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Western Union Asks IRS to Clarify Definitions Under Proposed FATCA Regulations

OCT. 5, 2012

Western Union Asks IRS to Clarify Definitions Under Proposed FATCA Regulations

DATED OCT. 5, 2012
DOCUMENT ATTRIBUTES

 

October 5, 2012

 

 

Mr. Jesse Eggert

 

United States Department of the Treasury

 

1500 Pennsylvania Avenue, NW

 

Washington, DC 20220

 

Re: Foreign Account Tax Compliance Act Proposed Regulations

 

Dear Mr. Eggert:

Western Union greatly appreciates the opportunity to provide comments to the proposed regulations issued by the Treasury on February 8, 2012 (the "Proposed Regulations") under Sections 1471 through 1474 of the Internal Revenue Code (collectively, the Foreign Account Tax Compliance Act or "FATCA"). Western Union seeks a clarification of the definition of a foreign financial institution ("FFI") that is in a banking or similar business, as well as a clarification of the definition of a financial account.

Western Union's Money Transfer Business

Western Union has several lines of business, including providing global money transfers to individuals (consumer money transfers). The majority of Western Union's consumer money transfers are "cash-to-cash" transactions.1 The consumer visits a Western Union agent location and completes a money transfer form that instructs the agent to transmit funds to the designated destination. If more than one payment currency or payment method is available in the destination country, the customer designates the currency and how the recipient will receive the funds. For a few countries, a customer may choose to have the recipient receive the principal in a form other than cash, such as a stored value card (prepaid card).2 The send agent obtains the customer's funds (principal) and fees (including taxes, where applicable) and transmits information concerning the transaction to Western Union. When the designated recipient calls at a Western Union agent location and submits a completed request form, that agent verifies the payment authorization in the Western Union system and distributes the customer principal to the recipient. The payout agent transmits information concerning the payout to Western Union.

Western Union and its agents comply with money transfer rules applicable in the country or countries where the money transfer is being initiated and paid out. For example, in the U.S. Western Union is subject to various state laws and certain federal rules concerning the monitoring and reporting of money transfer transactions.3 A customer may obtain a refund of the principal amount at any time before the funds have been paid to the recipient. No interest is paid on a refund. The recipient can obtain the funds at any time once the transfer has been authorized, usually within minutes after the transfer has been sent. Interest is not paid on an amount held for the recipient. Once a money transfer is paid to the recipient, the customer cannot obtain a refund.

Western Union agents do not transfer customer principal and fees received to Western Union with each transaction, nor does Western Union reimburse its agents for customer principal paid out with each transaction. Rather, Western Union settles periodically with each agent on a net basis (accounting for customer principal received, fees collected, customer principal paid out and agent commissions earned). Settlement often occurs in U.S. currency. Western Union has more than 72,000 agent locations in North America and more than 500,000 agent locations worldwide. The most common third party agents are banks, post offices, and retail chains.

Definition of a Foreign Financial Institution

Under FATCA, a foreign financial institution includes an entity that accepts deposits in the ordinary course of a banking or similar business. An entity is considered to be engaged in a banking or similar business if, in the ordinary course of its business with customers, it engages in one or more specified activities, including accepting deposits of funds and financing foreign exchange transactions. Prop. Treas. Reg. § 1.1471-5(e)(2)(A), (F).

The proposed regulations do not define the phrase "accepts deposits of funds". The term "deposit" is used in at least 121 separate sections of the Code and more than 442 sections of Final, Temporary and Proposed Treasury Regulations. There is not any single overarching definition of "deposit" in the Code. If the term is broadly construed, it may refer to the holding of money on behalf of another, which could potentially sweep in any amount "deposited" with an entity for any reason, such as a deposit for electricity or the rental of an apartment. See, e.g., First Savings & Loan Association v. Commissioner, 40 T.C. 474, 482-483 (1963) (relying on the plain meaning of a deposit to include "that which is placed anywhere or in any one's hands for safekeeping; something entrusted to the care of another . . .").

We note that, worldwide, the activity of money transfer is not considered to involve the acceptance of deposits. In the vast majority of countries, the regulations authorizing the activity of money transfer explicitly prohibit accepting deposits.

Thus, Western Union suggests that the definition phrase "accepts deposits of funds" should be changed in the final regulations to "accepts deposits of funds or other similar temporary investments." This definition is similar to the definition of deposit in other regulations and appropriately focuses on funds that are entrusted to an entity for an investment. See, e.g. Treas. Reg. § 1.907(c)-1(f) (income related to foreign extraction and processing of oil and gas); Treas. Reg. § 1.955A-2(b)(2)(i) (definition of a controlled foreign corporation's qualified investments in foreign base company shipping operations).

We note also that, under FATCA, a foreign entity is considered to be in a banking or similar business if it "finances foreign exchange transactions." This term is not defined in the Proposed Regulations and is not otherwise used in the Code or regulations. An expansive view of the term would treat a foreign entity as financing a foreign currency transaction where a customer gives the foreign entity funds in one currency with instructions to deliver the funds to a recipient in another currency. Alternatively, a narrower reading would limit the term to a currency contract entered into with the client for a transaction that is executed in a foreign exchange market or a foreign currency hedge. The first interpretation would broaden FATCA to apply to every currency exchange entity located outside of the United States, while the second definition would comport with the purpose of FATCA -- to provide reporting on foreign investment of U.S. persons. Western Union respectfully requests that the Treasury limit the scope of term "finances foreign exchange transactions" (or provide clarifying examples) making it clear that spot currency sales or purchases and cross border remittances that include the exchange of currencies do not come within the meaning of that term.

Clarification of the Definition of Account

The Proposed Regulations create four categories of financial accounts that are potentially subject to FATCA reporting and withholding: depository accounts, custodial accounts, certain equity or debt interests in an FFI, and certain insurance contracts. Prop. Treas. Reg. § 1.1471-5(b). A depository account is defined as a commercial, checking, savings, time or thrift account, or an account which is evidenced by a certificate of deposit, thrift certificate, investment certificate, certificate of investment, or other similar instrument.

We believe a prepaid card should not be considered a depository account. Prepaid cards function primarily as a means to make payments, not as means to accumulate money. Moreover, prepaid cards pose a very low risk of tax avoidance. Western Union's prepaid card is limited to a balance of $10,000, and the consumer money transfer limit is $950 per card per day. The definition of a depository account should be revised to exclude such low value prepaid cards.4

Conclusion

Western Union believes its comments represent a reasonable and balanced approach to addressing various definitions and issues raised by FATCA and the Proposed Regulations. We hope these comments will be given serious consideration. Western Union welcomes the opportunity to meet with you to discuss these comments. If you have any questions or need further information, please do not hesitate to contact the undersigned or Joshua Odintz (202-835-6164) with Baker & McKenzie LLP.

Very truly yours,

 

 

G. Markell Fluckiger

 

Sr. Vice President, Corporate Tax

 

The Western Union Company

 

Englewood, CO

 

cc:

 

 

Ms. Manal Corwin

 

Deputy Assistant Secretary (International Tax Affairs)

 

United States Department of the Treasury

 

1500 Pennsylvania Avenue, NW

 

Washington, DC 20220

 

 

Ms. Danielle Rolfes

 

International Tax Counsel (Acting)

 

United States Department of the Treasury

 

1500 Pennsylvania Avenue, NW

 

Washington, DC 20220

 

 

Mr. Michael Plowgian

 

Attorney Advisor

 

United States Department of the Treasury

 

1500 Pennsylvania Avenue, NW

 

Washington, DC 20220

 

 

Mr. Steven A. Musher

 

Associate Chief Counsel (International)

 

Internal Revenue Service

 

1111 Constitution Avenue, NW

 

Washington, DC 20224

 

 

Mr. Michael Danilack

 

Large Business and International Division

 

Deputy Commissioner (International)

 

Internal Revenue Service

 

1111 Constitution Avenue, NW

 

Washington, DC 20224

 

 

Mr. John Sweeney

 

Office of the Associate Chief Counsel (International)

 

Internal Revenue Service

 

1111 Constitution Avenue, NW

 

Washington, DC 20224

 

FOOTNOTES

 

 

1 In a cash-to-cash money transfer, a Western Union agent (send agent) collects the principal and fee from the customer in cash and another Western Union agent (payout agent) distributes the principal in cash to the designated recipient. In some countries, Western Union offers consumer money transfers where the funds originate from the consumer's non-Western Union bank or other account and/or are paid out to the recipient's non-Western Union bank or other account. In any cross-border money transfer involving the exchange of currencies, Western Union's revenue consists of both the money transfer fee charged to the consumer, as well as some foreign exchange revenue on the difference between the f/x rate quoted to the customer and the f/x rate Western Union obtains when making the currency exchange.

2 The maximum balance of a prepaid card is $10,000, and a consumer transfer to a card is limited to $950 per day. A prepaid card may be used to receive direct payroll deposits and may be used as an ATM card, subject to a $500 per day withdrawal limitation. The recipient can, but is not obligated to, reload the card at a later date.

3 The principal federal law imposing such obligations is the Bank Secrecy Act, U.S.C. 31 USC §§ 5311, et seq., and its implementing regulations, 31 C.F.R. Part 103 (the "BSA"). Primary responsibility for the enforcement of the BSA rests with the Financial Crimes Enforcement Network ("FinCEN"), a bureau of the Department of the Treasury.

4 See American Bankers Association Comments on Proposed Rules on Reporting by Foreign Financial Institutions Under FATCA, Sept. 26, 2012.

 

END OF FOOTNOTES
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