Jo Van de Velde,Euroclear SA/NV letter

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.

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 Ö8 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 foreigntargeted
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