 
complexity of the rules and the difficulty in achieving 100% compliance 
across the vast number of financial market participants, there 
inevitably will be a substantial amount of over-withholding. Moreover, 
by imposing withholding tax also on gross proceeds (which are exempt 
from substantive tax) and on payments to foreign financial institutions 
that have no material economic stake in those payments the withholding 
tax can be harsh and punitive in its impact, especially if the 
opportunity to obtain refunds or credits of such over-withheld amounts 
is restricted. Investors and FFIs will be evaluating their potential 
exposures under these rules in determining whether to invest in U.S. 
securities and to enter into FFI agreements. Accordingly, we recommend 
that every effort be made to have refund and credit procedures that 
maximize the ability to rectify over-withholding situations.
    We look forward to continuing to work with the Congressional tax-
writing committees, the Treasury Department and the IRS to achieve an 
effective, balanced and workable approach to addressing the gaps in the 
existing reporting and withholding tax rules.
  EUROPEAN BANKING FEDERATION          INSTITUTE OF INTERNATIONAL BANKERSGuido Ravoet                         Lawrence R. Uhlick
Secretary General                    Chief Executive Officer

                                 
          Statement of the U.S. Public Interest Research Group
    The following testimony represents the views of the U.S. Public 
Interest Research Group (PIRG), the federation of state Public Interest 
Research Groups, which is a non-profit, non-partisan public interest 
advocacy organization.
The Need for Real Reforms, and Why They Matter to Taxpayers
    Even as many American families are struggling to make ends meet and 
businesses are fighting to keep their doors open, Main Street still 
manages to pay their taxes.
    Taxpayers have also made an unprecedented investment in the 
banking, auto and insurance industries. These industries have made 
increasing use of complex schemes to avoid paying their own taxes. For 
instance, over 80% of the biggest U.S corporations maintain revenues in 
offshore tax haven countries.\1\ The names on the list are familiar: 
American Express, A.I.G, Boeing, Cisco, Dow, Hewlett-Packard, J.P. 
Morgan Chase and Pfizer--among others.
---------------------------------------------------------------------------
    \1\ Government Accountability Office, International Taxation: Large 
U.S. Corporations and Federal Contractors with Subsidiaries in 
Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions, 
Dec 2008.
---------------------------------------------------------------------------
    In U.S. PIRG's report, ``Who Slows the Pace of Tax Reforms,'' it's 
been found that even a modest number of corporations--just twelve--that 
oppose tax reforms of any kind, have over 440 subsidiaries in tax haven 
countries.\2\
---------------------------------------------------------------------------
    \2\ https://www.uspirg.org/home/reports/report-archives/campaign-
finance-reform/campaign-finance-reform/who-slows-the-pace-of-tax-
reforms
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    These corporations move their revenues, manipulate their costs and 
take generous deductions in order to pay minimal, if any, U.S. taxes. 
In fact, Goldman Sachs, which received $10 billion in federal bailout 
dollars, paid just a 1% tax rate in 2007.\3\
---------------------------------------------------------------------------
    \3\ http://www.bloomberg.com/apps/
news?pid=20601110&sid=a6bQVsZS2_18
---------------------------------------------------------------------------
    The Senate's Permanent Subcommittee on Investigations concluded 
that the U.S Treasury loses up to $100 billion per year because of tax 
haven abuse.\4\ U.S. PIRG has further analyzed that figure to establish 
the state shares of these revenue losses in its April 15, 2009 Report, 
``Tax Shell Game: The Cost of Offshore Tax Havens to Taxpayers.''
---------------------------------------------------------------------------
    \4\ Committee on Homeland Security and Governmental Affairs, 
Permanent Subcommittee on Investigations. TAX HAVEN BANKS AND U.S. TAX 
COMPLIANCE STAFF REPORT
---------------------------------------------------------------------------
    The massive losses in revenue must ultimately be made up by 
taxpayers. When companies ``change the geography'' of their earnings, 
their headquarters or their subsidiaries to tax haven countries--the 
taxpayers must pick up the tab by paying higher taxes themselves or 
suffering from reduced public services.
    When big businesses abuse tax havens, it puts ordinary businesses--
especially small businesses--without elaborate tax schemes and access 
to havens at a competitive disadvantage. Businesses should thrive based 
on their ability to be efficient and innovative, not their access to 
the best tax lawyers or their aggressiveness in hiding assets offshore. 
Companies that create jobs here in the United States should not be at a 
competitive disadvantage against other companies that are nominally 
registered in tax havens or that move their earnings to such places. 
Companies that share the same access to U.S. markets and U.S. consumers 
should compete on a level playing field.
    The negative impact of offshore tax havens extends beyond the 
burden it places on other taxpayers. According to the IRS, ``At least 
40 countries aggressively market themselves as tax havens. Some have 
gone so far as to offer asylum or immunity to criminals who invest 
sufficient funds. They permit the formation of companies without any 
proof of identity of the owners, perhaps even by remote computer 
connection.'' \5\ Corporate and bank secrecy set up breeding grounds 
for money laundering, drug trafficking and terrorism--both offshore and 
here in the United States.
---------------------------------------------------------------------------
    \5\ Internal Revenue Service website. Viewed 4 April 2009 http://
www.irs.gov/businesses/small/article/0,,id=106568,00.html
---------------------------------------------------------------------------
    Similar alarm has been sounded by Nobel-prize winning economist 
Joseph Stiglitz, who chairs the Commission of Experts of the U.N. 
General Assembly on reforms of the international monetary and financial 
system. He makes clear that tax havens are a losing proposition on all 
sides. ``Secret tax havens . . . are bad for developing countries, bad 
for money laundering, drugs corruption--bad in every dimension.'' \6\ 
Mr. Stiglitz indicates that the secrecy assists terrorists using these 
shadow markets to finance their agenda.\7\
---------------------------------------------------------------------------
    \6\ ``Economist calls for tax havens to be closed down.'' Cayman 
News Service. 26 Aug. 2008 http://www.caymannewsservice.com/business/
2008/08/26/economist-calls-tax-havens-be-closed-down
    \7\ ``Economist calls for tax havens to be closed down.'' Cayman 
News Service. 26 Aug. 2008 http://www.caymannewsservice.com/business/
2008/08/26/economist-calls-tax-havens-be-closed-down
---------------------------------------------------------------------------
    Finally, many bills making their way through Congress so far this 
year could use the additional revenue that would be retained in this 
country by restricting tax havens as a way to pay for other programs. 
U.S. PIRG does not advocate using revenues that would be recaptured 
from shedding light on tax haven abusers for any particular program. 
However, when Congress is struggling to find ways to find revenue 
sufficient for two wars, an economic recovery effort, and other major 
reforms, how can it look the other way when companies that benefit 
heavily from government contract work and government bailouts fail to 
pay their fair of taxes?
Corporate Tax Rates and Competition
    When lobbyists defend the existence of offshore tax havens, they 
typically argue that American corporations are already taxed enough. 
They refer to a claim that corporations pay a statutory tax rate of 
35%, which is simply based on the law or ``statute.'' However, the 
amount corporations actually pay is instead indicated by their 
effective tax rate, which is the percentage of their profit that they 
actually pay in taxes. And after corporations use myriad deductions, 
credits for business-related expenses and depreciation allowances, the 
amount of tax they actually pay on profit decreases dramatically--in 
some cases to nothing at all.\8\
---------------------------------------------------------------------------
    \8\ Huang, Chye-Ching. Putting U.S. Corporate Taxes in Perspective. 
Center on Budget and Policy Priorities. 27 Oct. 2008
---------------------------------------------------------------------------
    In 2008 the GAO reported that effective taxes rates end up varying 
greatly across corporations depending on their ability to use such tax-
reduction techniques.\9\ Another 2008 GAO study showed that 25% of U.S. 
corporations with more than $250 million in assets or $50 million in 
sales paid no federal income taxes at all in 2005, the most recent year 
for which such data is available.\10\ It has been widely reported that 
Goldman Sachs paid an effective tax rate of just 1% in 2008, citing 
they had made ``changes in geographic earnings mix.''
---------------------------------------------------------------------------
    \9\ Government Accountability Office, Effective Tax Rates Are 
Correlated with Where Income Is Reported. Aug. 2008
    \10\ Government Accountability Office, Comparison of the Reported 
Tax Liabilities of Foreign- and U.S.-Controlled Corporations, 1998-
2005. July 2008
---------------------------------------------------------------------------
    But this is really a separate issue. Whatever one thinks is the 
proper rate of corporate taxation, there should not be a parallel 
shadow system of tax avoidance that leaves other taxpayers shouldering 
the burden. When secrecy keeps individuals, governments and other banks 
from knowing exactly what is on the books and behind bank assets, it 
creates a false sense of security, making businesses more susceptible 
to the downward spiral we've seen over the last year.
    The mythical threat of ``double taxation'' is often re-circulated 
by businesses that oppose reform. This is a baseless threat, because 
the foreign tax credit already protects against double taxation--and no 
one is proposing repealing that. There's a proposal by the Obama 
Administration to make this tax credit reflective of the average of all 
the tax rates that apply to a business so businesses cannot effectively 
choose which rate they want to pay, regardless of where they do 
business.
Reforming the Broken System
    The Foreign Account Tax Compliance Act is a step in the right 
direction to reform a broken system where tax dodging individuals and 
corporations offload their burden on ordinary taxpayers. Holding 
foreign banks and corporations accountable for their clients can only 
help the process of ending bank secrecy.
    However, the bill can certainly be improved through even stronger 
enforcement mechanisms for the U.S. government, aggressive measures to 
tax shell companies and making sure that transactions have some 
economic purpose other than tax avoidance.
    When it is reported that Cayman Island financiers are breathing a 
giant sigh of relief and making official gestures of ``congratulations 
to Chairman Baucus and Chairman Rangel,'' then Congress should stop to 
see what's missing.\11\ The following are U.S. PIRG's recommendations 
for comprehensive reform.
---------------------------------------------------------------------------
    \11\ http://www.reuters.com/article/pressRelease/idUS210981+28-Oct-
2009+PRN20091028
---------------------------------------------------------------------------
Codify the Economic Substance Doctrine
    The bill should change the IRS code to ensure that a transaction 
has a purpose aside from reduction of tax liability in order to be 
considered valid. This covers any tax avoidance scheme into the 
future--which is a critical tool for law enforcement.
Address the Offshore Shell Companies and Collect Taxes
    Companies that exist only on paper or via a Post Office box in the 
Cayman Islands--but take advantage of American markets, have access to 
our consumer base, use our physical and financial infrastructure and 
are protected by the U.S. military--should pay U.S. taxes.
    Specific quantitative standards can be established to determine if 
a company is owned and controlled here in the United States in order to 
apply the correct level of taxation.
Repeal ``Check the Box''
    A provision should be added to keep companies from being able to 
simply check a box on a form to determine their business entity 
classification (to be most advantageous based on their location and tax 
treatment). This loophole has been abused in order to have the 
advantages and protections associated with incorporation, but not have 
to be taxed as such.
Ban ``Tax Strategy'' Patents
    As we said in a coalition letter to this Committee earlier this 
year, U.S. PIRG supports banning patents on complex tax transactions 
and strategies used to avoid, reduce or defer taxes.
    Our government should not be in the business of rewarding tax 
lawyers who help clients dodge their taxes. There is no patent 
protection for finding new ways to steal cars, and there shouldn't be 
protection for finding new ways to dodge taxes. These patents pose a 
significant threat to taxpayers and their advisors.
    Legislation to accomplish this was passed in the House last year by 
a vote of 220 to 175 as part of larger patent reforms. As of the 
writing of the letter, 82 tax strategy patents had been issued, with 
133 pending.
Conclusion
    By taking on this issue in a serious way Congress can demonstrate 
that it puts taxpayers first.
    Tax haven abuse is only legal because the law has not caught up to 
reality. It used to be legal to use other people's credit card numbers, 
dump raw sewage in rivers, and import radioactive materials--until we 
updated laws to stop it.

    Swiss Bankers Association, statement

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 
    
    State Street Bank and Trust, letter

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 

                         Statement of the EFAMA
Additional Comments on the Foreign Account Tax Compliance Legislation 
        introduced by Chairmen Rangel and Baucus
        1.  EFAMA \1\ recognizes and supports the intent of the Rangel-
        Baucus Bill of better detecting and discouraging offshore tax 
        evasion by U.S. persons. Our comments set forth below are 
        intended to contribute to solutions in this respect that are 
        workable in the context of prevailing intermediated investment 
        structures and that take into account the specific 
        characteristics of investment funds.
---------------------------------------------------------------------------
    \1\ EFAMA is the representative association for the European 
investment management industry. It represents through its 26 member 
associations and 44 corporate members approximately EUR 11 trillion in 
assets under management of which EUR 6.4 trillion was managed by 
approximately 53,000 funds at the end of June 2009. Just over 37,000 of 
these funds were UCITS (Undertakings for Collective Investments in 
Transferable Securities) funds. For more information about EFAMA, 
please visit www.efama.org.

Our concerns
        2.  The new regime brings into scope fund entities, and fund 
        managers, who were not within the scope of the USQI regime. The 
        Foreign Account Tax Compliance Act 2009 (``the Bill'') will go 
        beyond the QI regime in imposing a new withholding tax or a new 
        information reporting requirement that applies for the first 
        time directly to funds and fund managers, as opposed to their 
        custodian banks. The new, very broad, definition of a ``foreign 
        financial institution'' (``FII'') and the requirement that such 
        an FII enter into agreements with the IRS and provide annual 
        reporting in order to avoid new withholding tax rules on U.S. 
        source investment income and on U.S. related gross proceeds 
        will have profound implications.

            It has taken some time since the publication of the Bill on 
        27 Oct to assess all the implications and consequences it 
        potentially has for our industry, especially within 
        organizations which have no experience of the similar, albeit 
        narrower, QI rules, and the impact analysis is still ongoing. 
        Please note there are 53.000 funds represented by EFAMA's 
        member national bodies. The technical position under the new 
        rules will typically involve an interplay between the 
        custodian, broker, fund entity and fund manager.

        3.  The current effective date of the bill is December 31 2010. 
        The provisions laying down information reporting and 
        withholding requirements will apply for payments made after 
        that date. The scale of this task for FFIs that have no 
        existing U.S. tax information reporting systems is very 
        substantial, and we are concerned this timeline is not 
        achievable.
        4.  As pointed out in our previous letter of 20th November 
        2009, many investment funds will usually encounter real 
        difficulty entering into an agreement with the IRS that 
        requires the fund to report details on every U.S. account 
        holder. The reason for this difficulty arises from the little 
        that is usually known at fund level about the investors of the 
        fund.

                  In most of the European market, the process 
                of subscribing to investment funds is heavily 
                intermediated. In most European countries, the standard 
                distribution model for retail and other widely held 
                mutual funds is via local bank branch networks.
                  In other countries (such as the UK) 
                distribution is increasingly intermediated through 
                independent fund advisers who access funds through so-
                called ``platforms''. Platforms themselves can in some 
                circumstances be accessed directly by end investors 
                which enables the investors to purchase the funds 
                directly. Typically this will be via an automated sales 
                process, i.e. via the internet. This process of often 
                results in the creation of two layers of nominee, i.e. 
                the register of the fund will show the platform as 
                nominee, and platform's records will often just provide 
                the financial adviser's name. It will be the financial 
                adviser who will have a record of the beneficial owner.
                  Share or unit purchases are only rarely made 
                by retail investors directly with the Collective 
                Investment Vehicle (CIV) or its transfer agent (and in 
                some European markets, never). In the overwhelming 
                majority of cases CIVs will enter into distribution 
                arrangements with distributors who will themselves 
                enter into further arrangements with downstream 
                distributors or ``intermediaries'' in the distribution 
                chain (such as banks, insurance companies or 
                independent advisors).
                  Intermediated purchases of CIV shares or 
                units are typically held in an omnibus or nominee 
                account. The use of omnibus or nominee accounts has 
                developed for a variety of reasons. It can for example 
                assist intermediaries in terms of simplifying their 
                computerized administration and reporting systems and 
                thus gives rise to economies of scale.
                  In addition, as mentioned above individual 
                customer information is generally regarded as valuable 
                proprietary information. Therefore this information 
                will not be passed up the chain of intermediaries to 
                the CIV, a problem compounded by the additional costs 
                this would entail, which might well eliminate the 
                economies of scale arising from the use of omnibus/
                nominee accounts. In an omnibus account sales and 
                purchases are usually made on behalf of collections of 
                investors on a net purchase or net sales basis. Those 
                transactions can thus not be attributed to individual 
                investors behind the nominee.
                  An additional difficulty arises from the fact 
                that the investor base of a widely-held CIV changes on 
                a daily basis.

        5.  Significant practical difficulties will arise because of 
        local country data protection legislation in a number of 
        countries. Under these laws, no financial institution is 
        allowed to submit client details to another institution or 
        person without the formal approval of the relevant client. In 
        order to prove that the approval procedure has been correct, 
        usually the client approval is asked for in written form.
        6.  Against this background serious consideration should be 
        taken with regard to how to address the problem of identifying 
        U.S. persons that hold accounts or other investments through 
        multiple tiers of foreign entities such as investment vehicles. 
        For the reasons given above it will in many cases simply not be 
        possible for funds or their managers to identify such persons. 
        As you may be aware, this problem is one of the issues which is 
        being addressed as part of the OECD's project on the Taxation 
        of Collective Investment Vehicles and Procedures for Tax Relief 
        for Cross-Border Investors in the context of Double Taxation 
        Agreement benefits for CIVs. The U.S. government of course is 
        one of the participants in that project. This project has been 
        ongoing for many years not least because of the complexity of 
        the task of taking into account the intermediated investment 
        landscape and in particular the fund environment with its vast 
        distribution channels for purposes of enabling treaty relief 
        and reporting. We look forward to working constructively in the 
        course of 2010 with the IRS to address these issues.
        7.  We believe it will be a very challenging and onerous task 
        for the non-US funds industry to introduce a wholly new U.S. 
        tax reporting system that affects several times more financial 
        institutions than USQI. But an additional concern is the 
        aggregate practical burden for millions of investors and the 
        financial intermediaries who act for them. This seems out of 
        proportion to the small number of targeted U.S. account 
        holders. Non U.S. investors with no connection to the U.S. will 
        be reluctant to make declarations relevant only for U.S. 
        federal tax purposes, particularly in the case of funds which 
        have little or no direct U.S. investment. This will make it 
        difficult to achieve compliance even where there is no U.S. tax 
        evasion.
        8.  Even where adaptations to the current proposed mechanisms 
        are foreseen, it is likely that many widely-held investment 
        funds simply cannot comply with the remaining requirements. 
        Where disinvestment in the U.S. capital markets is not an 
        option, the punitive withholding, including the 30% withholding 
        on gross proceeds, will not be commercially viable for the 
        concerned investment funds. There is a reasonable prospect of 
        many of the concerned vehicles facing the alternative of having 
        to close down or eject a significant proportion of their 
        investor base (and thus shrink its investment volume). We 
        genuinely believe the medium term impact could be to cause a 
        measurable outflow from U.S. capital markets, especially if 
        insufficient transitional reliefs are made offered.

Our suggestions
        1.  Exemptions In part to avoid U.S.C reporting requirements, 
        many Collective Investment Vehicles (``CIVs'') established in 
        European countries go to some lengths to avoid U.S. persons 
        investing in such funds. In such cases the prospectus will 
        typically provide that the fund is not open to U.S. investors 
        and the application form will contain a representation to this 
        effect too. If a U.S. investor incorrectly states that he is 
        eligible to invest and the fund manager subsequently discovers 
        that the investor is a U.S. citizen then the investor will be 
        required to redeem his investment immediately, at net asset 
        value at that time. As such, we would urge that investment 
        funds that specifically prohibit investment by U.S. persons be 
        exempted from the new reporting regime. In the enclosed 
        appendix we include two typical examples of prospectus wording.

            We would also ask the IRS to consider a more general 
        exemption from the new regime for widely held and regulated 
        collective investment vehicles, especially in situations where 
        particular administrative difficulties apply. EU countries 
        typically have very wide-ranging regulatory rules which 
        determine the nature of investments, risk profile, 
        diversification strategies and levels of gearing which a fund 
        can have, and highly prescriptive rules as to the nature, 
        content and distribution of fund legal financial and marketing 
        documentation. In the case of UCITS, the pan European regulated 
        retail fund product, these rules are very onerous. With such 
        funds an individual investor can have no control over the 
        investment strategy or the continued existence of the fund, 
        which would make such a fund a less attractive vehicle for tax 
        evasion by larger investors.
        2.  In our view also the treatment of pension funds needs to be 
        clarified. EFAMA does not represent pension funds. However, it 
        would be an odd outcome of such funds, which could not be used 
        as investment vehicles for U.S. tax evaders, were to be 
        included; no doubt other bodies are making representations on 
        their behalf.
        3.  Tiering As pointed out in our letter, investors typically 
        invest through layers of intermediaries, with the legal 
        ownership held by nominees. The intended application of the new 
        regime to these multiple tiers is not sufficiently clear. 
        Guidance should be developed that a fund that needs to enter 
        into the reporting regime can accept any one of four formal 
        certifications from each registered unitholder:

                a.  That the unitholder is a registered reporting agent 
                under the new regime. This would typically apply to 
                fund of funds and distributors (such as branch banks 
                and fund platforms).
                b.  That the unitholder is an entity that does not have 
                substantial U.S. ownership. In the case of an `ordinary 
                corporate' that would mean <10% U.S. ownership (and at 
                7. below we request this 10% threshold be extended to 
                investment vehicles also). This would typically apply 
                to unlisted companies that are not themselves FFIs..
                c.  In the case of direct investments in the fund by 
                individuals: That the unit holder is a non-US person.
                d.  In the case of direct investments in the fund by 
                individuals or entities: That the unit holder's 
                interest is to be treated as a U.S. account
        4.  Direct reporting on request. Where a.) above applies, it 
        should be clarified in the final regulations and in the model 
        agreements issued by the IRS that the distributor with direct 
        client contact should report details of U.S. accounts directly 
        to the U.S. government and not to the fund. This distributor 
        will be closer to the investors in the fund and will thus be in 
        a better position to respond to the information requirements. 
        We further suggest that, to make the scheme more practical for 
        the IRS to administer, such data should be provided in response 
        to a request by the IRS (i.e. in areas of particular interest 
        to them) rather than automatically.

        5.  Withholding as a solution to the `cliff edge problem'. The 
        bill as currently drafted means that any FFI that needs to 
        become a reporting agent must provide information as to all 
        accounts. Failure to obtain information about just one out of 
        possibly thousands (or hundreds of thousands) of accounts means 
        the FFI has failed in its duties as reporting agent; the 
        penalty for this is not currently clear, but could presumably 
        extend to the re-imposition of the 30% withholding on all of 
        that FFI's U.S. source receipts. We believe it should be 
        sufficient remedy for the U.S. government's purpose that the 
        FFI withholds 30% from payments to just the small minority of 
        non-compliant accounts, and remits that amount to the US.
        6.  Documentation We would urge Treasury to introduce 
        commercially reasonable standards for identifying U.S. 
        accounts. A great difficulty would be connected with obtaining 
        certifications or other evidential material on the non-US tax 
        status from thousands of non-US account holders for the purpose 
        of identifying a small number of potential U.S. persons. The 
        vast majority of accountholders which are non-US persons not 
        seeking in particular U.S. investments or U.S. source 
        investment income would see no grounds for providing such 
        certification, in particular where such certification consisted 
        in U.S. tax forms. We note that under the USQI system it is 
        possible to obtain IRS rulings to allow reliance on KYC and AML 
        procedures. We suggest it should be possible for CIVs to obtain 
        similar rulings from the IRS that KYC-based procedures for 
        excluding U.S. persons are sufficiently robust that the CIV 
        need not enter into a full reporting agreement. We would 
        suggest that an FFI should have the possibility to fulfill 
        obligations under the new regime more generally by using 
        information in its possession or relying on existing 
        procedures.
        7.  Where such an IRS ruling were not be granted we believe 
        that neutral investor self declaration forms should be used. It 
        will be an extra deterrent that investors are asked to complete 
        a U.S. form, just as the average U.S. investor would be 
        reluctant to complete say a French or German government form. 
        We therefore believe that short of IRS ruling allowing the 
        reliance on KYC and AML procedures the form of Investor Self 
        Declaration envisaged in the OECD process would better achieve 
        the universal compliance the U.S. seeks than the use of U.S. 
        tax forms. This would have the additional advantage of allowing 
        authorised, industry standard, local language versions to be 
        produced.
        8.  De minimis threshold. The bill as drafted defines a 
        corporate to have `substantial U.S. ownership,' such that any 
        account belonging to that corporate is a `US account,' where 
        U.S. ownership exceeds 10%. In the case of an `investment 
        vehicle,' however, that limit is reduced to zero. We believe 
        that adds to the difficulty of the tiering problem, and will 
        result in entities that could otherwise have simply certified 
        as `non-US owned' instead entering into reporting agreements. 
        We suspect the number of such reporting agreements the IRS will 
        have to administer is very large, and any measure to reduce 
        their number will enhance the workability of the overall 
        system. We would therefore suggest that the differential limit 
        for `investment vehicles' is either abandoned altogether, or at 
        the very least set at a figure higher than 0%.

Transitional and administrative measures
        1.  Effective date. We would urge that this proposed effective 
        date be delayed in order to allow adequate time for the 
        substantial number of Foreign Financial Institutions (FFIs) 
        directly affected by the new regime to implement the required 
        complying mechanisms and associated systems changes. Further 
        impact analysis and industry consultation will be required to 
        define the date by which compliant systems could be built; but 
        the degree of delay needed will also be a function of the 
        willingness of the U.S. authorities to grant the transitional 
        reliefs requested below.
        2.  Transition We would urge that a transition relief and 
        implementation schedule be introduced in order to allow 
        sufficient time for introducing necessary industy practice and 
        systems changes. The bill would require foreign financial 
        institutions, among other things, to obtain such information 
        from its clients ``as is necessary'' to determine the accounts 
        of U.S. persons and to report items including the person's name 
        and taxpayer identification number. Because the local 
        jurisdictions in which many of these institutions operate have 
        client identification rules that may not comply in all respects 
        with what the U.S. may deem ``necessary,'' it is important that 
        these institutions be able to rely on their existing know your 
        customer and other client identification rules while they 
        gather the information necessary to comply with the new U.S. 
        rules.

            a)  Such transition relief could include reliance on 
        existing client identification information for all current 
        accounts with the new rules applying only to accounts opened 
        after an agreed future date.
            b)  Alternatively, if additional information must be 
        collected from existing clients to meet the new ``as is 
        necessary'' standard, institutions should be given a number of 
        years to collect this information, with a gradually increasing 
        percentage requirement for each year of the old accounts for 
        which the new ``as is necessary'' information test must be met.

                We would suggest that consideration be given at least 
        initially to applying the legislation on a duty of care/best 
        endeavours basis, whereby for example it is reasonable to 
        assume that if the investor does not have a U.S. address or a 
        U.S. bank account, then it is reasonable to conclude that the 
        relevant individual is not a U.S. person.

        3.  Group filing election We believe that in many cases it will 
        be necessary for the fund manager, and each fund in the fund 
        manager's range, to enter into reporting agreements if the 
        punitive withholding is to be avoided. Typically, a fund 
        manager will of course run tens or hundreds of funds. We 
        believe it would be to the benefit of both the fund management 
        industry and to the IRS to allow the fund manager to elect that 
        a single reporting agreement, and reports of U.S. Accounts 
        under it, should cover both the fund management company and all 
        funds managed by it on a consolidated basis.
        4.  Small accounts The bill as currently drafted allows a 
        reporting exemption for accounts of less than $10,000 (with a 
        grandfathering at $50,000 for preexisting accounts) where these 
        accounts are held by individuals. We believe this exemption 
        could be extended to accounts held other than by individuals, 
        without obviously exposing the U.S. to greater risk of tax 
        evasion. This would again reduce the volume of reporting the 
        IRS must deal with, and also make this exemption much easier 
        for FFIs to operate.

Appendix
    Examples of selling restrictions:

          The Company is a recognised scheme under Section 264 
        of the United Kingdom Financial Services and Markets Acts 2000.

``The shares have not been and will not be registered under 1933 Act or 
        the securities laws of any of the States of the United States. 
        The Shares are being offered and sold solely outside the United 
        States to non-US. persons in reliance on regulation 5S? of the 
        1933 Act. The company has not been and will not be registered 
        under the 1940 Act but will be exempt from such registration 
        pursuant to Section 3  (7) thereof. The outstanding securities 
        of issuers relying on Section 3 c 7, to the extent that they 
        are owned by U.S. persons (or transferees of U.S. persons), 
        must be owned exclusively by persons who, at the time of 
        acquisition of such securities, are ``qualified purchasers'' 
        within the meaning of Section 2 a 51 of the 1940 Act. Any U.S. 
        purchaser of the Company's shares must therefore be both a 
        ``qualified institutional buyer'' under Rule 144 A under the 
        1933 Act, the 1933Zct, the CEA, or U.S. income tax unless prior 
        consent is obtained from the manager. Please see Appendix IV 
        for the definition of U.S. persons and additional information 
        on the restrictions pertaining to U.S. persons.
Applicants for shares will be required to certify that they are not a 
        U.S. person.''
          Specimen declaration included in the application form 
        of an Irish investment fund which prohibits investment by U.S. 
        persons.

``The Applicant represents that the Applicant understands that (i) the 
        Fund will not be registered under the U.S. Investment Company 
        Act of 1940, as amended, (ii) the Shares have not been and will 
        not be registered under the U.S. Securities Act of 1933, as 
        amended (the ``1933 Act''), or under the securities laws of any 
        State or other jurisdiction within the United States, (iii) the 
        Shares may be resold only in transactions that are not subject 
        to or are exempt from the registration requirements of the 1933 
        Act, and (iv) the Shares may not be offered, sold or delivered, 
        directly or indirectly, in the United States, or to or for the 
        account or benefit of any ``U.S. Persons,'' as such term is 
        defined in the Prospectus.
The Applicant represents that (i) the Applicant is not, and the Shares 
        will not be purchased or held for the account or benefit of, or 
        purchased with funds obtained from, a U.S. Person, as defined 
        in the Prospectus, (ii) the Applicant has not used, to effect 
        the purchase of Shares, any funds obtained in gross income from 
        any U.S. Person, (iii) the Applicant will not transfer or 
        deliver, directly or indirectly, any of the Shares or any 
        interest therein to a U.S. Person, (iv) the Applicant was not 
        solicited to purchase and did not acquire any of the Shares 
        while present in the United States, (v) the Applicant is 
        acquiring the Shares for investment purposes only, (vi) the 
        Applicant will notify the Fund in the event the Applicant 
        becomes a U.S. Person at any time that the Applicant holds any 
        of the Shares, (vii) the Applicant will not transfer or redeem 
        any of the Shares while present in the United States, its 
        territories or possessions, or areas subject to its 
        jurisdiction, and (viii) if the Applicant is a bank, broker or 
        dealer, and the Applicant is acquiring Shares on behalf of 
        clients for investment purposes, that such clients are not U.S. 
        Persons, that the Applicant will notify the Fund if it shall 
        come to the Applicant's knowledge that any such client has 
        become a U.S. Person, that the Applicant will not at any time 
        knowingly transfer or deliver Shares or any part thereof or 
        interest therein to or for the account or benefit of a U.S. 
        Person
    and that the Applicant will not make any transfer of delivery 
        thereof directly orindirectly into the United States.
Definition of a U.S. Person per Prospectus
    ``U.S. Person'' means a ``U.S. Person,'' as defined by Rule 902 of 
Regulation S under the U.S. Securities Act of 1933, as amended (the 
``Securities Act''), including:
    (i)  any natural person resident in the United States;
    (ii)  any partnership organised or incorporated under the laws of 
the United States;
    (iii)  any estate of which any executor or administrator is a U.S. 
Person;
    (iv)  any trust of which any trustee is a U.S. Person;
    (v)  any agency or branch of a non-U.S. entity located in the 
United States;
    (vi)  any non-discretionary account or similar account (other than 
an estate or trust) held by a dealer or other fiduciary for the benefit 
or account of a U.S. Person;
    (vii)  any discretionary account or similar account (other than an 
estate or trust) held by a dealer or other fiduciary organised, 
incorporated, or (if an individual) resident in the United States; and
    (viii)  any partnership or corporation if:
    (a)  organised or incorporated under the laws of any non-U.S. 
jurisdiction; and (b) formed by a U.S. Person principally for the 
purposes of investing in securities not registered under the Securities 
Act, unless it is organised or incorporated, and owned, by accredited 
investors (as defined in Rule 501(a) of Regulation D under the 
Securities Act) who are not natural persons, estates or trusts.
Notwithstanding the preceding paragraph, ``U.S. Person'' shall not 
        include:
    (i)  any discretionary account or similar account (other than an 
estate or trust) held for the benefit or account of a non-U.S. Person 
by a dealer or other professional fiduciary organised, incorporated, or 
(if an individual) resident in the United States;
    (ii)  any estate of which any professional fiduciary acting as 
executor or administrator is a U.S. Person, if:
    (a)  an executor or administrator of the estate who is not a U.S. 
Person has sole or shared investment discretion with respect to the 
assets of the estate, and (b) the estate is governed by non-United 
States law;
    (iii)  any trust of which any professional fiduciary acting as 
trustee is a U.S. Person if a trustee who is not a U.S. Person has sole 
or shared investment discretion with respect to the trust assets and no 
beneficiary of the trust (and no settlor if the trust is revocable) is 
a U.S. Person;
    (iv)  an employee benefit plan established and administered in 
accordance with the law of a country other than the United States and 
customary practices and documentation of such country;
    (v)  any agency or branch of a U.S. Person located outside the 
United States if:
    (a)  the agency or branch operates for valid business reasons, and 
(b) the agency or branch is engaged in the business of insurance or 
banking and is subject to substantive insurance or banking regulation, 
respectively, in the jurisdiction where located;
    (vi)  certain international organisations (and their agencies, 
affiliates and pension plans) as specified in Rule 902(k)(2)(vi) of 
Regulation S under the Securities Act; or
    (vii)  an entity excluded or exempted from the definition of ``U.S. 
Person'' in reliance on or with reference to interpretations or 
positions of the U.S. Securities and Exchange Commission or its 
staff.''
[09-4107]

            Australian Bankers' Association, Inc., statement

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