Financial Group Supplements Comments on Implementation of FATCA

Dear Sirs:

We are writing to provide further comments on the Foreign Account Tax Compliance Act ("FATCA") provisions of the Hiring Incentives to Restore Employment ("HIRE") Act of 2010. More specifically, this letter addresses issues raised by our August 11, 2010 and November 1, 2010 letters to the Department of Treasury and Internal Revenue Service (the "IRS") and our January 11, 2011 meeting with several Treasury officials. We appreciate the opportunity to share our thoughts on how FATCA can be administered efficiently and effectively.

Like many similarly-situated foreign financial institutions ("FFIs"), we are concerned that Treasury and the IRS's current approach, as embodied in Notice 2010-60, could lead to significant conflict of law issues. Further, we remain concerned that the cost burdens of FATCA are disproportionate to FATCA's expected benefits. We believe that these concerns could be addressed through a system in which existing information reporting and automatic information exchange form the basis for an exception from the reporting of "United States accounts" under section 1471(d)(1)(C)(ii), relating to duplicative reporting. Such an exception would address conflicts between FATCA and foreign law as well as minimize burdens on foreign financial institutions. If Treasury and the IRS decline to exercise their authority under section 1471(d)(1)(C)(ii), we respectfully request that Treasury and the IRS consider developing an alternative FATCA regime for FFIs operating in jurisdictions with robust information reporting requirements and information exchange with the United States.

In our November 1, 2010 letter, we proposed that Treasury and the IRS except from the definition of "United States account" those accounts for which the following criteria are satisfied: (1) the country in which the account is held is a party to a tax treaty or tax information exchange agreement with the United States; (2) income generated in the account and earned by the account holder is reported to the tax authority in the country in which the account is held; (3) such information, as it pertains to nonresidents identified as U.S. persons, is automatically provided to the IRS; and (4) individual account holders resident in the country in which the account is held are subject to a sufficiently high tax rate.

To strengthen our proposal, and to respond to concerns Treasury may have, we have enhanced the second and fourth prongs of our proposal and suggest that a fifth and sixth prong be added. The fifth prong would require FFIs to satisfy certain due diligence requirements intended to provide Treasury and the IRS with adequate assurance that U.S. persons are being identified and reported to foreign tax authorities and the IRS through information exchange. The sixth prong of our proposal would require FFIs to request tax identification numbers ("TINs") from account holders of U.S. reportable accounts, as defined below.

Part I of our letter describes two central motivations for our proposal. Section I.A. addresses conflict of law issues, while Section I.B. describes the costs of implementation. Section II.A. describes our proposal, including the new fifth and sixth prongs, in further detail. Section II.B. responds to concerns that Treasury's authority to promulgate a duplicative reporting exception for accounts subject to foreign information reporting requirements and automatic information exchange may be limited to reporting that provides the IRS with each item of information listed in section 1471(c)(1)(A) through (D).

I. Motivations for Duplicative Reporting Proposal

Canadian ABBS rules may prevent a Canadian bank from denying banking services to individuals even if they refuse to comply with requirements that FFIs may implement to ensure compliance with FATCA.² For example, a financial institution is required to open certain types of bank accounts if an individual presents certain identification identified in the ABBS rules. A financial institution could not refuse to open an account for a U.S. person if such adequate identification is presented, even if the individual refuses to provide certain information that the financial institution may need to obtain to comply with FATCA, such as a U.S. TIN or a W-8BEN or W-9 (which may be required under the procedures described in Notice 2010-60 if U.S. indicia are found). If an FFI closed an account because such information was not provided, the purpose of ABBS rules would be frustrated and, in addition, the FFI could be subject to fines. Each violation of the ABBS requirements would subject the financial institution to a penalty of up to $200,000.³ Even if an FFI could close the account of an uncooperative accountholder, an FFI could not refuse to re-open an account for such individual if adequate identification under ABBS were again provided.

Local privacy rules may also conflict with FATCA. In Canada, financial institutions are subject to the Personal Information Protection and Electronic Documents Act ("PIPEDA"), which provides rules with respect to a financial institution's collection, use, and disclosure of an individual's personal information. PIPEDA's compliance requirements apply to all personal information, regardless of an individual's nationality or residency. Although PIPEDA contains certain exceptions for disclosures "required by law," it does not appear that compliance with FATCA would fall within this exception because compliance with FATCA is voluntary. It is also unclear whether a foreign, as opposed to Canadian, law requirement could qualify under the "required by law" exception. As a result, FFIs in Canada would likely need to obtain a waiver to disclose certain information lawfully under FATCA, which could cause the FFI to expend significant costs in obtaining waivers or in applying "passthru" payment rules to recalcitrant account holders.

In sum, financial institutions could be placed in the untenable position of choosing among violating local law to avoid withholding on their US assets, violating their FATCA agreement to avoid violating local law, or electing not to enter into a FATCA agreement and liquidating their U.S.-source assets.

Other Canadian banks would likely incur similar expenses. Over $1 billion could be expended by Canadian FFIs alone in the first five years of FATCA. The global costs for all FFIs could be greater than the revenue raised by FATCA.

On the other hand, if Treasury and the IRS follow our suggested approach, the costs of FATCA implementation could be dramatically reduced while avoiding conflicts of law and satisfying the United States' objectives to obtain information about potential U.S. tax evaders. By focusing on U.S. persons claiming to be non-resident account holders rather than dual residents paying substantial creditable taxes in their local jurisdictions, and by utilizing existing diligence and reporting systems, we estimate that FATCA initiation costs could be cut by 75% or more. Greater cost reduction could be achieved with respect to ongoing compliance costs.⁴

II. Duplicative Reporting Exception

To address the concerns described above, we propose that existing information reporting and automatic information exchange form the basis for an exception from the reporting of "United States accounts" under section 1471(d)(1)(C)(ii). The proposal described below is an enhanced version of the proposal contained in our November 1, 2010 letter.

• Under the fifth prong of our proposal, an FFI may not treat an account holder as a local tax country resident if the FFI knows or has reason to know that the information on which tax residency is determined is materially inaccurate or fraudulent.

• The expenditure of additional resources would be focused on dual residents, who are subject to significant rates of tax in their local tax country as required by the fourth prong of our proposal. It is unlikely that they would owe much, if any, residual tax in the U.S. because of the ability to credit local taxes.

• The system proposed here is reciprocal: U.S. dual residents with accounts at U.S. financial institutions are reported on Form 1099; not Form 1042-S, so automatic treaty exchange procedures (like those that the United States has in place with Canada) typically will not include information about such dual residents.

• More extensive rules will not help to catch the tax evaders at which the proposal is aimed, because it is unrealistic (and would potentially violate local ABBS rules) to require local residents to provide passport information. Although FFIs could make U.S. citizenship queries as a diligence mechanism, this mechanism is unlikely to provide a great deal of comfort to the IRS, as tax evaders could provide inaccurate information.

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  3. Requirement that Certain Information Must be Reported to Foreign Tax Authorities

The second prong of our proposal requires that the FFI report information substantially similar to that required by Form 1099⁷ or section 1471(c)(1). The sixth prong specifically requires FFIs to request TINs from U.S. reportable account holders, and to report TINs obtained to foreign tax authorities. If the U.S. person refused to provide a TIN, the information reported by the FFI to the other country's tax authority should be sufficient to allow the IRS to identify the U.S. persons that have failed to provide TINs and take further action if desired.⁸ This approach would be consistent with foreign ABBS laws, which may limit an FFI's ability to refuse to open or close an account, or withhold on non-U.S. source income, merely because a TIN is not reported.

Requiring FFIs to request TINs from U.S. persons would also mitigate the concern of Treasury and the IRS, discussed below, that foreign information reporting may not be sufficiently duplicative of regular FATCA reporting to qualify for the duplicative reporting exception of section 1471(d)(1)(C). The addition of the TIN request requirement, along with existing foreign information reporting requirements, should generally ensure that the items provided in section 1471(c)(1)(A) and (B) -- an individual's name, address, TIN (if provided upon the FFI's request), and account number -- are provided to the IRS. Foreign information reporting laws generally also require the gross income generated by the account to be reported. We believe that gross income may be viewed as serving a similar function as allowing FFIs to report under Form 1099 as provided by 1471(c)(2). Although foreign law would generally not require reporting "the gross receipts and gross withdrawals or payments from the account," as regular FATCA reporting requires under section 1471(c)(1)(D), Treasury is provided with explicit authority in section 1471(c)(1)(D) ("[e]xcept to the extent provided by the Secretary . . .") not to require the reporting of such information.

As a result, we believe that foreign information reporting should be treated as duplicative where name, address, and annual income is provided to foreign tax authorities and exchanged with the IRS and a TIN is requested as provided above.⁹ Indeed, as we described in our November 1, 2010 letter, the provision of this information would be similar to Form 1099 reporting, which an FFI may elect in lieu of regular FATCA reporting. With respect to regular depository accounts of individuals, section 6049 requires interest payers to report (1) the name, address, and TIN of each account holder that is a U.S. individual, (2) the account number, (3) the aggregate amount of interest payments, and (4) the amount of tax deducted and withheld under the backup withholding rules. As described above, our proposal would similarly requires reporting (with respect to U.S. persons) (1) the nonresident recipient's name and address, (2) a TIN (where provided by the account holder), (3) the type of income being reported, (4) the amount paid during the year, and (5) the nonresident tax withheld.

Section 1471(d)(1)(C)(ii) states that the term "United States account" does not include any financial account in a foreign financial institution if "the holder of such account is otherwise subject to information reporting requirements which the Secretary determines would make the reporting required by this section with respect to United States account duplicative." Thus, section 1471(d)(1)(C)(ii) provides Treasury and the IRS with discretion to determine whether the reporting is duplicative. This provision of administrative authority would be unnecessary if it required that reporting is "duplicative" only if the exact information listed in section 1471(c)(1)(A) through (D) is reported. In addition, the duplicative reporting exception applies where the foreign financial institution "is otherwise subject to information reporting requirements" that would make regular FATCA reporting duplicative. We are aware of no information reporting requirements that would require a financial institution to report to the IRS the exact same information required under section 1471(c)(1). Further, the Joint Committee on Taxation ("JCT") Technical Explanation of the FATCA legislation, which contains a thorough analysis of pre-FATCA information reporting and withholding, mentions no such requirements.

III. Conclusion

In sum, we respectfully request that Treasury and the IRS provide that accounts which satisfy the requirements set forth above are excepted from the definition of "United States account." As other financial institutions and banking associations have also recognized,¹⁰ an exception under FATCA for accounts for which information is routinely provided to local tax authorities and reported to the IRS through automatic information exchange could satisfy FATCA's goal of combating U.S. tax evasion while minimizing compliance burdens. In addition, an exception for duplicative reporting through information exchange could encourage other countries to enhance their information exchange programs with the United States.

We hope that you will favorably consider the comments herein and look forward to continuing to work with you.

² Withholding on "passthru" payments could also lead to conflicts of law depending on the eventual determination of what constitutes a "passthru" payment.

³ Financial Consumer Agency of Canada Act, section 19(2).

⁴ As a separate point, as we know you are aware, the prompt issuance of final guidance is essential for financial institutions to implement FATCA in time for the January 1, 2013 effective date. We have estimated that the FATCA build-out process will take at least eighteen months following the release of final regulations.

⁵ This type of information exchange reporting mechanism is already in place in some jurisdictions, including Canada.

⁶ If the account is treated under this exception as a non-U.S. account, then diligence requirements under section 1471(b)(1)(a) and (b) would be deemed to be satisfied.

⁷ At a minimum we suggest that the information would include the account holder's name, address, and the annual income generated by the account.

⁸ The absence of a TIN on information provided to the IRS could itself indicate to the IRS that the individual should be analyzed further.

⁹ Section 1471(c)(2).

¹⁰See, e.g., Letter from Tony Burke, Australian Bankers' Association Inc., to Internal Revenue Service (November 1, 2010) ("[W]e believe that there are some jurisdictions, such as Australia, that are so hostile to tax evasive activities that the concerns addressed by Chapter 4 are not implicated for institutions domiciled in them. Such jurisdictions are the antithesis of tax secrecy havens. . . . It is relatively simple to construct a list of criteria that the IRS should consider in identifying such highly compliant and cooperative jurisdictions. Such a jurisdiction would meet most, if not all, of the following criteria: It has a comprehensive income tax regime and tax rates comparable to those of the United States; It is not and never has been designated as a tax secrecy jurisdiction or tax haven by the OECD or any similar organization; It has a tax treaty with the U.S. that provides for the routine sharing of tax information necessary for each country to administer and enforce its tax laws; It requires financial institutions to implement customer identification and verification procedures that meet peer-reviewed internationally acceptable standards . . .").