[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
----------
U.S. GOVERNMENT PRINTING OFFICE
63-014 PDF WASHINGTON : 2011
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
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:]
****************************************************************
***************** deg. ************* IMPORTANT NOTE:
REMEMBER TO MANUALLY ADD AND ************* deg.
*********************** BODONI DASH AT END OF STATEMENT
*********************** deg.
****************************************************************
***************** deg.
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:]
****************************************************************
***************** deg. ************* IMPORTANT NOTE:
REMEMBER TO MANUALLY ADD AND ************* deg.
*********************** BODONI DASH AT END OF STATEMENT
*********************** deg.
****************************************************************
***************** 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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\12\ Proposed section 1471(d)(4).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\16\ Cf. Treasury regulations Section 1.1441-1(e)(4)(ix)(A).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\17\ Proposed section 1471(d)(1).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\20\ Proposed section 1473(2).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\21\ Proposed sections 1472(c)(1)(A) and 1473(3)(A) & (C).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\22\ Proposed section 1471(d)(1).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\23\ Proposed section 1471(c)(2).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\24\ Proposed section 1474(b).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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
---------------------------------------------------------------------------
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..
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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
---------------------------------------------------------------------------
\1\http://www.icmagroup.org/about1/isma1/
legal_and_documentation.aspx and http://www.icmagroup.org/about1/isma1/
primary_market_practices.aspx.
---------------------------------------------------------------------------
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
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\1\ Our membership's concerns and comments on other sections of the
Bill have been expressed by other commenters.
---------------------------------------------------------------------------
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).
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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
---------------------------------------------------------------------------
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
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]