Statement of The Financial Services Roundtable

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.