TEI Requests Summary List of Entities Subject to FATCA Rules

Section 501 of Part I of Subtitle A of the HIRE Act added Chapter 4 to the Internal Revenue Code of 1986; that Chapter, entitled Taxes to Enforce Reporting on Certain Foreign Accounts, sets forth four new sections to the Code:

• Section 1471, Withholdable payments to foreign financial institutions;

• Section 1472, Withholdable payments to other foreign entities;

• Section 1473, Definitions; and

• Section 1474, Special rules.

In Notice 2010-60,⁴ the U.S. Department of the Treasury and IRS provided preliminary guidance regarding priority issues involving the implementation of Chapter 4 and requested comments on that guidance and other issues that should be given priority. TEI submitted comments in response to Notice 2010-60 and FATCA generally on October 19, 2010.⁵

Notice 2010-60 was supplemented and in certain respects superseded by Notice 2011-34,⁶ which provides additional guidance under FATCA in response to concerns identified by commentators following the publication of Notice 2010-60, as well as other issues. Treasury and the IRS requested comments on issues addressed in Notice 2011-34 as well as comments on other priority issues in connection with forthcoming guidance on the application of Chapter 4. TEI is pleased to respond to their request for comments.

Because TEI is a broad-based organization that encompasses tax professionals employed by companies across all industry groups, the focus of our comments is on issues presented by Chapter 4 that apply to both financial and non-financial institutions and entities. For this reason, while Notice 2011-34 is concerned almost exclusively with issues related to financial institutions, the majority of TEI's comments relate to other priority matters, as requested by Treasury and the IRS.

While it may appear that deemed-compliant FFIs have no FATCA-related responsibilities this is clearly not the case. For example, Notice 2011-34 specifically requires that deemed- compliant FFIs calculate their passthru payment percentage⁸ or be deemed to have a percentage of 100. Further, a deemed-compliant FFI would continue to be a withholding agent if it makes withholdable payments, but would not be required to withhold on any passthru payments because it meets the requirements of section 1471(b).⁹ TEI is concerned, however, that the potential disconnect between the label "deemed-compliant FFI" and such an FFI's continued responsibilities under Chapter 4 will create confusion about the status of particular entities under FATCA, both with respect to the requirements applicable to the entities themselves and to persons making payments to those entities, resulting in administrative and compliance issues. The confusion will be exacerbated, moreover, by the numerous categories of entities under Chapter 4, the many exceptions to Chapter 4's requirements (some yet to be determined), and the variety and volume of payments made by affected entities (withholdable and otherwise).

TEI therefore recommends that some entities that may be categorized as "deemed compliant" FFIs be excluded from all Chapter 4 requirements and be treated as excepted NFFEs. Entities covered by the exclusion should include not-for-profit entities, including any investment company that is wholly owned by one or more not-for-profit entities. TEI recommends that a not-for-profit entity include any legal entity whose purpose is to safeguard the interests of its members or beneficiaries by way of mutual self-help, and which pursues political, religious, scientific, artistic, charitable, social or similar objectives. This definition tracks what is used for anti-money laundering and know-your-customer requirements in some jurisdictions.

In addition, some entities that currently may be FFIs should be treated as NFFEs because of the purpose, size, and nature of the entity. These entities would still have to provide information on the underlying substantial owners but would not have to incur the cost and effort required of deemed compliant FFI status. This would include entities such as (i) family trusts, (ii) testamentary trusts, and (iii) Personal Investment Companies.

More generally, to alleviate any confusion with respect to deemed-compliant FFIs and other entities fully or partially exempt from Chapter 4, TEI recommends that Treasury and the IRS publish in summary form a list of entities subject or potentially subject to FATCA, along with their associated Chapter 4-related duties, requirements, and exemptions. Such a summary would not only serve as a useful reference for persons with potential responsibilities under FATCA who may not be familiar with its requirements or who may believe they are not subject to Chapter 4 because they are "deemed" to be compliant (or fall into some other category of partially exempt entity), but also confirm to affected entities that are familiar with Chapter 4 that the government agrees with their interpretation of such entities' FATCA-related responsibilities and exemptions.

Regrettably, Notice 2010-60 only provides a brief outline of what types of entities may qualify for these yet to be determined exceptions, pending additional guidance. More troubling, statements from government officials have raised concerns that the exceptions briefly discussed in Notice 2010-60 may not be as broad or complete as expected,¹³ which is especially worrisome given the January 1, 2013 effective date for withholding under Chapter 4 to begin.

To ameliorate these concerns, TEI recommends that, instead of waiting until proposed regulations are promulgated, Treasury and the IRS issue interim guidance immediately providing in detail what entities will qualify for these exceptions and the FATCA-related requirements with which these entities must comply (if any). This would allow non-financial businesses as well as USFIs to determine the necessary changes to their systems and processes to ensure FATCA compliance and, if necessary, provide additional comments to the government. For example, with respect to financing affiliates and holding companies, Notice 2010-60 states that such entities, however defined, will (i) be excluded from the definition of an FFI and thus from the withholding and other requirements of section 1471, and (ii) even though such entities will be NFFEs (since they are not FFIs), they will be exempt from withholding under section 1472(a) with respect to beneficially owned withholdable payments made to them.¹⁴ Such entities would, however, continue to be withholding agents with respect to any withholdable payments they make and may have other FATCA-related responsibilities. Moreover, since financing affiliates and holding companies that do not qualify for the exception will be subject to the full Chapter 4 withholding regime as FFIs, it is imperative that Treasury and the IRS issue guidance so non-excepted entities will be on aware of their compliance requirements under FATCA. In addition, as noted above, a published summary list of the various entities under FATCA and their related exemptions and duties would provide needed clarification for these and other exceptions so that affected businesses may begin to implement changes necessary to comply with Chapter 4.

Further, comments by Treasury and IRS officials suggest that the activities of financing affiliates may not be fully understood. For example, there may be a misconception that such affiliates do not engage in transactions with unrelated parties or parties that are not members of the affiliate's expanded affiliated group, as defined in section 1471(e)(2). (Notice 2010-60 includes the statement that a hedging/financing center of a non-financial group "does not provide such services to non-affiliates. . . ."¹⁵) In point of fact, many of the activities and transactions take place with unrelated counterparties, such as hedging transactions that reduce a group's risk. Therefore, we urge Treasury and the IRS to clarify that a financing affiliate may engage in transactions with unrelated parties and still qualify for the exception to sections 1471 and 1472, as long as the primary purpose of the financing affiliate is to provide treasury and related services to the affiliated group and not to unrelated parties.

Finally, TEI is pleased that Treasury personnel have recently acknowledged that the government recognizes the exception in respect of retirement plans in Notice 2010-60 is narrow.¹⁶ We recommend that the definition of retirement plan include a plan that has U.S. participants so long as the participant does not render services for the foreign employer in the United States, i.e., that the exception not be limited to retirement plans related to services performed by beneficiaries in a single foreign country.

TEI is concerned that the scope of these "ordinary course" and "active business" exceptions envisioned by Treasury and the IRS do not correspond with the practices (or expectations) of non-financial businesses potentially subject to Chapter 4.¹⁸ We therefore urge Treasury and the IRS issue interim guidance detailing these two exceptions so that affected persons may comment on their scope and efficacy before final regulations take effect.

Finally, TEI previously recommended that Treasury and the IRS adopt an exception to Chapter 4 for de minimis payments that mirrors the limitation set forth in section 6041 of $600 in a calendar year. Two subsequent events have caused TEI to recommend a higher threshold for any such de minimis exception. First, Congress repealed the expanded Form 1099 reporting requirements for businesses under section 6041 that were enacted as part of the Patient Protection and Affordable Care Act (PPACA),¹⁹ in no small part because of the compliance burden that such requirements would have imposed on businesses. Second, final regulations under section 3402(t), which generally imposes a three-percent withholding requirement on payments made by governmental entities in the United States to their contractors, include a regulatory "payment threshold" of $10,000 per payment, subject to an anti-abuse rule.²⁰ Under this threshold, governmental entities must withhold on contractor payments only if the payment is $10,000 or more. The preamble to the proposed section 3402(t) regulations stated that the "Treasury Department and IRS are proposing this payment threshold of $10,000 because the burden of withholding on smaller transactions is likely to be substantial and outweigh the benefits of increased withholding."²¹

In light of these developments, TEI recommends that Treasury and the IRS adopt a $10,000 de minimis exception to the definition of withholdable payments under FATCA; thus, no reporting should be required for payments made by a withholding agent to an FFI or NFFE that aggregate less than $10,000 during the payor's taxable year. TEI submits that the compliance burden imposed by FATCA is comparable to the burden that would have been imposed by the PPACA and is substantially greater than that imposed by section 3402(t). Moreover, the burden imposed by FATCA on withholding agents that make less than $10,000 in payments to any single FFI or NFFE during a year outweighs the benefits to the government of subjecting such payments to Chapter 4. Finally, TEI submits that Treasury and the IRS have ample statutory authority to promulgate a de minimis regulatory exception to FATCA.²²

TEI believes that Treasury and the IRS have not directed sufficient attention to this point, which we addressed in our prior comments. There is no basis for concluding that an FFI will decline to enter into a participating FFI agreement with the IRS merely because its U.S. branch is treated as a USFI. Any such FFI will still need to enter into a participating FFI agreement and, in fact, the U.S. branch will be required to obtain documentation from and potentially withhold on any payment to a related party that is a non-participating FFI. (Even if all U.S. accounts were shifted to a U.S. branch of an FFI, they would still be subject to U.S. reporting and withholding requirements.)

TEI previously recommended that, at a minimum, U.S. branches of FFIs be permitted to make an election to be treated in the same manner as a USFI for all Chapter 4 reporting obligations in light of the requirements currently imposed on such branches and the competitive imbalances that will arise under FATCA as a result of the differing reporting requirements applicable to such branches and the their direct competitors -- USFIs. Further, if U.S. branches are treated as FFIs, the complexities that arise with respect to the various definitions and obligations under FATCA will multiply. For example, a participating FFI must calculate its passthru payment percentage. If a U.S. branch is an FFI, would it also be required to calculate such a percentage? This is potentially inconsistent with the statutory language of Chapter 4 and would place such institutions in a significantly disadvantageous position as compared with their USFI competitors, to whom such requirements do not (and would not) apply. Again, TEI believes that the simplest remedy for this problem would be either to treat a U.S. branch as a USFI for all Chapter 4 information reporting and withholding purposes or to allow an election to be made by such a U.S. branch to be so treated. TEI requests that Treasury and the IRS, at a minimum, address whether they believe such an election, or other similar relief, is appropriate given the underlying policy objectives of Chapter 4.

With respect to a payment, these determinations include whether (a) the payment is FDAP income or gross proceeds from dispositions of U.S. source dividend or interest property; (b) an FDAP income payment has a U.S. source (which will depend on the status of the payee in certain cases); (c) the payment falls within a class of payments identified by the Secretary as posing a low risk of tax evasion under section 1472(c)(2); (d) the payment is a passthru payment (if the payor is an FFI); and (e) the payment falls within one of an uncertain number of yet to be determined exceptions. With respect to the payee, the payor must determine whether the payee is (a) a U.S. or foreign person; (b) an FFI, and if so what type (participating, deemed-compliant, non-participating, or any other future category); (c) an entity described in section 1471(f); (d) an NFFE; (e) an excepted NFFE; and (f) the beneficial owner of the payment. Some of the determinations in these categories may overlap or be dependent on one another, and there may be other determinations in each category not listed above.

In sum, unless a payor is confident that it has no U.S. source payments of any kind, or makes no withholdable payments regardless of source, then the payor must make at least some of the determinations set forth above to ensure it has complied with its withholding agent responsibilities under Chapter 4. Further, many of these determinations will need to be made by payors that have little or no experience with a withholding regime similar to FATCA. In addition, outside the area of financial accounts held by FFIs and USFIs, Treasury and the IRS have published no guidance on the manner in which a withholding agent can properly make these determinations, the type of information a withholding agent can rely upon, and the form in which such information must be provided to the withholding agent (if any).²³ Finally, there has been no guidance on how a withholding agent is to transmit the information provided to it by NFFEs to the IRS, as required by section 1472(b)(3).

Significantly, withholding must begin with respect to withholdable payments on January 1, 2013. And, under FATCA, such withholding must take place regardless of whether the exact contours of the various exceptions discussed in Notice 2010-60 and 2011-34 and any future guidance are known. Regrettably, given the time required to effect necessary systems changes, time is running short. The less time withholding agents have to adjust their systems and processes to satisfy final regulatory requirements, the more likely it is that withholding agents will default to withholding 30 percent of all withholdable payments they make to avoid being held liable for the tax themselves under section 1474(a), which would not satisfy FATCA's information reporting objectives. In the case of USFIs, this may mean a default to Chapter 4 withholding at the expense of Chapter 3 withholding, which would distort the overall U.S. withholding regime, frustrate the regime's goals, and create severe issues for all parties involved, including the IRS. TEI therefore urges Treasury and the IRS to issue preliminary guidance addressing the manner in which withholding agents can perform their Chapter 4 related tasks and responsibilities to provide time for withholding agents to prepare for the effective date of FATCA and for them to comment upon the methods in any such guidance.

Given the unique compliance challenges presented by FATCA, not only to participating FFIs, but to deemed-compliant FFIs, USFIs, NFFEs, withholding agents, and other affected parties, TEI recommends that (i) the general effective date of FATCA be delayed, at a minimum, to January 1, 2014, and (ii) in no event should the effective date be earlier than 24 months from the date of publication of final regulations under Chapter 4.²⁴

Postponing FATCA's effective date is consistent with the delayed applicability date of section 3402(t) provided by recently issued final regulations under that section.²⁵ The preamble to the section 3042(t) regulations notes that "commentators indicated that an extended period of time following the issuance of final regulations would be necessary for government entities to adopt the systems and processes necessary to comply with § 3402(t) withholding and related reporting requirements" and that commentators stated "government entities would need at least 18 months from the issuance of final regulations . . . to be able to comply."²⁶ The final regulations under section 3402(t) therefore effectively delayed the three-percent withholding requirement from January 1, 2012, to January 1, 2013, providing affected parties with an additional 12 months to prepare to comply. TEI submits that the FATCA withholding regime imposed by Chapter 4 is, if anything, more complex and detailed than that under section 3402(t). TEI therefore believes that a general 24 month delay after publication of final regulations for effectiveness is reasonable.

In addition, TEI reiterates its prior recommendation that the effective date of section 1472 for payments made by non-financial institutions to NFFEs be delayed until 24 months after FFIs must comply with Chapter 4. Such entities are not familiar with withholding regimes such as FATCA and will therefore need much more time to bring themselves into compliance with the final rules.

² In 2009, a predecessor to Subtitle A was drafted. This proposed legislation was later modified and incorporated into the HIRE Act. See generally, Tello, Carol, Reporting, Withholding, and More Reporting: HIRE Act Reporting and Withholding Requirements, 39 TAXMGM'TINT'LJ. 243 (May 14, 2010).

³See 156 Cong. Rec. S1745 (Mar. 18, 2010).

⁴ 2010-37 I.R.B. 329 (Sept. 10, 2010).

⁵ A copy of TEI's previous comments is attached as Appendix A.

⁶ 2011-19 I.R.B. 765 (May 9, 2011).

⁷ An NFFE is any foreign entity that is not a financial institution. I.R.C. § 1472(d).

⁸ 2011-19 I.R.B. at 771. In general, an FFI's "passthru payment percentage" is the sum of its U.S. assets, as defined, divided by the sum of its total assets, each as determined on its last four quarterly testing dates. Id. at 770.

⁹ The definition of passthru payment includes "the amount of the payment that is a withholdable payment." Id. Deemed-compliant FFIs are not required to withhold on passthru payments because they are treated as satisfying the requirements of section 1471(b) by virtue of their deemed-compliant status. To the extent a passthru payment includes a withholdable payment, Notice 2011-34 raises the possibility that deemed-compliant FFIs may consider themselves exempt from the basic withholding requirement of section 1471(a) with respect to withholdable payments because they are not required to withhold on passthru payments, which include withholdable payments. TEI recommends Treasury and the IRS address this issue in future guidance.

¹⁰ 2011-19 I.R.B. at 776.

¹¹See, e.g., Trivedi, Shamik, Drafters of FATCA Notices Offer Insight Into Latest Guidance, Future Plans, 2011 TNT 97-5 (reporting the comments of Michael Plowgian, Attorney Advisor, Office of International Tax Counsel, U.S. Treasury Department).

¹² 2010-37 I.R.B. at 331.

¹³See, e.g., Sheppard, Lee, Danilack Warns Multinationals on FATCA and GRAs, 2011 TNT 39-1 (reporting comments of Michael Danilack, LB&I Deputy Commissioner (International) of the IRS, that the government is concerned about the scope and application of the potential exceptions to FATCA for financing affiliates and certain holding companies) (hereinafter "Sheppard").

¹⁴ 2010 I.R.B. at 331.

¹⁵Id.

¹⁶See, e.g., Elliot, Amy, Treasury Understands Need for Sensible FATCA Transition Rules, Official Says, 2011 TNT 15-6 (Jan. 24, 2011) (reporting comments of Itai Grinberg, Attorney Advisor, Office of International Tax Counsel, U.S. Treasury Department).

¹⁷ We discuss the repeal of the expanded Form 1099 reporting requirements below.

¹⁸See, e.g., Sheppard (quoting Deputy Commissioner LB&I Danilack as stating "We need to focus on whether the active business exception gives away too much.").

¹⁹ Pub.L. No. 111-148, 124 STAT. 782 (2010).

²⁰ Treas. Reg. § 31.3402(t)-3(b).

²¹ 2009-4 I.R.B. 362, 364 (Jan. 26, 2009) (emphasis added).

²²See I.R.C. § 1474(f).

²³ Notice 2011-34 states that "Treasury and the IRS intend to publish . . . draft information reporting and certification forms." 2011-19 I.R.B. at 765. No time frame was given for such guidance.

²⁴ Section 1474(f) provides that the "Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes" of Chapter 4. Guidance delaying FATCA's effective date, in whole or in part, could be properly issued pursuant to this legislative grant of regulatory authority so that the purposes of Chapter 4 are not frustrated by withholding agents and other affected persons being unable to properly comply with the reporting regime due to a lack of time to prepare.

²⁵See T.D. 9524.

²⁶Id.

Section 501 of Part I of Subtitle A added Chapter 4 to the Internal Revenue Code of 1986; that Chapter, entitled Taxes to Enforce Reporting on Certain Foreign Accounts, sets forth four new sections to the Code:

• Section 1471, Withholdable payments to foreign financial institutions;

• Section 1472, Withholdable payments to other foreign entities;

• Section 1473, Definitions; and

• Section 1474, Special rules.

In Notice 2010-60,⁴ the U.S. Department of the Treasury and IRS provided preliminary guidance regarding priority issues involving the implementation of the new law and requested comments on that guidance and other issues that should be given priority. TEI is pleased to respond to their request for comments.

I. BACKGROUND

Tax Executives Institute is the preeminent association of business tax executives worldwide. Our nearly 7,000 members represent 3,000 of the leading corporations in the United States, Canada, Europe, and Asia. TEI represents a cross-section of the business community, and is dedicated to developing and effectively implementing sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply in a cost-efficient manner.

TEI members are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and professional training of our members enable us to bring a balanced and practical perspective to the issues raised by FATCA's implementation.

II. DEFINITIONS AND EXCEPTIONS TO FATCA

FATCA establishes rules for payments to foreign financial institutions and other foreign entities, and imposes a 30-percent withholding tax on the gross amount of a "withholdable payment" made to a (i) "foreign financial institution" (FFI) if the institution does not meet certain requirements (section 1471(a)); or (ii) "non-financial foreign entity" (NFFE) if the beneficial owner of such payment is an NFFE that does not meet certain requirements (section 1472(a)). Section 1471(b) provides that an FFI must enter into an agreement (FFI agreement) with the Secretary of the Treasury and, among other items, agree to annually report extensive information about each financial account held by a U.S. person or a U.S.-owned foreign entity. The definitions of FFI and "financial institution" under section 1471(d) are very broad:

Under section 1472, NFFEs may also be subject to FATCA. Payments to an NFFE are subject to the 30-percent withholding tax if (i) the beneficial owner of such payment is such an entity or any other non-financial foreign entity; and (ii) certain requirements are not met with respect to the beneficial owner. Section 1472(d) defines an NFFE as "any foreign entity which is not a financial institution (as defined in section 1471(d)(5))." Section 1472(b) provides that withholding is not required with respect to the beneficial owner of a payment if (i) the beneficial owner or the payee provides the withholding agent with either (a) a certification that the owner does not have any substantial U.S. owners, or (b) the name, address, and tax identification number (TIN) of each substantial U.S. owner of the beneficial owner; (ii) the withholding agent does not know, or have reason to know, that any information provided is incorrect; and (iii) the withholding agent reports the information to the Secretary.

Sections 1471(f)(4) and 1472(c)(2) provide exceptions to the 30-percent withholding tax for any class of persons or any payments identified by the Secretary as "posing a low risk of tax evasion." The Technical Explanation of the HIRE Act, prepared by the Joint Committee on Taxation, states:

A. Exception for Financing Affiliates. Notice 2010-60 provides that a foreign entity primarily engaged in financing and hedging transactions with or for members of its expanded affiliated group (EAG) (as defined in section 1471(e)(2)) that are not FFIs and do not provide such services to non-affiliates "may be excluded from the definition of financial institution, provided that the expanded affiliated group is primarily engaged in a non-FI business."⁸ TEI agrees that such an exclusion is appropriate.

To meet the definition of a hedging/financing center of a non-financial group, TEI recommends that the financing affiliate be primarily engaged in one or more of the following activities with or for members of its EAG, so long as the EAG is primarily engaged in a non-FI business and the financing affiliate does not provide such services to non-affiliates:

B. Exception for Holding Companies. The Notice states that the definition of "financial institution" will exclude a foreign entity the primary purpose of which is to act as a holding company for a subsidiary or group of subsidiaries that primarily engages in a trade or business other than that of a "financial institution," as defined under section 1471(d)(5) (an FI business).¹⁰ TEI agrees that holding companies whose only activity is investing in companies that are not financial institutions should be exempted from FATCA.

We remain concerned, however, because the term "financial institutions" will still include any entity functioning as an investment fund, including "any investment vehicle whose purpose is to acquire or fund the start-up of companies and then hold those companies for investment purposes for a limited period of time."¹¹ This language will unnecessarily subject numerous foreign non-financial institution holding companies to withholding under FATCA. For example, consider a private foreign corporation owned 51 percent by a private equity investor, 45 percent by a large publicly traded corporation, and 4 percent by management; the company's sole purpose is to hold operating companies that provide insurance consulting services. While the statute could be interpreted to treat such an entity as an FFI because its sole purpose is to "acquire or fund the start-up companies for a limited time," such a result would be overkill because such an entity bears little resemblance to an FFI and, indeed, operates in a manner identical to the other holding companies to which an exemption expressly applies. We believe the exemption for holding companies should include any foreign holding company of operating companies outside the banking/financial institution field.

C. Exception for Certain Retirement Plans. Section 1471(f) authorizes the Secretary to exempt from withholding any payment to the extent that the payment's beneficial owner is part of a class of persons identified by the Secretary "as posing a low risk of tax evasion." Noting that a retirement plan may qualify as a financial institution under section 1471(d)(5), the Treasury and the IRS have announced an intent to exempt certain foreign retirement plans from withholding under section 1471(a). For this purpose, the foreign retirement plan must --

TEI recommends that the definition of a retirement or benefit plan or other deferred compensation plan in paragraph (iii) be expanded to include U.S. participants and their beneficiaries so long as the participant does not render services for the foreign employer in the United States. Frequently, employers may operate in more than one country or send their employees to work in other countries, or the employees may occasionally travel to other countries to provide services. These types of activities do not pose a high risk of U.S. tax evasion.

Moreover, TEI recommends that a retirement plan eligible for the benefits of an income tax treaty with the United States --whereby U.S.-source interest and dividends received by the plan are not subject to U.S. tax -- should be exempt from withholding under section 1472.

In respect of certification, TEI recommends that a benefit plan certify through an expanded Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding) that (i) it is a benefit plan under the laws of the country in which it is established; (ii) the plan is sponsored by a non-U.S. employer; and (iii) the services provided by its employees for purposes of benefits in the plan are rendered outside the United States.

III. WITHHOLDABLE PAYMENTS

Withholdable payments are defined by section 1473(1)(A) as --

A. Exception for Related Party Payments. Sections 6038 and 6038A require information reporting with respect to foreign-related parties. Under pre-FATCA law, the IRS developed specific forms to facilitate information reporting requirements for foreign subsidiaries and other foreign affiliates: Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, which must be filed for each controlled foreign corporation (CFC) of a U.S. shareholder, and Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, which must be filed for foreign affiliates of foreign-owned U.S. corporations. These forms require, among other items, information related to the foreign entity's ownership, and a report of all transactions between the U.S. and foreign corporations in the controlled group. The information reported is the same information reported under section 1471 because it includes amounts borrowed from such foreign corporations as well as interest paid with respect to such borrowings. There are significant penalties for failing to report these payments ($10,000 for each taxable year with respect to which such failure occurs), and the statute of limitations may be suspended.

Sections 1472(c)(1)(A) and (B) provide exceptions for payments made to NFFEs that are publicly held corporations and their affiliates.¹⁴ Sections 1473(3)(A) and (B) provide an exception for payments made to FFIs with respect to publicly held account holders. To provide relief for those companies that are not publicly traded, TEI recommends that an exception from sections 1471 and 1472 be added for payments made to related entities that are reported on Forms 5471 and 5472.

B. Exception for Payments Made in the Ordinary Course of Business. The Technical Explanation states:

The Notice states that the IRS may exempt certain classes of payments made by U.S. financial institutions (USFIs) to NFFEs.¹⁶ TEI supports this exemption and recommends that it also include payments made by all U.S. payors (and not just USFIs) for withholdable payments made to NFFEs in the ordinary course of business.

The Notice also sets forth an exemption "with respect to certain classes of payments, such as arm's-length payments made for goods or services in the ordinary course of the withholding agent's trade or business."¹⁷ A payment made for goods to an NFFE, however, does not fit within the definition of a withholdable payment under section 1473(1)(A). TEI recommends that the word "goods" be stricken from Section G of the Notice.

According to the Notice, the IRS is considering an exception to section 1472 for payments made by withholding agents (other than financial institutions) to NFFEs that are engaged in an active trade or business.¹⁸ classes of persons or with respect to certain classes of payments, such as arm's length payments made for goods or services in the ordinary course of the withholding agent's trade or business."). TEI agrees that such an exception is appropriate because there is a low risk of tax evasion associated with such payments. Requiring NFFEs to send certifications to all their customers, however, is impractical. For example, an NFFE engaged in the development and licensing of software may have thousands of customers in the United States. Rather than an NFFE's communicating its withholding status to all its U.S. customers, TEI recommends that the determination whether an NFFE is engaged in an active trade or business be based on a certification that the NFFE would provide to the IRS, which could publish a list of companies that have so certified.

1. Exclusion of Non-Financial Foreign Corporations from Withholding Agent Definition. Section 1473(4) defines withholding agent as all persons, in whatever capacity acting, having the control, receipt, custody, disposal, or payment of any withholdable payment. The definition is expansive and could be interpreted as including foreign persons, including NFFEs. Under sections 1471 and 1472, any U.S.-source payments made to FFIs and NFFEs would require an analysis to determine whether the recipient is an FFI or an NFFE. In the case of an FFI, the payor must determine whether the FFI has signed an agreement with the IRS. In the case of payments to NFFEs, the payor must determine whether there are substantial U.S. owners or whether the payee meets the exceptions provided in section 1472(c)(1). Although few U.S.-source payments would likely be made by a non-financial foreign corporation to an FFI or NFFE, the foreign corporation would have to implement controls to ensure that it could identify such payments and report them as required. In addition, payments made between foreign corporations and U.S. shareholders and their affiliates are required to be reported to the IRS under sections 6038 and 6038A. Therefore, any potential routing of U.S.-source payments to be received ultimately by a U.S. person through related foreign corporations is already required to be reported. U.S.-source payments made by foreign corporations to FFIs or NFFEs present a low risk of tax evasion because of the low number of such payments and the presence of an extant reporting mechanism. TEI therefore recommends that the definition of withholding agent for purposes of sections 1471 and 1472 exclude non-financial foreign corporations.

2. Payments Made By U.S. Payors. Under current rules, foreign vendors that do not sell or provide goods or services in the United States are not subject to U.S. information reporting or withholding requirements, but often must provide detailed information to U.S. payors before receiving payment to document to the payor that the vendor is a foreign person and that the payment either is not U.S. source or is subject to a treaty. This may take the form of the payee completing a Form W-8 BEN (required if treaty-based withholding relief is requested) or supplying other documentation showing that the payee is a foreign person. The FATCA guidance should clarify that no additional reporting or withholding is required in these circumstances. For example, a U.S. payor paying for hotel stays in a foreign jurisdiction should not be subject to the FATCA reporting requirements in respect of the hotel.

3. Credit Card Payments. To avoid duplicative reporting, TEI recommends that the withholding agent for payments made via credit card should be the credit card company. This is consistent with reporting under section 6041 because the regulations under section 6050W provide that payments made with credit cards are exempt from reporting under section 6041. Furthermore, an exclusion from the reporting rules for finance charges imposed on credit cards should be adopted because these payments pose a low risk of tax evasion.

C. Public Companies. Except as otherwise provided by the Secretary, section 1472(c)(1)(A) exempts public companies from the FATCA reporting requirements. It is unclear, however, how the exemption applies when the status of a company changes, for example, from public to private. The Notice does not address this issue.

To implement the reporting and withholding rules of section 1472, accounts payable departments will need to be notified. Just as in the case of information reporting under section 6041, an employee processing the payments must rely on information as of a given point in time. The guidance should address how the reporting requirements will apply when the public status of a company changes. TEI recommends permitting a payor to rely on a foreign payee's publicly held status at the beginning of a calendar year to determine whether reporting and withholding under section 1472 applies.

D. De Minimis Payments. FATCA contains no exception for de minimis payments. TEI recommends that an exception be provided that mirrors the limitation set forth in section 6041 of the Code, which currently is $600 in a calendar year.¹⁹

E. Clarification of Sourcing Rules. Section 1473(1)(A) defines "withholdable payment" as "any payment . . . if such payment is from sources within the United States," and "any gross proceeds from the sale . . . of any property . . . which can produce interest or dividends from sources within the United States." Section 1473(1)(B) sets forth an exception to the definition of a withholdable payment for income connected with a U.S. business, providing that "[s]uch term shall not include any item of income which is taken into account under section 871(b)(1) or 882(a)(1) for the taxable year." Section 1473(1)(C) sets forth a special rule for sourcing interest paid by foreign branches of domestic financial institutions, providing that "[s]ubparagraph (B) of section 861(a)(1) shall not apply."

Under sections 861 and 862, the source of interest income is generally determined by the residence of the debtor: Interest paid by residents of the United States constitutes U.S.-source income, while interest paid by foreign residents is foreign-source income. Section 861(a)(1)(B) treats interest on deposits with foreign branches of U.S. banks as foreign-source income. Section 1473(1)(C) therefore re-sources the interest on deposits with foreign branches of domestic banking institutions as U.S.-source income.

TEI suggests that the government clarify that the re-sourcing rule in section 1473(1)(C) is not intended to change the source rules to bring purely foreign-to-foreign payments under the definition of "withholdable payment." To illustrate this point, the following example should be added to the guidance:

A. Information Reporting for U.S. Branches. Section 1471(c)(2) permits an FFI to elect to be subject to the same reporting as a USFI:

In Notice 2010-60, Treasury and the IRS state their intent not to exempt an FFI from the requirement to enter into an FFI Agreement, even if the FFI receives withholdable payments solely through its U.S. branch:

Requiring U.S. branches to enter into an FFI agreement would create a severe disadvantage for such branches vis-à-vis USFIs. U.S. branches would be required to create new systems to capture, track, and report the additional information, increasing both the costs and difficulties of doing business in the United States. While electing to be treated as a U.S. payor under sections 6041, 6042, 6045, and 6049 avoids the balance reporting, the scope of the reporting required is expanded far beyond that required by USFIs. Under current law, U.S. withholding agents are not required to report interest, dividends, or broker proceeds to U.S. or foreign corporations. Chapter 4 does not change this exception. Under section 1471(c)(2), the election to be subject to the same reporting as a USFI requires the FFI to treat "each holder of such account which is a specified United States person or United States owned foreign entity [as if it] were a natural person and citizen of the United States." This would mean that a U.S. branch making the election would be required to perform full Form 1099 reporting on all U.S.-owned foreign entities while a USFI would not be required to do so. Thus, the reporting requirements for U.S. branches of FFIs would be significantly more costly than those for USFIs.

Because, like USFIs, U.S. branches are already U.S. withholding and reporting agents, TEI recommends that U.S. branches be permitted to make an election either on a separate form or as part of the FFI agreement to be treated in the same manner as a USFI for all chapter 4 reporting obligations.

B. Use of Form W-8BEN. To facilitate compliance with the obligations imposed by chapter 4, the Notice states that participating FFIs will be permitted to rely on Forms W-9 they collect for other U.S. tax purposes (i.e., for purposes of chapters 3 and 61 of the Code), and will generally be required to treat accounts of individuals that are so documented as U.S. accounts for purposes of chapter 4. Participating FFIs will also be required under chapter 4 to collect Form W-8BEN or Form W-9 (or acceptable substitute forms) from certain account holders, but this requirement will be limited.²¹ TEI recommends that these procedures be extended to NFFEs.

TEI agrees that, rather than creating a new reporting format, current information reporting rules should be used. The Form W-8BEN should be expanded to include the information required under both sections 1471 and 1472.

As noted above, foreign vendors that provide goods and services in locations outside the United States must provide detailed information to U.S. payors before receiving payment to document foreign status or to claim treaty benefits. Future guidance should clarify that no additional reporting is required in these circumstances. In addition, adding a box or series of boxes on Form W-8BEN to help payors determine whether a payment for goods or services is U.S. source would assist payors in determining their U.S. reporting or withholding obligations. Alternatively, the form could allow the payee to attach a statement that none of the goods or services is sold or provided in the United States.

Current rules for filing Form W-8BEN require that a payor obtain new documentation every three years if a U.S. taxpayer identification number (TIN) is not used and within 30 days of a change in circumstances. If a TIN is used, the documentation remains valid until there is a change in circumstances. A change in circumstances includes a change of address if treaty benefits are claimed. Although a provider's ultimate owners and the location where it provides goods or services may change over time, the section 1472 guidance should not impose a requirement to obtain the required ownership information more frequently than is required under current law with respect to foreign status information.

C. Electronic Receipt of Form W-8BEN. Section 522 of the HIRE Act amends section 6011(e) to the Code to permit the Secretary to require electronic filing by financial institutions with respect to the tax for which such institutions are liable under chapters 3 and 4 of the Code, without regard to the general rule under section 6011(e)(2) that limits the authority of the Secretary to require electronic filing. According to the Notice, Treasury and the IRS will issue regulations that would require all or most financial institutions to electronically file their returns with respect to these taxes.²² TEI supports this requirement.

TEI recommends that electronic filing be extended to entities required to obtain Forms W-8BEN, i.e., the requirement to obtain paper copies of the form should be eliminated. In today's global electronic environment, most businesses are required to file income tax returns and provide audit information to tax authorities in electronic format. Legal documents are executed electronically through facsimile signatures and most businesses store and process information electronically. It is impractical and costly to use the postal services in many countries to send Forms W-8BEN, which may take months to arrive. The government should therefore consider eliminating the paper copy requirement.

V. TRANSITION RULES

FATCA is generally effective for payments made after December 31, 2012. The new law will require an unprecedented level of U.S. tax information gathering and reporting by foreign entities that have not traditionally engaged in such efforts. This will be particularly true for NFFEs. The ability of companies to successfully complete such efforts in a short time frame (or, indeed, at all) cannot be presumed. Time will also be needed to implement systems changes and to educate vendors on the new requirements.

NFFEs will need considerably more time than foreign financial institutions to make the necessary systems changes to comply with these new provisions and to train their employees to understand these complex rules. Such companies generally have little or no familiarity with this reporting environment. Therefore, implementing these new rules will be significantly more time-consuming for them than it will be for FFIs. For this reason, TEI recommends that the effective date of section 1472 for payments by non-financial institutions to NFFEs be delayed until two years after FFIs must comply with these provisions.

VI. CONCLUSION

Tax Executives Institute appreciates this opportunity to present its views on Notice 2010-60 and the Foreign Account Tax Compliance Act. If you have any questions, please do not hesitate to call Mark C. Silbiger, chair of TEI's IRS Administrative Affairs Committee, at 440.347.5781, or mark.silbiger@lubrizol.com; or Mary L. Fahey of the Institute's professional staff at 202.638.5601, or mfahey@tei.org.

² In 2009, a predecessor to Subtitle A was drafted. This proposed legislation was later modified and subsequently incorporated into the HIRE Act. See generally, Tello, Carol, Reporting, Withholding, and More Reporting: HIRE Act Reporting and Withholding Requirements, 39 TAX MGM'T INT'L J. 243 (May 14, 2010).

³See 156 Cong. Rec. S1745 (Mar. 18, 2010).

⁴ 2010-37 I.R.B. 329 (Sept. 10, 2010).

⁵ In contrast, there are only about 5,500 Qualified Intermediaries registered under Code section 1441. Staples, John, & Edward Tanenbaum, Hot Topics in Withholding Tax and Reporting Rules: The FATCA Provisions of the HIRE Act, ABA Section of Taxation, Slides 11 & 24 (May 2010). See also Bennett, Allison, U.S. Institutions, Agents Affected by FATCA As Focus on Reporting Increases, E&Y Says, BNA Int'l Tax Monitor (Sept. 22, 2010) (FATCA "dwarfs the qualified intermediary regime in the financial institutions it covers").

⁶ Joint Committee on Taxation, Technical Explanation of the Revenue Provisions Contained in Senate Amendment 3310, the "Hiring Incentives to Restore Employment Act," Under Consideration by the Senate (JCX-4-10), 44 (Feb. 23, 2010) (hereinafter cited as the "Technical Explanation"). Since the underlying statute expressly applies to foreign financial institutions, the reference to "affiliated group" in the Technical Explanation is presumably to the term "expanded affiliated group" as defined in section 1471(e)(2); that provision states that the exclusion for foreign corporations in section 1504(b)(3) is to be disregarded.

⁷ 2010-37 I.R.B. at 331.

⁸Id.

⁹ A decision to make an election under section 1221(a)(7) or 1256(e) is based on many practical considerations that do not affect whether the underlying instrument was executed to manage business risks. For example, for financial reporting purposes, hedges are generally marked to market. To avoid book-tax differences, a taxpayer may decide not to make an election under section 1256(e).

¹⁰ 2010-37 I.R.B. at 331.

¹¹Id.

¹² 2010-37 I.R.B. at 333.

¹³ Technical Explanation at 41 (emphasis added).

¹⁴ The other exceptions specified in section 1472(c)(1) are: any entity organized under the laws of a possession of the United States wholly owned by one or more bona fide residents of such possession; any foreign government, political subdivision of a foreign government, or wholly owned agency or instrumentality of one or more of the foregoing; any international organization or wholly owned agency or instrumentality thereof; any foreign central bank of issue; or any other class of persons identified by the Secretary for purposes of this subsection.

¹⁵ Technical Explanation at 46. Chapter 3 (Withholding of Tax on Non-Resident Aliens and Foreign Corporations) and chapter 61 (Information and Returns) will, however, continue to apply to foreign vendor payments.

¹⁶ 2010-37 I.R.B. at 344 ("Treasury and the IRS contemplate permitting U.S. withholding agents other than USFIs to rely on a foreign entity's certification as to its classification for chapter 4 purposes, absent reason to know that such certification is unreliable or incorrect. These requirements would also apply with respect to withholdable payments made by FFIs and USFIs to NFFEs that are not holders of financial accounts maintained by the financial institution. Treasury and IRS request comments on the form of such certifications, their renewal provisions, and circumstances under which a withholding agent should not be required to solicit such certifications from certain classes of persons or with respect to certain classes of payments, such as arm's length payments made for goods or services in the ordinary course of the withholding agent's trade or business.").

¹⁷Id.

¹⁸Id. ("Treasury and the IRS also anticipate providing an exception in guidance to the withholding required under section 1472 for payments made to an NFFE engaged in an active trade or business by withholding agents other than financial institutions. Comments are requested regarding the appropriateness of such an exception, how a withholding agent may determine whether an NFFE is engaged in an active trade or business, and other exceptions to withholding under section 1472 that may be appropriate.").

¹⁹ Pending legislation would raise the de minimis amount under section 6041 to $5,000. If the legislation passes, the amount here should be the same.

²⁰ 2010-37 I.R.B. at 333 (emphasis added).

²¹ 2010-37 I.R.B. at 335.

²² 2010-37 I.R.B. at 344.