ICI Lists Guidance Priorities for Regulated Investment Companies

May 28, 2021

Mark Mazur
Acting Assistant Secretary, Tax Policy
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

William M. Paul
Acting Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

RE: Guidance Priority List Recommendations

Dear Mr. Mazur and Mr. Paul:

The Investment Company Institute¹ recommends the following issues affecting regulated investment companies (RICs) and their shareholders for inclusion on the 2021-2022 Guidance Priority List.²

As requested in Notice 2021-28, these recommendations have been listed in order of priority. Those issues the Institute believes require prompt guidance are listed immediately below. The Institute notes, however, that there are many outstanding issues that are important to the industry; additional items that have been included in prior requests for guidance from the Department of the Treasury (Treasury Department) and Internal Revenue Service (IRS) are included below as Enclosure A.

I. Foreign Tax Recoveries from European Union Member States under Santander

The Institute urges the Treasury Department and the IRS to issue guidance, expanding upon Notice 2016-10, that provides an administrable solution for the US fund industry's receipt of withholding tax refunds following the European Court of Justice (ECJ) decisions in Santander³ and DFA Emerging Markets.⁴ Specifically, we reiterate our proposals in previous letters⁵ that the Treasury Department and the IRS permit RICs to carry forward to future years any excess tax recoveries that cannot be fully netted under the Notice against foreign tax credits in the year the payment is received. We also urgently request that the IRS provide guidance standardizing the terms of closing agreements for situations not covered by the Notice; this standardization would provide a uniform methodology for calculating the “compliance fee” that balances appropriately the relevant administrative and fairness considerations. Importantly, permitting carryforward and finalizing a standard closing agreement would reduce substantially the administrative burdens to the IRS and the financial costs to funds and their shareholders.

The need for this guidance is increasingly urgent, as France has conceded the issue and has begun repaying several billion dollars in previously withheld tax. Given the size of the recoveries, it is vital that any uncertainties regarding the treatment of these amounts and a RIC's potential tax liabilities be resolved quickly, particularly as these issues can impact a fund's net asset value (NAV). The lack of guidance, for an issue that has been outstanding for over five years, has put RICs in an extremely difficult situation.

II. Electronic Filing of Form 8802, Application for US Residency Certification and Processing of Form 6166, Certification of US Tax Residency

The ICI recommends changes to improve Form 8802 and the process for issuing Form 6166, Certification of US Tax Residency (CoRs).⁶ Currently, the IRS does not accept Forms 8802 that are postmarked earlier than December 1 of the prior year. The typical processing time ranges from 8-12 weeks, and even then, erroneous rejections are frequent and many CoRs are issued with errors or omissions. This results in a permanent loss of treaty benefits for income received prior to the date on which the CoR can be furnished to a withholding agent and for which retroactive relief through tax reclaims is not permitted. The US Treasury ultimately bears the cost for foreign taxes that cannot be recovered to the extent that US investors claim foreign tax credits.

The COVID-19 “work from home” environment has dramatically increased these problems for taxpayers and the IRS. For example, IRS agents must confirm that a Form 8802 applicant timely filed the previous year's tax return — typically by checking the IRS internal system. Because a Form 1120-RIC, however, can be filed only on paper the IRS takes a very long time to process these returns, resulting in cascading delays for issuing CoRs to RICs. The recommendation below would allow the IRS to more quickly reduce the backlog of Forms 8802 and CoRs. Specifically, the ICI recommends the following:

III. Electronic Filing and Permanent Digital Signature Relief

The Institute recommends that the IRS permit RICs and their officers to sign and file electronically Form 1120-RIC, US Income Tax Return for RICs.⁷ The requirement that these returns, which can be hundreds of pages long, be physically signed and filed on paper is particularly problematic in the COVID-19 environment.⁸ We also recommend eliminating the requirement that RICs file Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, for each foreign investment and clarifying that RICs do not need to file Form 8990, Limitation on Business Interest Expense under Section 163(j).

Specifically, we suggest that the Modernized e-File (MeF) system be updated to process these forms. In the interim, until the MeF system can process 1120-RICs, we recommend that RICs be permitted to submit PDF copies of the returns to a secure IRS email address. Additionally, we are greatly appreciative of the IRS temporary relief for digital signatures and request that the guidance be made permanent so that RIC officers may utilize the same signing options — rubber stamp, mechanical device, or a computer software program — that are available to a paid preparer. Electronic filing reduces tax compliance burdens on taxpayers, especially with respect to bulky corporate returns such at the 1120-RIC.

IV. IRS Form SS-4 Responsible Party Requirements and Limitations

The Institute recommends improvements to IRS Form SS-4, Application for Employer Identification Number (EIN). First, we recommend that an employee that is designated a “responsible party” of an entity on behalf of his or her employer be permitted to obtain a Preparer Tax Identification Number (PTIN) and that the PTIN be permitted to be used on Forms SS-4.⁹ Second, we recommend that the IRS increase the current limitation of issuing only one EIN per responsible party per day to 10 EINs per responsible party per day. The current limitation is causing significant delays for large taxpayers that must obtain multiple EINs per day for business purposes or on behalf of their clients. We believe increasing the number of EINs issued per responsibility per day will allow taxpayers to obtain EINs more efficiently so that IRS can better serve all taxpayers applying for EINs.

V. Qualified Interest Income

The Institute appreciates that the Treasury Department and IRS have issued guidance over the past few years to address SEC money market rules and prevent tax considerations from undermining a RIC's ability to meet them. One last issue arising from the resulting increased demand for government securities, however, must be addressed for these RICs to remain attractive for foreign investors.

Specifically, RICs are being forced by the increased demand for government securities to gain this exposure through repurchase agreements (repos) on government securities. Disparities in banking regulations, however, are causing banks to conduct their repo business through foreign branches that, as a general matter, result in “foreign source” income.

For government money market funds to make distributions that are fully exempt from US withholding tax as qualified interest income (QII) when paid to foreign investors, the income must have a US source. US tax is problematic for foreign investors using money market funds for cash management purposes, particularly when non-US alternatives are available.

The Institute therefore requests guidance that amounts received on repos, that are collateralized solely by US government securities (as that term is applied under Subchapter M), will be treated as US source income in determining QII under Code section 871(k)(1)(E).¹⁰

* * *

If we can provide you with any additional information regarding these issues, please contact Keith Lawson (202-326-5832 or lawson@ici.org), Karen Gibian (202-371-5431 or kgibian@ici.org) or me (202-326-5826 or katie.sunderland@ici.org).

Sincerely,

Katie Sunderland
Assistant General Counsel — Tax Law
Investment Company Institute
Washington, DC

cc:
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