Banks Seek to Ward Off Abuse of Their Proposed Withholding Exception

09 October 2019

Ms. Kamela Nelan
Attorney-Advisor (Office of Tax Policy)
Department of the Treasury
1400 Pennsylvania Avenue, NW
Washington, DC 20224

Mr. Ray Stahl
Office of Associate (Chief Counsel), International
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Mr. John Sweeney
Office of Associate (Chief Counsel), International
Branch Chief, Branch 8
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Mr. Ron Gootzeit
Office of Associate (Chief Counsel), International
Counsel, Branch 4
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Recommendations on proposed regulations under section 1446(f)

Dear Gentlemen and Madam:

We respectfully submit this letter on behalf of Barclays Bank PLC (“Barclays”) and Bank of Montreal (“BMO”) to further respond to the request for comments in the Notice of Proposed Rulemaking under Section 1446(f)¹ relating to transfers of interests in publicly traded partnerships (“PTPs”) by foreign persons. On July 15, 2019, Barclays and BMO submitted a comment requesting an exception to Section 1446(f) withholding for non-US taxpayers who furnish a valid Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States, to the relevant withholding agent.

We appreciate that IRS and Treasury may have concerns as to whether such an exception to withholding could result in taxpayers furnishing Forms W-8ECI in inappropriate situations, including where taxpayers are not otherwise filing US tax returns. In order to address any concern, we are submitting additional comments.

We envision that final regulations under Section 1446(f) would provide this exception, and related instructions to the Form W-8ECI would require that taxpayers claiming this exception to withholding must specify gain from the sale, exchange, or other disposition of an interest in a PTP on line 11 of the Form W-8ECI as an item of effectively connected income. In order to address the concern mentioned above, we believe final regulations and instructions to the Form W-8ECI could provide that non-US persons are entitled to claim this exception from withholding only to the extent that gain or loss from the disposition of the partnership interest would be effectively connected with a US trade or business without regard to the application of Section 864(c)(8). Further, we would support requiring a taxpayer to specifically make such a statement on line 11 of the Form W-8ECI in addition to specifying the gain from the sale, exchange, or other disposition of an interest in a PTP as an item of effectively connected income.

In this manner, a taxpayer who does not hold a PTP interest in connection with a US trade or business for which the taxpayer independently files a US tax return would not be eligible for this exception. We believe these requirements and conditions would act as a limit to the number of non-US persons eligible to claim the requested exception.²

If the government continues to have concerns with potential abuse this exception might invite, we believe that further limiting the availability of this exception to dealers in securities would sufficiently address any such risk. Dealers are most at risk of excessive withholding because of the sheer number of transactions they enter into. Consequently, if the government believes a further limitation is necessary, we would propose the final regulations and instructions to the Form W-8ECI provide that the exception is limited to non-US taxpayers that are dealers in securities within the meaning of Section 475(c)(1). A person claiming the exception would need to certify its dealer status on the Form W-8ECI (either through a new checkbox or a representation on line 11), and a withholding agent's reliance on that certification would be subject to the same actual knowledge standard as other Section 1446(f) certifications.

We believe restricting the exception to securities dealers would further ensure that the exception is a limited one, and therefore less likely to be claimed by a wide number of non-US persons. Securities dealer status requires regular transactions with customers in the ordinary course of a trade or business, and thus represents a barrier to foreign persons who merely wish to avoid Section 1446(f) withholding. Further it would provide targeted relief to the type of business conducted by non-US persons in the US most likely to be significantly impacted by the Section 1446(f) withholding regime in the manner we have outlined.

We have considered alternative limitations to propose to the government, but in each case encountered situations where either the limitations proved too restrictive, or where the limitations might insufficiently discourage improper claims for the exception. For example, we considered limiting the exception to dealers using the definition of dealers in securities in Treas. Reg. § 1.6045-1(c)(3)(i)(B)(6) rather than the Section 475(c)(1) definition. However, given the different ways non-US financial institutions are regulated, using the Treas. Reg. § 1.6045-1(c)(3)(i)(B)(6) definition for dealers in securities would not provide relief with respect to a significant portion of PTP transactions based on some of our structures. We believe that using the Section 475(c)(1) definition is best suited for purposes of the requested exception because it both is a well-understood standard in the industry and would be expected to limit significantly the number of non-US taxpayers claiming the exception.

As stated in the letter dated July 15, 2019 submitted by Barclays and BMO, the projected withholding tax under Section 1446(f) on gross proceeds on PTP positions associated with the banks' US businesses is significant and is expected to greatly exceed the amount of income tax due with respect to this trading activity. Accordingly, we are committed to working with the IRS and Treasury on a withholding exception for our industry. If the government continues to have reservations or concerns over potential abuse, we would welcome the opportunity to explore alternative ways of addressing those concerns. You may reach Tara Ferris at (201) 551-5014 or tara.ferris@ey.com and Jonathan Jackel can be reached at (202) 327-5725 or jonathan.jackel@ey.com.

Sincerely,

Tara N. Ferris
A member firm of Ernst & Young Global Limited
Ernst & Young LLP
Hoboken, NJ