M E M O R A N D U M
September 23, 2010
TO: Distribution
FROM: Burt, Staples, Maner, LLP
RE: IRS Comments on FATCA Notice 2010-60
Several senior IRS executives addressed the Tax Executives Institute
in New York City on September 22, 2010, as part of a panel chaired by
John Staples, and commented on FATCA Notice 2010-60 (the “Notice”).
Their views, while not official government positions, provide valuable
insight into the potential direction of future FATCA guidance. We
summarize some of their more important comments below.
Overall Government Approach: In response to industry concerns
about the limited nature of the Notice, the IRS officials explained that
they did as much as they could in the short time since the March
enactment of FATCA and thought it better to publish their initial
thinking rather than let more time pass before publishing more
comprehensive guidance. They stressed that they are dedicated to putting
out further guidance as quickly as possible to fill in additional
details, and answer some of the more pressing questions presented by the
Notice itself.
Industry Comments: The IRS
officials stressed a number of times that they need and welcome comments
from industry on the many issues presented by FATCA. They told the
audience that, just because the Notice either did not address an issue
that had been the subject of a prior comment letter or took a different
approach from that suggested, it did not mean that the issue was off the
table. Industry groups accordingly should assess their prior comment
letters and re-emphasize any key points with greater detail if possible.
FFI Carve-Outs: The officials expect additional
classes of entities and institutions to be carved out of FATCA and
requested comments on these (many industry comments have suggested
various carve-outs and these should be re-emphasized). With respect to
the carve-out for “non-U.S. retirement plans,” the IRS acknowledged that
the criteria in the Notice may be too narrow, particularly in Europe
where U.S. employees covered under a European employer’s plan
established in one country are actually working in another country. The
IRS asked for comments on what criteria might adequately identify a
legitimate retirement plan/pension from a vehicle that might be more
likely subject to manipulation by U.S. persons.
Small
FFIs and the IRS’s New Agency Concept: In discussing the small
FFI carve-out, the IRS acknowledged that the Notice did not define
exactly what constitutes a “small” FFI and that future guidance might
need to do so. However, the officials also floated a dramatically
different way for an FFI or U.S. financial institution (“USFI”) to
essentially treat an FFI more like a non-financial foreign entity
(“NFFE”) regardless of the size of the FFI. The IRS suggested that they
might leave it to the FFI or USFI to determine for which FFI customers
they are willing to take on the greater documentation and due diligence
requirements associated with the “small” FFI status outlined in the
Notice. In other words, if a withholding agent’s FFI customers were
willing to provide such withholding agent with sufficient
documentation/information identifying their investors (both U.S. and
non-U.S.), then the withholding agent essentially could treat that FFI
more like an NFFE. The withholding agent in essence would become the
agent of the customer/FFI in collecting pertinent investor information
and including it on its FFI annual report to the IRS. The IRS officials
believe that an FFI or USFI would only take on this added due diligence
burden for customers of a certain size, thus potentially obviating the
need to strictly define what is a “small” FFI. The panel discussed
whether this sort of approach is desirable given that it requires a high
degree of interaction between the withholding agent and its customer
base. This concept will need to be thoroughly vetted by the industry.
Due Diligence: Some IRS comments suggested that
there is an expectation that FFIs and USFIs will track “changed
circumstances” of their clients and report accordingly if a client
previously viewed as non-U.S. turns out to be U.S. However, the IRS had
not apparently thought through how “reason to know” or “actual
knowledge” of such changes might work. For example, does it require some
sort of periodic sweep of electronic databases? Does it attribute
knowledge of such changes from a relationship manager to the withholding
agent generally (for example, the customer mentions to the relationship
manager that an entity customer has a new U.S. owner)? Does it require
an FFI or USFI to “know” the terms of a trust’s organizational document
that states that a U.S. person may become a beneficiary at a later date?
The industry should focus on the concept of continuing due diligence and
how it reasonably could be accomplished without presenting unacceptable
levels of risk to withholding agents.
Proof of No U.S.
Accounts: The IRS acknowledged the need to provide their views
on how an entity would establish that it has no U.S. accounts and
continue to prove a lack of U.S. accounts on a prospective basis. The
panel discussed extensively the pressing need for this guidance given
that many FFIs are assessing whether retaining U.S. accounts is
commercially feasible in light of the costs of FATCA. Interestingly, the
IRS urged FFIs not to act too hastily in dropping U.S. customers at this
juncture given the overall development of the guidance (e.g., perhaps
the agency concept discussed above might allow smaller non-U.S.
financial institutions to retain such accounts and pass the due
diligence and reporting burden to larger FFIs).
U.S.
Controlled Foreign Corporations (“CFC”): If USFIs had hoped
that the government might back away from treating CFCs as FFIs, there
was little indication of such an intent by the IRS officials. They
emphasized that they believe that CFCs should be subject to the
heightened FFI documentation and reporting standards and that they did
not think that the current Form 1099 rules were a good substitute.
Documentation of Existing Accounts: The IRS stated
that the concept of “electronically searchable databases” means those
databases that have current search engine capabilities and that they do
not expect FFIs to build search engines for those that do not have them.
The IRS also expressed their views that an FFI would not need to go
through the heightened due diligence procedures associated with the 2-
and 5-year transition periods for individuals if an account showed no
U.S. indicia based upon the automated search of electronic databases and
the withholding agent had some sort of KYC type document on file. This
is largely the same approach that applies to Qualified Intermediaries
(“QI”) using KYC type documentation and does not require the FFI to
establish that the customer is not a dual citizen, permanent U.S.
resident or a taxpayer with substantial presence in the United States.
However, the IRS had not considered the many transition rules built into
the QI regime that allowed a QI to rely on non-documentation to
establish non-U.S. status (e.g., under the Canadian QI attachment, a QI
may rely on Canadian Social Insurance Numbers for certain older accounts
to establish non-U.S. status). The IRS requested comments on when such
alternatives to actual documentation could be relied upon particularly
in light of the IRS’s approach in the QI country attachments.
Unfortunately, the panel was unable to cover the many other issues
associated with the Notice itself and what the Notice did not cover.
Nonetheless, we hope that you find the above notes of help. We would be
happy to discuss any of the above points further.
Please visit
the BSM website
for client letters and/or Compliance Technologies
International, LLP for operational and systems guidance.