Statement of the EFAMA

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.
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 socalled
‘‘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 nonUS
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 KYCbased
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
or indirectly 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]

(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.