Statement of the Organization for International Investment

Statement of the Organization for International Investment

The Organization for International Investment (OFII) is a business association
representing the U.S. subsidiaries of many of the world’s largest international companies.
The U.S. subsidiaries of companies based abroad directly employ over 5 million Americans
and support an annual U.S. payroll of over $364 billion. As evidenced
by the attached OFII membership list, many OFII members are household
name companies with historic and substantial U.S. operations. On behalf of these
companies, OFII advocates for the fair, non-discriminatory treatment of U.S. subsidiaries.

We undertake these efforts with the goal of making the United States an
increasingly attractive market for foreign investment, which will ultimately encourage
international companies to conduct more business and employ more Americans
within our borders. Given the recent global financial turmoil, as well as companies
increasing ability to conduct worldwide operations through other jurisdictions,
OFII’s mission is more critical than ever to sustaining and rebuilding the American

On October 27, 2009, the Chairman of the Senate Finance Committee, Max Baucus,
and Senator John Kerry, and the Chairman of the House Ways and Means
Committee, Charles Rangel, and Representative Richard Neal, released proposed
legislation titled the Foreign Account Tax Compliance Act of 2009 (FATCA). The
proposed legislation adopts and revises many of the proposals set forth in President
Obama’s Administrative Proposal titled Leveling the Playing Field: Curbing Tax Havens
and Removing Tax Incentives for Shifting Jobs Overseas that was released in May 2009.
OFII welcomes the initiative of Congressional leaders to enhance the ability of the
Internal Revenue Service to police tax evasion perpetuated by U.S. persons through
the use of offshore accounts and entities. All legitimate business enterprises benefit
from a tax system that is respected by taxpayers and key to that respect is confidence
that everyone is paying their fair share. Accordingly, OFII not only endorses
the aims of the proposed legislation but is anxious to work with Congress to formulate
rules that aid the Internal Revenue Service in the detection of tax evasion and
increases the flow of information to the Internal Revenue Service while, at the same
time, does not impede the orderly conduct of legitimate business commerce nor disrupt
or discourage foreign investment into the United States.

Our comments below are limited to those aspects of the proposed legislation that
are most relevant to our members, the U.S. subsidiaries of foreign multinational corporations,
and to their parent companies. We stand ready to offer our assistance in
refining the legislation to achieve its important goals without disrupting legitimate
business activities.

We have organized are (sic) comments as follows:

Section I—Limiting the Scope of New Chapter 4 to Target Circumstances in
Which the Most Realistic Potential for Abuse Exists Without Unnecessarily Impeding
International Commerce.
Section II—Refining the New Rules to Maintain Equitable Treatment.
Section III—Preserving the Ability of Multinational Corporations to Access the
Eurobond Market.
Section IV—Making the New Rules More Workable.

Section I
Limiting the Scope of New Chapter 4 to Target Circumstances In Which the Most Realistic Potential for Abuse Exists Without Unnecessarily Impeding International Commerce

1. Targeting the Section 1472 Documentation Requirements to Areas of Concern—Section
1472 imposes burdens on foreign enterprises that can be difficult,
and, in some cases, impossible to meet. Determining the U.S. tax status
of minority owners and tracing indirect ownership through private equity
funds can place an impractical burden on business enterprises that are not
the logical targets for offshore tax evasion. Any foreign corporation that does
not qualify for the exception for corporations publicly-traded on an established
securities market (or that could become non-public in the future) could
be seriously impacted by this part of the legislation.

  • The category of foreign entities subject to the increased documentation requirements
    should be narrowed—We believe that the category of foreign
    entities subject to this burden be narrowed as follows:
  • The exclusion for publicly-traded companies should be expanded. Many countries
    have not developed their capital markets to the level of the United
    States. As a result, many widely-held foreign enterprises may be within the
    spirit of the exclusions in Section1472(c) but do not meet the requirement of
    being traded on ‘‘an established securities market.’’
    OFII Recommendation: Section 1472(c) should be modified to address alternative
    markets, similar to Section 7704(b)(2), by adding at the end: ‘‘or is readily
    tradable on a secondary market (or the substantial equivalent thereof).’’
  • Section 1472 can be further refined to exclude companies that are unlikely
    to be candidates for utilization by tax evaders. This can be best accomplished
    by using precedent in the tax law to identify the appropriate category of corporations
    that are most susceptible to improper use and can most readily
    apply the operative rules.

OFII Recommendation: An exception to the application of Section 1472, patterned after the original Code section aimed at inappropriate use of offshore companies—the
now-obsolete foreign personal holding company regime, should be added.
Section 552(a) included an ownership test which was met if 5 or fewer individuals
who are U.S. citizens or residents owned over 50% of the company, by vote or value,
at any time during the taxable year. This test is appropriately aimed at the right
class of companies and is a test that would be practical for foreign companies to
apply. Utilizing an ownership test that is relatively easy for the company to apply
is likely to be more effective than using a more expansive standard that may not
be practical for many companies to apply.

  • Foreign pension funds and sovereign wealth funds are major sources of foreign
    investment in the United States and generally are exempt from U.S. taxation
    on U.S. source investment income under Section 892.
    OFII Recommendation: Foreign pension funds and sovereign wealth funds
    should be excepted from Section 1472.
  • The category of payments to which expanded documentation applies should be
    narrowed—Many foreign business enterprises may have a high volume of
    payments receivable from payors in the ordinary course of business that
    would be subject to the increased documentation obligations, including broad
    disclosure of ownership information to the payors. For example, a UK company
    licensing software to U.S. users may have thousands of customers making
    royalty payments. Section 1472(b) would require the software company to
    provide every U.S. customer with the name, address, and U.S. taxpayer identification
    number of each of its U.S. substantial owners (including indirect
    ownership) or certify that there is no U.S. ownership.

OFII Recommendation: The intent of Section 1472 can be achieved by limiting
its application to payments of dividends and interest without disrupting the ordinary
course of commerce.

2. Clarify That Internal Holding and Finance Companies Are Not Financial Institutions
Within the Scope of Section 1471—Section 1471(d)(5)(C) includes in
the definition of a financial institution any entity that is engaged in the business
of investing in securities. Many foreign multinational enterprises have
holding and finance companies within the corporate, whose sole purpose is
to hold shares of affiliates or to act as an internal central financing vehicle
for intercompany loans. These internal special purpose entities may exclusively
operate to hold securities—equity of affiliates or notes from affiliates.
The Section 1471(d)(5)(C) definition could be read to treat these internal
holding and finance companies as foreign financial institutions.
OFII Recommendation: The Section 1471(d)(5)(C) definition of a ‘‘financial institution’’
should be clarified to make clear that a holding or finance company (including
the parent of an affiliated group that holds the shares of its subsidiaries)
that predominantly holds securities of affiliates does not fall within this definition.

Section II Refining the New Rules to Maintain Equitable Treatment
1. Maintain Parity of Treatment for U.S. Subsidiaries of Foreign Multinationals

  • The definition of ‘‘specified U.S. person’’ should treat subsidiaries of publiclytraded
    foreign corporations comparably to subsidiaries of publicly-traded U.S.
    corporations—Section 1473(3) defines ‘‘specified United States person’’ which
    defines the category of accounts subject to the new proposed reporting rules
    of Chapter 4. The first exclusion is any U.S. person that is a publicly-traded
    corporation. The second exclusion is any corporation that is a member of the
    same expanded affiliated group as the publicly-traded corporation. This formulation
    could be read as not including U.S. affiliates of foreign publicly-traded
    corporations. This potential discrimination between a U.S. subsidiary of a
    U.S. publicly-traded corporation and U.S. subsidiary of a foreign publiclytraded
    corporation is not justified. It is not clear this distinction is intended.
    OFII Recommendation: Section 1473(3) should be clarified to make clear that
    U.S. subsidiaries of foreign corporations are treated comparably to U.S. subsidiaries
    of U.S. corporations. This could be accomplished by adding to the end of Section
    1473(3)(B) the following: ‘‘without regard to whether the corporation described in
    subparagraph (A) is domestic or foreign.’’

2. Foreign Financial Institutions That Do Not Enter Into Chapter 4 Agreements
Should Not Be Denied Statutory Tax and Treaty Benefits—
In addition to requiring 30% withholding on the expanded category of withholdable payments
for financial institutions that do not enter into an agreement with the IRS,
Section 1474(b)(2) would further burden these foreign financial institutions
with the denial of interest on refunds and the denial of current statutory exemptions
from tax with respect to income beneficially owned by the institution.
These additional burdens imply that if a foreign financial institution
does not enter into a Chapter 4 agreement, it is unwilling to cooperate on
combating tax evasion. However, the Chapter 4 agreement can be quite burdensome
on a financial institution and some institutions may make a business
judgment, based on their customer base and operations, that the benefits
of entering into an agreement with the IRS are outweighed by the burdens
that the agreement would impose on them. This is a ‘‘benefits and burdens’’
business decision; not typically motivated by willingness to aid in the
perpetuation of tax evasion. The burden of a 30% withholding tax on all
withholdable payments to the foreign financial institution achieves the basic
compliance goal of Section 1471. The additional burdens respecting withholdable
payments made to a foreign financial institution for its own account are
punitive in nature, unjustified, and set a dangerous precedent.
OFII Recommendation 1 (No impairment of treaty benefits): The disallowance
of interest with respect to a credit or refund of over withheld tax (under Section
1474(b)(2)(A)(i)) if the beneficial owner of the payment is entitled to a reduced
rate of tax under a U.S. income tax treaty would impose an effective tax penalty
on the treaty benefit—an unprecedented partial clawback of treaty benefits. This
would be a dangerous precedent and should be eliminated.

OFII Recommendation 2 (Reinstate statutory tax benefits): The denial
(under Section 1474(b)(2)(A)(ii)) of the benefit of tax reductions for several types of
payments that are currently statutorily exempt from tax, including the exemptions
for bank deposit interest, short-term original issue discount, and portfolio interest,
and payments representing effectively connected income that may otherwise be subject
to a lower net income tax should be eliminated. Denial of any reduction from
the 30% tax on gross proceeds, to account for return of basis, is particularly penal
in nature. We are very concerned about the impact the denial of the portfolio interest
exemption would have on the ability of issuers of portfolio debt instruments, as
it would interfere with an important secondary market for the sale of these debt
instruments within the banking community.

3. The Proposed Override of the existing Withholding Rules Should Be Limited
in Scope—
The existing withholding rules under Chapter 3 of the Code (Sections
1441–1446) have been developed over a long period of time and contain
numerous exceptions, limitations, and coordination rules that further the
policies behind the withholding rules and assure their proper interaction
with other Code provisions. Section 101(b) of the proposed legislation provides
coordination rules that would appear to override all the above limitations
and exceptions. For example, current law Section 1441 excludes from
its scope U.S. FDAP that is effectively connected with the conduct of a U.S.
trade or business (which must be evidenced by the payee providing Form W–
8ECI) whereas the proposed Chapter 4 definition of a withholdable payment
appears to include FDAP that is also effectively connected income. Other examples
include rules coordinating the interaction of Sections 1441, 1445, and
1446 and the waiver of interest and penalties for underwithholding where
the withholding agent establishes that the full substantive tax liability has
been satisfied.

OFII Recommendation: The legislative history should make clear the expectation
that Treasury will apply the exceptions, limitations, and other coordination
rules that currently exist under Chapter 3 withholding rules to the extent not in
conflict with the purpose behind new proposed Chapter 4.

Section III Preserving the Ability of Multinational Corporations to Access the Eurobond Market
We believe that Section 102, repealing tax benefits for foreign-targeted bearer
bonds should be stricken and Treasury be instructed to review the foreign targeting
rules to determine whether they need to be revised to minimize the risk of these
bonds being utilized as a vehicle for U.S. tax evasion. In today’s market place, the
distribution and transfer of bearer bonds is carried out through a regimented system
in which these bonds typically are not physically transferred but are ‘‘immobilized’’
by being physically held by the major clearing houses. Ownership interests
are transferred through a largely book entry system maintained by clearing houses,
brokers and dealers. The use of foreign-targeted bearer bonds is the traditional
means by which bonds are floated in the Eurobond market. The repeal of the U.S.
tax benefits for issuers and holders of these bonds could be a major impediment to
the ability of U.S. corporations to float debt in the Eurobond market. Any perceived
concern about bearer bonds could be addressed by Treasury regulations treating immobilized
obligations as either registered or as the only acceptable form of bearer
bonds. We note that, in order to claim the portfolio interest exemption for registered
bonds, the beneficial owners have to provide IRS Form W–8BEN to the payor of the
interest. Requiring every holder of a Eurobond to submit a U.S. tax form would be
a significant impediment to floating Eurobonds that would put U.S. corporations,
and some foreign corporations (see immediately below), at a substantial disadvantage.

In addition, foreign corporations that are entitled to the benefit of a U.S. income
tax treaty typically are able to loan funds to their U.S. affiliates and obtain the benefit
of the reduced rates of tax, or exemption from tax, on interest paid by the U.S.
affiliate. However, if the lender of the funds (or a related party) to the U.S. affiliate
has borrowed funds and the interest on the borrowed funds would not be entitled
to a comparable U.S. tax reduction had the borrowed funds been lent directly to the
U.S. affiliate, the treaty benefit may be denied under the U.S. anti-conduit regulations
under certain circumstances. Currently, if the foreign affiliate borrowed funds
in the Eurobond market by the common practice of issuing foreign-targeted bearer
bonds, the anti-conduit rules would not be applicable because, had the U.S. affiliate
issued the bearer bonds directly, the interest would have been exempt from tax
under the portfolio interest exemption. The repeal of the exemption for foreign-targeted
bearer bonds would mean that this protection from the application of the anticonduit
regulations would no longer be available.

Section IV Making the New Rules More Workable
1. The Proposed Effective Date Rules Are Unrealistically Short—The new proposed
Chapter 4 withholding rules are proposed to be effective for payments
made after December 31, 2010. Neither the government nor taxpayers are
likely to be able to comply with this effective date. Most financial institutions
have sophisticated and complex systems in place, many of which have been
adapted over time to conform to U.S. tax compliance requirements. A great
deal of time, expense, and energy will be required to alter, or replace, these
systems and operating procedures. Financial institutions with retail banking
operations that have documented their account holders based on local identification
cards or by employing know-your-customers procedures will have no
reliable means of determining whether account holders are U.S. citizens or
residents without requesting new documentation from every customer. New
procedures will be required to determine which foreign entity account holders
are themselves foreign financial institutions under the expansive definition
of a foreign financial institution and, once that determination is made,
which foreign entities have substantial U.S. owners, which will require determining
both the direct and indirect U.S. ownership of the foreign entity
by both vote and value. The challenges foreign financial institutions will face
with regard to account holders that are trusts is discussed in Paragraph 5,
below. Similarly, it will require time to educate foreign entities that are not
financial institutions to the new compliance requirements and to put adequate
procedures in place. Foreign financial and non-financial institutions
that will want to become compliant with the requirements of the new legislation,
which is proposed to become effective for payments made after December
31, 2010, would not have sufficient time to ensure that their systems are
adequate to provide the required information.

OFII Recommendation: The statute should delay the effective date of new proposed Chapter 4 for at least an additional year with express authority vested in the
Secretary to delay the effective date to assure adequate time for both the government
and taxpayers to adapt to the new rules.
2. The FATCA Provisions Should Not Apply to Transactions Already in Place—
Effective dates for many provisions of the proposed legislation do not take
into account existing financial arrangements. For example, under Section
501, the treatment of certain notional principal contract payments made to
foreign persons as U.S. source dividends for U.S. tax purposes applies to payments
made on or after a date that is 90 days after the date of enactment.
Even if the scope of the rule were specifically defined, which it is not, as the
Secretary would have broad authority to prescribe its scope, the effective
date is unrealistically short to permit the orderly unwinding of existing contracts.

OFII Recommendation: The effective date rules should be revisited with a view
to a more equitable transition to the new rules. As in the case of the above recommendation
with regard to the effective date of Chapter 4, the Secretary should
be given the discretion to delay the prescribed effective dates.

3. Individual Reporting Requirements for Interests in Foreign Financial Assets
Should Not Be Duplicated—New Section 6038D would add new information
reporting by individuals that hold any interest in a ‘‘specified foreign financial
asset.’’ The new reporting would overlap with the reporting of foreign financial
accounts under the TD F 90–22.1 (FBAR) reporting regime.

OFII Recommendation: One or the other regime, but not both, would allow filers to conform to a rational set of rules. If Section 6038D reporting is selected, care
should be taken to ensure that individuals with only signature authority and no financial
interest in the account are not considered to ‘‘hold an interest in a foreign
financial asset.’’ As noted in the comments made by OFII in relation to FBAR reporting
in the 2009 letter concerning Notice 2009–62, the administrative burden and
complexity must be reduced as a matter of encouraging compliance.

4. Making Compliance by Foreign Financial Institutions Workable—Chapter 4
impacts every foreign financial institution that exists outside the United
States, including a great many entities that do not traditionally fall into the
category of a financial institution. Below we include two specific recommendations
to make the rules more workable for these institutions and entities,
brought to our attention by OFII members. We expect that many impacted
entities and trade associations will provide Congress with more extensive
input on the practical implications of Chapter 4 for foreign financial institutions.
The two recommendations below are not intended to be a comprehensive
identification of all the practical hurdles these institutions may face.

  • Workable due diligence and verification procedures need to be established.— Section 1471(b)(1)(B) provides for verification and due diligence procedures as
    the Secretary may require with respect to the identification of United States
    accounts. If such procedures include an external audit, it would add a significant
    cost for foreign financial institutions, especially if it required a regular
    audit process rather than the existing QI agreed-upon procedures.

OFII Recommendation: We suggest that the financial institutions should have
the option to be able to make representations to the IRS concerning their
verification and due diligence procedures and that there have been no breaches of
such procedures under an internal rolling risk evaluation program that the institution
has agreed with the IRS.

  • Application of Chapter 4 rules to trusts needs to be practical—There is a practical
    issue caused by the interaction between Bill sections 101 and sec. 402,
    which introduces a new presumption rule for foreign trusts under new sec.
    679(d). The new presumption rule states that if a U.S. person directly or indirectly
    transfers property to a foreign trust (other than a trust established for
    deferred compensation or a charitable trust), the trust shall be presumed to
    have a U.S. beneficiary, unless such person can demonstrate to the satisfaction
    of the Secretary that pursuant to the trust deed:
    (1) no income or corpus
    of the trust may be paid or accumulated during the tax year to or for the benefit
    of a U.S. person; and
    (2) if the trust were terminated during the taxable
    year, no part of the income or corpus could be paid to or for the benefit of
    a U.S. person. In addition, the U.S. transferor must submit all information
    required by the Secretary to avoid the U.S. beneficiary presumption.
    As a result of the U.S. beneficiary presumption, existing section 679(a) would
    treat the U.S. transferor as an owner with respect to the portion of the trust attributable
    to such property and thus treat the trust as a grantor trust. Under new section
    1473(2), a ‘‘substantial United Sates owner’’ is defined to include any specified
    United States person treated as an owner of any portion of a grantor trust. Hence,
    it will be necessary for a foreign entity to monitor all transfers to all trusts to determine
    if they were made by a U.S. person and examine the trust documentation to
    determine if no income could be paid to or for the benefit of a U.S. person, in order
    to see whether it must apply the presumption and be required to treat the trust
    as a grantor trust with a U.S. owner and thus a substantial United States owner.

OFII Recommendation: Either the presumption rule should be eliminated or
section 1473(2)(iii) should be modified to exclude the applicability of the new presumption
rule in determining whether a trust is a grantor trust (e.g., add to the
end of clause (iii) the words ‘‘without regard to section 679(d)’’ or similar verbiage).
We also note that the definition of substantial United States owner does not address
other types of trusts such as complex and simple trusts, which perhaps implies
that there is no requirement to look through such trusts.