The Securities Industry and Financial Markets Association, letter
Dear Chairman Neal and Ranking Member Tiberi,
The Securities Industry and Financial Markets Association (SIFMA) 1 welcomes
the opportunity to submit comments on the Foreign Account Tax Compliance Act
of 2009, H.R. 3933 (the Bill), which was introduced on October 27, 2009, by House
Ways and Means Committee Chairman Charles B. Rangel (D–NY) and House Ways
and Means Select Revenue Measures Subcommittee Chairman Richard E. Neal (D–
SIFMA shares the objectives of the bill’s sponsors, and the Obama Administration,
in improving offshore tax compliance. SIFMA also welcomes the fact that the
Bill is responsive to a number of important concerns that were expressed in its earlier
comment letter, dated August 31, 2009, regarding the related offshore tax compliance
proposals included in the General Explanation of the Administration’s Fiscal
Year 2010 Revenue Proposals.
This letter comments on several aspects of the Bill primarily relating to the expansive
new information reporting and withholding regimes that it would impose.
These regimes would create a broad new definition of foreign financial institution
(FFI) and require that these FFIs enter into agreements with the IRS and provide
annual information reporting in order to avoid a new U.S. withholding tax on U.S.
source dividends, interest, and other FDAP income, as well as U.S.-related gross
proceeds. They would also impose related information reporting and withholding requirements
in respect of payments made to non-financial foreign entities (FEs).
In evaluating the Bill, SIFMA has proceeded on the basis of five core observations:
• The principal goal of the Bill, which SIFMA supports, is to collect tax from
U.S. taxpayers who have been evading their responsibilities by investing
through FFIs and FEs that have thus far been generally free of reporting obligations
to the IRS.
• To achieve this goal, the Bill would impose the risk of a punitive withholding
tax on a very broad class of U.S.-related payments (including gross proceeds)
to a broad class of foreign investors, unless relevant FFIs and FEs agree to
provide information to the IRS regarding their U.S. account holders and owners.
Accordingly, the withholding tax would function as a hammer to encourage
• Although the withholding tax would hopefully not need to be utilized, if it
were actually collected, it could cause a decline in inbound investment that
would significantly increase the global financing costs of U.S. issuers (as described
in more detail below).
• Even if the Bill functioned as planned, and the withholding tax were not actually
collected, the new information reporting and withholding regimes would
require the development and implementation of extensive new compliance
systems by FFIs, FEs, and withholding agents.
• In order to achieve the Bill’s goals without causing market disruption, financial
institutions and other market participants will need clear statutory rules
as well as supporting legislative history that explains the rules’ context and
intended meaning. They will also need precise regulatory guidance that is
published in advance of the time that both the information reporting and
withholding requirements of the Bill would take effect.
SIFMA looks forward to working with the Congress and the Treasury Department
in crafting the details of the Bill and its accompanying regulatory implementation.
In the remainder of this letter, SIFMA proposes the following specific comments on
the Bill, which are intended to assist the Congress and the Treasury Department
in this effort:
(1) Delay the effective date of the information reporting and withholding requirements.
(2) Exclude short-term obligations from the withholding tax.
(3) Defer repeal of the foreign-targeted bearer bond exception until it can be
(4) Simplify and extend the grandfather rule for existing registered debt.
(5) Provide a grandfather rule for existing securitization vehicles.
(6) Exclude U.S. payors and Schedule K–1 filers from the FFI definition.
(7) Provide workable procedures for reliance on certifications by FFIs.
(8) Establish commercially reasonable standards for identifying U.S. accounts
and foreign entities with substantial U.S. ownership.
(9) Provide a uniform 10 percent test for substantial U.S. owner status.
(10) Revise carve-outs for corporations and tax-exempt entities.
(11) Exempt separate depository accounts not exceeding $50,000.
(12) Allow simplified Form 1099 reporting by FFIs.
(13) Allow FFIs to receive refunds or credits of the withholding tax in additional
(14) Coordinate with other withholding and information reporting provisions.
(15) Provide for further limits to the definition of withholdable payment.
(16) Address tiering issues.
Comment 1: Delay the Effective Date of the Information Reporting and
The Bill should provide adequate time for the development of the extensive regulatory
guidance and compliance systems that will be necessary to implement the new
information reporting and withholding regimes.(3)
The information reporting and withholding provisions of the Bill applicable to
FFIs and FEs are proposed to be effective for payments made after December 31,
2010. SIFMA believes that this proposed effective date should be substantially delayed.
These provisions of the Bill are by their nature not self-implementing, and
will require the Treasury Department and the IRS to develop detailed and complex
regulations, reporting agreements, certification forms, and other guidance. Based on
recent experience, it is reasonable to expect that it will take more than one year
for a proposed version of the implementing regulations to be produced and that substantial
comments will be submitted on the proposed regulations by the affected
parties.4 In this regard, the regulatory process will need to take into account the
large number of FFIs, FEs, and withholding agents who will be directly affected by
the regulations (including a significant number of entities that have not previously
had occasion to deal with U.S. tax compliance rules), as well as the many companies,
investors, and depositors who will be indirectly affected. Moreover, once a substantial
comment process has run its course and implementing regulations are finalized,
it is reasonable to expect that the IRS will need a substantial amount of time
to draft and then enter into the required reporting agreements with FFIs.(5) Finally,
but most importantly if the goals of the Bill are to be achieved, FFIs, FEs, and withholding
agents will need a substantial amount of time to develop and implement the
necessary compliance systems to perform their duties under the agreements and the Bill.
The Bill will require an unprecedented level of U.S. tax information gathering and
reporting by foreign entities that have not traditionally engaged in such efforts.
Even for a seasoned U.S. financial institution, expanding existing U.S. tax information
reporting systems to satisfy the requirements of the Bill would be time consuming
and expensive. For an FFI that has no existing U.S. tax information reporting
systems, complying with the requirements of the Bill will be a monumental task,
which will require the hiring of numerous additional employees, the creation of extensive
new information technology systems, and the training of large numbers of
current workers. The ability of FFIs to engage in such efforts on a short time frame
(or, indeed, at all) cannot be presumed.
SIFMA believes that the implementation of the necessary compliance systems for
the information reporting and withholding regimes will take at least two years from
the date that all applicable regulatory guidance is finalized (including the publication
of a model reporting agreement). Therefore, SIFMA recommends that the new
information reporting and withholding regimes not enter into force until at least
three years after the date of enactment of the Bill. In order to plan for unforeseen
issues and avoid market disruption, SIFMA also believes that it is critical that the
Bill authorize the Secretary of the Treasury to postpone the effective date of the information
reporting and/or withholding regimes as needed. The delay in the effective
date of the withholding provisions will also benefit the IRS, which will be required
to establish and implement a system to provide refunds and credits for the withholding
Comment 2: Exclude Short-Term Obligations from the Withholding Tax.
An exception from the withholding provisions of the Bill should be provided for
short-term obligations, in order not to disrupt the ability of U.S. issuers to obtain
funding from foreign investors that have historically invested in the United States
for short-term liquidity purposes.(6)
Many large U.S. financial institutions and other U.S. issuers derive billions of dollars
of funding through the issuance of short-term debt instruments (such as commercial
paper) in foreign markets, to entities that would be treated as FFIs. These
funding sources are relied on, in part, to support substantial domestic lending to
large and small businesses, as well as to mortgagors and credit card holders. To the
extent that these foreign lenders receive little or no other U.S. source income, they
will likely not be willing to enter into information reporting agreements with the
IRS. It can also be expected that they will be unwilling to incur any risk of a 30
percent withholding tax on the principal amount of their investment, which the Bill
would create. As a consequence, such investors could substantially decline as a
funding source for U.S. financial institutions and other U.S. issuers.
SIFMA believes that the Bill should carefully balance its tax compliance objectives
against the need for U.S. financial institutions and other U.S. issuers to readily
finance themselves. Although many U.S. issuers may be able to replace the affected
borrowings with funds from other sources (at possibly higher rates), the
weaker or less creditworthy U.S. issuers may suffer funding shortfalls. In the case
of U.S. financial institutions, such shortfalls could significantly limit their lending
into the domestic market or even challenge their viability. For this reason, SIFMA
suggests that the definition of a withholdable payment contain an exclusion for interest
and gross proceeds payments made in respect of obligations of U.S. issuers
with a term not exceeding 183 days. Such an exclusion would be consistent with
longstanding exemptions for short-term debt instruments in other provisions of the
Code’s exemptions which reflect a long-held belief that such instruments do not lend
themselves to tax evasion.(7)In this regard, SIFMA believes that FFIs and FEs will
be powerfully motivated to comply with the information reporting provisions of the
Bill because the potential withholding tax would still apply to longer term obligations,
Treasury securities, U.S. equity securities, and other obligations that pay U.S.
source income. To allay any concerns that FFIs or FEs could abuse a short-term obligation
exception by continuously rolling over short-term obligations, SIFMA would
suggest that the Bill provide that a debt instrument would be considered short-term
only if payments thereon would qualify under section 871(g) as exempt from nonresident
gross income and withholding tax (for which the same abuse considerations
apply). As an alternative, and at a minimum, SIFMA believes that the Secretary
of the Treasury should be given authority to identify situations where short-term
obligations may be exempted from the withholding tax because they do not create
a significant opportunity for abuse.
Comment 3: Defer Repeal of the Foreign-Targeted Bearer Bond Exception Until It Can Be Studied Further.
The consequences of the repeal of the foreign-targeted bearer bond exception should
be subjected to further study before such exception is repealed, in order to prevent
restricting U.S. issuers’ access to non-U.S. markets. Additionally, the disparity between
the repeal’s effective date and the effective date of the new information reporting
and withholding rules should be eliminated. (8)
Since 1982, the TEFRA rules generally have allowed U.S. issuers to issue debt
obligations in bearer form, so long as the obligations are issued under arrangements
reasonably designed to ensure their sale to non-U.S. persons (the foreign-targeted
bearer bond exception). The Bill would repeal this exception to the registration requirement.
SIFMA believes that the repeal of the foreign-targeted bearer bond exception may
restrict access to a number of non-U.S. markets in a manner that would adversely
affect U.S. borrowers. In a number of markets, securities traditionally have been
issued in bearer form. In some of those markets (e.g., Japan), it may not be feasible
to issue securities in registered form, or there may not be sufficiently well developed
mechanisms in place to permit the effective collection of Form W–8s. Thus, U.S.
issuers would be unable to issue debt in such markets under the Bill, or would be
able to do so only in a manner that causes interest on the obligations to be subject
to withholding tax at a 30 percent rate, effectively precluding them from raising
funds in these markets. In addition, even in markets in which it is feasible to issue
securities in registered form, the transition to such issuances may create substantial
market disruptions if it is not the current market norm.
In this regard, it is worth noting that most bearer bonds are currently bearer in
only a very technical sense, since most beneficial interests in such bonds are held
through Euroclear or other book-entry clearing systems. As a consequence, it seems
unlikely that such instruments would pose any special risks of tax evasion under
the Bill, since the information reporting and withholding provisions of the Bill could
generally be applied to payments in respect of such securities in the same manner
as for payments in respect of registered bonds (in each case for bonds issued after
the applicable grandfather date).
In order to prevent unwarranted disruption to the borrowing ability of U.S.
issuers in situations where the risk of U.S. tax evasion seems miniscule, SIFMA recommends
that the Congress direct the Treasury Department to study the potential
consequences of the repeal of the foreign-targeted bearer bond exception and prepare
a report regarding such a repeal before any action is taken. In this regard, one
alternative to a complete repeal that the Treasury Department might wish to consider
would be a more limited prohibition that focused solely on bearer bonds in definitive
form (i.e., those not held through Euroclear or other book-entry clearing systems).
In addition to the foregoing considerations, there appears to be an inadvertent
glitch in the effective date provisions of the Bill relating to the repeal of the foreigntargeted
bearer bond exception. In general, the repeal of the foreign-targeted bearer
bond exception would be effective for obligations issued more than 180-days after
the date of the Bill’s enactment. The new information reporting and withholding
rules, however, would apply to any bearer-form obligation that is issued by a U.S.
issuer after the date of first Committee action. As a consequence, the Bill would create
two categories of U.S.-issued bearer bonds, one that is subject to the new information
reporting and withholding regimes and one that is not. SIFMA believes that
this result was not intended, and suggests that, if the repeal of the foreign-targeted
bearer bond exception is retained, the effective date of the information reporting and
withholding rules should be conformed, by grandfathering bearer-form obligations
issued prior to the effective date of the repeal of the foreign-targeted bearer bond
Comment 4: Simplify and Extend the Grandfather Rule for Existing Registered
To avoid market confusion and disruption, the grandfather rule for existing registered
debt should be simplified and extended to exempt all registered debt instruments
that are outstanding on the effective date of the new information reporting and
withholding regimes and that contain an issuer gross-up provision. (9)
The FFI and FE information reporting and withholding regimes are proposed to
be effective for all registered form debt instruments of U.S. issuers, unless the debt
is outstanding on the date of first Committee action and includes a provision under
which the issuer would be obligated to make gross-up payments by reason of the
Bill. This grandfather provision has already led to substantial market uncertainty
as to whether many instruments will or will not be eligible for its protection, and
would be very difficult for withholding agents to apply. As one example, gross-up
provisions frequently allow an issuer to elect either to make a required gross-up
payment or to redeem a debt instrument early. In such a case, it may be questioned
whether the issuer is obligated to make gross-up payments for purposes of the
grandfather provision. As another example, gross-up provisions frequently contain
carve-outs for withholding taxes that would not be imposed but for a failure by a
holder or beneficial owner of an instrument to make a certification or comply with
information reporting requirements. In such a case, because the information reporting
obligations contemplated by the Bill would apply to intermediaries in a chain
of ownership that may not be holders or beneficial owners for purposes of the grossup
provision, it may be questioned in some instances whether a failure to enter into
an information reporting agreement with the IRS under the Bill constitutes such
a failure, and whether the issuer would be required to make gross-up payments for
purposes of the grandfather provision.
More generally, SIFMA notes that many large U.S. financial institutions and
other U.S. issuers derive billions of dollars of funding through debt issuances to foreign
investors. In some cases (e.g., debt issuances to foreign retail investors), it may
be impossible to effect issuances while the application of the new information reporting
and withholding provisions of the Bill remain uncertain, because the issuance
structures will not tolerate the uncertainty neither as a reputational matter for the
issuer and underwriters or oftentimes as a local securities law matter that an intermediary
in a chain of payments could fail to comply with the information reporting
provisions of the Bill with the result that a foreign investor would suffer a withholding
tax through no fault of its own. If the grandfather rule for registered debt
contained in the Bill continues to apply only up to the date of first Committee action,
U.S. issuers may accordingly be required to cease some or all of their registered
debt issuances in foreign markets after that date until uncertainties regarding
the application of the information reporting and withholding provisions of the
Bill are resolved.
If retained in its current form, SIFMA anticipates that the grandfather rule for
existing registered debt could lead to substantial market confusion and disruption.
In order to minimize such confusion and disruption, and the legal and other disputes
between issuers, holders, and withholding agents that could result, SIFMA
recommends that the grandfather rule for existing registered debt be simplified and
extended to exempt all registered debt instruments that are outstanding on the effective
date of the new information reporting and withholding regimes and that contain
an issuer gross-up provision, regardless of whether that gross-up provision
would in fact be triggered by the Bill. Because even this simplified grandfather rule
would place substantial compliance burdens on withholding agents needing to determine
the status of numerous debt instruments, SIFMA further recommends that withholding agents be
permitted to presume that a registered debt instrument outstanding
on the grandfather date qualifies for the grandfather rule, unless the withholding
agent knows or has reason to know that it does not qualify.
Comment 5: Provide a Grandfather Rule for Existing Securitization Vehicles.
The Bill should provide a grandfather rule for existing offshore securitization vehicles,
under which such vehicles would be excluded from the FFI definition and
exempt from the FE information reporting and withholding regime.
A typical offshore securitization vehicle that holds U.S assets and issues its own
equity and/or debt securities (such as a CDO issuer) would be considered an FFI
under the Bill.(10) As a result, such a securitization vehicle would be required to enter
into an information reporting agreement with the IRS and report on U.S. holders
of non-publicly traded debt and equity that it had issued, or otherwise be subject
to the withholding tax on its U.S. investments. Foreign securitization vehicles currently
in existence have invested billions of dollars in the United States, particularly
in loans and other debt instruments issued by U.S. companies.
Unfortunately, it is quite likely that many offshore securitization vehicles will
simply be unable to enter into and comply with the required reporting agreement,
which could lead to large scale disruptions in the markets. Offshore securitization
vehicles have no employees and, in most cases, their activities are strictly controlled
by a trust indenture. The trust indentures for existing securitization vehicles predate
the Bill, and accordingly do not authorize or require any party on behalf of the
securitization vehicle to perform the actions required of FFIs under the Bill. The
trust indentures also do not provide a means of paying for such activities. Although
it might in theory be possible for the trust indenture of a securitization vehicle to
be amended by a vote of the investors in the vehicle to permit the vehicle to enter
into an FFI information reporting agreement, no party is likely to be designated to
initiate such an amendment process. In addition, different investors may have conflicting
interests in permitting such an amendment. Some investors may in particular
prefer for the vehicle to be prematurely wound up, which would be required
in many cases if the investments of the vehicle became subject to the withholding
tax imposed by the Bill. Finally, even if it were possible to amend a trust indenture
to permit a securitization vehicle to enter into an information reporting agreement
with the IRS and hire contractors to perform the required actions, there can be no
guarantee that the vehicle would be able to force holders of its outstanding debt and
equity interests to comply with applicable identification and documentation requirements
that were not contemplated at the time the trust indenture was executed and
the securities were issued.
Taking these considerations into account, it appears very likely that many typical
offshore securitization vehicles that have invested in U.S. assets would become subject
to the withholding tax imposed by the Bill, which could lead to their required
liquidation. A large scale liquidation of U.S. debt instruments by offshore
securitization vehicles could result in a very significant disruption of the U.S. credit
markets. Therefore, SIFMA believes that the Bill should provide a grandfather rule
for securitization vehicles in existence on the date of first Committee action. The
grandfather rule should provide that existing securitization vehicles are (i) excluded
from the FFI definition; and (ii) exempt from the FE information reporting and
withholding regime in respect of their U.S. assets.(11)
Comment 6: Exclude U.S. Payors and Schedule K–1 Filers from the FFI Definition.
In order to avoid unnecessary duplication and confusion, the FFI definition should
exclude certain foreign entities and branches that are considered U.S. payors required
to file Form 1099 reports as well as certain foreign partnerships that are required
to file Schedule K–1 reports.(12)
The FFI definition is extraordinarily broad, and there are a great many entities
that could need to enter into information reporting agreements with the IRS under
the terms of the Bill. SIFMA believes that it would be beneficial to market participants
and the IRS to limit the scope of the FFI definition in the case of certain foreign
entities that already have robust U.S. tax information reporting responsibilities,
in order to reduce the potential for a flood of information reporting agreements.
For example, foreign entities and branches that are considered U.S. payors
under the current information reporting rules (e.g., U.S. branches of foreign banks
and controlled foreign corporations) are already required to file full Form 1099 reports
with respect to income paid to U.S. persons.(13) In addition, foreign partnerships
that derive gross income that is either U.S. source or effectively connected
with the conduct of a U.S. trade or business are already required to file Form 1065
and accompanying Schedule K–1 reports, which include extensive information regarding
both U.S. and foreign source income allocable to all partners. SIFMA believes
that the Form 1099 and Schedule K–1 information reporting regimes generally
provide the IRS with sufficient tax information where they apply. Keeping
such foreign entities within their existing information reporting regimes would also
reduce the very substantial burden that the IRS will bear as it enters into the new
information reporting agreements with FFIs. As a consequence, SIFMA recommends
that U.S. payors and Schedule K–1 filers be excluded from the FFI definition.
Comment 7: Provide Workable Procedures for Reliance on Certifications by FFIs.
The proposed standard for knowledge of an incorrect certification is unworkable
in the context of global financial institutions. Instead, FFIs should be permitted to
rely on certifications from account holders so long as they implement procedures reasonably
designed to identify incorrect certifications. (14)
The Bill provides that, in fulfilling its information reporting obligations, an FFI
may rely on a certification from an account holder only if neither the FFI nor any
entity which is a member of the same expanded affiliated group knows, or has reason
to know, that any information provided in such certification is incorrect. The
expanded affiliated group of a large FFI may include tens of thousands of employees
in hundreds of different branches, business entities, and segments, located in numerous
jurisdictions. FFIs do not currently maintain systems that can monitor and
compare the knowledge of these vast numbers of employees across such branches,
business entities, and segments. The creation of such systems would be extremely
expensive and difficult to implement and, even if the construction of such systems
were practically achievable, their use may be impermissible under U.S. and nonU.S.
securities, data protection, and other laws.15
In order to make the certification reliance provision workable in the context of
global financial institutions, SIFMA recommends that the Bill provide that an FFI
may rely on a certification from an account holder so long as the FFI has implemented
procedures reasonably designed to identify incorrect certifications. The
Treasury Department and the IRS would then be expected to craft safe harbors that
are deemed to satisfy the requirements. In general, SIFMA believes that the development
of these safe harbors is best left to the regulatory process, in which SIFMA
would be pleased to participate. It would be helpful, however, if the Treasury Department
and the IRS could be directed in legislative history to focus the safe harbor
procedures on the knowledge of employees of an FFI that directly establish an
account or perform direct client-facing services in respect of the account, together
with any information actually contained in a universal account system,(16) and to
avoid any procedures that could be in conflict with U.S. and non-U.S. securities,
data protection, or other laws. Potential abuse concerns could then be addressed
with a targeted anti-abuse rule to prevent an FFI from structuring an account relationship
in a manner that avoids the purposes of the Bill.
Comment 8: Establish Commercially Reasonable Standards for Identifying
U.S. Accounts and Foreign Entities with Substantial U.S. Ownership.
The Bill and its legislative history should direct the Treasury Department and the
IRS to establish commercially reasonable standards for identifying U.S. accounts
and foreign entities with substantial U.S. ownership, and should confirm that, until
such standards are adopted, FFIs and U.S. withholding agents may rely on existing
documentation, account information, and KYC and AML procedures for such purposes.(17)
SIFMA understands that the Bill does not mandate any particular method or procedure
to identify U.S. accounts, and welcomes the JCT Report’s reference to the
use of existing know-your-customer (KYC) and anti-money-laundering (AML) procedures
as a method of account identification.(18) Nevertheless, it is important that the
Treasury Department and the IRS be directed to adopt identification and documentation
standards that are commercially feasible and utilize existing documentation
and account information wherever possible. Until more complete guidance is
issued, the Bill and its legislative history should also confirm that FFIs and U.S.
withholding agents may rely on existing documentation, account information, and
KYC and AML procedures for purposes of identifying U.S. accounts and foreign entities
with substantial U.S. ownership. SIFMA believes that confirmation of this intended
result will be particularly critical in the case of certain investment fund FFIs
(e.g., foreign mutual funds) that hold U.S. securities and that have beneficial owners
that hold their interests in the investment fund through other entities (e.g., a mutual
fund distributor), where such other entities are not themselves reporting FFIs
(see additional discussion of foreign mutual funds under Comment 16).(19) SIFMA
also believes that, in all cases, the applicable identification and documentation
standards should apply equally to FFIs (whether or not U.S. controlled) and U.S.
withholding agents (e.g., for purposes of determining whether a foreign entity has
substantial U.S. ownership under the FE information reporting and withholding regime),
and regardless of whether the account is on-shore or offshore, in order not
to put either U.S. or non-U.S. financial institutions at a competitive advantage. Furthermore,
in utilizing existing documentation and account information, FFIs and
U.S. withholding agents should not be required to perform due diligence that would
require aggregating the knowledge of all members of their expanded affiliated
groups, for the same reasons noted above with respect to aggregating knowledge
that could potentially cause an FFI to question the correctness of a certification.
SIFMA looks forward to assisting the Treasury Department and the IRS in adopting
more complete guidance in this area during the regulatory process.
Comment 9: Provide a Uniform 10 Percent Test for Substantial U.S. Owner Status.
The substantial United States owner definition should apply a uniform 10 percent
The Bill provides that an FFI must report on substantial United States owners
of foreign entities that hold financial accounts with the FFI. The Bill also requires
FEs to provide information regarding their own substantial United States owners
to withholding agents for provision by such withholding agents to the IRS. For these
purposes, the Bill defines substantial U.S. ownership to be 10 percent or more with
respect to foreign corporations and foreign partnerships that are not foreign investment
entities, but any U.S. ownership with respect to a foreign investment entity.
SIFMA does not believe that any currently existing or contemplated KYC or AML
procedures investigate entity ownership below a 10 percent level (and, indeed, only
the more advanced KYC and AML procedures investigate entity ownership at that
level). In addition, the proposed dual standard would be extremely difficult to implement
in practice, particularly as the determination of the correct percentage test
would require an FFI to study and identify the business of each such account holder
to determine whether it is a foreign investment entity. SIFMA accordingly believes
that the Bill should adopt a uniform 10 percent test for substantial United States
ownership for all foreign entities.
Comment 10: Revise Carve-outs for Corporations and Tax-Exempt Entities.
The carve-out for corporations whose stock is regularly traded on established securities
markets should be replaced with a carve-out for foreign entities that are per
se corporations under Treasury regulations Section 301.7701–2(b)(8). In addition,
certain foreign tax-exempt entities should be fully carved out from the FFI and FE
information reporting and withholding regimes. (21)
The Bill provides carve-outs from the account holders that are subject to FFI information
reporting and from the entities that are subject to FE information reporting and withholding
in the case of corporations whose stock is regularly traded on
an established securities market, presumably because the risk of tax evasion in connection
with a publicly traded corporation is low. It would be extremely difficult and
expensive, however, for an information reporting or withholding agent to determine
whether the stock of large numbers of corporations is regularly traded. Accordingly,
SIFMA recommends that the Bill instead provide a carve-out for foreign entities
that are per se corporations under Treasury regulations Section 301.7701–2(b)(8),
subject to such exceptions as the Secretary of the Treasury determines are necessary
to prevent avoidance of the purposes of the Bill. Per se corporations (e.g.,
U.K. public limited companies) generally present a low risk of being used to facilitate
U.S. tax evasion, because they are generally subject to tax filing requirements
and/or more extensive corporate regulation, and because they are not eligible to be
flow-through entities for U.S. tax purposes. Moreover, although there may be certain
situations where a particular per se corporation presents greater risks, SIFMA believes
that the Treasury Department and the IRS should be able to identify relevant
abuse factors and provide exceptions for this purpose in regulations.
The Bill also provides a carve-out from the account holders that are subject to FFI
information reporting (but not from the entities that are subject to FE information
reporting and withholding) in the case of an organization that is exempt from tax
under section 501(a), again presumably because such entities pose a low risk of
being used to facilitate U.S. tax evasion. As such, and in order to preserve a level
playing field between U.S. financial institutions dealing with foreign entities
through the FE regime, on the one hand, and FFIs dealing with foreign entity account
holders through the FFI regime, on the other, the exception should be expanded
to apply equally to the FE information reporting and withholding regime.
(Otherwise, FFIs would have a competitive advantage over U.S. withholding agents
in providing account services to such entities.) This could be done by adding such
entities to the list, in Proposed section 1472(c), of the entities that are exempt from
the requirements of Proposed section 1472(a). In addition, however, SIFMA believes
that there are many additional foreign pension funds and other tax-exempt entities
that similarly pose a low risk of being used to facilitate U.S. tax evasion, but that
may not meet the definition of section 501(a) (or have any idea whether they do or
do not meet that definition). Accordingly, SIFMA would recommend that the carveouts
for foreign tax-exempt entities be expanded to include all foreign tax-exempt
entities that are entitled to treaty benefits under a comprehensive income tax treaty
with the United States.
Comment 11: Exempt Separate Depository Accounts Not Exceeding $50,000.
Depository accounts that do not exceed $50,000 on a non-aggregated basis and that
have not been structured to avoid the purposes of the Bill should be excluded from
the definition of United States account. (22)
The Bill provides two de minimis thresholds, one at $10,000 for new accounts and one
at $50,000 for existing accounts, to determine whether a depositary account
held by an individual may be exempt from FFI information reporting. In applying
the thresholds, all accounts throughout an FFIO˜ s expanded affiliated group must
be aggregated. SIFMA believes that it would not be practical or perhaps legal for
FFIs to collect the information necessary to aggregate the value of all depositary
accounts across their expanded affiliated groups for purposes of applying the de minimis
test, for the same reasons noted above with respect to aggregating knowledge
that could potentially cause an FFI to question the correctness of a certification. In
addition, having two tests would make compliance substantially more difficult, since
an FFI would have to implement two different tracking mechanisms in addition to
the many other compliance systems that it would be required to develop to comply
with the Bill. As a consequence, SIFMA would suggest that the de minimis threshold
be revised to a uniform level of $50,000, applied on a non-aggregated basis, and
that potential abuse concerns be addressed with a targeted anti-abuse rule that aggregates
accounts that have been structured to avoid the purposes of the Bill.
Comment 12: Allow Simplified Form 1099 Reporting by FFIs.
The alternative reporting election available to FFIs should allow simplified Form
1099 reporting, rather than full Form 1099 reporting, in order to induce more FFIs
to elect this more useful reporting alternative. (23)
The Bill is responsive to many of the concerns expressed in SIFMA’s prior comment
letter on the Obama Administration’s offshore tax compliance proposals.
SIFMA in particular welcomes the Bill’s simplified reporting regime for FFIs that
would apply as a default matter (the default reporting regime). SIFMA also welcomes
the flexibility provided by the election to opt for full Form 1099 reporting if
an FFI so desires. The latter election would be much easier for FFIs to implement,
however, and thus much more likely to be adopted, if it provided for simplified Form
1099 reporting that contains more information than the default reporting regime,
but less than full Form 1099 reporting would require. SIFMA would be pleased to
work with the Treasury Department and the IRS to develop a process for such simplified
Form 1099 reporting. In general, SIFMA contemplates that such reporting
would be limited to cash payments, and would not require an FFI to, e.g., report
any income on an accrual basis, deemed income, adjusted tax basis, or any supplemental
information that might otherwise be required. This would mean that an FFI
would report cash payments of dividends, interest, royalties, and gross proceeds
from the sales of securities, but would not be required to report accruals of original
issue discount on long-term obligations, foreign tax withheld, deducted investment
expenses, adjusted issue price, market discount information on REMICs or CDOs,
imputed income or supplemental information on a widely held fixed income trust,
or similar tax information. This would obviate the need, among other things, to reclassify
income paid, track holding periods, make complicated tax calculations to determine
income amounts, or perform tax lot accounting for securities sold in order
to prepare Form 1099s. SIFMA believes that these simplifications would not significantly
impair the IRS’s ability to combat offshore tax evasion, and that the simplified
Form 1099 information would indeed be substantially more useful to the IRS
than the information that it would receive under the default reporting regime. As
a consequence, SIFMA believes that the goals of the Bill would be advanced by providing
for a simplified Form 1099 reporting alternative.
Comment 13: Allow FFIs to Receive Refunds or Credits of the Withholding
Tax in Additional Cases.
As a matter of fundamental fairness, an FFI should be allowed to receive a refundor credit with respect to amounts withheld in the same circumstances as other investors.(24)
The Bill provides that, except to the extent required by a treaty, no refund or
credit of the withholding tax imposed by the Bill will be available if the beneficial
owner of a withholdable payment is an FFI. This rule is punitive in nature (since
other beneficial owners are permitted to receive such refunds and credits where they
disclose their beneficial ownership). Its purpose is presumably to induce FFIs to
enter into reporting agreements with the IRS, in order to avoid the withholding tax
in the first instance. As a matter of fundamental fairness, SIFMA believes that FFIs
should be allowed the same refund and credit possibilities as other investors if they
disclose their beneficial ownership of a withholdable payment. At a minimum, the
Treasury Department and the IRS should be authorized and directed to provide
such refunds where the withholding tax results from an inadvertent or temporary
disqualification of an FFI that is otherwise compliant, and where an FFI subsequently
enters into or reestablishes an information reporting agreement with the
IRS within a certain period after the withholding.
Comment 14: Coordinate with Other Withholding and Information Reporting
Although the Bill provides appropriate coordination language with respect to the
existing withholding provisions of Section 1441 (withholding tax on nonresident
aliens) and Section 1445 (withholding tax on dispositions of U.S. real property interests),
additional coordination language should be added with respect to other sections,
including but not limited to Section 1442 (withholding tax on foreign corporations),
Section 1446 (withholding tax on foreign partnersO˜ share of effectively connected
income), Section 3402 (wage withholding), Section 3405 (withholding tax on
pension, annuities, and other deferred income), Section 3406 (backup withholding
tax), and Section 4371 (foreign insurance excise tax).
In addition, the Bill should provide for appropriate coordination language with respect
to existing information reporting provisions, including but not limited to Section
6041 (information at the source), section 6041A (returns regarding payments
of remuneration for services and direct sales), Section 6042 (returns regarding payment
of dividends), Section 6045 (returns of brokers), and Section 6049 (returns regarding
payment of interest).
Comment 15: Provide for Further Limits to the Definition of
Withholdable Payment. (26)
The definition of withholdable payment is extremely broad, and appears to include
many items that pose a very low risk of facilitating U.S. tax evasion (including, e.g.,
payments for services performed in the United States; adjustments required under
section 482; issuances of stock in tax-free reorganizations; and intercompany payments
between a U.S. company and a foreign affiliate). Although the FE information
reporting and withholding regime provides a mechanism for the Secretary of the
Treasury to exclude certain payments from the withholding tax, the FFI information
reporting and withholding regime does not contain a similar payment-based carveout
SIFMA recommends that the Bill authorize the Secretary of the Treasury to exclude
from the entire definition of withholdable payment any payments that pose
a low risk of tax evasion, and that the Treasury Department and the IRS be directed
to consider the exclusion of the above-noted payments (and others) under this
Comment 16: Address Tiering Issues.
The Bill or its legislative history should provide guidance to the Treasury Department
and the IRS regarding tiered ownership issues.
In addition to the points raised in the foregoing comments, there are a number
of other more mechanical issues raised by the Bill. For the most part, a discussion
of these issues would be beyond the scope of this letter, and is better left to the
regulatory process. One particular area of concern, however, will be the application
of the new information reporting and withholding rules in the case of tiered FFIs
and withholding agents. SIFMA believes that it would be helpful if the Treasury Department
and the IRS could be given some direction, in either the text of the Bill
or legislative history, regarding the way that certain tiered ownership situations are
intended to be addressed.
One important situation that will need to be addressed concerns a payment made
by one FFI to another FFI. In this case, SIFMA would suggest that primary information
reporting responsibility should be placed on the recipient FFI, since that FFI
will have the closer relationship to the beneficial owner (or will be the beneficial
owner), and will accordingly be in the best position to provide appropriate information
to the IRS. As a consequence, the payor FFI should be exempted from any information
reporting or withholding requirements in respect of the payment so long
as the recipient FFI confirms that it has entered into an information reporting
agreement with the IRS. SIFMA believes that clarification of this intended result
will be particularly critical in the case of certain investment fund FFIs (e.g., foreign
mutual funds) that hold U.S. securities and that have beneficial owners that hold
their interests in the investment fund FFI through other entities (e.g., a mutual
fund distributor), where such other entities are themselves reporting FFIs.
Another tiering issue that will need to be addressed concerns the case where an
FFI establishes an account on behalf of a customer directly with a U.S. payor that
files Form 1099 reports. In that case, SIFMA would recommend that the U.S. payor
be given primary information reporting responsibility with respect to the account,
and that the FFI should be exempted from any information reporting or withholding
requirements in respect of the account so long as the U.S. payor confirms that it
will undertake that responsibility.
We appreciate the opportunity to comment on the Bill and to provide our recommendations
for improving offshore tax compliance. We would welcome the opportunity
to discuss our recommendations in more detail and hope to provide further
comments and suggestions as the legislation progresses. If you have any questions
or need more information, please do not hesitate to contact Ellen McCarthy, or Scott
Kenneth E. Bentsen, Jr.
Executive Vice President, Public Policy and Advocacy
(1)SIFMA brings together the shared interests of securities firms, banks, and asset managers.
SIFMA’s mission is to promote policies and practices that work to expand and perfect markets,
foster the development of new products and services, and create efficiencies for member firms,
while preserving and enhancing the public’s trust and confidence in the markets and the industry.
SIFMA works to represent its members’ interests locally and globally. It has offices in New
York, Washington D.C., and London and its associated firm, the Asia Securities Industry and
Financial Markets Association, is based in Hong Kong.
(2) A companion bill, S. 1934, was introduced on the same day by Senate Finance Committee
Chairman Max Baucus (D–MT) and Senator John Kerry (D–MA). Also on October 27, an accompanying
technical explanation prepared by the Staff of the Joint Committee on Taxation (the
JCT Report) was released.
(3)Section 101(d) of the Bill.
(4)For example, the new basis reporting rules of sections 6045(g) & (h), 6045A, and 6045B were first proposed by the Joint Committee on Taxation in its August 3, 2006, report on Additional Options to Improve Tax Compliance. They were eventually enacted into law in October 2008.
Thus far, the Treasury Department and the IRS have not issued proposed versions of any of
the regulations that will be necessary to implement the rules. Unless otherwise indicated, section
references herein are to the Internal Revenue Code of 1986, as amended (the Code).
(5)We note, for example, that the IRS did not provide a first draft of the much needed Model Qualified Intermediary Agreement until January 1999, despite the fact that the qualified intermediary (QI) regime was first introduced in proposed regulations issued in April 1996 and that
final regulations were issued in October 1997. The absence of this Model Qualified Intermediary
Agreement and the fact that necessary refinements to certain critical sections of the final regulations
occurred after 1997 caused the effective date of the final regulations to be postponed
multiple times to, eventually, January 2001. As another example, we note that the IRS introduced
temporary regulations in November 1987 that required payors to send backup withholding
notices (B–Notices) to payees informing them that they had provided an incorrect taxpayer
identification number and that they would be subject to backup withholding tax if this
failure were not timely rectified. The IRS did not provide payors with a model B–Notice, however,
until August 1989.
(6)Proposed section 1473(1).
(7)For example, interest and original issue discount on an obligation with a term of 183 days or less are generally exempt from current nonresident gross income and withholding tax. See
(8)Sections 102(d) and 101(d)(2)(A) of the Bill.
(9)Section 101(d)(2)(B) of the Bill.
10 A typical CDO is structured as an offshore corporation that invests in loans and other debt instruments issued by U.S. companies. Such CDOs in turn issue several classes of non-publicly traded debt and equity securities themselves, which divide up the cash flows on the underlying
U.S. investments. Another example of a typical securitization vehicle is a grantor trust that invests
in U.S. debt or equity investments and in turn issues pass-through certificates that represent
the cash flows on those investments. Pass-through interests in U.S. investments could
also be structured as shares of an offshore cell company.
(11) Note that there is precedent for a targeted exception from otherwise applicable rules for securitization vehicles, including an appropriate limiting definition, in section 743(f). (12)Proposed section 1471(d)(4).
(13)See Treasury regulations Section 1.6049–5(c)(5) for the complete list of entities that are considered U.S. payors for Form 1099 information reporting purposes.
(14)Proposed section 1471(c)(3).
(15)For example, the sharing of relevant information may be prohibited under the so-called Chinese Walls required under U.S. securities laws. See, e.g., 15 U.S.C. 78o(f) (2006) (requiring
broker-dealers to adopt policies and procedures designed to prevent insider trading and tipping);
15 U.S.C. 80b–4a (2006) (requiring investment advisors to establish policies and procedures reasonable
designed to prevent insider trading and tipping).
(16) Cf. Treasury regulations Section 1.1441–1(e)(4)(ix)(A).
(17)Proposed section 1471(d)(1).
(18) Under the current QI program, QIs have long been able to rely on KYC documentation in
lieu of obtaining certifications in appropriate cases. See Revenue Procedure 2000–12.
(19)Such investment fund FFIs have invested billions of dollars in the United States, and it will be very important to their decision to continue such investments that they have a clear idea from the outset as to how the new information reporting and withholding regimes will apply
(20)Proposed section 1473(2).
(21)Proposed sections 1472(c)(1)(A) and 1473(3)(A) & (C).
(22)Proposed section 1471(d)(1).
(23)Proposed section 1471(c)(2).
(24)Proposed section 1474(b).
(25)Section 101(b) of the Bill.
(26)Proposed section 1473(1).
(27) Compare proposed section 1472(c)(2) with proposed section 1471(f)(4).