Statement of The Investment Industry Association of Canada

Statement of The Investment Industry Association of Canada

The Investment Industry Association of Canada (IIAC) would like to take this opportunity
to submit comments to the House Ways and Means Select Revenue Measures
Subcommittee with regard to the draft legislation impacting foreign financial
institutions (FFIs) contained in HR 3933, the Foreign Account Tax Compliance Act
of 2009 (the Act) filed by Chairman Rangel on October 27, 2009. We would kindly
ask that you consider these comments, and include them in the record for the hearing
held on November 5, 2009.

BACKGROUND INFORMATION
The IIAC is Canada’s equivalent to the Securities Industry and Financial Markets
Association (SIFMA) in the United States, and represents over 200 investment dealers
across Canada.

In June 2000, the Department of Finance Canada reported that there were 188
securities firms in Canada at the end of 1999 and that the 7 largest firms accounted
for approximately 70% of the industry’s capital. At that time, all but one of Canada’s
large, full-service securities firms were bank owned. The landscape of the Canadian
securities industry has not changed significantly since that time.

In August 2001, the Department of Finance Canada estimated that banks accounted
for approximately 70% of the total domestic assets held by the financial
services sector, and that the six major domestic banks accounted for over 90% of
the assets held in the banking industry.

GENERAL CONCERNS REGARDING THE ACT

The IIAC understands the U.S. government’s concerns regarding the use of offshore
accounts and entities by certain persons to evade U.S. tax. This is a concern
shared by the governments of many countries, and we have observed increased global
efforts and inter-governmental cooperation through the inclusion of tax information
exchange provisions in many new income tax treaties and protocols to existing
treaties, as well as an increase in the number of tax information exchange agreements
between countries that do not have income tax treaties in effect.

We recognize that an opportunity exists for the Internal Revenue Service (IRS)
to use its influence over FFIs in the U.S. government’s efforts to identify U.S. persons
that may be evading U.S. taxation of income earned, directly or indirectly,
through offshore accounts. Implementing the Act as proposed would allow the IRS
to receive information automatically from FFIs and avoid having to make requests
to foreign governments under tax information exchange agreements or under exchange
of information provisions contained in income tax treaties. However, we believe
that a more appropriate means to address tax evasion is by the use of international
solutions developed through negotiations between governments, not
through negotiations and agreements between the IRS and private entities.

We are extremely concerned that compliance with the Act will impose a significant
level of additional cost and operational risk on FFIs that will be disproportionate
to the amount of additional U.S. tax revenue generated. In particular, we
are concerned that many FFIs will not find it economically feasible to enter into
agreements with the IRS under proposed section 1471(b) (FFI Agreements) and
to continue to operate as Qualified Intermediaries (QIs). It would be unfortunate
to see foreign financial institutions forced to exit the QI regime into which they and
the IRS have invested significant resources.

Foreign financial institutions will also need to consider the impact on their clients.
It will be difficult to justify additional burdens and costs being placed on nonU.S.
account holders with no investment in U.S. securities. Ultimately, this will
likely have a detrimental impact on U.S. capital markets generally by creating disincentives
for Canadians and other foreign investors to invest in the U.S. The
‘‘green shoots’’ of economic recovery in the U.S. could be stunted by the disproportionately
onerous provisions of the Act. It could also result in a loss of opportunity
for American investors by creating disincentives for U.S. persons to open accounts
in Canada and elsewhere, disrupting the flow of global capital markets.

If the Act is enacted, it is critical that the Department of the Treasury (Treasury)
and the IRS work closely with FFIs to ensure that the detailed requirements
strike a reasonable balance between increasing U.S. tax revenue by identifying tax
evasion by U.S. persons, and the additional financial burden and operational risks
being imposed upon FFIs, in an effort to maximize the continued participation of
such institutions in the QI regime and the number that enter into FFI Agreements
with the IRS.

CONCERNS REGARDING SPECIFIC PROVISIONS OF THE ACT

Below we have summarized our concerns regarding specific provisions of the Act.

Our comments are limited to the proposed new Chapter 4 of the Internal Revenue
Code.

1. Effective Date
The Act provides that new Chapter 4 will generally apply to payments made after
December 31, 2010.
We strongly believe that the implementation of the Act’s requirements with respect
to the identification and reporting of certain foreign accounts will require a
substantially longer timeframe, especially given that much of the detail about implementation
will be contained within regulations to be developed by Treasury, and
within the FFI Agreements to be negotiated between FFIs and the IRS.
Once the Act is enacted, Treasury and the IRS will need to develop detailed regulations,
model FFI Agreements, reporting forms, and other guidance. Until these details
are finalized, an FFI will not be in a position to fully assess the costs and risks
associated with compliance, and ensure that there are no legal or operational restrictions
which would impede the FFI’s ability to comply with the terms of the FFI
Agreement.

An FFI cannot make the business decision to enter into such an agreement without
completing this internal review and analysis.

Once an FFI has confirmed that it can and will enter into an FFI Agreement with
the Secretary, it needs time to make the necessary systems and operational changes
to gather and record the additional information required for the purposes of identifying
United States accounts, as well as accounts that are excluded from the requirements,
and to modify systems to be able to produce the necessary reporting information.

For most large FFIs, the minimum period required to make the necessary
changes will be at least two years.

If FFIs are not given enough time to make the changes necessary to be able to
comply with the terms of the FFI Agreement, there is a risk that they will delay
entering into such agreements until they are able to comply, even if this is after
the effective date. If this results in the application of the 30% withholding on payments
to the FFI in the interim, it could be extremely disruptive to the flow of U.S.
withholdable payments and investment in the U.S. market.

Withholding agents will also need to identify their FFI clients and determine
which ones have entered into FFI Agreements. Those FFIs that do not currently
have the capability to withhold 30% tax on withholdable payments made to other
FFIs or applicable non-financial foreign entities will need to implement the necessary
changes. For many such FFIs, withholding on gross proceeds may present
the greatest challenge.

Significant IRS resources will also be needed to process large numbers of FFI
Agreements in a very short time period. A large affiliated group of FFIs could easily
be operating in more than 50 countries and may have multiple legal entities within
each of those countries that might enter into FFI Agreements. Whereas there are
currently approximately 5,500 entities that have QI Agreements with the IRS, given
the broad definition of FFI, there are potentially hundreds of thousands of entities
that could be in position to enter into FFI Agreements with the IRS.
We recommend that the effective date of December 31, 2010 be removed from the
Act and replaced with a provision giving power to the Secretary to devise a flexible
or staggered effective date under the accompanying regulations. The effective date
should be determined with regard to finalization of regulations, guidance and agreements.

2. Authority of the Secretary of the Treasury

The Act provides that the ‘‘Secretary shall prescribe such regulations or other
guidance as may be necessary or appropriate to carry out the purposes of this chapter.’’
Throughout proposed new Chapter 4, there are numerous provisions that give
the Secretary the authority to define exceptions and exclusions from the requirements,
as well as the detailed requirements.

However, there are certain additional areas where we would like to see greater
authority given to the Secretary:

• Authority to define exceptions to the requirement in section 1471(b)(1)(A) to
obtain information from each holder of each account maintained as is necessary
to determine which accounts are ‘‘United States accounts’’.
For example, it may be appropriate for the Secretary to provide exceptions for
accounts existing on the effective date or accounts that are regarded as posing
a low risk of tax evasion.

• Authority under section 1471(b)(1)(E)(ii) to provide alternatives to closing
United States accounts for which the FFI is unable to obtain a valid and effective
waiver under section 1471(b)(1)(E)(i) where foreign law prohibits the
closing of such accounts.
• Authority to define the thresholds under which depository accounts for individuals
are excluded from the definition of ‘‘United States account’’. See additional
comments under point 5 below.

3. Information to be reported on United States Accounts

Section 1471(c)(1) sets out very specific requirements with respect to the information
to be reported on United States accounts, including the following:

• Name, address and TIN of each account holder that is a ‘‘specified United
States person,’’ and in the case of an account for a ‘‘United States owned foreign
entity,’’ the name, address and TIN of each ‘‘substantial United States
owner’’ of the entity.
• Account number.
• Account balance or value (determined at such time and in such manner as
the Secretary may provide).
• Gross receipts and gross withdrawals or payments from the account (determined
for such period and in such manner as the Secretary may provide).

With respect to account balance or value, and gross receipts, withdrawals or payments,
our understanding is that the Secretary only has the authority to determine
the time or reporting period, and the manner in which such information is to be
provided, but not whether or not such information must be reported.

There may be situations in which reporting such information may be extremely
onerous and/or not particularly meaningful or useful to the IRS. For example, in
some financial institutions, clients may have a depository account to hold cash and
a custody account to hold securities. In such situations, purchases, sales and income
transactions will be reported in both the depository account and the custody account.
If both of these accounts report the proposed amounts, the information provided
to the IRS will be overstated and misleading. We recommend that section
1471(c)(1) be amended to delete (D) and replace the current requirement under (C)
with a more general requirement for such additional information and in such manner
as the Secretary may provide.

4. Reliance on Certification from Account Holders

Although the Act does not set out specific requirements regarding the methods
that an FFI is to employ for purposes of identifying its United States accounts, there
is a degree of protection provided to the FFI in section 1471(c)(3), allowing them
to rely on a certification from an account holder ‘‘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.’’

Most FFIs that belong to an affiliated group will not be able to make use of the
protection that this provision is intended to provide, primarily for the following reasons:

• Most affiliated groups of financial institutions do not have common operating
systems or systems that have the ability to communicate with one another.
In many cases, groups have grown and expanded through acquisitions, with
each new acquisition bringing their legacy systems with them. Even within
a single legal entity, there are frequently a number of different systems being
used to support the diverse range of products and services that the FFI offers.
• In most jurisdictions, there are legal restrictions which prevent the sharing
of information between separate legal entities without explicit client consent.
We recommend that section 1471(c)(3) be amended to limit the FFI’s knowledge,
or purported knowledge, that any information provided in a certification is incorrect
to the information that the FFI has in its own electronic files. We understand the
concern that an account holder could provide information to one entity within an
affiliated group indicating that they are not a United States account holder, and
they could also have an account with another member of the affiliated group that
has information on file indicating that the account holder is a U.S. person. However,
given that information about the account with the second affiliated entity would be
reported to the IRS, the IRS is already being provided with adequate information
regarding the U.S. person which could then be used to request additional information
for this person under income tax treaties or tax information exchange agreements.

5. Exception for Certain Accounts Held by Individuals

The definition of ‘‘United States account’’ provides an exception for depository accounts
held by natural persons where the aggregate value of all depository accounts
held does not exceed $10,000, or $50,000 where all such account were already in
existence on the date of enactment.

While we understand that this ‘‘de minimis’’ type exception was likely created
with the intention of providing some relief to FFIs, the exception as currently drafted
is operationally impractical, and would provide little or no relief to FFIs that
would need to build the exception into their reporting systems. It would be extremely
difficult and costly for an FFI to identify all accounts held by an individual,
particularly where the individual only has a partial interest. In addition to the practical
considerations, as discussed above under point 4, most jurisdictions impose
legal restrictions which restrict the sharing of information between legal entities.
We recommend that the provision be amended to apply on an account by account
basis and that authority be given to the Secretary to define the thresholds.

6. Termination of the Agreement

The Act provides that the FFI Agreement to be executed by the FFI and the Secretary
may be terminated by the Secretary upon a determination that the FFI is
out of compliance. A reciprocal provision should be added allowing the termination
of the agreement by the FFI upon notice to the Secretary.

The IIAC appreciates the opportunity to provide you with this submission and
would very much like to meet with your committees and staff to discuss our position
and recommendations. To arrange a meeting, please contact the undersigned or Andrea
Taylor, Assistant Director.

Yours sincerely,

Ian Russell
President