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Firm Seeks Equity for Non-U.S. Individuals Under FATCA Reporting Rules

DEC. 11, 2014

Firm Seeks Equity for Non-U.S. Individuals Under FATCA Reporting Rules

DATED DEC. 11, 2014
DOCUMENT ATTRIBUTES

 

December 11, 2014

 

 

The Honorable Mark J. Mazur

 

Assistant Secretary (Tax Policy)

 

1500 Pennsylvania Ave., NW

 

Washington, DC 20220

 

 

The Honorable John A. Koskinen

 

Commissioner

 

Internal Revenue Service

 

1111 Constitution Ave., NW

 

Washington, DC 20224

 

 

The Honorable William J. Wilkins

 

Chief Counsel

 

Internal Revenue Service

 

1111 Constitution Ave., NW

 

3026 IR

 

Washington, DC 20224

 

Re: Joint Account Rules of the Qualified Intermediary Agreement

 

Dear Sir or Madam:

In response to Revenue Procedure 2014-39 (the "Revised QI Agreement") and the amendments to the Revised QI Agreement posted to IRS.gov on September 23, 2014 (the "Amendments"), we are pleased to submit comments on behalf of our client, the Swiss Bankers Association ("SBA").1 We appreciate the considerable efforts of the Internal Revenue Service ("IRS") and the Department of the Treasury ("Treasury") to provide qualified intermediaries ("QI") with additional guidance relating to the QI regime, as well as Chapter 4 of the Internal Revenue Code ("FATCA"). Specifically, we appreciate the retention of the so-called Joint Account rules in Section 4.05 of the Revised QI Agreement and the modifications to such rules detailed in the Amendments (the "Joint Account Rules"). As discussed herein, we respectfully request that the IRS and Treasury allow QIs to have until June 30, 2016 to document the Chapter 4 status of accountholders utilizing the Joint Account Rules and implement a transition rule that permits the Joint Account rules of the prior QI Agreement to continue to apply until such time.2

Since their inception, members of the SBA and other QIs outside of Switzerland, have welcomed the use of simplified information reporting procedures for non-US partnerships and non-US trusts which have no US beneficial owners.3 We understand QIs throughout the world regularly utilize these simplified procedures and wish to continue to offer such services to accountholders. Likewise, accountholders that use these procedures want to continue to benefit from such simplified treatment.

QIs have been working vigorously to implement the procedures required by the Revised QI Agreement and the Amendments, including the Joint Account Rules, since the publication of the Revised QI Agreement on June 27, 2014. Pursuant to the Joint Account Rules, QIs must document the Chapter 4 status of accountholders at account opening, when an account is opened after June 30, 2014. On the other hand, the Joint Account Rules may be read to require that QIs must document the Chapter 4 status of an accountholder that benefitted from the Joint Account rules of the prior QI Agreement (i.e., an account existing prior to July 1, 2014) ("existing accountholders") by December 31, 2014.

We understand that the decision by the IRS and Treasury to permit an entity that maintains a preexisting account at a foreign financial institution ("FFI") to document its Chapter 4 status by June 30, 2016 was designed, in part, to reduce the burdens imposed on non-US entities and facilitate the orderly implementation of FATCA. Consequently, current IRS Instructions related to Forms W-8BEN-E and W-8IMY (including the requestor instructions) explicitly provide that non-US entities that maintain preexisting accounts have until June 30, 2016 to provide details of their Chapter 4 status to withholding agents. Stakeholders welcomed this approach as it facilitated a more orderly implementation of FATCA than would otherwise have been the case. That being said, a significant number of entities that maintain preexisting accounts at FFIs have only begun the process of ascertaining their Chapter 4 status on account that they are not obligated to provide this information to their financial institution until June 30, 2016.

We generally understand that existing accountholders that are contacted by QIs requesting the entity's Chapter 4 status fall within three categories. Some entities are only first learning of FATCA and their obligation to ascertain their Chapter 4 status. These entities are simply unprepared to provide this data by December 31, 2014. Other entities might be aware of the existence of FATCA, but believe that prior IRS and Treasury guidance gives them the right to provide Chapter 4 documentation to their financial institution by June 30, 2016 and have therefore not reached a point where they are comfortable certifying their Chapter 4 status. Additionally, a minority of entities located in jurisdictions that have entered into Model 1 IGAs with the United States rely on the terms of their IGA to conclude that they have no obligation to confirm their Chapter 4 status to anyone (including the IRS) prior to January 1, 2015. In response, QIs have been diligently educating clients regarding the requirements of FATCA. While substantial efforts relating to client outreach have been ongoing, it takes time and effort and the fact remains that many existing accountholders, including those that utilize the Joint Account Rules, are simply unprepared to provide their Chapter 4 status to a QI.

Given the fact that existing accountholders are not prepared to provide the documentation required to benefit from the Joint Account Rules, there are few remaining options available to accountholders and QIs. If QIs and existing accountholders are not afforded sufficient time for an effective implementation of the Joint Account rules and the related documentation requirement, we believe that unnecessary business disruptions and potentially adverse consequences will result, including the expected divestment of US securities by existing accountholders.

In a public conference IRS inquired whether the agreement entered into between QI and accountholder permitting the use of the Old Joint Account Rules would, in all cases, require the QI to enter into a new agreement with an accountholder to utilize the Joint Account Rules.4 We further understand that in crafting the Joint Account Rules, the IRS may have believed that if a QI and its accountholder are obligated to enter into a new agreement to utilize the Joint Account Rules, it may not have been considered onerous to also require the QI to obtain the Chapter 4 status of the accountholder. We expect that while some QIs may take the position that their prior agreement with an accountholder does not require an update to explicitly reflect the Joint Account Rules, others may reach a different conclusion. Accordingly, some QIs may potentially avoid having to obtain the Chapter 4 status of accountholders prior to December 31, 2014 and will continue to offer simplified reporting opportunities to their accountholders, while others may not unless substantial efforts are made to execute new agreements and document the Chapter 4 status of accountholders. We note that proprietary differences in long-standing contractual boilerplate should not be the basis to permit some QIs and their accountholders to benefit over others. We respectfully recommend that the IRS and Treasury provide all QIs with an equal basis to continue to use the Joint Account Rules by harmonizing the chapter 4 documentation requirements between FATCA and the Joint Account Rules.

QIs that take the position that they need to "renew" their Joint Account Rules agreement with accountholders prior to December 31, 2014 have been using their best efforts to accomplish this task in the few months since the Revised QI Agreement was issued. For instance, despite the best efforts of SBA members to obtain the Chapter 4 status of existing accountholders, some accountholders are simply not prepared to provide this data by year end. Part of this difficulty is due to the disparate requirements to document so-called "preexisting accounts" held by entities for purposes of FATCA and existing accountholders pursuant to the Joint Account Rules.

We believe that harmonizing the documentation rules for purposes of FATCA and the Joint Account Rules is reasonable and appropriate. Providing such transitional relief should have no impact regarding the identification and reporting of US persons, as existing accountholders were already prohibited from having US beneficial owners under the Old Joint Account Rules. Accordingly, granting such relief would not increase the risk of improper tax avoidance of the type that FATCA was designed to prevent. During this transitional period (until June 30, 2016), the Old Joint Account Rules of the former QI Agreement would, in effect, continue to apply.

In closing, we acknowledge the substantial effort that has been made by the IRS and Treasury to seamlessly implement the Revised QI Agreement and FATCA. We also take note of the remarkable efforts of QIs to implement the Revised QI Agreement, while adjusting to the continuing developments relating to FATCA. We respectfully, urge the IRS and Treasury to harmonize the seemingly disparate requirements of FATCA and the Joint Account Rules in order to achieve an equity result for non-US persons who simply wish to continue to benefit from a longstanding simplification of an information reporting rule.

Sincerely,

 

 

Jonathan A. Sambur

 

Mayer Brown LLP

 

Washington, DC

 

cc:

Mr. Robert Stack, Deputy Assistant Secretary (International Tax Affairs)

Ms. Danielle Rolfes, International Tax Counsel

Mr. Steven Musher, Associate Chief Counsel (International)

Mr. John Sweeney, Chief, CC:INTL:8

Ms. Tara Ferris, Senior Counsel, CC:INTL:8

Mr. Theodore Setzer, Director, Foreign Payments Program, LB:I

 

FOOTNOTES

 

 

1 The SBA functions both as a self-regulatory organization and trade association for almost every bank operating in Switzerland, including US banks with branches or subsidiaries there. Its membership includes Switzerland's two largest Swiss banks with substantial U.S. operations as well cantonal banks, private banks, securities dealers, and auditing companies active in Switzerland.

2 The Joint Account Rules are applicable to accountholders that opened an account on or after July 1, 2014. Although this letter is focused on accounts outstanding prior to July 1, 2014, the logic discussed herein applies equally to accounts that are opened between July 1, 2014 and December 31, 2014 (i.e., entity accounts that are preexisting obligations for purposes of FATCA).

3 Revenue Procedures 2003-64 (for withholding partnerships and withholding trusts) and 2004-21 (for QIs) (collectively, the "Old Joint Account Rules").

4 E.g., does the agreement between the QI and the accountholder that permits the use of the Old Joint Account Rules continues to have effect following the issuance of the Revised QI Agreement, or whether the particular agreement incorporates by reference any revisions to the then-existing QI Agreement, including the modifications to the Joint Account Rules.

 

END OF FOOTNOTES
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