European Banking Federation’s Letter

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)

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 omit
ting 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).

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)

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)

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)

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 overwithheld
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 BANKERS
Guido Ravoet Lawrence R. Uhlick
Secretary General Chief Executive Officer

Footnotes
(1)Our membership’s concerns and comments on other sections of the Bill
have been expressed by other commenters.
(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.
(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.
(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.
(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.