Menu
Tax Notes logo

PwC Suggests Changes Under Final Regs Implementing FATCA

JUL. 10, 2013

PwC Suggests Changes Under Final Regs Implementing FATCA

DATED JUL. 10, 2013
DOCUMENT ATTRIBUTES

 

PUBLIC SUBMISSION

 

 

Docket: IRS-2012-0009

 

Information Reporting by Foreign Financial Institutions and

 

Withholding on Certain Payments, etc.

 

 

Comment On: IRS-2012-0009-0001

 

Information Reporting by Foreign Financial Institutions and

 

Withholding on Certain Payments, etc.

 

 

Document: IRS-2012-0009-0287

 

Information Reporting by Foreign Financial Institutions and

 

Withholding on Certain Payments, etc. (REG-121647-10)

 

Submitter Information

 

 

Name: Steve Nauheim

 

Address: United States,

 

Organization: PricewaterhouseCoopers, LLC

 

General Comment

 

 

From: stephen.a.nauheim@us.pwc.com

 

[mailto:stephen.a.nauheim@us.pwc.com]

 

Sent: Wednesday, July 10, 2013 1:22 PM

 

To: Sweeney John

 

Cc: Eggert Jesse -- OTP; Tara.Ferris@irs.gov

 

Subject: FATCA Technical Corrections

 

 

John,

We have come up with a few more candidates for technical corrections to the regulations. These are al clarifications to the rules relating to excepted FFIs in Reg. Sec. 1.1471-5(e)(5).

First, with respect to the definition of a treasury center in Reg. Sec. 1.1471-5(e)(5)(i)(D)(1), some of the activities a treasury center may undertake include managing the working capital of the EAG and acting as a financing vehicle for EAG members. However, the wording could be read to inappropriately restrict the scope of the rules:

  • Reg. Sec. 1.1471-5(e)(5)(i)(D)(1)(iv) states: "Managing the working capital of the expanded affiliated group (or any member thereof) by investing or trading in financial assets solely for the account and risk of such entity or any member of its expanded affiliated group." The underlined language implies that an entity that manages working capital but does not invest or trade may not satisfy this definition. For example, a group's cash pooling entity may be in a net deficit position and may therefore not be investing or trading in financial assets. We understand that this is not an unusual fact pattern in current times.

  • We suggest clarifying that an entity that manages the working capital of the EAG (or any member thereof) will not cease to qualify as a treasury center if it has no investments and does not trade in financial assets. The provision could be revised to read as follows: " Managing the working capital of the expanded affiliated group (or any members thereof) such as by pooling the positive and deficit cash balances of affiliates or by investing or trading in financial assets solely for the account and risk of such entity or any member of its expanded affiliated group."

  • Reg. Sec. 1.1471-5(e)(5)(i)(D)(1)(v) states: "Acting as a financing vehicle for borrowing funds for use by the expanded affiliated group (or any member thereof)." This language could be read to provide that the financing vehicle itself must be a borrower of funds that it on-lends to group members and that a financing entity that is itself equity funded cannot qualify as a treasury center. Equity funded treasury centers are not uncommon.

  • We suggest clarifying this provision by revising it to read "Acting as a financing vehicle for use of funds by the expanded affiliated group (or any member thereof)."

 

The other suggested technical correction involves the excepted FFI category for inter-affiliate FFIs:
  • Reg. Sec. 1.1471-5(e)(5)(iv), which provides an excepted FFI status for inter-affiliate FFIs is restricted to FFIs that are members of a participating FFI group. It appears the same reasons for not treating such entities as FFIs apply with even greater force to entities that perform similar functions within nonfinancial groups.

  • We suggest revising the first part of Reg. Sec. 1.1471-5(e)(5)(iv) to read "A foreign entity that is a member of a participating FFI group or a nonfinancial group (as such term is defined in Reg. Sec. 1.1471-5(e)(5)(i)(B)) if-".

 

We are happy to discuss these with you.
Regards,

 

 

Steve and Nils

 

 

Steve Nauheim

 

Managing Director

 

PricewaterhouseCoopers LLP

 

(pwc.com)

 

1301 K Street NW

 

Washington, DC 20005

 

Telephone: +1 202 414 1524

 

Facsimile: +1 813 288 7895

 

Mobile: +1 202 415 0625

 

WNTS ITS

 

stephen.a.nauheim@us.pwc.com

 

* * * * *

 

 

PUBLIC SUBMISSION

 

 

Docket: IRS-2012-0009

 

Information Reporting by Foreign Financial Institutions and

 

Withholding on Certain Payments, etc.

 

 

Comment On: IRS-2012-0009-0001

 

Information Reporting by Foreign Financial Institutions and

 

Withholding on Certain Payments, etc.

 

 

Document: IRS-2012-0009-0286

 

Information Reporting by Foreign Financial Institutions and

 

Withholding on Certain Payments, etc. (REG-121647-10)

 

Submitter Information

 

 

Name: Steve Nauheim

 

Address: United States,

 

Organization: PricewaterhouseCoopers, LLP

 

General Comment

 

 

  • 1) Sponsored entities --

  • consistent with footnote 7 of Annex II of the Model 1 IGA, the responsibilities of the Sponsoring Entity that sponsors both entities in IGA jurisdictions and non-IGA jurisdictions should be consistent with responsibilities of each Sponsored Entity;

  • in addition, the responsibilities of the Sponsoring Entity should be no greater than those that would otherwise apply to the Sponsored Entity;

  • clarify whether a Sponsoring Entity reports to the local revenue authority or to the IRS when either the Sponsored or the Sponsoring Entity is in an IGA jurisdiction;

  • clarify whether a Sponsoring Entity can sponsor a branch in an IGA jurisdiction; and

  • clarify the requirement that the Sponsoring Entity has to be able to "manage" the Sponsored Entity -- that this does not mean managing all business decisions but only those relevant to FATCA compliance.

  • (2) Inter-Affiliate FFI -- The definition as currently drafted excludes any entity that has a bank account (because they have a "financial account" with a party other than an affiliate). Almost all holding companies and "blockers" have external financial accounts of some kind (even if it is just a bank account to hold funds as they pass through the holding company). A revision to the definition that permits a bank account with a third party as acceptable transaction with a non-affiliate would address the concern and make the category significantly more useful.

    (3) EAG --

  • The regulations do not permit a participating FFI to have affiliates that are exempt beneficial owners. This appears inconsistent with the characteristics of EBOs as presenting a low risk of tax evasion. A carve out from EAG for exempt beneficial owners would be consistent with the exclusion of tax-exempts governed by section 501 under section 1504.

    • It would be helpful to clarify that an EBO will not lose its status if it has a non-compliant FFI in the EAG (e.g., if it takes a majority ownership stake in an FFI that turns out to be non-compliant).

    • Need a know or reason to know standard in determining members of an EAG. (For example, if a foreign fund is owned more than 50% vote and value by an FFI, need to clarify that the foreign fund does not have to include all of the affiliates of the FFI investor that it does not know or have reason to know of their existence/status.)

    • Need guidance on the treatment of an EAG that is not part of a single consolidated compliance environment.

     

    (4) Definition of FFI (overlap between investment entity and holding company definitions) -- Rules such as 1.1471-6(g) require an entity to be an FFI "solely because it is an investment entity." However, in many cases there appears to be significant potential that investment entities technically also meet the definition of a holding company/treasury center FFI. The "solely because it is an investment entity" standard should be clarified. For example, require that the entity must be an investment entity and may not also be a depository institution, custodial institution, or specified insurance company.

    (5) Pre-existing obligation definition -- Should expand definition to all accounts held by funds managed by a single investment manager (or affiliated group of investment managers) even if the funds do not opt into "sponsored entity" status.

    (6) Treatment of distributors outside of restricted funds -- Clarify treatment of omnibus accounts and similar arrangements where the distributor holds the shares in their name as an undisclosed nominee of the beneficial owners.

    (7) Other items:

  • Reg. 1.1471-5(f)(2) provides that any nonreporting IGA FFI is a certified deemed-compliant FFI (with no distinction made between Model 1 or 2 nonreporting FFIs). However, -- 5(f)(1) indicates that Model 2 nonreporting FFIs are registered deemed-compliant. The treatment of FFIs treated as nonreporting under an IGA should be clarified.

  • Bearer shares: suggest changing the rule that the fund cannot have issued bearer shares after Dec. 31, 2012 to a later date to account for the fact that the regulations had not been released as of that date so that funds would have no way of knowing they would have to stop issuing them.

  • Steve Nauheim

     

    Managing Director

     

    PricewaterhouseCoopers LLP

     

    (pwc.com)

     

    1301 K Street NW

     

    Washington, DC 20005

     

    Telephone: +1 202 414 1524

     

    Facsimile: +1 813 288 7895

     

    Mobile: +1 202 415 0625

     

    WNTS ITS

     

    stephen.a.nauheim@us.pwc.com

     

* * * * *

 

 

PUBLIC SUBMISSION

 

 

Docket: IRS-2012-0009

 

Information Reporting by Foreign Financial Institutions and

 

Withholding on Certain Payments, etc.

 

 

Comment On: IRS-2012-0009-0001

 

Information Reporting by Foreign Financial Institutions and

 

Withholding on Certain Payments, etc.

 

 

Document: IRS-2012-0009-0277

 

Information Reporting by Foreign Financial Institutions & Withholding

 

on Certain Payments, etc. (REG-121647-10)

 

Submitter Information

 

 

Name: Steve Nauheim

 

Address: United States,

 

Organization: PriceWaterHouseCoopers, LLP

 

General Comment

 

 

From: stephen.a.nauheim@us.pwc.com

 

[mailto:stephen.a.nauheim@us.pwc.com]

 

Sent: Thursday, May 23, 2013 11:46 AM

 

To: Sweeney John

 

Cc: Eggert Jesse -- OTP; Ferris Tara N; nils.cousin@us.pwc.com;

 

candace.b.ewell@us.pwc.com

 

Subject: FATCA Technical Correction re Sponsored FFIs?

 

 

John

We wanted to bring to your attention a question we have seen frequently arising that may be appropriate to address in technical corrections regulations. Namely, the requirements in relation to Sponsored Investment Entities (and CFCs) under reg. sec. 1.1471-5(f)(1)(i)(F). The Sponsored Entity category is one that has been received enthusiastically as a way to reduce burdens on families of funds by centralizing the responsibilities in the sponsoring entity. However, one of the requirements to be a sponsoring entity is that the sponsor agrees to perform, on behalf of each sponsored FFI, all due diligence, withholding, reporting, and other requirements that the FFI would have been required to perform if it were a participating FFI. It is unclear what this means if the potentially sponsored FFI is in a Model 1 IGA jurisdiction, or, correlatively, the potentially sponsoring FFI is in a Model 1 IGA jurisdiction. In either case, the due diligence, withholding and reporting under the IGA may be materially different from what it would be for a participating FFI. I would have thought the intent would be to impose upon a sponsoring FFI the responsibility to fulfill whatever obligations the sponsored FFI would otherwise have. If the sponsored FFI is in an IGA jurisdiction, I would have thought the appropriate obligations would be those imposed by the IGA. Similarly, it is not clear why an FFI that qualifies for a deemed compliant category could not be a sponsored FFI if all of its obligations are satisfied by a sponsor. Finally, if the sponsoring FFI is in a jurisdiction that restricts direct reporting to the IRS but is also party to an IGA, it would seem to make sense to allow the sponsoring IGA to report to its local tax authority for ongoing transmission to the IRS.

With regards,

 

 

Steve Nauheim

 

Managing Director

 

PricewaterhouseCoopers LLP

 

(pwc.com)

 

1301 K Street NW

 

Washington, DC 20005

 

Telephone: +1 202 414 1524

 

Facsimile: +1 813 288 7895

 

Mobile: +1 202 415 0625

 

WNTS ITS

 

stephen.a.nauheim@us.pwc.com

 

* * * * *

 

 

Seed Capital Rule:

Proposed rule:

Add a new Section 1.1471-5(i)(2)(iii), which provides:

(iii) Exception for Certain Funds. Notwithstanding the rules of this subsection (i), a collective investment vehicle will be deemed not to be a part of an expanded affiliated group with a provider of seed capital to the fund if each of the following requirements is met:

 

(A) The seed capital is provided, directly or indirectly, by a person that is in the business of establishing or promoting collective investment vehicles, or by a person that is related to a person that is in the business of establishing or promoting collective investment vehicles;

(B) The seed capital is provided to the collective investment vehicle in the ordinary course of business of the provider;

(C) The sponsor of the collective investment vehicle has created the collective investment vehicle with the intention that it be marketed and sold to parties unrelated to the sponsor;

(D) The seed capital is documented as such on or before the date that it is contributed to the collective investment vehicle;

(E) The seed capital is contributed to the collective investment vehicle with the intention that it be withdrawn over time; and

(F) Within three years of the contribution of the seed capital, the value of the seed capital remaining in the collective investment vehicle constitutes no more than 20 percent of the value of the total capital interests in the collective investment vehicle.

 

For purposes of this paragraph (iii), the term "seed capital" means an initial capital contribution that is made to a collective investment vehicle intended as a temporary investment deemed by the fund manager to be necessary or appropriate for the start up of the fund, such as, for the purpose of establishing a track record of investment performance for such collective investment vehicle, achieving economies of scale for diversified investment, avoiding an artificially high expense to return ratio, or similar purposes.

Bearer Share Rule:

Proposed Rule:

Add a new Section 1.1471-5(f)(1)(i)(C)(4), which provides:

 

(4) Notwithstanding the provisions of subparagraph (2), in determining whether each holder of record of direct debt interests in excess of $50,000 or equity interests in the FFI or any other account holder of a financial account with the FFI is held by persons other than those described in subparagraph (2), the holder of a certificate that has been issued in bearer form and is not directly held by a financial institution described in subparagraph (2) will be considered held by a person described in subparagraph (2) if all of the following requirements are met:

 

(a) All payments of distributions and redemption payments on the bearer certificates are made, directly or indirectly, through a participating FFI, a FATCA partner FI, or a USFI;

(b) The qualified CIV does not actively promote or advertise the availability of bearer certificates;

(c) If the issuance of bearer certificates in the future is not prohibited by the qualified CIV's prospectus or organizing documents, the qualified CIV must use its best efforts to amend the terms of its prospectus or organizing documents so as to prohibit the issuance of bearer shares in the future.

Referring Brokers/AML Reliance Rule:

Proposed Rule:

Add a new Section 1.1471-5(f)(1)(i)(D)(8):

 

(8) Reliance on introducing broker. Where an introducing broker undertakes account identification procedures under the AML rules of its country of organization, the fund may rely on the procedures performed by the broker to determine the FATCA status of an account in the circumstances described below.

 

(a) Introducing broker organized in same country as fund. Where the introducing broker and the fund are organized in the same country, the fund may rely on the introducing broker's certification that it is subject to the AML laws of its country of organization, that it has performed account identification procedures (as described in paragraph (5)) with respect to such direct accounts of the fund for which it has acted as an introducing broker, and that it has determined that such accounts are not maintained by any specified U.S. person, nonparticipating FFI, or passive NFFE with one or more substantial U.S. owners.

(b) Introducing broker is organized in a jurisdiction determined by IRS to have adequate AML procedures or which has entered into an IGA. Where the introducing broker and the fund are not organized under the laws of the same jurisdiction, the fund may rely on the introducing broker's certification that it is subject to the AML laws of its country of organization, that it has performed account identification procedures with respect to such direct accounts (as described in paragraph (5)) of the fund for which it has acted as an introducing, and that it has determined that such accounts are not maintained by any specified U.S. person, nonparticipating FFI, or passive NFFE with one or more substantial U.S. owners. However, the fund may rely on such certifications only if the introducing broker is organized in a jurisdiction that has been determined by the Commissioner or his delegate to have adequate AML rules for purposes of the qualified intermediary program or is organized in a jurisdiction that has entered into a FATCA agreement with the United States.

(c) Introducing broker organized in jurisdiction not determined by IRS to have adequate AML procedures. Where the introducing broker and the fund are not organized under the laws of the same jurisdiction, and where the introducing broker is not organized in a jurisdiction that has been determined by the Commissioner or his delegate to have adequate AML rules for purposes of the qualified intermediary program, the fund nevertheless may rely on the introducing broker's certification that it is subject to the AML laws of its country of organization, that it has performed account identification procedures with respect to such direct accounts (as described in paragraph (5)) of the fund for which it has acted as an introducing broker, and that it has determined that such accounts are not maintained by any specified U.S. person, nonparticipating FFI, or passive NFFE with one or more substantial U.S. owners. However, in order to be able to rely on such certification, the introducing broker must provide the fund with a copy of the AML rules to which it is subject, and the fund must determine that such AML rules are sufficiently robust so that the broker is subject to substantially similar AML obligations as if it would be subject to the AML rules of the fund's country of organization.

Steve Nauheim

 

Price Waterhouse Coopers, LLP
DOCUMENT ATTRIBUTES
Copy RID