Prepared Statement of American Bankers Association

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.