Euroclear Bank Seeks More Detailed Guidance Under Proposed FATCA Regs

CC:PA:LPD:PR (REG-121647-10)

Reference: IRS REG-121647-10

Dear Sirs, Madam

Further to recent discussions that we have had with John J Sweeney and Tara N Ferris, the purpose of this letter is to draw your attention to a number of specific implementation difficulties which we view as being critical to the proper and timely implementation of FATCA as a whole.

We understand that only a very limited number of comments have been received on the topics we raise herein, presumably because the current market focus is very much on the identification obligation under FATCA and because the Intergovermental Agreements (IGAs) may give the impression that withholding under FATCA is a problem only for qualified intermediaries with primary withholding responsibility ("Withholding QI"). Indeed, it seems to us that Partner Financial Institutions (FI) tend to ignore (at least for the time being) the fact that they will have to pay their non-compliant foreign accounts net of FATCA tax and will have to provide information on such accounts to their upward Withholding QI.

Euroclear Bank is a prospective FATCA Partner FI under an agreement between Belgium and the United States and is also a Withholding QI. In the absence of detailed requirements in the IGA as to how Partner FIs such as ourselves should perform FATCA withholding, we have looked to the proposed regulations for guidance on these requirements.

We see difficulties with:

As a general rule, payments made as from January 1, 2014 under a grandfathered obligation will be excluded from the definition of withholdable payment until such time as the obligation undergoes a material modification. The 'grandfathering deadline' is December 31, 2012, therefore, material changes have to be tracked from January 1, 2013 -- a date that is only a matter of weeks away.

A material modification is any significant modification of a debt instrument as described in § 1.1001-3. § 1.1001-3 sets out a series of tests to be applied to determine whether a modification has taken place, and whether that modification is significant.

We have looked in detail at the provisions of § 1.1001-3, and sought to develop an operational procedure which would allow material changes to be 'tracked' as from the beginning of 2013. Due to the complexity of the rules, the lack of information available to us, and the considerable tax implications for holders in case of incorrect interpretation of a material change to a debt security, we have come to the conclusion that it is not appropriate for a Withholding QI to be responsible for identifying and communicating what it interprets as being a material change to a grandfathered security.

We believe that the actor that is best-placed to identify and communicate material changes is the issuer of the relevant debt security. We note that issuers generally communicate significant modifications under § 1.1001-3 through consent solicitations and other corporate event notifications.

Our request

We believe that it would be appropriate for a degree of responsibility to be placed on the issuer, as part of the rules governing FATCA, to communicate material changes to grandfathered securities. In the absence of any such communication, a Withholding QI would not have reason to know that such a change had occurred.

Furthermore, issuers should be required to advise their agents and intermediaries on material changes through the channels habitually used to communicate on corporate events. Such communication should include the effective date of the material change.

2. Form 1042 and 1042-S reporting requirements

Upon releasing the proposed regulations in February 2012, the IRS indicated its intention to modify the current Form 1042-S to meet the additional FATCA reporting requirements and to coordinate that reporting with existing QI reporting.

These modifications have not yet been described in detail, and we understand that they will be made clear only when the revised Forms 1042 and 1042-S are published (which is expected to be some time early in 2013).

Our problem lies in the fact that:

• we are asked to be ready to withhold as from January 1, 2014 without having a view on the data that must be collected prior to payment and that will be used for subsequent reporting through Forms 1042 and 1042-S; and

• our clients have no view on what type of information they will need to provide prior to payment in addition to the information which they will provide to us as Partner FI to allow us to meet our FATCA identification obligations under the IGA.

The optimum timing for implementation is 18 months from the date on which final legal requirements are known -- we are left with less than 13 months at the time of writing this comment.

We have so far assumed that updates to the reporting would be limited to (i) providing the FATCA status of the payee and (ii) to the need to distinguish between FATCA withholding and QI withholding.

Our request

We ask that an urgent communication be made on the data that are expected to be reported in Forms 1042 and 1042-S, particularly by Partner FIs that are also Withholding QIs.

3. Backup withholding requirements

We assume that, just as FATCA withholding will take precedence over QI withholding, the same will be true of backup withholding. Therefore, where FATCA withholding and reporting is carried out in respect of a given position, there should no longer be a need to carry out QI or backup withholding nor QI or Form 1099 reporting in respect of that position.

Our request

As regards backup withholding, it remains unclear how the documentation requirements will interact with FATCA documentation requirements. Will we be able to assume that an undocumented US nonexempt recipient for backup withholding purposes will be automatically FATCA non-compliant, without the need for additional documentation? Conversely, will a documented US nonexempt recipient automatically be considered FATCA compliant without the need for further documentation?

4. The overlap in implementation dates

Announcement 2012-42 had the effect of aligning the broad implementation timelines and removing gaps between the IGAs and the proposed FATCA regulations. Whilst this is undoubtedly welcome, there remain a number of detailed implementation issues that give us cause for concern.

a) Withholding before the end of the permitted identification period

What is not clear for Withholding QIs is how they should treat a payment of U.S., source FDAP income made to a FFI that is acting as intermediary without withholding responsibility in the interim period between January 1, 2014 (start of withholding obligation) and December 31, 2015 (end of identification period for pre-existing accounts under the IGA).

Indeed, Withholding QIs such as Euroclear Bank have no view on:

• the nature of the indirect clients;

• whether those indirect clients are holding pre-existing or new accounts with the intermediary; nor

• whether the intermediary has completed its identification process on a given account.

It should be made clear that Withholding QIs should offer their clients the possibility of supplying QI and FATCA withholding information on their underlying clients upon a US FDAP payment as from January 1, 2014. Until December 31, 2015, Withholding QIs should tax any undocumented position at maximum rate and report it as a QI reportable amount.

From January 1, 2016, Withholding QIs should require all clients to provide them with full FATCA withholding information on their underlying clients when applicable. This means that, as from that date, any undocumented position will be taxed at maximum rate and reported as a FATCA reportable amount.

b) Identification of Prima Facie FFIs

Following Announcement 2012-42, prima facie FFIs must be identified by June 30, 2014, whilst other FFIs should be identified by December 31, 2015. No such obligation is detailed in the model IGAs.

Our request

We request confirmation that the earlier identification of prima facie FFIs is not an obligation for FATCA Partner FIs that are Withholding QIs.

We trust that the above illustrates the difficulties that incomplete information on the withholding obligations of a FATCA Partner FI is causing to our implementation procedure. As we have stated in previous comment letters, we recognize and applaud the efforts that Treasury and the IRS have made to date to shape the FATCA legislation to make it more practically feasible. However, critical implementation issues such as the above remain, and Treasury and the IRS should be aware that, without the detailed requirements on issues such as reporting and grandfathering, Withholding QIs have no choice but to take certain assumptions, opening up the increasingly real possibility of a divergence of opinion between financial institutions as to how these issues should be put into practice.

We remain at your disposal to discuss the above issues, or any other issues on which our input would be helpful to you. My contact details are below.