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2011

FOREIGN BANK ACCOUNT REPORTING AND TAX 

COMPLIANCE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

NOVEMBER 5, 2009

Serial No. 111–35 

Printed for the use of the Committee on Ways and Means 

( 

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COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, New York, Chairman 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK B. MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

DANNY K. DAVIS, Illinois 

BOB ETHERIDGE, North Carolina 

LINDA T. SA ́ NCHEZ, California 

BRIAN HIGGINS, New York 

JOHN A. YARMUTH, Kentucky 

DAVE CAMP, Michigan 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GINNY BROWN–WAITE, Florida 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

DEAN HELLER, NEVADA 

PETER J. ROSKAM, ILLINOIS 

JANICE MAYS, Chief Counsel and Staff Director 

JON TRAUB, Minority Staff Director 

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

RICHARD E. NEAL, Massachusetts, Chairman 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

ALLYSON Y. SCHWARTZ, Pennsylvania 

EARL BLUMENAUER, Oregon 

JOSEPH CROWLEY, New York 

KENDRICK B. MEEK, Florida 

BRIAN HIGGINS, New York 

JOHN A. YARMUTH, Kentucky 

PATRICK J. TIBERI, Ohio, Ranking Member 

JOHN LINDER, Georgia 

DEAN HELLER, Nevada 

PETER J. ROSKAM, Illinois 

GEOFF DAVIS, Kentucky 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also, published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 

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C O N T E N T S 

Page 

Advisory of October 29, 2009 announcing the hearing ......................................... 2 

WITNESSES 

Stephen E. Shay, Deputy Assistant Secretary for International Tax Affairs, 

United States Department of the Treasury ....................................................... 6 

William J. Wilkins, Chief Counsel, Internal Revenue Service ............................ 12 

Thomas Prevost, Americas’ Tax Director, Credit Suisse, New York, New York 34 

Charles I. Kingson, Adjunct Professor, New York University Law School, 

New York, New York ........................................................................................... 51 

Dirk J.J. Suringa, Partner, Covington & Burling LLP, Washington, D.C. ......... 58 

SUBMISSIONS FOR THE RECORD 

American Citizens Abroad, Statement ................................................................... 69 

Chamber of Commerce of the United States of America, Statement .................. 72 

Managed Funds Association, Statement ................................................................ 75 

American Bankers Association, Statement ........................................................... 80 

American Citizens Abroad, Letter .......................................................................... 82 

American Institute of Certified Public Accountants, Statement ......................... 84 

Jo Van de Velde, Letter ........................................................................................... 88 

The Securities Industry and Financial Markets Association, Letter .................. 90 

Financial Services Roundtable, Statement ............................................................ 101 

Graham Cox, International Capital Markets Services Association, Letter ........ 105 

Martin Egan and Kate Craven, International Capital Market Association, 

Letter ..................................................................................................................... 107

Investment Fund Institute of Canada, Statement ................................................ 108 

Investment Industry Association of Canada, Statement ...................................... 109 

Organization for International Investment, Statement ....................................... 112 

Clearing House Association, L.L.C., Letter ........................................................... 118 

European Banking Federation, Letter ................................................................... 119 

U.S. Public Interest Research Group, Statement ................................................. 126 

Swiss Bankers Association, Statement .................................................................. 129 

State Street Bank and Trust, Letter ...................................................................... 134 

EFAMA, Statement ................................................................................................. 138 

Australian Bankers’ Association, Inc., Statement ................................................ 144 

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FOREIGN BANK ACCOUNT REPORTING AND 

TAX COMPLIANCE 

THURSDAY, NOVEMBER 5, 2009 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON SELECT REVENUE MEASURES, 

Washington, DC. 

The subcommittee met, pursuant to notice, at 10:05 a.m., in 

Room B–318, Rayburn House Office Building, the Honorable Richard E. Neal [chairman of the subcommittee] presiding. 

[The advisory of the hearing follows:] 

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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON SELECT REVENUE MEASURES 

November 5, 2009 

By (202)225–5522 

Neal Announces Hearing on Foreign 

Bank Account Reporting and Tax Compliance 

House Ways and Means Select Revenue Measures Subcommittee Chairman Richard E. Neal (D–M(A) announced today that the Subcommittee on Select Revenue 

Measures will hold a hearing on foreign bank account reporting and related tax 

compliance issues. The hearing will take place on Thursday, November 5, 

2009, in the main Committee hearing room, B-318 Rayburn House Office 

Building, beginning at 10:00 a.m. 

Oral testimony at this hearing will be limited to invited witnesses. However, any 

individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed 

record of the hearing. 

FOCUS OF THE HEARING: 

The hearing will focus on non-compliance by U.S. taxpayers with foreign bank accounts, rules regarding foreign trusts with U.S. beneficiaries, and certain U.S. dividend equivalent payments to foreign persons to avoid U.S. taxes. The hearing will 

also focus on recently introduced legislation, HR 3933, the Foreign Account Tax 

Compliance Act of 2009. 

BACKGROUND: 

According to the most recent tax year data available (2003), more than $293 billion in U.S. source income was sent to individuals and businesses residing abroad. 

The United States imposes withholding taxes when U.S. source investment earnings 

are paid to a foreign person. Those withholding taxes were largely designed to collect tax on income earned in the United States even though the income is earned 

by a foreign person not subject to the jurisdiction of our laws. Those withholding 

taxes also play a role in preventing non-compliance by U.S. persons holding investment assets in accounts overseas. 

The Internal Revenue Service (IRS) has established the Qualified Intermediary 

(QI) program that authorizes foreign financial institutions to collect withholding 

taxes on behalf of the U.S. government. The program was implemented to improve 

compliance for tax withholding and reporting on U.S. source income that flows offshore through foreign financial institutions. The recent UBS case revealed problems 

with the QI program that permitted tax evasion by U.S. persons. Further, even with 

jurisdictions in which the United States has a tax treaty, effective information exchange used by tax enforcement agencies may sometimes be undermined by local 

laws providing for banking secrecy that conflict with U.S. law. 

In March of this year, this Subcommittee held a hearing on bank secrecy and tax 

evasion at which the Commissioner of the Internal Revenue Service testified (Ways 

and Means Committee Hearing Print, Serial 111-12, Hearing on Banking Secrecy 

Practices and Wealthy American Taxpayers). In May, the President released a fiscal 

2010 budget proposal including a number of new requirements on taxpayers with 

foreign bank accounts and foreign financial institutions holding those accounts. Last 

week, Representative Charles B. Rangel filed HR 3933, the Foreign Account Tax 

Compliance Act of 2009 containing, among other proposals, many of the proposals 

from the Administration’s budget, including a mandatory 30 percent withholding on 

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payments to foreign financial institutions unless they disclose information to the 

IRS on accounts owned by U.S. individuals or close the accounts, and a requirement 

on individuals and entities to report offshore accounts with values of $50,000 or 

more on their tax returns (see Joint Committee on Taxation Technical Explanation, 

JCX-42-09). 

In announcing the hearing, Chairman Neal stated, ‘‘For many years, I have 

sought to crackdown on individuals and corporations that are abusing overseas tax 

havens. With billions of dollars in revenue being lost each year, strengthening our 

tax compliance efforts is essential. I strongly believe the Foreign Account Tax Compliance Act of 2009, introduced this week in the House by Chairman Rangel and 

myself, gives the Treasury Department the necessary tools it needs to get tough 

with those Americans hiding their assets overseas. I welcome the support for this 

bill offered by President Obama and Treasury Secretary Geithner, and look forward 

to working with them to turn this proposal into law. It is my hope that this hearing 

marks the beginning of a vigorous campaign by Congress and the Obama administration to end the practice of offshore tax avoidance by U.S. citizens.’’ 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the 

hearing record must follow the appropriate link on the hearing page of the Committee website and complete the informational forms. From the Committee homepage, http://democrats.waysandmeans.house.gov, select ‘‘Committee Hearings.’’ Select 

the hearing for which you would like to submit, and click on the link entitled, ‘‘Click 

here to provide a submission for the record.’’ Once you have followed the online instructions, complete all informational forms and click ‘‘submit’’ on the final page. 

ATTACH your submission as a Word or WordPerfect document, in compliance with 

the formatting requirements listed below, by close of business November 19, 2009. 

Finally, please note that due to the change in House mail policy, the U.S. Capitol 

Police will refuse sealed-package deliveries to all House Office Buildings. For questions, or if you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, 

but we reserve the right to format it according to our guidelines. Any submission 

provided to the Committee by a witness, any supplementary materials submitted for 

the printed record, and any written comments in response to a request for written 

comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will 

be maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone, and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202-225-1721 or 202-226- 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://democrats.waysandmeans.house.gov. 

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Chairman NEAL. Let me call this hearing to order. I apologize 

for just being a couple of minutes late. Governor Patrick was here, 

and the mass delegation had breakfast with him this morning. And 

based on the attendance, I won’t be calling the question on any—— 

[Laughter.] 

Chairman NEAL. Let me welcome everyone to this hearing of the 

Select Revenue Measures Subcommittee on tax avoidance in foreign bank account reporting. 

When we last met on this issue, in March of this year, we were 

seeking legislative options to handle the weaknesses exposed by 

the UBS case. The IRS and the Justice Department were struggling to get the names of U.S. account holders from a bank that 

had already admitted complicity in a tax avoidance scheme for 

which they agreed to pay $780 million, in terms of a fine. 

The treaty would only provide tax enforcement information if it 

was a crime under local law, and if you had a name. Negotiations, 

however, produced a break-through, and more than 4,500 names 

were to be divulged. 

The IRS announced an amnesty program which has thus far netted 7,500 taxpayers with previously hidden overseas accounts seeking to avoid the worst penalties. I congratulate the IRS and the Department of Justice on this hard-fought victory. 

Of course, the story does not end there. We never knew that the 

tax information exchange would be virtually meaningless because 

we didn’t have the names. We didn’t know bank secrecy would 

prove such an effective shield for evaders, even when we knew a 

crime had been committed. 

Following our March hearing, President Obama announced a 

number of new enforcement provisions as part of his budget proposal. Under the leadership of Chairman Rangel, we have spent 

months sorting through these issues. And last week Mr. Rangel 

and I filed the Foreign Account Tax Compliance Act of 2009. 

This bill creates a new reporting regime for foreign financial institutions with U.S. account holders, whether they are participants 

in the existing qualified intermediary program or not. This legislation casts a wide net in search of undisclosed accounts and hidden 

income. It is carefully balanced. And, as we will hear from one foreign bank today, it is actually supported by one who will bear the 

brunt of this new disclosure. 

The boxer, Joe Lewis, once told an opponent who proceeded to 

outrun him for 12 rounds, ‘‘You can run, but you can’t hide.’’ Lewis 

knocked him out in the 13th round. And I believe we are entering 

that 13th round, and it will not be long before those individuals 

seeking to hide money overseas will be caught. This bill could be 

enacted by the year-end. 

And just before I recognize Mr. Tiberi, it has become a priority 

issue for the G20, as well as the G7. And I think that, in terms 

of the economic confrontation that America currently is experiencing, that it makes good sense, before we talk about raising revenue elsewhere, that we begin talking about closing down these tax 

havens and these loopholes that the American people have justly 

come to see being patently unfair. 

And with that, I would like to recognize my friend, Mr. Tiberi, 

for his opening statement. 

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Mr. TIBERI. Thank you, Mr. Chairman. Early this year the subcommittee met to examine issues surrounding banking secrecy and 

illegal tax evasion. At that hearing we all agreed that criminal tax 

evasion should be aggressively pursued and punished. 

I also said that I hoped our efforts in the area would remain focused on compliance, that the line between illegal tax evasion and 

legal tax practices used by U.S. taxpayers around the world is distinct. And to blur that line may only make our compliance efforts 

more difficult. 

I am pleased, Mr. Chairman, that you have called this hearing 

to discuss legislation recently introduced by Chairman Rangel and 

you that seeks to address the issue of illegal tax evasion. During 

this—these challenging economic times, honest, hardworking taxpayers who play by the rules expect others to do the same. 

I am anxious to hear from our witnesses about some of the details of the bill, and certainly hope it is a workable solution to the 

problem of offshore tax evasion that avoids unintended consequences. 

I will note, however, that I am very pleased the bill does not blur 

the issues of tax evasion and legal tax practices, and does not include the most controversial international tax policy changes proposed by the Administration. We have heard a lot of rhetoric in recent months from the Administration and others designed to confuse the issues, and characterize them as one and the same. I am 

pleased to see, Mr. Chairman, that you have cut through that, and 

drawn a bright line separating the two. 

I look forward to continued work with you on all these issues in 

the days and weeks and months ahead. Thank you to our witnesses. I look forward to your testimony today. 

With that, Mr. Chairman, I will yield back. 

Chairman NEAL. Thank you, Mr. Tiberi. Let me welcome our 

witnesses today. On our first panel, we will hear from Stephen 

Shay, the Deputy Assistant Secretary for International Tax Affairs 

at the Treasury Department. We were fortunate to have Mr. Shay 

as a private sector expert in our March hearing, but even more 

pleased to have him today in his official capacity. 

We will next hear from William Wilkins, the chief counsel for the 

Internal Revenue Service. The legislation we are discussing today 

could not have been possible without the thoughtful commentary 

from both Treasury and IRS. And we are very appreciative of your 

contribution. 

Our second panel will allow us to hear from Mr. Thomas Prevost, 

a managing director and America’s head of tax for Credit Suisse. 

In his position, he is responsible for all tax matters in the Americas 

for the Swiss-owned bank. 

Next we will hear from Professor Charles Kingson, from New 

York University. 

And, finally, we will hear from Dick Suringa, a partner at Covington & Burling, specializing in international tax matters. 

I will note for the record that all of these witnesses have put in 

their time, either at Treasury or IRS. And we look forward to their 

unique perspectives. 

Without any objection, any other Members wishing to insert 

statements as part of the record may do so. All written statements 

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offered by our witnesses will be inserted into the record, as well. 

With that, let me recognize Mr. Shay for his opening statement. 

STATEMENT OF STEPHEN E. SHAY, DEPUTY ASSISTANT SECRETARY FOR INTERNATIONAL TAX AFFAIRS, UNITED 

STATES DEPARTMENT OF THE TREASURY 

Mr. SHAY. Thank you, Mr. Chairman. Chairman Neal, Ranking 

Member Tiberi, and Members of the Subcommittee, I appreciate 

the opportunity to testify today about foreign bank account reporting and tax compliance. With the permission of the chairman, I will 

ask that my statement be put in the record, and just summarize 

a few remarks. 

Chairman NEAL. Without objection. 

Mr. SHAY. For too long, some Americans have taken advantage 

of the system by hiding unreported income in a foreign financial account, trust, or corporation. When Americans evade their tax-paying responsibilities, the millions of workers and businesses who do 

pay their taxes are forced to pay the price. 

The Foreign Account Tax Compliance Act of 2009—I will refer to 

it on occasion as H.R. 3933—and its companion bill in the Senate, 

S. 1934, represents an important step toward reducing the amount 

of taxes lost through illegal use of hidden accounts, and making 

sure that everyone pays their fair share. 

Before talking about the act itself, I would like to discuss more 

broadly how the Administration is addressing the problem of offshore tax evasion. Because offshore evasion has many facets, the 

Treasury Department has developed a multi-pronged approach to 

it. This comprehensive approach includes legislative proposals, a 

focus on bilateral information exchange agreements, multilateral 

initiatives to improve transparency and information exchange in 

tax matters, and IRS enforcement actions. 

This approach is intended to provide the IRS with the information from taxpayers, third parties, and other countries, and the 

tools needed to tackle offshore evasion. The Administration’s fiscal 

year 2010 budget includes a series of legislative proposals to curb 

the abuse of offshore accounts and entities. The proposals are directed at enhancing information reporting, strengthening penalties, 

and making it harder for foreign account holders to evade U.S. 

taxes. 

Some information that the IRS needs to enforce U.S. tax law can 

be obtained only through foreign countries. Accordingly, the Administration has placed a high priority on concluding tax information exchange agreements. In the last year alone, we have signed 

agreements to exchange tax information with Switzerland, Luxembourg, Liechtenstein, Gibraltar, and Monaco. 

The Administration also seeks to improve international tax cooperation. Thus, we are working on a multi-lateral basis to make 

sure that countries meet international standards on tax transparency and information exchange. We are committed to preventing the facilitation of offshore tax evasion. 

To further the IRS’s enforcement capacity, the President’s budget 

proposes new enforcement tools to crack down on evasion through 

offshore accounts and entities, and provides funds to add nearly 

800 new IRS employees to combat offshore evasion, and to improve 

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compliance with U.S. international tax laws by businesses and 

wealthy individuals. 

The Foreign Account Tax Compliance Act represents an important step forward in correcting problems within U.S. tax law that 

have allowed taxpayers to shirk their responsibilities. 

Like the Administration’s proposals, H.R. 3933 would make it 

more difficult for U.S. persons to hide assets abroad in foreign financial accounts by: Enhancing information reporting; increasing 

withholding taxes for foreign financial institutions that do not engage in information reporting; and strengthening the penalties for 

taxpayers who do not adequately report their income. 

It will also make it more difficult for taxpayers to hide behind 

foreign trusts. And it will prevent taxpayers who receive the benefit of U.S.-sourced dividend payments from avoiding U.S. withholding taxes. 

Mr. Chairman, we applaud the leadership role taken by you and 

Chairman Rangel in the House, and by Chairman Baucus and Senator Kerry in the Senate, in introducing this legislation. And, additionally, the work of Senator Levin and Congressman Doggett, in 

supporting a strong international tax enforcement agenda. 

Mr. Chairman, Ranking Member Tiberi, and Members of the 

Subcommittee, the Foreign Tax Compliance Act fits well into the 

Administration’s multi-pronged strategy of improving our domestic 

tax laws, while increasing global cooperation on tax information exchange to help narrow the tax gap, and create the fairer tax system 

we need. 

We look forward to working with you and Members of this Subcommittee on this important subject. I would be pleased to answer 

questions when the time is appropriate. 

Thank you. 

[The statement of Mr. Shay follows:] 

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Chairman NEAL. Thank you, Mr. Shay. 

Let me recognize Mr. Wilkins to offer testimony. 

STATEMENT OF STATEMENT OF WILLIAM J. WILKINS, CHIEF 

COUNSEL, INTERNAL REVENUE SERVICE 

Mr. WILKINS. Thank you, Chairman Neal, Ranking Member 

Tiberi, Members of the Subcommittee. I the opportunity to present 

the Internal Revenue Service’s views on H.R. 3933. Like Mr. Shay, 

I would like to summarize the key points of my written testimony. 

The IRS does support this legislation, because we feel it will provide significant new tools for our international tax compliance 

strategy. Our strategy is a multi-year effort. It is tailored for both 

individual and corporate taxpayers. For the strategy to be successful, it requires guidance for taxpayers and their advisors, legislative support, adequate resources, more enforcement activities, more 

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and better information reporting, and stronger international cooperation. 

We believe that this strategy is already producing results. Part 

of our approach was the initiative that ended October 15th to provide clear rules for imposing severe civil penalties, back taxes, and 

interest, but not imposing criminal penalties on qualifying taxpayers who came forward to disclose previously undisclosed offshore accounts. 

The successes of the IRS and the Department of Justice in their 

investigation of UBS created a setting under which this kind of initiative could succeed. Just before the October 15th closing date of 

that program, the IRS announced that it expected at least 7,500 

people to come forward. I have been told that the final numbers 

will be well over that initial estimate. The IRS hopes to be able to 

provide additional data later in November. 

There will be significant taxes and penalties paid as a direct result of these disclosures. But just as importantly, these taxpayers 

are now back in the U.S. tax system, and will be paying taxes on 

their offshore income in the years to come. 

In addition, publicity regarding the obligations of U.S. citizens 

and residents to report worldwide income and assets has, for a 

practical matter, made it impossible for U.S. taxpayers to ignore 

the clear mandate of our tax laws, even if they may reside abroad, 

or even if they may have derived their wealth from foreign sources. 

The IRS will also develop leads that we obtain from voluntary 

disclosures. We will be scouring this information to identify financial institutions, advisors, and others who promoted or otherwise 

helped U.S. taxpayers hide assets and income offshore, and skirt 

their tax responsibilities at home. 

Some weakness in our reporting systems have come to light, as 

a result of this enforcement activity, and the valuable investigative 

work carried out by Congress. H.R. 3933 would repair these weaknesses. 

The particular problem being addressed here is the deliberate 

and illegal hiding of assets and income from the IRS by U.S. citizens and residents. It is true that such law breakers now face significant civil and criminal penalties. H.R. 3933, however, is still 

needed to help the U.S. government detect such activities, and to 

enforce applicable penalties. 

The problems being addressed fall into certain categories. One 

category is the limited scope of current requirements, whether for 

qualified or non-qualified foreign intermediaries to report on their 

U.S. customers’ investments. There is a limitation on reporting on 

investment and foreign securities, because of source rules. 

Another category of problem is that intermediaries may be able 

to avoid reporting their U.S. customers’ indirect investments that 

are made through foreign entities. 

Another category of problem is the lack of diligence required for 

non-qualified intermediaries to detect a U.S. customer’s false certification of foreign status, even when investing in U.S. securities. 

Another category of problems involves features of the FBAR rules 

that create obstacles to enforce penalties for failures and violations. 

Finally, the bill would tighten certain existing rules involving 

trust, bearer bonds, and dividend withholding, and would require 

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certain advisors to become part of the diligence and reporting system when they assist a U.S. person to avail himself of a foreign 

legal entity. 

On the topic of qualified intermediaries, most international financial institutions have entered into agreements with the IRS to 

be qualified intermediaries, because that status helps them to more 

efficiently serve their non-U.S. clients who want to invest in U.S. 

securities. 

However, the obligations of qualified intermediaries to provide 

the IRS with reports on their U.S. customers is currently inadequate in two important respects. First, as I mentioned, there is 

generally no obligation to report the non-U.S. source income of a 

U.S. customer that’s not paid within the United States, or to report 

the gross disposition proceeds of a U.S. customer who does not communicate with the institution from within the United States. 

Second, a foreign corporation or other foreign entity is normally 

not subject to Form 1099 and back-up reporting and withholding 

rules that apply to U.S. persons, even if that foreign entity is 

owned by a U.S. taxpayer who does have the obligation to pay tax 

on the entity’s income. 

H.R. 3933 would repair both of these inadequacies, and would require a qualified intermediary to provide reporting to the IRS and 

to the customer broadly on financial activities through foreign financial accounts, including non-U.S. securities activities, and including activity of foreign entities owned by U.S. persons. 

In the area of non-qualified intermediaries, another problem that 

we have faced is that a U.S. person who invests in U.S. securities 

through a non-QI can falsely claim to be a non-U.S. person. And 

there is probably too little that the payer of the securities income 

must do to check the certification, and too little that the intermediary must do. 

Further, we do not have the ability to verify the information provided by the non-QI. And this increases the risk that false claims 

will remain undetected. To address this problem, the bill would 

generally apply a new U.S. withholding tax to U.S. securities proceeds, dividends, and interest that are paid to a non-qualified intermediary, unless the intermediary agrees to due diligence and reporting obligations on its U.S. customers’ worldwide investments, 

including indirect U.S. customers who invest through foreign entities. 

A customer who is subject to withholding could apply to the IRS 

for a refund of withholding that was in excess of its U.S. tax obligation. 

It is our expectation that most, if not all, significant international institutions would undertake the due diligence and reporting obligations necessary to avoid U.S. withholding on U.S. securities proceeds of their customers and on their own proprietary U.S. 

securities activity. 

On the FBAR topic, under current law the penalties applicable 

to persons who fail to file an FBAR, a foreign bank account report, 

are not imposed through the Internal Revenue Code. They are, instead, imposed through the Bank Secrecy Act, which is in Title 31 

of the U.S. Code. 

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If an individual fails to report income held in a foreign financial 

account, on the one hand, the IRS could use traditional tools such 

as assessments, liens, and garnishments to collect the taxes and 

the tax penalties. However, the traditional IRS enforcement tools 

may not be used to collect the Title 31 FBAR penalties that apply 

if the foreign account is not reported. The FBAR penalty must instead be referred to the Justice Department for separate prosecution and collection. 

H.R. 3933 amends the Internal Revenue Code to create an 

FBAR-like reporting obligation as part of the filing of a tax return, 

and a separate penalty regime for failure to report the foreign financial account. This would allow the IRS to enforce the new Internal Revenue Code penalty by applying traditional IRS enforcement 

tools. 

There would be a new 40 percent penalty that would apply to income tax deficiencies attributable to unreported assets. And this 

would apply not only to unreported foreign investment income, but 

also to business and other income that was hidden through the use 

of foreign accounts. 

The bill would address an important detection issue by amending 

the statute of limitations in the case of income admissions attributable to foreign assets, importantly including a suspension of the 

statute, until the asset was properly reported. 

Other provisions of the bill—clarifying foreign trust rules would 

be helpful in addressing some forms of tax avoidance involving 

those entities. There are also provisions affecting use of derivatives 

to avoid dividend withholding. And, finally, the withholding exception for foreign targeted bearer bonds should eliminate the kind of 

investment that may have been used for tax avoidance in the past. 

To conclude, we believe this bill will be of significant assistance 

to the IRS in assuring greater compliance with U.S. tax rules. The 

deliberate and illegal hiding of income and assets from the IRS 

should not be tolerated, and we believe the bill will help make this 

activity easier to detect and punish, and will help deter future such 

illegal activity. Thank you. 

[The statement of Mr. Wilkins follows:] 

Statement of William J. Wilkins, Chief Counsel 

Internal Revenue Service 

Chairman Neal, Ranking Member Tiberi and Members of the Subcommittee, 

thank you for this opportunity to testify on H.R. 3933, the ‘‘Foreign Account Tax 

Compliance Act of 2009.’’ 

We strongly support this important legislation that, if enacted, would provide the 

IRS with additional tools to address offshore tax evasion by U.S. persons who hide 

unreported income and assets in offshore accounts. The Foreign Account Tax Compliance Act would aid the IRS in its mission to ensure that all businesses and individuals are playing by the rules and paying their fair share of taxes. 

H.R. 3933 is a far-reaching and comprehensive bill that brings together most of 

the strong international reporting and disclosure proposals outlined earlier by President Obama—and subsequently incorporated in the FY 2010 Budget—and those 

contained in other proposed legislation designed to combat offshore tax evasion. 

In this regard, we applaud not only Chairmen Baucus and Rangel and you, Mr. 

Chairman, but also Senator Levin and Representative Doggett for their significant 

and important contributions to the ‘‘Foreign Account Tax Compliance Act of 2009.’’ 

IRS International Compliance Program 

To meet the broad array of challenges that we face in the international arena, 

the IRS has focused its efforts on a multi-year international tax compliance strategy 

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that is tailored for both individual and corporate taxpayers. For this strategy to be 

successful it requires guidance for taxpayers and their advisors, legislative support, 

adequate resources, more enforcement activities, more and better information reporting, and stronger international cooperation. 

So far, we believe that this strategy is already producing results. The IRS recently 

announced that over 7,500 people came forward under its special offshore voluntary 

compliance program that ended in mid-October. It is too early to say how much tax 

will be collected from this effort. However, I can tell you that account sizes ranged 

from just over $10,000 to more than $100 million. Just as importantly, these taxpayers are now back in the U.S. tax system and will be paying taxes on their offshore income in the years to come. 

A key aspect of our future international offshore work will be mining the voluntary disclosure information from people who have come forward. We will be scouring this information to identify financial institutions, advisors, and others who promoted or otherwise helped U.S. taxpayers hide assets and income offshore and skirt 

their tax responsibilities at home. 

In addition, we are increasing our scrutiny of annual foreign bank and financial 

account reports (Treasury Department Form TD F90–22.1, ‘‘Report of Foreign Bank 

and Financial Accounts,’’ or ‘‘FBAR’’). Current law requires that U.S. taxpayers file 

an FBAR if their foreign financial accounts total more than $10,000. But current 

rules make it difficult to catch taxpayers who do not file a required FBAR. 

Our focus today is on ending offshore noncompliance by U.S. individuals. The bill 

will provide the IRS welcome tools toward that goal. 

The Problem: Secret Offshore Accounts 

Recent experience has provided a wake up call for the United States, and tax administrations worldwide, on the problem of taxpayers hiding assets and income in 

offshore financial institutions. We have more insight about the manner in which 

U.S. persons hide their income offshore and conceal their identities from the IRS. 

The use of secret offshore accounts, often in the name of offshore entities, like trusts 

or corporations—sometimes with the assistance of advisors—makes it increasingly 

difficult for the IRS to gather the information it needs to enforce our tax laws. 

Strengthening the QI System 

The bill will build upon the network of foreign financial institutions the IRS has 

established as the foundation for its nonresident withholding tax system for U.S. 

portfolio investments, known as the Qualified Intermediary (QI) system. A QI’s 

main task has been to check the qualification of nonresident investors in U.S. securities, and report their income entitled to reduced withholding rates under treaties 

or the Code. The system has managed this job well, and regularly processes billions 

of dollars in U.S. portfolio investment income flows and associated withholding 

taxes. QIs also directly report to the IRS information on the U.S. source income and 

certain gross proceeds of their U.S. individual account holders. We know that some 

U.S. taxpayers have exploited this framework by failing to report income associated 

with 1) non-U.S. securities held in QIs or affiliates, or even 2) U.S. securities with 

a shell foreign entity interposed as the technical account owner. The bill would prevent this kind of exploitation of today’s rules for reporting and withholding. 

The potential for U.S. taxpayers to evade U.S. tax through the use of offshore accounts maintained by nonqualified foreign intermediaries (NQIs) also poses a serious problem. Because NQIs have little incentive to report information to the IRS, 

the IRS is at a disadvantage in verifying compliance by these financial intermediaries. Under the bill, an NQI would be subject to withholding unless it enters 

into an agreement with IRS and complies with the associated reporting, due diligence, and verification obligations with regard to its direct and indirect U.S. customers. The bill would, therefore, create a strong incentive for global foreign financial institutions to provide the IRS with the information it needs to ensure that U.S. 

account holders are complying with U.S. tax laws. 

Similar provisions are included in the FY2010 Budget. 

Repeal of Bearer Bond Eligibility for Portfolio Interest Exemption 

Along similar transparency lines, the bill would repeal the remaining exceptions 

to the ability to issue bearer bonds eligible for the portfolio interest exemption. 

This provision is not included in the FY2010 Budget. 

Assisting the Examination of Individual Offshore Accounts 

The bill would fill gaps in the current reporting requirements with regard to the 

foreign financial assets and income of U.S. individual taxpayers or their domestic 

entities formed to hold foreign financial assets. Individuals or entities that have an 

interest in foreign financial assets or accounts with an aggregate value over $50,000 

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during the taxable year must disclose their holdings of foreign financial assets or 

accounts with their income tax return. 

Regular penalties in increments of $10,000, up to a maximum penalty of $50,000 

for one taxable period, apply for failures to comply with this new information reporting obligation, as well as an elevated 40% accuracy-related penalty for understatements attributable to a transaction involving a foreign financial asset. 

Individuals also would face an extended 6-year statute of limitations in the event 

of significant omissions of income attributable to foreign financial assets. 

In addition to enhanced reporting of foreign financial interests by taxpayers and 

an extended statute of limitations, material advisors also would be required to report assistance they provide to U.S. persons acquiring or forming a foreign entity. 

Similar provisions are included in the FY2010 Budget. 

Transactions with Foreign Trusts 

U.S. grantors of foreign trusts have taken aggressive positions by failing to report 

income of foreign trusts that afford a U.S. person with effective enjoyment of the 

trust assets and income. The bill would clarify and enhance the grantor trust rules 

in regards to when a foreign trust may have a U.S. beneficiary. The bill would treat 

uncompensated use of foreign trust property as a distribution equal to the value of 

the use. The foreign trust reporting provisions and applicable penalty are also 

strengthened to help prevent U.S. persons from concealing income or assets offshore 

in foreign trusts. 

A similar foreign trust penalty provision is included in the FY2010 Budget. 

Avoidance of the Dividend Withholding Tax 

Foreign persons seek to avoid the 30% withholding tax imposed on U.S. source 

dividends by temporarily converting U.S. stock into an economically equivalent derivative investments such as total return swaps. The IRS is actively pursuing these 

schemes under existing law. 

The bill would prevent this abuse by treating dividend equivalent amounts as 

generally U.S. source, thereby subjecting them to the withholding tax. 

Regulation authority is provided to provide exceptions in cases where the contract 

or other arrangement does not have the potential for avoidance of tax. 

A similar provision is included in the FY2010 Budget. 

International Consistency and Cooperation 

As I noted at the outset, IRS is not alone in facing the enforcement challenge 

posed by secret offshore accounts. Other tax administrations across the globe share 

a similarly problematic experience. The bill will help, but international cooperation 

and coordination is also key. It is fundamentally important to achieve consistent 

international standards of transparency that support compliance without overly burdening the efficiency of cross border portfolio investment flows. Financial institutions obviously also have a strong interest in international consistency in this area. 

There is an obvious link to the ongoing efforts to promote better mechanisms for 

exchange of information under treaties, TIEAS, and other international agreements. 

The IRS will continue to seek a consensus on transparency with its counterpart tax 

administrations in bilateral competent authority discussions, as well as in multilateral forums such as JITSIC and OECD. The Commissioner and I are committed to 

this effort. 

Conclusion 

In conclusion, the ‘‘Foreign Account Tax Compliance Act of 2009’’ would provide 

the IRS with enhanced tools it needs to continue its expansion of international tax 

enforcement and make it even more difficult for U.S. taxpayers to avoid paying their 

faire share of taxes by unlawfully hiding money overseas. 

Thank you Mr. Chairman. The Internal Revenue Service looks forward to working 

with the Subcommittee on this important legislative initiative. 

f 

Chairman NEAL. Thank you, Mr. Wilkins. Mr. Shay, we will 

hear testimony today that some are concerned that if this bill becomes law, that other countries could use it as a model for reporting, as well. Great Britain, perhaps, the most notable example. 

How would Treasury treat such an international effort for greater information exchange, even if it meant greater reporting for our 

financial institutions? 

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Mr. SHAY. Thank you, Mr. Chairman. We can’t—I can’t anticipate what other countries will do. Countries that operate in the 

markets of another country are going to have to be responsible to 

the—for the compliance with the laws of that country. 

Let me comment a little bit about this bill in relation to other 

countries and, you know, multi-lateral activity. This bill is intended 

to increase reporting. 

And so, what it does is uses the incentive of not having to suffer 

a withholding tax to provide for a foreign financial institution to 

assist the IRS with respect to providing information to the IRS regarding U.S. accounts. If other countries were to do the same, it 

would be a legitimate action on their part, as I think it’s legitimate 

on our part. 

What this approach reflects is an effort to use the tools that are 

available outside of a multi-lateral context. If at some point in the 

future there is an ability to reach multi-lateral agreements to 

achieve the same thing, then you would have the potential to calibrate the nature of the incentive that’s involved. 

Chairman NEAL. Okay. Mr. Wilkins, we will hear suggestions 

today that the effective date under this bill is too soon, that the 

amount of the work that the IRS will need to do in renegotiating 

with QIs in establishing relationships with non-QIs will simply 

take too much time. 

How ready, or how prepared is the IRS for something as bold as 

this proposal? 

Mr. WILKINS. Well, we are prepared to devote the resources 

necessary to implement the legislation. I do think it will be important for us to continue to work with you on being sure that there 

is—the flexibility is there to not impose withholding taxes because 

a reporting system is not ready to go yet. 

As Mr. Shay said, the idea here is to collect the information, 

more than to collect the withholding tax. The withholding tax is 

really an incentive to collect the information. So, I do think we 

need the flexibility to face—you know, to face realities that may 

occur, given the—what’s going to be imposed. 

That may be partly recalibrating parts of the effective dates. It 

may be providing flexibility for us to address important issues first, 

and have the flexibility to address the secondary and tertiary 

issues after the—you know, the primary issues of the major international financial institutions are first addressed. 

Chairman NEAL. And let me ask you, Mr. Wilkins. Your amnesty program sounds as though it’s been quite successful. And I 

must tell you I have not received one letter from one constituent 

opposing my position on this issue. 

And I wonder if the threat of disclosure by UBS made taxpayers 

more nervous and more willing to come forward voluntarily. And 

can you tell me how this initiative fared, compared to prior amnesties? 

Mr. WILKINS. Well, thank you for that opportunity, and including for the opportunity to point out that it’s really not an amnesty. 

There are severe penalties involved. It does provide relief from 

criminal prosecution for qualifying applicants. 

There is no question that the enforcement activity surrounding 

UBS was an extremely important part of the atmosphere that 

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made this initiative work. We have—there has been a voluntary 

disclosure policy within IRS for a very long time. It typically only 

produces a handful of disclosures each year. Getting disclosures in 

the thousands, like we were getting with this one, is really something new and different. And I don’t think there is any question, 

but that the enforcement activity and the surrounding publicity 

was really responsible for making that happen. 

Chairman NEAL. Thank you. And, Mr. Shay, some of the criticism that we will hear today is that this initiative is too bold, and 

that we should rely on multi-lateral negotiations for our information exchange. Might you comment on that? 

Mr. SHAY. Well, I don’t think this initiative is too bold. I think 

there are great responsibilities, if it’s adopted, on the administration and on the Internal Revenue Service, to be sure it’s implemented in a way that the United States gets the information it 

wants, that we only have withholding on any circumstances where 

there are essentially non-compliant financial institutions—or, if 

not, withholding final tax, because there is the ability to reclaim 

the tax—and that we do it in a manner that is as respectful of the 

burdens on the financial institutions and—but still gets us the information as we can make it. 

We want this to work, and hopefully a win-win for good tax administration and good, efficient capital markets. It simply is doing 

something that cannot be done through a multi-lateral arrangement. And it certainly reflects, I think, the urgency of this issue 

and—by bringing this powerful incentive to move forward. And I 

think that actually will probably advance the time when there are 

multi-lateral arrangements—get to this and process it. 

But as I think we all know, that’s a very, very long process, and 

I think this legislation will increase the likelihood of it, but will assure that information is provided to the IRS before that ultimately 

happens. 

Chairman NEAL. Thank you. With that, I would like to recognize Mr. Tiberi to inquire. 

Mr. TIBERI. Thank you, Mr. Chairman. Mr. Wilkins, can you assure us and the hard-working, law-abiding taxpayers that we all 

represent that the IRS is doing everything in its power to collect 

and aggressively go after tax cheats? 

Mr. WILKINS. Yes, this is a priority for the commissioner, and 

it’s a priority for the whole IRS. There is particular focus on international tax compliance, which is the subject matter of this bill. 

And we are focused on it. That is where our deployment of additional resources is focused, and we need to balance service and enforcement. 

But there is no question that enforcement is key, and bringing 

taxpayers into compliance is important. We will likely need assistance of the congress from time to time in those efforts, such as the 

current example. 

Mr. TIBERI. Thank you. To further go on, with respect to international tax, would you agree that there is a distinction between 

individuals and corporations who are deliberately avoiding taxation, deliberately hiding assets, not following the Internal Revenue Code, and a distinction between American, U.S.-worldwide 

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ing every day with the Internal Revenue Service on issues of deferral, and check the box, and other legal measures within the Internal Revenue Code? 

Mr. WILKINS. Yes. I definitely agree with that statement. What 

we are dealing with in this bill is deliberate and illegal hiding of 

income and assets, and non-compliance with what the law is today. 

Issues of tax policy surrounding multi-national corporations 

whose returns are audited every year is a different question, and 

requires different strategies. 

Mr. TIBERI. And there are IRS officials that are working with 

U.S. companies, literally, every day on those issues, correct? 

Mr. WILKINS. Yes, that is correct. Most large, multi-national 

corporations are constantly under audit, and they frequently have 

IRS auditors on site. 

Mr. TIBERI. To continuing questioning on just a slightly different issue, most people seem to agree that international exchanges of information in particular are key elements of our ongoing effort to fight tax evasion. 

Do you agree that excluding black-listing from the legislation 

that Chairman Rangel and Chairman Neal have introduced makes 

countries around the world more willing to continue providing the 

Internal Revenue Service the critical information needed to combat 

tax evasion effectively? 

Mr. WILKINS. Well, Mr. Shay may want to comment on this, 

too. 

Mr. TIBERI. I was going to ask him next. 

Mr. WILKINS. I think the approach in this bill was focused more 

on institutions than countries. I think the institutions is really 

where the activity is, and where the money is, and I think that was 

a good choice. 

I think, obviously, you need to have the flexibility to go around 

country by country and work on information exchange. And that 

kind of negotiation and treaty activity is an important part of an 

overall strategy. But, as Mr. Shay says, that doesn’t get you all the 

way there. I think using this kind of approach to obtain information directly from institutions is an important part of it, too. 

Mr. TIBERI. Mr. Shay. 

Mr. SHAY. I think Bill said it all. No, I think we certainly like 

the approach in this legislation. It has—it reflects—it is in common 

with the approach that was taken by the administration’s budget 

proposals, and we’re very hopeful that it, combined with information exchange together, will be successful. 

I want to add one comment, and that is in—during the course 

of the—the legislation includes a possibility that the foreign financial institution will provide not just information on the U.S. person’s account, but information in the form that’s traditional for a 

U.S. bank, what’s called 1099 reporting. 

And my understanding is that was actually requested by a financial institution that had had conversations with relevant staffs, so 

that not only does this legislation have the potential to help or address the evader, help us—help the IRS find the evader, but it also 

has the potential, frankly, to make compliance easier and more effective by the U.S. person with a foreign account that wants to 

comply with their tax. 

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And, frankly, I think for most of us, getting a 1099 from a bank 

is a huge help. And we do know, on the compliance side, that we 

have the highest rates of compliance where we have 1099 reporting. Thank you, sir. 

Mr. TIBERI. Thank you. Mr. Chairman, on a final note, I think 

Congresswoman Schwartz would agree Saturday is a big day in 

Happy Valley, where my Ohio State Buckeyes are taking on the 

Penn State and Nittany Lions. 

I just want to thank—I understand, and I wasn’t going to bring 

up the World Series. But, Mr. Shay, I just want to thank you. I 

don’t know if it’s subliminal or not, but you are wearing scarlet and 

gray. That tie is very nice. I want to thank you for that. I yield 

back. 

Mr. BLUMENAUER. He needs a bow tie. 

Chairman NEAL. It was part of our strategy to disarm you. 

Let me recognize the gentleman from Georgia, Mr. Linder, to inquire. 

Mr. LINDER. Thank you, Mr. Chairman. I would ask each of 

you, how many dollars are offshore in dollar denominated deposits? 

Mr. WILKINS. I don’t have that data. 

Mr. LINDER. Why don’t you have that data? 

Mr. WILKINS. I wasn’t prepared to answer that question. I 

apologize. 

Mr. LINDER. Mr. Shay, do you have any idea? 

Mr. SHAY. I also don’t have that data. I think just to fine tune 

it, I assume that the question would be not just dollar accounts, 

but dollar accounts by U.S. persons with respect to accounts held 

outside the United States. 

Mr. LINDER. The answer is $13 trillion. Three groups, including 

McKinsey & Company, did studies in early 2005, and came up with 

$10 trillion, growing by about $800 billion a year in dollar denominated deposits. 

Can you give me any idea how much of that is legitimately there 

for reasons other than hiding it? 

Mr. SHAY. Thank you for that. And I would be very interested 

in seeing those studies. 

Mr. LINDER. I’m surprised you haven’t. 

Mr. SHAY. I’m not sure we’re—I would have to make sure we 

are talking about the same—you know, I haven’t seen what you are 

referring to, but I would be very interested in it. 

And I am not in a position to answer today the question of how 

much of whatever that denominator is would be reported or not. I 

think it would be—I think we will know a lot more, and have a lot 

more confidence in our ability to answer that question, if this legislation is adopted. I—— 

Mr. LINDER. The number is available. This legislation is simply 

not going to change it. 

Mr. SHAY. Was your question whether it was reported, or 

whether—I am sorry. Maybe I misunderstood your question. 

Mr. LINDER. There are about $13 trillion in offshore financial 

centers in dollar denominated deposits. My question is, do you have 

any idea how much of that is there legitimately for purposes other 

than evasion? 

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Mr. SHAY. It seems to me the answer to that question would depend on whether the—not the account itself, but the income from 

the account that is owned by U.S. taxpayers has been fully and 

adequately reported on the U.S. tax returns. And I—if people know 

the answer to that today, I would be very interested in the data 

source for that. Thank you. 

Mr. LINDER. Mr. Chairman, I have no further questions. 

Chairman NEAL. Thank you, Mr. Linder. Let me recognize the 

gentleman from Illinois, Mr. Roskam, to inquire. 

Let me recognize—it looks like we’re going to recognize the gentleman from Nevada, Mr. Heller, to inquire. 

Mr. HELLER. Thank you, Mr. Chairman. And I apologize for 

running a little late. I had another hearing, testifying on another 

bill in another committee, so I didn’t get to hear all the testimony, 

and I apologize. So if my questions overlap a little bit, please bear 

with me. 

But based on the comments of Mr. Linder, and the amount of 

money that we’re talking about, a large number of accounts that 

obviously are at stake here, Mr. Shays, can you give us or explain 

to us what your specific methodology is to determine U.S. ownership of these accounts? 

Mr. SHAY. Under the legislation, there are—there is a provision 

that the foreign financial institution would identify U.S. owners of 

accounts, and substantial U.S. owners of foreign entities that have 

accounts. And there is a great—there is leeway given to the Treasury Department and to the IRS to specify further. 

But there is provision in there to look to certifications from the 

account owners, and then such additional requirements as may be 

required by regulations, I believe, is the approach. 

Mr. HELLER. Are these known as know-your-customer rules? 

Mr. SHAY. Well, if there is a certification that is in addition to 

a know-your-customer rule—the know-your-customer rule refers to 

banking practices which vary in different jurisdictions, which are 

the standards by which the banks in those jurisdictions are expected to obtain information about their account holders. And that, 

of course, is very helpful and important as a base on which to identify whether there would be an account holder by a U.S. person. 

But this legislation would seek that information in particular, 

and would—as I said, there is some regulatory authority to further 

elucidate what the requirements would be. And there is a provision 

in circumstances for self-certification. 

Mr. HELLER. Okay. So I understand you’re prepared to allow 

KYC rules in—for this purpose? 

Mr. SHAY. I think when the legislation is passed, that would be 

part of the analysis. As I said earlier, I think it’s in everybody’s interest to try and come up with rules that are—work as well as possible with existing financial institution practices. 

So, I think that while that’s a determination that should be made 

after we see the final legislation, that certainly is an objective to 

get the information, but to do it in a way that is as least burdensome, but that that achieves the task, as is possible. 

Mr. HELLER. Thank you, Mr. Shay. Mr. Wilkins, your time 

frame for implementing the FFI agreements, what do they call for 

in this particular bill? 

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Mr. WILKINS. Under this bill, the effective date is at the beginning of 2011. I think, as I mentioned in response to an earlier question, we would devote resources needed to at least address the most 

important aspects of these rules dealing with major financial institutions. 

We will continue to work with the committee, and we would continue to work in the regulatory process, to try to roll this out in 

such a way that it—if certain pieces of it couldn’t be fully implemented by the beginning of 2011, we would hope to have the flexibility to have preliminary measures that maybe were not full implementation, but didn’t impose withholding taxes in areas where 

we really didn’t want to get the withholding tax; what we really 

want to get is the information. 

Mr. HELLER. Will these side agreements be made public? 

Mr. WILKINS. Typically not, but they are—they would, if they 

follow current practices in the QI area, they would follow a particular form that is a public document. 

Mr. HELLER. Okay. Thank you. Thank both of you for being 

here. Thank you, Mr. Chairman. 

Chairman NEAL. Thank you, Mr. Heller. Let me recognize the 

gentleman from Oregon, Mr. Blumenauer, to inquire. 

Mr. BLUMENAUER. Thank you, Mr. Chairman. And I deeply 

appreciate both the work you’re doing and the course of this hearing, the thrust and direction. It seems to me, for years, Congress— 

and sadly, this committee—has been less interested in actually 

moving forward aggressively with compliance. And, at times, it almost seemed like it was tying your hands, denying resources. And 

I love the fact that we are now making it a legitimate force of activity to help you do your job. 

I want to say that I too am interested in the answer to Mr. 

Linder’s question. I didn’t quite fully understand the grasp—or 

grasp, I guess, the nature of it. 2005 data on, for example, volume 

of money might have changed pretty radically in the course of the 

last—— 

Mr. LINDER. Would the gentleman yield? 

Mr. BLUMENAUER. I would be happy to yield. 

Mr. LINDER. Three companies, including McKinsey & Company, 

and a Boston group, and a third one I don’t recall now, studied 

MasterCard and Visa transactions, and extrapolated that into a $9 

trillion to $11 trillion figure, and they said it was growing by about 

$800 billion a year, probably growing more than that right now. 

The question that it seems to me these gentlemen should have 

thought about is how much is there. But a significant part of that 

is there for legitimate reasons, and not evasive reasons. And that’s 

the number we really ought to know about. Thank you. 

Mr. BLUMENAUER. I appreciate the clarification. My point is I 

think there has been a—you mentioned the year 2005 for the 

study. I think in the last four years there has been a wild roller 

coaster, in terms of activity overseas. I know some of us had 

401(k)’s that are now 201(k)’s. There have been changes, in terms 

of the value of currency and the velocity of it. So I am guessing 

that finding current data, I think we would all be interested in. 

The notion of what’s there for legitimate or illegitimate purposes 

is also curious. I mean, how much of United States deposits are 

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there for legitimate business purposes, or to help facilitate meth 

lab activity? I think there is an issue of intent and activity that is 

curious. And I would look forward to finding out how those studies 

determined intent, and what you would do to determine intent. 

I think the purpose of our hearing is one of compliance with the 

law. I would put, I guess, two questions before you—I see my time 

is rapidly getting away. 

One is whether or not we, in Congress, are doing enough to give 

you the tools to actually implement this and other elements of compliance. Because, in times past, we have talked one story and then 

cut back on your resources while we have done things that make 

it difficult to do your job. 

And I am very interested at getting a sense from you—not necessarily at this point, but getting a sense of whether or not Congress is on your side, in terms of things in the budget, and if there 

are items that we could employ that would make it easier to more 

directly use the resources that you might uncover to make sure 

that it’s self-financing. 

I hear from tax professionals that there are certain audit func- tions where the people earn $5,000 or $10,000 an hour for their undertakings, in terms of what specific things they do. And not that 

I am suggesting that we put them on commission, but if there is 

a way to make sure that areas that are generating more money because it is dealing with compliance, if there is a way to target 

money back to that, to be—make sure that we are doing it adequately. And your help from—to help me think that through would 

be appreciated. 

The second piece I would put on the table seeking your guidance 

is whether or not we are doing enough in terms of the actual penalties against businesses and professionals who are in the business 

of, frankly, aiding and abetting evasion. I am just as interested in 

the reporting. I am interested in making sure we understand what 

the appropriate penalties and sanctions are for people who are engaging in the facilitation. 

I think the evidence is that there are lots of people who can’t do 

this alone. And, in some cases, they have been counseled to do this. 

And having an assessment from you about the adequacy of those 

provisions, and where they might be enhanced, both for individuals 

and for organizations, would be of great interest to me. 

Thank you very much, Mr. Chairman. 

Chairman NEAL. Thank you, Mr. Blumenauer. Let me recognize 

the gentleman from Kentucky, Mr. Yarmuth, to inquire. 

Mr. YARMUTH. Thank you. I want to expand a little bit on the 

questions that Mr. Linder raised. And I recall the statement made 

by a former Secretary of Defense who said, ‘‘There are things we 

know, things we don’t know, things we know that we don’t know,’’ 

and all of that continuum. 

How much of what—the question that Mr. Linder phrased, how 

much of this—these amounts do we know that we know—know 

that we don’t know, and how much do we don’t know that we don’t 

know? 

Mr. WILKINS. Well, you are putting your finger on an issue, in 

terms of assessing levels of tax evasion and the tax gap, and so 

forth. And part of the problem is that, for example, many, if not 

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25 

most, of the previously undisclosed foreign accounts that are coming in through our voluntary disclosure initiative we did not know 

about before. 

And so, part of the issue is because of the efforts to hide offshore 

assets, we don’t know what the total number of hidden offshore assets is. 

Mr. YARMUTH. Has the voluntary program given you clues as 

to how you might detect things that you don’t know that you didn’t 

know? 

Mr. WILKINS. The data is still quite fresh. And I am not sure 

we are ready to answer that question yet. 

Mr. YARMUTH. So you don’t know? 

Mr. WILKINS. We will be looking at it to see what it teaches us, 

and to see if—first, for enforcement reasons—to see—to go out and 

detect additional accounts that didn’t come in voluntarily. But it is 

possible that it will be helpful to us for data analysis and projection 

reasons, as well. 

Mr. YARMUTH. Mr. Shay, a question about the relevance of tax 

rates to this whole problem. 

I suspect that if the corporate tax rate in the United States or 

income tax rate were zero, we wouldn’t have this problem. People 

would be happy disclosing everything they made. 

Have you done an analysis of how tax rates, relative tax rates 

in this country, have affected the non-disclosure rate? Is that something that would be valuable? I mean, it’s an intuitive response to 

it, but I don’t know whether it is a practical response. 

Mr. SHAY. Well, actually, I think one needs to be cautious about 

the intuitive response, in that, you know, if one viewed tax evaders 

as rational, then you would correlate it very closely to how much 

you’re making by evading taxes, which would correlate to the size 

of the rate. 

The literature on non-compliance is still, I think, in my judgement, fairly weak. In other words, there has not been as much resource devoted to it academically and otherwise as we would like, 

sitting here today, in order to be addressing all the questions we’re 

hearing. But I do think there is some evidence in the literature 

that non-compliance is not directly correlated to tax rates. 

And that may be counter-intuitive, but there are a lot of emotional and other aspects that go into non-compliance. Now, that is 

an anecdotal response. So I think we would all like to have more 

work done in that area. And maybe, Bill, if you want to comment? 

Mr. WILKINS. I guess the only thing I would add is the anecdotal observation that many of the most aggressively promoted individual tax shelters in the tax shelter heyday were devised to 

shelter 15 percent capital gains income. So it’s—the rate at which 

the incentive stops, at least for some people, has got to be lower 

than that. 

Mr. YARMUTH. I yield back, Mr. Chairman. Thank you. 

Chairman NEAL. Thank you, Mr. Yarmuth. Let me recognize the 

gentleman from California, Mr. Thompson, to inquire. 

Mr. THOMPSON. Thank you, Mr. Chairman, and thank you for 

holding this hearing. I would be interested, Mr. Shay, in hearing 

if you believe that we are doing enough in this bill to get at the 

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issue of evasion. And I want to—I guess we have already established the fact that—the difference between evasion and avoidance. 

But on the evasion part, are we doing enough? Are there other 

proposals that are out there that we should be including in this to 

be able to get a better handle on it? 

Mr. SHAY. Thank you. One way to approach that question is to 

observe that this bill adopts in a legislative form—in substance, not 

in every respect the same way—substantially all of the anti-evasion 

proposals that were in this administration’s budget. 

I would note there is one proposal in our budget that is not in 

the legislation, and that we have been working on, the Internal 

Revenue Service, and the Treasury, to develop further. And we 

think it does need further work before we bring it back as a proposal. And that involves reporting on cross-border transfers of cash. 

And the reason—— 

Mr. THOMPSON. Cross-border transfers—— 

Mr. SHAY. Transfers of cash, cross-border wire transfers from 

bank to bank. And the reason for that, and the work we are trying 

to do, is the volume is extremely high. 

And one of the things that we are working toward is trying to 

identify a way that we could take that volume of information and 

sort of—if you think of it as a sieve, whittle it down to the information that will not overburden the Internal Revenue Service, and 

allow us to target it to enforcement, so that our use of resources 

is efficient and focused. 

Do you want to comment any further on that? 

Mr. WILKINS. I think that is—— 

Mr. THOMPSON. Before you do, how long before you have this 

thing run out, or able to make a proposal as to what it should look 

like? 

Mr. SHAY. We’ve been working—we’ve actually been working on 

it very actively. I can’t give you a precise answer to that. But one 

part of our next step is we also—we do want to be talking to the 

elements of the business community that would be the companion 

to the IRS in having it implement something. 

So, I can’t give you a precise answer, but we are working on it 

very actively. 

Mr. THOMPSON. Mr. Wilkins, anything to add? 

Mr. WILKINS. I think Mr. Shay said it. I mean, the shaping that 

needs to be done is one to identify that kind of information to tax 

obligations and taxpayers, and that’s where the work is being done, 

to try to shape it that way. 

Mr. THOMPSON. Thank you. I yield back. 

Chairman NEAL. I thank the gentleman. The gentlelady from 

Pennsylvania, Ms. Schwartz, is recognized to inquire. 

Ms. SCHWARTZ. Thank you, Mr. Chairman, and thank you for 

your efforts in taking action on, you know, the legislation you’ve introduced to be able to move forward on what I think all of us are 

outraged about. 

I guess we all might have imagined that, you know, there is tax 

evasion. And the amount of money that is overseas, I think, actually—whether the amounts we know about—almost $1 trillion, I 

guess, is something that has been talked about, now maybe much 

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more than that. It’s outrageous that it’s actually out there and 

we’re not collecting taxes on it. 

So, I actually appreciate the work the legislation would do, and 

the work you have already done in trying to get these dollars back 

for the taxpayers and for the Treasury. We could use it, as you 

know. 

So, I really—you made a couple of comments about ways you’re 

moving forward. And I think, Mr. Wilkins, you even used the word 

‘‘urgency,’’ in your sense of what needs to be done. So—and I think 

we share that. 

So, while we want to see movement on this legislation, I did 

want to ask what else you could be doing, or are doing now, in two 

ways. One is in making sure that other banks, other institutions— 

you were sort of suggesting that this is country-to-country and it’s, 

you know, the issue of these kind of agreements between nations. 

It’s really also getting to the banks. 

I mean, UBS, that agreement settlement really did change the 

atmosphere. And I am assuming that—a question for Mr. Shay— 

how many other banks have—are you—or institutions are you engaging with, in terms of having similar agreements about reporting 

voluntarily? And how much do you think is out there? Do you have 

any sense of that? 

And, secondly, Mr. Wilkins, whether—you talked about the amnesty, or people coming through voluntarily now. What else do you 

need to be doing, or are you doing, to actually make sure that taxpayers know that this is no longer acceptable, that we’re going to 

go after folks and we have legislation coming down the pike, but 

in the meantime we have—we know the money is there, we know 

that there are—you say thousands and thousands of accounts? 

Tens of thousands of accounts? I mean what kind of volume are we 

talking about? And what kind of dollars are we talking about? And 

how quickly can you move without additional tools, is sort of my 

question. 

So, Mr. Shay, if you could, speak to how aggressively you are 

moving to engage other financial institutions to give us voluntary 

agreements, as we move—so we can move forward more quickly. 

Similar reporting to what UBS is doing. 

And, Mr. Wilkins, if you could, speak to the kind of volume and 

urgency of what you can do, given the information—given the tools 

that you will have before we give you extra tools. 

Mr. SHAY. The activities of the Treasury that involve expanding 

agreements are largely with other countries. And I am going to 

turn it back to Bill for the—— 

Ms. SCHWARTZ. Okay. And I apologize if I’m not asking the 

right people the right questions. You can decide who answers them 

this time. 

Mr. SHAY. Yes, I will give that piece to Bill. But let me—as I 

mentioned in my testimony, we have recently expanded the range 

of countries with whom we have agreements. But I think, as Secretary Geithner has observed in connection with this broader effort 

at the G20 more generally, the number of information exchange 

agreements that have been signed internationally in the last 12 

months exceeds the number of agreements that was signed in the 

prior decade. 

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And I was in the Treasury Department in the 1980s. I can tell 

you that the atmosphere internationally—I was the international 

tax counsel—the atmosphere internationally has been transformed, 

and a great deal of credit for that goes to the Liechtenstein bank 

case and, very importantly, the case that the IRS and the Justice 

Department have brought with UBS. It has had, I think, a transformative effect. Bill, do you want—— 

Mr. WILKINS. In terms of going forward, investigations are continuing. I can’t comment on ongoing investigations, but they are 

ongoing. I would not be surprised to see additional investigations 

be generated from the information that we are collecting this year. 

Characterizing the agreement with UBS as voluntary needs to 

be—you need to think about how voluntary it was. 

Ms. SCHWARTZ. Right. 

Mr. WILKINS. It was under pain of indictment. 

Ms. SCHWARTZ. Yes. 

Mr. WILKINS. That is how these agreements get obtained. 

Ms. SCHWARTZ. Yes, right. 

Mr. WILKINS. And so we are continuing—— 

Ms. SCHWARTZ. You’re pursuing that—— 

Mr. WILKINS. We are pursuing that in other cases. 

Ms. SCHWARTZ. Okay. In terms of the—just to follow up on the 

international agreements, that’s good to know how many more are 

happening. 

One of the concerns I suppose we would have is that new countries that have not engaged in this behavior who have been off sort 

of the radar screen now may actually become new tax havens. Do 

you have any sense of how you anticipate—maybe sort of the opportunity to actually anticipate where else we might go? 

And this is not actually—rather than—there are some obvious 

countries, I assume, but then there might be some less obvious that 

might actually promote this. Is there more that we’re doing in that 

regard, too? 

Mr. SHAY. The international process that is currently undergoing has actually targeted, or looking for or monitoring new countries attempting to become offshore financial centers. That is one 

of the very hopeful aspects of the multi-lateral work that is going 

on under the overall oversight of the G20. 

And recalling that G20 includes, really, not just European—I 

mean the major countries of the world. And the work that’s being 

done in what’s called the global forum on tax transparency and information exchange includes somewhere between 80 and 90 countries. There are very few jurisdictions left. And they have all 

agreed back in this last fall in Mexico, one of their—to monitor and 

look for jurisdictions that attempt to become tax havens. 

Ms. SCHWARTZ. Thank you. Thank you, Mr. Chairman. 

Chairman NEAL. Thank you, Ms. Schwartz. The gentleman from 

New York, Mr. Crowley, is recognized to inquire. 

Mr. CROWLEY. Thank you, Mr. Chairman. I did arrive a little 

late. So, a couple of questions that may have been answered before, 

and so you can just say that and I can get the record. 

In terms of the number of potential accounts that we’re looking 

at, we’re looking at possibly millions of accounts overseas. Is that 

correct? 

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Mr. WILKINS. We don’t have that kind of data. As I said, the 

voluntary disclosure program was projected at around October 14th 

to bring in about 7,500 new accounts. I have been told that the 

number is significantly in excess of that. But, again, that is that 

range of numbers. And for the voluntary disclosures the millions 

number would not be right. 

Mr. CROWLEY. There are some measurements in place, for instance a customer—an anti-money laundering legislation in place 

already. Are those the tools by which—or the methodologies by 

which we use to account for these particular accounts? Or are you 

looking at other methodologies to do that? 

Mr. WILKINS. I think the answer is both, and Mr. Shay discussed it earlier. Certainly for banks that are subject to robust 

know-your-customer regimes, that information would produce the 

data that is needed for them to provide the reports that the legislation seeks on U.S. investors. 

For banks that did not have as robust KYC regimes, they would 

need to adopt, you know, additional measures to be sure that they 

complied with their diligence obligations for being either a qualified 

intermediary or a foreign financial institution that entered into one 

of these disclosure agreements. 

Mr. CROWLEY. Mr. Shay, do you want to comment, or—it’s covered. 

How many FFI agreements do you anticipate you will have to 

enter into agreement here? 

Mr. WILKINS. I am not sure we know a number to expect. We 

do expect the existing qualified intermediaries to, for the most part, 

amend their agreements in the ways that are contemplated here. 

Mr. CROWLEY. Prior to having to formally enter into, you mean, 

or—— 

Mr. WILKINS. Well, no. I mean there are existing qualified 

intermediary agreements with a number of foreign financial institutions. Really, most of the major international ones. 

This legislation would seek to impose some new obligations on 

QI’s, with respect to U.S. account holders. And we would expect, for 

the most part, those existing agreements to be amended, and we 

would look to efficient ways to accomplishing those amendments, 

rather than, you know, retail level, one-by-one negotiations. 

Mr. CROWLEY. Is it the intent to publicize those—the—when 

those agreements are entered into? I guess following a little bit on 

Ms. Schwartz’s question before. 

Mr. WILKINS. I think individual agreements typically have not 

been the subject of press releases, unless the banks decide to do 

that on their own, for their own—— 

Mr. CROWLEY. So the government itself will not—— 

Mr. SHAY. But the fact that a bank is a party to an agreement 

will be public, because it will be necessary information for the U.S. 

withholding agent that is dealing with that bank to know that they 

have an agreement, and therefore, they will not withhold on payments to that institution. 

Mr. CROWLEY. Okay. The U.S. is the world’s largest market for 

foreign portfolio investment. And foreign investment in the U.S. is 

good for our economy. I think, Chairman, you would agree with 

that. 

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I have some concerns that the real cost of investment in the U.S. 

for non-U.S. investors has increased significantly, as foreign financial firms complied with the IRC Section 1441, the QI regs. While 

I welcome the IRS and Treasury’s goal of identifying U.S. persons, 

there is concern in the financial services community that the U.S. 

has and could further create an invasive administrative burden 

that applies to all recipients of the U.S. income, not just Americans, by discouraging our shared goal of increased U.S. investment. 

Could you just comment on this issue, on the complexity, the cost 

of implementing this program, and do you believe it is easier and 

less costly than the current system we have in place? 

Mr. SHAY. Let me comment, if I may, first. We share the view 

that foreign portfolio investment in the United States is important, 

and we want to be sure that it is—it continues unabated. 

And, as I said in my earlier remarks, part of our objective—and 

a very important objective of ours in implementing legislation, 

should this legislation be passed—will be to do—work closely with 

the affected financial institutions, business community, and to 

come out with rules that will balance and achieve the information 

reporting that we seek, but at the least burden and cost as possible 

to the affected intermediaries. 

I—our view is it is going to be possible to do this, to allow Americans to comply with their tax obligations, and not interfere in an 

inappropriate way with cross-border investment, which we view as 

very important. 

Mr. CROWLEY. Thank you. I agree with the intent of the legislation. With that, I yield back, Mr. Chairman. 

Chairman NEAL. Thank you very much, Mr. Crowley. Let me 

recognize the gentleman from Texas. While not a member of the 

subcommittee, he has certainly demonstrated a consistent interest 

in this issue. Mr. Doggett. 

Mr. DOGGETT. Thank you, Mr. Chairman, and thank you for 

your efforts in this area, those addressed through your most recent 

legislation with Chairman Rangel, and those in this general area. 

I thank both of you for your testimony and your public service. 

Mr. Shay, you have—or Secretary Shay—you have testified before us over the years on a number of occasions. And I realize that 

the views you express now in this new position are not necessarily 

those that you have written about in the past. But I would just say, 

as a general matter, that I think a good place for Treasury to start 

on many of these problems, particularly with reference to international corporate tax avoidance, would be to go back and read 

what you have written in the past, and adopt it as policy in the 

main. 

My interest today in this, as you know, stems from my having 

filed with Senator Carl Levin—and I appreciate your reference to 

it—the Stop Tax Haven Abuse Act. I appreciate the fact that Secretary Geithner, when he was before the full committee in March, 

indicated that the administration fully supports that legislation. 

And while the primary focus of the hearing today, and the sole 

focus of the recent legislation that’s been introduced is tax evasion 

by individuals, I believe that much more costly tax evasion is occurring from corporate individuals, and that that must also be considered. 

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As I noted when this subcommittee convened on March the 31st 

considering these matters, the use of international tax games by 

corporations in these offshore tax havens is widespread, and it 

drains billions of dollars from the treasury. 

I don’t believe that there is any justification for having one 

standard for individual taxpayers and another, more permissive approach, to corporate individual taxpayers. One rule for Wall Street 

corporations and one rule for individuals? I think that’s indefensible. 

And after years, if not decades of delay in this committee, there 

is also no justification for failing to address international tax 

abuse, or insisting that this has to be done in a two-step approach, 

one for individuals now, and another for corporations some day. We 

need a comprehensive approach, not just a vague promise that corporate evasion will eventually be addressed. 

In fact, while some may try to draw a distinction, as has occurred here today, between illegal tax evasion and tax avoidance, 

the real difference primarily is—between individuals illegally hiding their cash overseas and corporations manipulating the tax 

does—the main difference is that the corporations have better lobbyists to obtain the—legitimacy for some of these questionable 

transactions than do some of the individuals. 

With reference to some of the ideas that are advanced here by 

Professor Kingson today, I hope you will review those. I understand 

you can’t take a position on them formally this morning, but I 

think he advances a number of ideas about how to handle those. 

The whole idea of the stock tax haven approach was to prompt 

other legislative response and discussion. And I am pleased that it 

has prompted what I think are some improvements on our approach as it relates to individuals, but a concern that it does not 

address the issue of corporate tax abuse. 

Let me ask you specifically about one matter, just as an example 

of these problems. As you know, we finally, a while back, addressed 

this issue of corporate inversions, of companies that are American 

but claim, by putting up a post office box somewhere, that they are 

no longer American, except to receive all the benefits, and not pay 

for them. 

In addition to the companies that have done that, and the law 

that was passed to try to discourage that in the future, does the 

current law cover corporations that are formed here in the United 

States, or that choose not to be formed here initially in the United 

States, to be formed abroad, even though all their management, 

most of their operations in the United States—can they simply incorporate in a tax haven and develop their intangibles from this 

foreign corporation, even though doing so may cause them to yield 

other tax benefits? And is that occurring with some corporations? 

Mr. SHAY. It is permissible under current law to establish a foreign corporation at the outset. Section 7874, which is the anti-inversion proposal you were referring to, does not address corporate 

formation at the outset. 

As you observed, if one is then going to be investing in R&D, 

then assuming that they’re not carrying on business in the United 

States such that they would be taxed currently, then they would 

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be losing or deferring the benefit of those deductions. And so that 

is one pretty significant drag on doing that from the outset. 

Mr. DOGGETT. But there are—that has occurred. And the current inversion law does not cover that, does it? 

Mr. SHAY. That is correct. The current inversion law does not 

cover corporate formations. 

Mr. DOGGETT. Is there any justification for an American corporation with a foreign subsidiary retaining passive assets in that 

foreign subsidiary that exceed the resources that it needs to compete abroad? 

Mr. SHAY. There—— 

Mr. DOGGETT. Any competitive justification. I’m not talking 

about tax dodging as justification—— 

Mr. SHAY. Well, I think without the—certainly a foreign corporation that, under today’s law, is permitted to accumulate earnings and retains it in passive form, there are some limits on that. 

But they are not very great. 

But certainly one would, I think, think that an amount that 

would permit what—normal working capital amounts would be acceptable. To the extent that amounts are accumulated beyond that, 

then that’s a question—that’s really a policy question that I think 

you’re alluding to. And current law would permit that. 

Mr. DOGGETT. Right. Well, I believe that the chairman, Mr. 

Neal, got it right at the outset, that we shouldn’t be looking to 

raise taxes, to seek revenue from people that are playing by the 

rules here at home, working hard, if there are others who are engaged in tax avoidance, through manipulating international rules 

and the Tax Code, and that he also got it right with the famous 

Joe Lewis, ‘‘You can run, but you can’t hide.’’ 

Unfortunately, even if we adopted, just as it has been proposed, 

the legislation that he and Mr. Rangel and Chairman Baucus have 

introduced, corporate tax avoidance will still be hiding, and some 

Americans will be asked to pay more because those multi-nationals 

are not paying their fair share. Thank you very much. 

Chairman NEAL. Thank you, Mr. Doggett. The gentleman from 

Louisiana, Dr. Boustany, is recognized to inquire. 

Mr. BOUSTANY. I thank the chairman for this courtesy. I think 

the ranking member, at the outset, made the—I think the clear 

distinction between tax evasion and legitimate tax planning on the 

part of corporations, based on current policy and law. And, gentlemen, I believe you acknowledged that there is that clear distinction. Am I correct in—— 

Mr. WILKINS. Yes, that’s right. 

Mr. BOUSTANY. Thank you. I want to focus on a couple of 

issues in the bill that’s proposed. Very important to ensure that 

dividend withholding rules are not abused. But equally important 

is clarity with this. 

And the scope of the bill’s proposal on this issue seems to me to 

be unclear, because it applies to a broad range of payments that 

may be economically similar to a dividend, but excludes any payment pursuant to any contract which the Secretary determines 

does not have the potential for tax avoidance. The statute then lays 

out several general factors to use in determining whether a payment has the potential for tax avoidance. 

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So, can you explain what types of payments Treasury regards as 

having the potential for tax avoidance, or what types of payments 

Treasury regards as not having that potential? We need a little 

clarity on where you are going with this. 

Mr. SHAY. Thank you for that question. This is an important 

and highly technical area. And the work of the permanent subcommittee on investigations clearly brought out that there were 

transactions being entered into where—I don’t think there would 

be much disagreement—inappropriately avoided dividend withholding tax. 

Our task, should this legislation be adopted—and it was—it is a 

provision that we also had in the administration’s budget, a very 

comparable provision, I should say—will be to identify that dividing line between the transactions which are dividend avoidance, 

and the transactions which do not have that—are part of everyday 

commercial activity, which we do not want to interfere with. 

I don’t think it—today, particularly before—that will be our objective during the regulation-writing process, to achieve that. And 

we will work with the industry participants, to learn what they are 

doing. And then we will make a judgement as to how to draw that 

line. It’s not something I think we can do in testimony. Thank you. 

Mr. BOUSTANY. I hope we can explore this further as time goes 

on, because it is a critically important issue. 

My other question pertains to the QI program. And current law 

already provides for QI agreements between foreign banks and the 

IRS. Can you elaborate on the overlap, if any, between the QI program and the bill’s proposal to require banks to enter into certain 

agreements with the IRS to avoid a 30 percent withholding tax? 

Mr. WILKINS. Well, I think there would be two alternative ways 

for a bank to avoid that. One would be to enter into a full-blown 

QI agreement. The other would be to enter into sort of a QI light, 

or a modified agreement with the IRS which would impose information sharing obligations on the bank, but not imposing the obligation on the bank to do the work for non-U.S. investors investing 

in U.S. securities market that happens with a QI. 

Mr. BOUSTANY. Are you looking at a streamlining process? 

Mr. WILKINS. Yes. We will be interested in coming up with 

processes that are efficient, and are not sort of onesies, if—— 

Mr. BOUSTANY. Okay. And for banks already part of the QI regime, might there be a way of bootstrapping into the new regime, 

by using practices they have already developed for the QI program? 

Mr. WILKINS. Yes. I mean, we do hope to work with the industry, and learn from our QI experience, in order to make this transition as effective as possible. 

Mr. BOUSTANY. Thank you. I yield back, Mr. Chairman. 

Chairman NEAL. Thank you, Doctor. And let me thank our witnesses. I thought it was most helpful. Always impressed with the 

caliber of witnesses that are sent here by Treasury and IRS. And 

I must say left, right, or center, I think it’s always well informed 

information that they pass on to us. 

And, with that, let me call up our second panel. Thank you. 

Mr. SHAY. Thank you, Mr. Chairman. 

Mr. WILKINS. Thank you. 

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Chairman NEAL. We are anticipating a vote in the next few 

minutes, and I believe that there will be two additional votes after 

that. 

So—but I would like to proceed with the witness testimony. And 

I think that it would be helpful, as we go along, just anticipating 

that we might be interrupted. 

With that, let me recognize Mr. Prevost. 

STATEMENT OF THOMAS PREVOST, AMERICAS’ TAX 

DIRECTOR, CREDIT SUISSE, NEW YORK, NEW YORK 

Mr. PREVOST. Thank you, Chairman Neal. Good morning. My 

name is Tom Prevost, and I am an Americas tax director for Credit 

Suisse. I would like to thank you for allowing us to offer testimony 

today. 

Credit Suisse has always been an active participant in the qualified intermediary program. The bill makes broad changes that will 

have implications for the QI regime, and impact how financial institutions will deal with both U.S. and non-U.S. customers with foreign accounts. 

Our comments are not intended to be unique to Credit Suisse, 

and will be relevant to tax reporting for all non-U.S. financial institutions, with the majority of the comments also being relevant to 

U.S. financial institutions. 

We would like to make three basic points today. First, Credit 

Suisse supports the proposed framework for simplified reporting of 

accounts under control by U.S. taxpayers. The measure is very 

comprehensive, and represents a meaningful improvement over the 

administration’s initial greenbook proposal, and previously proposed measures, which would have been considerably more difficult 

to implement, from an operational basis. 

We appreciate the committee’s diligence in working through 

these issues in its effort to eliminate problematic requirements. 

Second, while we support the framework proposed in the bill, we 

have concerns about some of the specific details related to FFI tax 

reporting, and in certain areas we would like to work with the committee to garner greater clarity. We express these concerns in an 

attempt to ensure that the stated aims of the legislation are met, 

rather than falling short due to complications associated with unintended consequences. 

In considering operational details, we believe that the current QI 

program has been a success in allowing U.S. securities to be held 

by both U.S. and non-U.S. taxpayers overseas, and suggest that as 

new requirements are put in place to deal with U.S. taxpayers, 

there needs to be a careful balance struck between the amount of 

information that the IRS would like to collect, and the compliance 

burden placed on institutions so that the qualified intermediary 

program remains attractive to institutions participating outside of 

the U.S. 

Rightly or wrongly, there are significant fears in the international banking community that being a QI may lose its appeal 

and simply carry too much compliance burden, which could have 

negative ramifications for foreign investment into the U.S. We recommend a practical focus in the implementation stage to ensure 

the legislation fulfills its worthy aims. 

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Finally, Credit Suisse has some concerns and comments relating 

to two other provisions of the bills, bearer bonds and equity swaps, 

and we would like to offer constructive ideas to ensure the responsible participants in these markets are not unnecessarily penalized. 

With respect to the simplified information reporting approach in 

the bill, it is a meaningful improvement over the greenbook and 

other proposals, because it eliminates the requirements for foreign 

financial institutions to do full 1099 reporting, and a requirement 

that all related foreign financial institutions be qualified intermediaries. 

We appreciate the tremendous effort made by the committee and 

the Treasury Department to thoughtfully address the concerns 

raised by financial institutions with respect to the previous proposals. 

Regarding the technical issues on reporting, in the interest of 

time I will not fully detail the technical implementation issues we 

have with the bill, but instead, summarize our concerns. We have 

provided considerably more detail in our written testimony. 

First, there are effective date issues with a number of provisions 

in the bill. The rules have to be fully known and foreign financial 

institution agreements have to be executed before systems and procedures can be established. And it takes time to implement after 

the rules are established—probably 18 to 24 months, depending on 

the specific provision. 

Second, the method of determining U.S. status of financial accounts is critical. We believe that most foreign financial institutions will not choose to obtain customer certifications from their entire customer base, as permitted by the bill. So, the bill should clarify that foreign financial institutions may, as an alternative, rely 

on their existing know-your-customer, anti-money laundering procedures. 

Third, the verification process should not be so burdensome that 

it dissuades foreign financial institutions from signing an agreement with the IRS. The concern is that you’re dealing with the 

FFI’s entire customer base, versus their much smaller QI customer 

base, so the cost could be prohibitively expensive. 

Fourth, in an effort to ensure that reporting will always occur, 

the bill has created a number of situations where reporting of the 

same information happens more than once. We should strive to 

eliminate these redundant reporting situations. 

With respect to the bearer bond provisions, there is an economic 

issue, in that the bill limits access to certain capital markets for 

U.S. issuers. For example, the Swiss market and the Japanese retail market. 

With regard to equity swaps, we appreciate the committee’s efforts to recognize that equity swaps are primarily used for legitimate business purposes, by having the bill only target abusive equity swaps. We welcome the opportunity to assist the Treasury Department in defining non-abusive equity swaps. 

Besides an effective date concern, there is also a double-withholding issue for internal hedging swaps, which is described in our 

written testimony. 

To close my testimony, I would like to restate our three primary 

points. First, Credit Suisse supports the new framework for foreign 

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account reporting as a thoughtful improvement on earlier proposals. Second, we would like to see consideration given to certain 

technical and implementation issues. Third, we would like to ensure that responsible parties are not unnecessarily harmed by restrictions on bearer bonds and equity swaps. 

Thank you for the opportunity to appear today, and I will be 

happy to answer any questions you may have. 

[The statement of Mr. Prevost follows:] 

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Chairman NEAL. Thank you, Mr. Prevost. 

Professor Kingson is recognized to offer testimony. 

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STATEMENT OF CHARLES I. KINGSON, ADJUNCT PROFESSOR, 

NEW YORK UNIVERSITY LAW SCHOOL, NEW YORK, NEW YORK 

Mr. KINGSON. I’ve been invited here to discuss avoidance of 

U.S. tax by using companies and by—incorporated in tax havens. 

And, of course, you know, tax—they are called tax havens, but they 

are only tax havens to the extent that we let them be tax havens. 

And my comments really concentrate on publicly held companies 

where the money is. 

And they avoid U.S. tax in two ways. One, they transfer intangibles to their foreign subsidiaries, and the foreign subsidiaries make 

them, and they’re not taxable until the money is brought back into 

the U.S. And in the case of U.S. parents that become subs of foreign parents, the foreign parents are not taxed on any non-U.S. income ever, and including interest on capital gains. 

Now, this can be countered by reasonably effective measures. 

One would repeal an obscure provision that was enacted in 1997 

in the name of alleviating complexity. And the second would be, 

really, Representative Doggett’s suggestion that we say that a company that is managed, controlled in the United States is a resident 

of the United States, and fully subject to U.S. tax. 

The—although the former has—the subsidiaries have more revenue loss, I am going to take up the parent’s technique first, because it’s more visible and it’s more resented, and also because it’s 

the only thing on the table because of Representative Doggett’s bill. 

Now, the use of—for both parents and subsidiaries, what is important is intangibles. We have changed from a world of steel 

where Andrew Carnegie was the richest man to a world where Bill 

Gates is the richest man, and the wealth is intangibles. 

And the United States, too, has intangibles. It has a government—I mean a great government—it has shared ideals, it has sacrifices. And we have commercial intangibles. We have great educational institutions, a skilled workforce, and we have maybe the 

best scientific community that ever was. And these U.S. corporations take advantage of these to make their fortunes, and they then 

want to really say, ‘‘Well, you know, I have made mine, and now 

I don’t have any more obligations.’’ 

And as for the parents, they very often want to incorporate 

abroad and still live here, and we don’t allow individuals to do 

that. If you live here and you want the benefits of civilization, I 

mean, you have to pay what Justice Holmes called the price of civilization. I mean taxes. 

And the stuff to deter inversions, I mean, that’s very long and 

complex, and I don’t know how well it works. It certainly doesn’t 

work, as Mr. Shay said, in the case of start-ups. 

But even if you have a U.S. sub of a foreign parent, they can 

take the intangibles out of the U.S., and have them forever outside 

U.S. tax jurisdiction. Now, you can’t do that with something that’s 

legal, because you know, a patent you have to transfer out, and 

that’s a realization event. The corporation gets taxes on its value, 

and so does the foreign parent on the dividend. 

But other things are easier to get out of U.S. tax jurisdiction, and 

that’s stuff like know-how, and goodwill, and the workforce. You 

can’t put your hand on them. And that’s why—and that gives an 

incentive to get these—this stuff that has been done forever. 

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Now, I would like to say about the foreign subs, they transfer 

these intangibles to the foreign subs, and they build up incredible, 

incredible amounts of money. The table prepared by the Democratic House Ways and Means Committee staff said that in 2003 

alone, 9 pharmaceutical companies reinvested $26 billion abroad, 

and this was in low-tax jurisdictions. And they did it because they 

syphoned the intangibles off to their subsidiaries, and so they had 

$26 billion, mostly in passive assets they didn’t need in the business. 

And if you—the way to combat this really is to, I think, to repeal 

an exemption they had, they got in 1997. It said, basically, if you’re 

an investment company you have to—a foreign investment company—you have to economically repatriate all your earnings. And 

these companies were going to become investment companies because more than 50 percent of their assets became—they didn’t 

know what to do with them. They had no business reason. And 

they were stocks and bonds and bank deposits. 

So, the—they got an exemption in 1997 from foreign subsidiaries 

of U.S. companies being called investment companies, and characterized as investment companies. And then, in 1997, the real accumulation began, because there were no tax penalties. 

And then, starting in 2002, they said, ‘‘Well, you know, we really 

have to get this stuff back, because this stuff we siphoned abroad, 

we have to bring it back tax-free, so we can recreate U.S. jobs.’’ 

And they got it back. And, you know, to show what happens, a 

company like Intel, which brought back $6 billion, as soon as— 

you’re supposed to have a plan to create more jobs—and the next 

year they cut 10,500 jobs. And Pfizer, which had $38 billion abroad, 

the next year they fired 10 percent of their domestic sales force. 

And so, I characterize this as really one of the most brilliant, farsighted, and ingenious rip-offs of the U.S. tax base ever accomplished. And to counter this, Congressman Rangel’s bill would say, 

‘‘Well, you can’t just bring back your high-tax earnings and use 

them to wipe out tax on your exports. You have to allocate part of 

that against the income that you keep abroad in low-tax earnings.’’ 

But I think that what would be much more effective would be to 

repeal the exemption that these companies got from foreign investment companies. It wouldn’t hurt their competitive position at all. 

Because, by definition, you only count as passive assets, assets that 

you don’t need in the business as working capital. So there is no 

real justification for this. 

And, you know, you have legitimate reasons for doing business 

in a foreign country, and a tax haven. Avis can’t rent cars in Florida and send them—I mean, can’t send them to the Bahamas every 

time somebody wants to rent a car, so you have to have a business 

there. And if it’s untaxed, it’s untaxed. But that doesn’t mean that 

Avis should be—Avis Bahamas should be able to get a huge mutual 

fund there going with untaxed income. 

And this would—my second thing would be—because, I mean, I 

have had experience with what companies do, and they value earnings much more than they do saving taxes. And if you required 

that published income statements couldn’t say that there is no U.S. 

tax on these accumulated earnings because you’re never going to 

bring it back, that would deter them very substantially. Instead of 

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1The views expressed are personal. 

2 A former tax chief of Intel Corp. suggested to the Senate Finance Committee that had he 

known at Intel’s founding in 1968 about the present international tax rules, he would have suggested incorporating in a lower-tax jurisdiction. Senator Moynihan then asked the tax officer 

Continued 

showing $100 of income on their balance sheet in Bermuda, they 

would show $65 of income. And without earnings per share being 

increased, which is the, you know, the summum bonum, I mean, 

you don’t really have any—you don’t have that much of an incentive. It doesn’t show up in your performance to do these tax havens. 

And the final thing is really just—I think you—I think one of the 

things—although these foreign information things are, I think, valuable. I haven’t had much experience in the area, but I think it 

should be—I think the focus of my testimony has been that you 

concentrate on the U.S. activities. If a company has U.S. activities, 

and you measure it by where the executives live—because they’re 

not going to live in the Cayman Islands, and you don’t do it by 

their officers, because they can fool around with titles, you just say, 

‘‘Who are the highest paid people,’’ and that’s it. 

And when you focus on U.S. activities, and focus on the consequences to the U.S. parents when they’re—with their foreign subsidiaries, I think you will—it will do very well. 

And, as a coda, I just want to say that I would do the same thing 

for—focus on U.S. people with respect to tax evasion. I mean, if a 

person—instead of chasing the crooks and the tax evaders, I would 

also go after their beneficiaries, because in my experience everybody who wanted to give up a citizenship, he would never have his 

children give up their citizenship. And so, if you just said if everybody who got more than $10 million in gifts and bequests had to show that it had been reported 

in the Internal Revenue Service—and with $10 billion or some 8- 

figure number, you couldn’t say, ‘‘Well, we just forgot to keep 

records’’—I mean, if you said that that was income and subject to 

an excise tax, you would make law-abiding people—you would— 

people would lose the incentive to give money—to take tax evasion, 

if they couldn’t give money to the next generation. And that 

wouldn’t be involving chasing foreigners. 

[The statement of Mr. Kingson follows:] 

f 

Statement of Charles I. Kingson, Adjunct Professor 

New York University Law School, New York, New York 

Testimony 

My name is Charles Kingson. The subcommittee has invited me here to discuss 

avoidance of United States tax by using companies set up in low-tax foreign jurisdictions. These countries are often called tax havens, but of course they are only tax 

havens to the extent we let them be. My comments and suggestions concentrate on 

publicly held U.S. companies, which is where the real money is.1

U.S. corporations use tax-haven companies in two ways. One is by U.S. parent 

corporations establishing a tax-haven subsidiary, to which is allocated income not 

taxed by the United States (or anyone else) until assets representing that income 

are brought back as dividends. The other is by the top U.S. company reincorporating 

as a tax-haven parent in, say, Bermuda. This removes foreign operations, and the 

income they produce, from the United States ability to tax them now or later.2

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‘‘if he expected the Marines to show up in the Caymans in case of trouble.’’ Hal Lux, Nationalities of Convenience, Inst. Investor, Feb. 2002 (paraphrasing Moynihan’s question). 3Tax commentary by the Organization for Economic Cooperation and Development (OECD) 

states that in determining the residence of a company, ‘‘It would not be an adequate solution 

to attack importance to a purely formal criterion like registration. Therefore, paragraph 3 attaches importance to the place where the company, etc. is actually managed.’’ Paragraph 22 of 

the Commentary on Article 3 of the OECD Model Tax Convention. 4See Model Treaty, art. 23(2). 

5 Id., art. 4(1). 

The first, use of tax-haven subsidiaries to deflect United States tax, can be countered by repealing an unpublicized provision enacted in 1997 in the name of alleviating complexity. The second, reincorporating as a foreign parent, can be countered by doing what almost all other industrialized nations do: treating a corporation managed and controlled in their country as a resident subject to full tax.3 Although the former problem involves more revenue loss, I will begin with the latter, 

because it is more visible (and resented); and because it is the only one on the table 

owing to Representative Doggett’s bill. 

A. The Use of Tax Haven Parents 

United States corporations benefit from perhaps the greatest intangibles that 

have ever existed; a system of government, a fairness of law, and a defense made 

possible by sacrifice. As a commercial matter, they benefit from other U.S. intangibles as well: great educational institutions; a skilled workforce; perhaps the best scientific community ever; the most universal language; and a culture—or several cultures—that are both inclusive and admired. 

Having benefited from those intangibles in making their fortunes, some want to 

escape tax on them while retaining the benefits. We do not allow individuals to do 

this; we consider those who live here ‘‘residents’’ of the United States and tax them 

on all their income. Accordingly, a person cannot avoid U.S. taxation by giving up 

citizenship. If you get the benefits of our intangibles, you pay what Justice Holmes 

called the price of civilization. 

By contrast, we consider a corporation to be resident in the country in which it 

is incorporated—say, Bermuda. This has led some United States parent companies 

to reincorporate in jurisdictions like Bermuda. The procedure, known as corporate 

inversion, involves the domestic parent of a multinational corporation becoming the 

subsidiary of a tax-haven foreign parent with the same stockholders. The United 

States continues to tax all earnings of the domestic company, now a subsidiary; but 

earnings from foreign operations that can be shifted to or started by the tax-haven 

parent, as well as interest and capital gain, will fall outside what we define as our 

residence jurisdiction. 

Section 7874, intended by the 2004 Jobs Act to deter inversions occupies over two 

pages of the Internal Revenue Code of 1986, as amended (the ‘‘Code’’). But these 

complex provisions, although often a deterrent, do not deal with the fact that our 

definition of resident is wrong; a corporation, like an individual, lives where it is 

present. Therefore, once the price of Section 7874 is paid (and for a loss or startup corporation it might be small), there is a substantial incentive for the new foreign parent to transfer the valuable U.S. intangibles of its U.S. subsidiary to foreign 

companies—that is, outside what we define as residence jurisdiction. This is easy 

to monitor and tax with items such as patents: their transfer will be treated as a 

taxable sale by the U.S. corporation followed by a taxable dividend to its foreign 

parent. But a transfer is harder to ascertain with items like goodwill, workforce and 

know-how: opportunities to make money can be funneled elsewhere. (A colleague refers to this as a ‘‘slurp’’ reorganization.) 

A report by the Joint Committee on Taxation, contemporaneous with the original 

enactment of Section 7874, suggested a residency test similar to that used by most 

other countries. The report suggests that a company incorporated abroad should be 

considered a U.S. corporation if its day-to-day management is located here. As the 

report says, that factor ‘‘is more difficult to manipulate. Moving the management 

of a company generally requires the physical relocation of top executives and their 

families to an office in a foreign jurisdiction.’’ The United States in fact has adopted 

this standard through tax treaties. A treaty often grants a corporation that is a 

‘‘resident’’ of the other country either reduction of or exemption from U.S. source 

tax.4 The definition of resident includes a corporation that is managed and controlled, or has its effective place of management, in the other country.5 In deciding 

whether a foreign corporation is entitled to treaty benefits, the United States is— 

perhaps unknowingly—determining what those terms mean under its own law. 

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6 Concern exists that a managed-and-controlled test might sweep legitimately foreign corporations—for example, Swiss pharmaceutical companies with substantial U.S. research and marketing activities—into full U.S. jurisdiction. But the scope can be mostly limited to tax-haven 

companies. For countries with which the United States has an income tax treaty (such as with 

Switzerland, see Income Tax Treaty, U.S.-Switz. Art. IV, Oct. 2, 1996, 4 Tax Treaties (CCH) 

¶9101.04, but not Bermuda), the United States could cede residence jurisdiction to the country 

in which an entity is incorporated. Special consideration might apply to low-tax treaty partners 

such as Ireland and Barbados. 7Those assets are listed in Code section 936(h), part of a section intended to prevent their 

value (and the resulting income) from being shifted to subsidiaries exempt from U.S. tax because they operate in Puerto Rico. Two significant assets not listed are goodwill (reputation) and 

going concern value (skilled workforce). 8The table is reproduced on page 358, Summer 2005 issue of the Tax Law Review, vol. 58, 

number 4. 

tion is a resident on the basis of its place of management is resting on foreign rather than domestic concepts.6

The landmark British case on management and control, involving De Beers Consolidated Mines Ltd., was fairly straightforward: the directors met primarily in London. Since then, as a subsequent British case noted, communications allow meetings 

to be held without physical presence. Moreover, management and control of public 

companies resides substantially with their executives. Representative Doggett’s provision treats certain foreign corporations as domestic corporations for U.S. federal 

income tax purposes if the management and control of the corporation occurs primarily within the United States. That concept gets it right, and I would suggest 

that it be made more specific by using a criterion of where the most highly compensated employees live. They will be reluctant to give up the intangibles this country offers, as well as their personal ties. Where a company is incorporated might 

determine its taxes, but where an executive has to live determines his life. 

In addition to U.S.-based start-up corporations incorporated in tax havens, a corporate residence test based on management and control would affect previously expatriated corporations. These would become domestic companies, bringing earnings 

from their foreign operations back into U.S. corporate tax jurisdiction. This puts the 

companies in the same position as if they had not inverted, yet allows them to pay 

U.S. tax later. Any complaint can be met by paraphrasing John F. Kennedy: Ask 

not what your country can do to you: ask what you did to your country. 

B. The Use of Tax-Haven Subsidiaries 

1. Avoidance of U.S. Tax: The Transfer of Intangibles and Portfolio Investment 

Abroad 

Wealth has changed from physical to intangible, from Andrew Carnegie to Bill 

Gates. Therefore, although companies will not replicate U.S. Steel mills in the Caymans, they find it relatively easy to transfer intangible assets to a tax-haven subsidiary.7 Congress’ response, the statutory commensurate-with-income test, works; 

but only if you get caught. 

A table prepared by the Democratic staff of the Ways and Means Committee 8

shows that during 2003 the foreign reinvested earnings of nine pharmaceutical companies totaled more than $26 billion. Like Intel, these companies have intangibles 

of immense value; and their foreign subsidiaries’ income is attributable to those intangibles. When the 2004 Jobs Act permitted low-taxed foreign earnings to be repatriated to United States parent corporations with virtually no U.S. tax, companies 

that took most advantage of this were those in high-tech industries. 

In a sense, then, the high-tech industries have pulled off a hat trick. First, they 

beat the intercompany pricing rules. They have been able, despite all the work on 

482 and 367, to transfer intangibles to Ireland and Singapore. Next, those companies beat back the passive foreign investment company (PFIC) rules, which would 

have stopped them investing the income from those intangibles abroad in non-productive portfolio assets without incurring U.S. tax. Before 1998, once more than 50% 

of a foreign subsidiary’s assets were bank deposits and bonds, all the income of that 

subsidiary would therefore in effect be taxed currently in the U.S. But in 1997, the 

PFIC rules were changed to exempt a foreign subsidiary. Subsidiaries of high-tech 

companies could therefore keep their intangibles profits abroad in passive assets. 

They did not use them to compete, which is the justification for encouraging lowtaxed profits abroad. 

By 2002, the high-tech companies were beginning to say, although not in these 

words, that ‘‘We need this money that we siphoned abroad to recreate U.S. jobs.’’ 

Under that rationale, the 2004 American Jobs Creation Act allowed them to replace 

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9 Intel, which repatriated $6.2 billion under the Jobs Act, shortly thereafter announced that 

it was cutting 10,000 jobs, about 10 percent of its workforce. (Editorial, ‘‘Cashing their Chips,’’ 

N.Y. Times. Sept. 8, 2006, p. A28.) Pfizer, which had $38 billion indefinitely reinvested abroad 

at the end of 2003, drastically cut its domestic sales force in 2006. 10This was prompted by a call to me from a Swiss lawyer, concerned about what would happen to his U.S. client’s large secret Swiss account when he died. ‘‘Money grows faster when you 

don’t pay tax,’’ he explained. 

the money they had paid out in dividends by bringing their foreign bank deposits 

back to the U.S. tax-free.9

In short, by taking advantage of the U.S. tax system: outfoxing intercompany pricing rules; justifying the accumulation of bank deposits abroad in the name of tax 

simplicity; and claiming that those bank deposits would replace lost jobs, companies 

have succeeded in exempting U.S. profits from U.S. tax. 

I think this has been one of the most brilliant, farsighted and ingenious rip-offs 

of the U.S. tax base ever accomplished. To counter this, Chairman Rangel’s tax reform bill rightly proposes that foreign tax credits be allocated fungibly among hightaxed repatriated earnings and unrepatriated low-taxed earnings. The stiffness of 

the opposition implies how effective it would be. 

Perhaps even more effective would be repeal of Code section 1297(d), which exempts tax-haven subsidiaries from PFIC status. Its repeal would force the distribution of tax-haven earnings not needed in the business, and thus should not hurt 

their competitive position. Companies do have legitimate reasons for doing business 

in tax havens. Avis, for example, cannot rent cars in the Bahamas by shuttling 

them back and forth from Florida. But that should not mean that Avis Bahamas 

Ltd. can become a giant mutual fund, making portfolio investments with untaxed 

income. 

Two related recommendations to deter the use of tax havens: 

• Require that, on their published income statements, companies reflect United 

States tax on foreign earnings even if considered permanently reinvested. 

Corporations value earnings even more than saving taxes; and taking away 

the earnings incentive would lessen the attraction of tax havens. 

• Require companies whose foreign subsidiaries show more than, say, a 25 percent return on tangible assets to describe (consistent with keeping trade secrets) the intangibles of the subsidiary and how it obtained them. This would 

reinforce the intercompany pricing rules of sections 367 and 482 and show if 

the parent was materially assisting the subsidiary in earning amounts that 

could be subpart F income. 

2. Avoidance of Non-U.S. Tax Repatriation of Business Profits from High-Taxed to 

Low-Taxed Foreign Subsidiaries 

The proper U.S. response to the avoidance of non-U.S. taxes is not the topic of 

this testimony. Because it is related, Appendix I discusses the issue with respect 

to U.S. multinationals. 

CODA 

A theme of this testimony is to deter avoidance by focus on the United States. 

A similar focus might be applied to deter individual evasion, even though evasion— 

unlike avoidance—is criminal. In addition to the anti-abuse measures proposed in 

Congressman Doggett’s bill and the Rangel-Baucus bill, I would add an additional 

suggestion. As a complement to the foreign information, tax law might elicit compliance by enlisting beneficiaries. Gifts and bequests to Americans in excess of, say $10 

million—or some other eight figure number—could be characterized as income and 

subjected to an excise tax unless it could be shown that the assets and income from 

which they were derived had been reported on tax returns.10

APPENDIX I: 

Avoidance of Non U.S. Tax: Repatriation of Business Profits from High-Taxed to 

Low-Taxed Foreign Subsidiaries 

A. Dividends, Interest and Royalties 

For 70 years the United States has considered there to be no legitimate reason 

for its taxpayers to earn passive portfolio income—dividends, interest and royalties—outside its immediate taxing jurisdiction. When the investment was not part 

of an active business (like banking or insurance), taxing the income immediately 

was considered not to affect the ability of U.S. persons to compete abroad. 

The Revenue Act of 1962 extended the scope of that principle to undistributed 

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11The 1986 Blue Book description of section 904(d)(3) at p. 866. 12We try to prevent United States subsidiaries of foreign companies from distributing profits 

with the least U.S. tax cost, even when it entails discrimination, Code 163(j), aimed at what 

is called earnings stripping. By contrast, U.S. private equity funds depend on this technique. 13One subpart F provision, known as the branch rule, even polices alternative ways of avoiding foreign tax. Code section 954(d)(2). 

come became a type of subpart F income taxed as if earned directly by its United 

States shareholders. 

For subpart F purposes, passive income includes not only portfolio investment like 

bank deposits but also what is essentially the distribution of business profits from 

one foreign subsidiary to another. Those distributions could take the form of lowtaxed dividends, interest or royalties paid by one foreign subsidiary to another; or 

in the most complete realization of business profits, it would take the form of gain 

from sale of all the stock owned in one foreign subsidiary by another. Unlike interest from liquid bank deposits, which a foreign subsidiary rather than the U.S. parent had little reason to receive except to defer U.S. tax, realization of one foreign 

subsidiary’s business profits by another generally was intended to save foreign tax. 

The inclusion of business profits distributed from one foreign subsidiary to another as subpart F income, despite the motivation to save foreign rather than U.S. 

tax, has provoked fierce attack since (and during) its original enactment in 1962. 

Yet, however correct that position was, circumstances have changed. Once, after 

World War II, the United States had all the money there was; and now it does not. 

The Tax Reform Act of 1986 reflected this sea change. For purposes of the foreign 

tax credit, the act treated deductible payments of interest and royalties from foreign 

subsidiaries to U.S. parents—which eroded foreign tax bases—in the same way as 

dividends. Legislative background described this as an incentive for U.S. multinationals to reduce their foreign taxes.11 The 2006 enactment of section 954(c)(6) 

was therefore extending that logic when it exempted foreign-to-foreign interest and 

royalties from subpart F. Although such logic may not have motivated the provision, 

it remains valid. Distributing business profits with the least foreign tax cost should 

not be considered avoidance for U.S. tax purposes.12

Accordingly, section 954(c)(6) should be continued and be extended to include gain 

from sales of stock in foreign subsidiaries. There would be no income for U.S. tax 

purposes—and thus no subpart F income—if instead the transferred foreign subsidiary sold its assets and distributed the cash to its foreign parent in liquidation. 

It is foreign rather than U.S. tax that generally makes an asset sale prohibitive. 

B. Artificial Intercompany pricing: Sales and Services Income 

Section 482 gives the IRS authority to prevent erosion of the U.S. income tax base 

by artificial intercompany pricing. To illustrate, a domestic corporation may charge 

too little for goods sold to, or services performed for, a foreign subsidiary. This inflates the subsidiary’s profit (which the United States does not tax) while decreasing 

that of the parent (which the United States does tax). 

But enforcement of intercompany pricing requires enormous effort. To combat 

what President Kennedy termed ‘‘the shifting of management fees and similar practices which maximize the accumulation of profits in a tax haven,’’ subpart F income 

included profit from sales and services between foreign subsidiaries and related corporations. In significant part, this was intended to make Section 482 attribution of 

subsidiary sales and services income to a U.S. parent corporation unnecessary. 

Whether the transaction resulted in the parent earning $20 and the subsidiary $80, 

or the parent $80 and the subsidiary $20, the entire $100 would be taxed to the 

parent. 

Again, however, subpart F income includes sales and services income intended to 

erode a foreign as well as a U.S. tax base; and the same considerations that should 

exclude from subpart F income the distribution of business profits among related 

foreign companies should likewise exclude income from sales and services transactions among them. We are not the world’s tax policeman of intercompany pricing: 

we can hardly police our own.13

Without too much detail, some suggestions follow: 

• In view of encouragement of U.S. multinationals to reduce their foreign taxes, 

restrict subpart F to transactions that erode the U.S. tax base. This would 

entail at least repeal of the section 954(d)(2) branch rule, and might well go 

further and limit subpart F sales and services income to transactions that reduce U.S. taxable income. • Concomitant with having subpart F sales and services income limited to the 

U.S. tax base, ensure preservation of that base in two ways: ending the avoidance of subpart F sales income by contract manufacturing with its complex 

and vague rules; and stopping the avoidance of subpart F services income 

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when foreign subsidiaries perform services with substantial assistance from 

a United States parent in the form of sub rosa expatriated intangibles. 

The central issue of the U.S. international tax system has become the expatriation 

of U.S. intangibles abroad. In the case of services income, the proposals intend to 

mitigate the result of that expatriation. Repeal of the passive foreign investment 

company exception for foreign subsidiaries (proposed in the testimony above) also 

intends to mitigate the effect of those intangibles. 

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Chairman NEAL. Thank you. Mr. Suringa, it’s up to you. Do you 

want to offer testimony in the next five minutes, or do you wish 

to have us reconvene here at approximately noon time, and then 

it would give you a better chance? I want to make sure we’re fair. 

Mr. SURINGA. Whatever the committee would like. I am happy 

to stay within the five minutes, or—— 

Chairman NEAL. Then do it. 

Mr. SURINGA. Okay. 

Chairman NEAL. So are we. 

Mr. SURINGA. Thank you, sir. 

STATEMENT OF DIRK J.J. SURINGA, PARTNER, COVINGTON & 

BURLING LLP, WASHINGTON, D.C. 

Mr. SURINGA. Chairman Neal, Ranking Member Tiberi, and 

Members of the Committee, my name is Dirk Suringa. I am a partner with the law firm of Covington & Burling. From 2000 to 2003, 

I was an attorney advisor in the office of international tax counsel 

at the Treasury Department. I appreciate very much the opportunity to testify before the committee today. 

Although I regularly advise clients on how best to comply with 

U.S. information reporting requirements, my testimony today is on 

my own behalf, and not on behalf of any of my clients. 

I would like to make, briefly, three basic points summarizing my 

written testimony. First, offshore tax evasion remains a significant 

problem, and the committee is right to be concerned about it, and 

focused on efforts to stop it. 

Although it’s difficult to establish with precision the extent of offshore tax evasion, it clearly represents a substantial cost to the 

U.S., and undermines the basic fairness of our tax system. Put simply, the IRS needs effective enforcement tools to ferret out and stop 

U.S. tax evasion abroad. 

Second, the conceptual approach effect, in my view, increased information reporting and disclosure, gives the IRS exactly the right 

type of tool to deal with offshore tax evasion. Disclosure enables 

the IRS to bring cases to recover revenue otherwise lost to tax evasion, and it discourages evasion in the first place, by raising the 

risk of detection. 

Equally as important, properly structured information disclosure 

need not interfere with legitimate business transactions, which is 

as essential to our economic recovery as it is to generating tax revenue for our government. 

While the objectives and overall approach of the bill, FATCA, are 

clearly correct, my third point is that the legislation may give rise 

to certain unintended consequences, largely because it’s a unilateral measure. 

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The sanction that FATCA uses to obtain foreign bank account information is a withholding tax imposed on U.S. source investment 

income. So, a foreign financial institution or foreign entity can 

avoid the sting of FATCA simply by divesting from the United 

States. This type of a divestment would be troubling, not only because it would deprive the IRS of the opportunity to obtain actionable information, but also because of its potential harmful effect on 

the U.S. dollar and on in-bound U.S. investment, and the ability 

of U.S. companies to raise capital. 

FATCA also could encourage foreign countries to impose a withholding tax on payments to U.S. financial institutions and U.S. entities, unless they disclose ownership by those countries’ citizens 

and residents. A proliferation of country-by-country reporting and 

requirements of withholding taxes would raise, in my view, barriers to trade that should be avoided. 

Last point is that FATCA, as drafted, may have the unintended 

consequence of overriding existing U.S. tax treaties. U.S. tax treaties typically require, as a condition for obtaining benefits, that the 

foreign person provide—demonstrate ownership, or demonstrate 

qualified treaty residence. In other words, they have to show that 

they are a good foreign country resident. Under existing treaties, 

that does not depend on whether they demonstrate that they have 

a U.S. ownership or now. 

Thus, even if a foreign entity satisfies all the requirements of a 

treaty, FATCA could deny it the reduced rate of withholding tax 

provided by the treaty. In my view, a multi-lateral agreement on 

the sharing of taxpayer financial information would better serve 

the enforcement objectives of FATCA without these unintended 

consequences. 

The more jurisdictions that would join such an agreement, the 

less of an incentive foreign financial institutions and foreign investors would have to divest from the United States, because they 

would know that wherever they invest their money in major markets, they would face the same problem. 

At the same time, the less likely foreign governments would be 

to adopt conflicting unilateral measures that could end up putting 

information about taxpayers in the hands of governments that do 

not protect it to the same degree that we protect it under Code Section 6103. 

Finally, an agreement among our major treaty partners would 

reduce the risk of the treaty override effect of the bill. 

My written testimony has a couple of technical points on other 

aspects of the bill. I am happy to answer questions about that. 

Thank you very much for the opportunity. 

[The statement of Mr. Suringa follows:] 

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Chairman NEAL. Thank you, Mr. Suringa. We have three votes 

on the floor. So we will recess until after the last vote. I anticipate 

being back here right after noon time. And then we will have an 

opportunity to not only resume testimony, but have some questions 

answered. The committee stands in recess. 

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[Recess.] 

Chairman NEAL. Let me call this meeting back to order. And we 

have finished testimony from the witnesses, so there will be now 

an opportunity to raise questions with our very good panelists. 

Mr. Prevost, let me congratulate you, first of all, on your willingness to come and testify today. I know it was not an easy decision, 

given the strong objections that we have heard to this bill from 

some in the international banking community. But you seem to 

think, overall, it is a responsible approach to the enforcement problem. 

You mentioned that this bill is an improvement over the budget 

submission from earlier this year. Would you be specific? 

Mr. PREVOST. Sure, Chairman Neal. You know, there were a 

couple very fundamental concerns with the greenbook proposal that 

this bill fixed, and I think this is going to be helpful to the banking 

community. 

The first is the elimination of the requirement to do full 1099 reporting. That was a major concern by a number of foreign financial 

institutions. And the other was the requirement that every qualified intermediary—all of their affiliates had to be qualified intermediaries, as well. It’s a very big sort of compliance issue to be a 

qualified intermediary. So, to have to make every entity be forced 

to be one was a concern that a lot of people had. 

Chairman NEAL. I was also interested in your comments about 

potential duplicative reporting. Maybe you can suggest some ways 

for us that Treasury and the IRS limit the potential for this use? 

Mr. PREVOST. Sure. I mean, some of this is described in our 

written testimony, but you know, there is fundamental things. 

Like, if a hedge fund is already providing K1s to the Internal 

Revenue Service, to ask them to do this reporting as well, which 

actually doesn’t even give you as much information that’s already 

on the K1, that seems to us to be unnecessary. 

If you have got a bank that has a hedge fund account and the 

hedge fund has also got the FFI agreement to have the bank do 

the reporting and then have the hedge fund do the reporting as 

well, you—basically you’re giving the same information to the IRS 

twice. And, if anything, it has the potential to confuse them, because they’re getting more information than actually what’s really 

out there in dollar terms, because they get the same information 

more than once. 

So, it is things like that that they need to work on. 

Chairman NEAL. And, Professor Kingson, I was interested in 

your suggestion that companies be required to disclose the U.S. tax 

on their foreign earnings that are permanently reinvested. Can you 

explain why that would make tax havens less attractive? 

Mr. KINGSON. It would not result in their increasing earnings 

per share. 

I can give two examples of this. I went to a conference at Merrill 

Lynch years ago where the Internal Revenue Service had offered 

to say that they would give a bigger—an interest factor on convertible bonds, increasing your deductions, if the companies did the 

same thing for book purposes. And there were tax lawyers and investment bankers there, and the tax lawyers said, ‘‘This is great, 

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you will save a lot of taxes,’’ and the bankers said, ‘‘It will hurt 

earnings,’’ and they did not agree. 

And you take something like the HealthSouth Corporation. To support their billion dollars of earnings, they overpaid $300,000 of 

taxes. And when they went bankrupt, the trustee got it back. They 

were willing to pay taxes in order to really inflate their earning. 

Chairman NEAL. And Mr. Suringa, I appreciate the fact that, in 

your testimony, you acknowledged that this was a legitimate problem that we are examining here, and I thought that was very helpful. 

Mr. SURINGA. Yes. 

Chairman NEAL. You would note that there is very little rancor 

here on the subcommittee today. I think much of it has to do with 

the fact that this is a serious issue—— 

Mr. SURINGA. Yes. 

Chairman Neal.—and that the American people are focused on it. 

Mr. SURINGA. I agree completely. I think it is an important 

issue. Individual tax evasion has a corrosive effect on the willingness of law-abiding taxpayers to pay their fair share. So I think it’s 

a very important problem. 

Chairman NEAL. Thank you. And let me yield to Mr. Tiberi. 

Mr. TIBERI. Thank you. Thank you, Mr. Chairman. First, Mr. 

Prevost, thank you for being here. Question to you. 

You mentioned the issue of bearer bonds. If I can ask you a question related to that, I understand that bearer bonds have sometimes enabled dishonest people to cheat on their taxes. And it’s important to address that problem. On the other hand, I think that 

it’s also important that these—in these troubled economic times, to 

broaden the U.S.—the access to U.S. companies and the Treasury 

to sources of capital, not to restrict such access, in this particular 

case. 

Wouldn’t the bill’s bearer bond provision make it harder for the 

Treasury Department and American companies to raise capital in 

some markets around the world, and wouldn’t the resulting implications—and what would the resulting implications be for the economy right now, the U.S. economy right now? 

Mr. PREVOST. Oh, you know, I am not an expert on bearer 

bonds, but yes, I am aware of the fact that there are some markets 

where U.S. companies can only raise money through bearer bond 

activity. 

For example, in Switzerland, we understand that, you know, $40 

billion was raised in the 2004 through 2007 period by U.S. companies. And, you know, if they wanted to tap that market, if they 

couldn’t do bearer bonds they wouldn’t be able to raise the money. 

So I don’t know what the alternative would be. But there is an 

issue that needs to be thought about. 

Mr. TIBERI. Mr. Suringa, have you thought about the issue at 

all? 

Mr. SURINGA. I have. I mean, I think in terms of—we would 

be in sort of uncharted territory, if we were to repeal the ability 

of issuers to include the TEFRA disclaimer language, and the reason is that the issuer sanctions, for example, apply, in essence, to 

all issuances of debt. So it’s sort of drafted in a way that is an 

extra-territorial application of U.S. law. 

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And the way that foreign issuers, as well as U.S. issuers, deal 

with that problem or that potential problem is to include the 

TEFRA disclaimer language in all debt issuances. So they basically 

can avoid the issue by just putting the foreign targeting requirements into their issuances of debt. And so we don’t have to encounter the problem about whether or not, if that language weren’t in 

there, if it weren’t effective, that issuance would be subject to a one 

percent excise tax, multiplied by the number of years of the 

issuance. 

If we take away the ability of companies to be able to do that, 

then I think we have to confront the extra-territorial application of 

the bill—of the law, as it stands now. And that could have a negative effect on the ability of U.S. companies to raise capital, and on 

foreign companies, as well. 

Mr. TIBERI. Taking a step further, as I understand it—and 

please correct me if I’m wrong—the legislation would not prevent 

a foreign company, my understanding, from using bearer bonds, 

which then would put U.S. companies, potentially, at a competitive 

disadvantage, while not meeting the objective, I believe, the objective of removing bearer bonds from the markets entirely. 

So, instead of unilaterally—a unilateral U.S. action on the issue, 

wouldn’t it maybe be more effective, if we’re trying to get this 

more—at it from a global perspective, attempt to address the bearer bond issues cooperatively, through multi-lateral negotiations 

with other countries? 

Mr. SURINGA. Well, I do think—I mean, the tenor of my testimony is that I think a multi-lateral approach is the best way to 

avoid the issues that kind of rise—— 

Mr. TIBERI. If we don’t do that, wouldn’t it put us at a disadvantage, our folks at a disadvantage? 

Mr. SURINGA. Oh, I think that’s right, in terms of where can 

we raise capital, where can our companies raise capital—— 

Mr. TIBERI. Right. 

Mr. Suringa [continuing]. If we have this disincentive, or this 

sanction. I mean, other companies are going to be able to raise capital without having to deal with that sanction, I mean, assuming 

that they can work out the extra-territorial application—— 

Mr. TIBERI. Mr. Kingson, you agree? 

[No response.] 

Mr. TIBERI. Do you agree? 

Mr. KINGSON. I’m sorry, I am not—really not qualified to—— 

Mr. TIBERI. Okay. Mr. Prevost? 

Mr. PREVOST. I do agree that that is an issue that has to be 

addressed. 

Mr. TIBERI. Want to take a stab at it, Mr. Kingson, even though 

you’re not—we’re not experts, either. 

No? All right. Mr. Chairman, I will yield back. 

Chairman NEAL. Thanks for giving up the disguise. 

Let me yield to Mr. Doggett to inquire. 

Mr. DOGGETT. Thank you very much, and thanks to each of our 

witnesses. I will have some questions for Mr. Kingson. 

Doesn’t the revenue loss from corporate manipulation of the Tax 

Code far exceed even the very substantial revenue loss from individual tax evasion? 

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Mr. KINGSON. I think it does. 

Mr. DOGGETT. And, given the magnitude of that problem, and 

the loss to the treasury from international tax misconduct, do you 

agree that a comprehensive approach to international tax abuse 

should include proposals that you have advanced, along with managed and controlled provisions of the stock tax havens, in order to 

really deal with the whole problem? 

Mr. KINGSON. Yes. 

Mr. DOGGETT. And as far as this whole term ‘‘managed and 

controlled,’’ I know you talk about it in your testimony. But all 

we’re really saying is if you look like an American corporation, you 

sound like an American corporation, you’re here as—physically, as 

an American corporation with your directors and your management, maybe you ought to pay taxes like an American corporation? 

Mr. KINGSON. That’s—what an individual does, a corporation 

should do, too. 

Mr. DOGGETT. As I discussed with Mr. Shay, one category of 

corporate entities that would be affected by this provision for management and control are newly formed corporations that start out 

by filing a piece of paper somewhere in the Caribbean entitling 

them under current law to be treated as a foreign corporation, even 

though the company is being run here, from America. 

Is it correct that our current inversion provisions do not reach 

those companies? 

Mr. KINGSON. I think they don’t, no. 

Mr. DOGGETT. And is there a substantial problem in that area 

that needs to be corrected, legislatively? 

Mr. KINGSON. It depends on how good the idea is. I mean, if 

they’re going to be successful, obviously they would get a lot of 

stuff offshore. 

Mr. DOGGETT. All right. And I will take that as a yes, is that 

right? 

Mr. KINGSON. Yes. 

Mr. DOGGETT. Some have argued that a managed and controlled provision would conflict with our tax treaties. Because, 

under the treaty, the corporation is considered a resident of the 

contracting state, and liable for tax there. Is there any legitimacy 

to the argument that the managed and controlled provision from 

Stop Tax Havens would lead to double taxation for some corporations? 

Mr. KINGSON. I don’t think there should be—title of every tax 

treaty says it is a convention for the prevention—for the avoidance 

of double taxation. And almost all of our treaty partners use the 

management and control test. 

And, what’s more, the OECD commentary said it would not be 

proper to use the function of just registration. You should use a 

management and control test. And that’s the OECD commentary 

on their model treaty. 

Mr. DOGGETT. And the management and control provision, I believe, has been used in the Netherlands tax treaty in a little different form, and it is a factor in the conduct of many other countries, that we’re just asking the same standard apply here. 

Mr. KINGSON. Yes. 

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Mr. DOGGETT. I will pose one more question to you, and that 

is that corporate tax avoidance, as substantial as it is, is usually 

defended as just being essential to maintaining American competitiveness. 

In fact, don’t these avoidance provisions that are usually available only to a multi-national with a fleet of lobbyists and CPAs, 

aren’t those provisions actually providing a competitive advantage 

over small businesses across America who don’t have those opportunities? 

Mr. KINGSON. Yes. I think the competitiveness cry is really sort 

of the second-to-last refuge of a scoundrel. I mean, I think there is 

very little basis in it. I usually don’t believe it. You cannot ascertain effective rates very, very precisely. 

And, for example, years ago, if we exempted real estate from income tax, there would have been a revenue gain. 

Mr. DOGGETT. And as multi-national shenanigans that aren’t 

available on Main Street, but are available on Wall Street, I know 

you feel they need to be addressed in this legislation, and that they 

are not. 

But let me ask you whether, if we address and try to provide a 

level playing field and real competitiveness for all businesses here 

within the United States, if we will be—based on your experience, 

having worked as international tax counsel for the Treasury, and 

having taught this at a number—the whole question of international tax law—at a number of prestigious law schools—if there 

will be any adverse effect, versus foreign companies that we compete with that are real foreign companies, rather than just madeto-look-like a foreign company to dodge our tax burden? 

Mr. KINGSON. Well, if companies have no tax at all, I think, obviously, they are getting a free ride. And I think that you raise a 

very important issue, that when they’re talking about competitiveness, there is some significant competitiveness of people who keep 

jobs in the United States and who export, from those who say, 

‘‘Well, we need to compete abroad by not having any tax.’’ 

Mr. DOGGETT. Thank you. Thank you, Mr. Chairman. 

Chairman NEAL. Thank you, Mr. Doggett. And I want to thank 

our panelists today for their informed testimony. You may receive 

some written follow-up questions from Members, and I hope that 

you will respond promptly, so that we might include your comments in the record. 

Being no further business before the subcommittee, then the 

hearing is adjourned. 

[Whereupon, at 12:49 p.m., the subcommittee was adjourned.] 

[Submissions for the Record follow:] 

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American Citizens Abroad, statement 

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Chamber of Commerce of the United States of America, statement 

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Managed Funds Association, statement 

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Prepared Statement of American Bankers Association 

Chairman Neal, Ranking Member Tiberi, and Members of the Subcommittee, the 

American Bankers Association (‘‘ABA’’) appreciates having this opportunity to submit a written statement for the record of the Subcommittee on Select Revenue 

Measures’ November 5, 2009 hearing on H.R. 3933—the Foreign Account Tax Compliance Act of 2009 (the ‘‘H.R. 3933’’). 

The American Bankers Association brings together banks of all sizes and charters 

into one association. ABA works to enhance the competitiveness of the nation’s 

banking industry and strengthen America’s economy and communities. Its members—the majority of which are banks with less than $125 million in assets—represent over 95 percent of the industry’s $13.3 trillion in assets and employ over 2 

million men and women. 

The ABA commends the government’s efforts to combat offshore tax evasion and 

ensure that all U.S citizens, whether at home or abroad, are in compliance with the 

U.S. tax rules. We would be glad to work with the Committee on Ways & Means 

(the ‘‘Committee’’) in its efforts to achieve these goals through clear and targeted 

rules that do not unintentionally place undue and unnecessary burdens on any particular sector(s). 

The ABA supports legislation that will ensure that all U.S. citizens and residents 

pay their fair share of taxes, and thus, prevent loss of millions of dollars by the U.S. 

because of taxpayers that engage in illegal use of offshore accounts to hide taxable 

income. It is important that the IRS has the tools necessary to investigate and prosecute U.S. taxpayers that take advantage of the system to evade their tax obligations, thereby shifting the cost of their actions to law-abiding taxpayers who pay 

their taxes. On its face, H.R. 3933 appears to give the government the necessary 

tools for improving compliance and achieving the stated goal of ensuring that U.S 

taxpayers are not able to hide income abroad. However, as drafted, the legislation 

raises a number of issues that must be addressed in order to avoid unintended negative consequences, and we strongly urge the Committee to focus on those negative 

consequences as it continues to examine the issue of offshore tax evasion. With respect to H.R. 3933, we specifically urge the Committee to focus on the following: 

• the effective date of the legislation is very unrealistic, both from an industry 

compliance perspective and an IRS enforcement perspective; 

• the legislation is so broad in scope and application that it pulls in entities 

and activities that are not the intended target of the legislation; and, 

• IRS/Treasury should be given significant latitude and flexibility in the administration of these rules, especially with respect to clarification of terms and 

definitions included in H.R. 3933 and the imposition or waiver of penalties 

under certain circumstances. 

It is important to point out that this statement does not attempt to cover H.R 

3933 or the topic of offshore tax evasion in a comprehensive manner. Instead, we 

are providing very broad and general comments on the logistics of the legislation 

from an industry perspective. 

Effective Date is Unrealistic 

Payments made to a foreign financial institution or foreign nonfinancial entity 

after December 31, 2010 will be subject to these rules. The rules relating to offshore 

bank account tax reporting and compliance are already very broad and complex. 

H.R. 3933 would add significant complexity to existing rules that U.S. withholding 

agents would be expected to be able to implement within an insufficient period of 

time. In addition to the fact that U.S. withholding agents cannot realistically be expected to fully comply on such short notice with rules that would need to be further 

clarified and fine-tuned, there is no question that the proposed effective date does 

not provide sufficient time for the IRS to issue the required regulations, forms, or 

guidance that would be necessary for implementing the rules and for withholding 

agents to understand and implement them by the effective date. 

The legislation would require foreign payees to enter into agreements with the 

IRS and, presumably, a list of foreign payees that have entered into such agreements would be made available to U.S. payors in advance of the effective date. For 

many foreign financial institutions, much of the information that may be needed to 

comply with the proposal may not currently be collected or retained in their customer files—for instance, some institutions do not ask (because they are not required to ask) the questions necessary to determine whether a customer is a U.S. 

citizen. Thus, an entity that has decided to participate in the program would have 

to set up a process for collecting such information, and there is no assurance that 

it will be able to obtain all the information (for maybe hundreds or thousands of 

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customers) and have systems and controls ready in order to enter into an agreement 

with the IRS by December 31, 2010. Nevertheless, according to the legislation, 

payors would be obligated to withhold on every payment that is made to a foreign 

financial institution after the effective date in order to avoid penalties, without regard to whether the IRS list is completed within sufficient time for the payors to 

work with the information from the IRS. This would create a significant amount of 

confusion, including the possibility of a huge interruption in services and activities, 

particularly when payees that should not have been subject to withholding challenge 

the U.S withholding agent on numerous transactions. 

Further, H.R. 3933 would require U.S. withholding agents to engage in operational and technological overhauls, because their current systems do not collect all 

of the information needed to comply with the proposal. For instance, U.S. withholding agents do not currently track gross proceeds payments or payments of portfolio interests on foreign-targeted bearer instruments made to foreign financial institutions or foreign nonfinancial entities. Since this legislation would require that 

they track and withhold on such payments, they would need sufficient lead time to 

update their systems. Hence, the proposed effective date is not realistic. In fact, an 

effective date cannot be realistically set until Treasury has promulgated the necessary rules or other guidance that would clearly be needed for the implementation 

of the Legislation. 

Scope and Application Too Broad—Results in Unintended Consequences 

The scope and application of H.R. 3933 is overly broad and will lead to certain 

unintended consequences. Clearly, the U.S. does not intend to enact legislation that 

would disturb legitimate cross-border business activities, impair liquidity and access 

to vital capital, or interfere with existing treaty provisions. The permissible goal of 

enhancing information reporting that will help identify tax cheats can be attained 

without undesirable results that will negatively impact the U.S. economy. This could 

be done through legislation that clearly targets the areas of concern rather than 

broadly scoping in so many unrelated activities and taxpayers, thereby creating unworkable rules that result in significant costs to the industry and the economy as 

a whole. For instance, the legislation defines ‘‘withholdable payment’’ to include U.S. 

source short-term interest, which is treated as original issue discount under current 

law and not subject to withholding. Requiring foreign payees to enter into an agreement with the IRS or provide additional documentation may limit the sources of 

short-term funding, which banks and other U.S. companies depend on to conduct 

their business. ABA recommends that any final legislation include a provision exempting U.S. source short-term interests from the definition of withholdable payments. 

The legislation would impose unnecessary burdens on foreign affiliates of U.S. 

withholding agents. Such entities should be exempt from the application of the rules 

if they are already subject to the 1099 filing requirements. The legislation would 

require a foreign financial institution to enter into an agreement with the Treasury 

to provide certain information on U.S. account holders. Such an entity may also 

elect to be subject to the same information reporting requirements as a U.S financial institution (i.e., the 1099 reporting rules). Thus, a foreign financial institution 

that is already subject to the 1099 reporting rules (because it is a Qualified Intermediary or a subsidiary of a U.S. financial institution) and files information returns 

for its U.S. customers would still be required to go through this onerous exercise. 

In addition, the scope of the material advisor reporting requirement is so broad 

that it tends to capture all types of services, rather than just advisory services. For 

instance, would a U.S. withholding agent that provides a prospectus at a client’s request be considered a ‘‘material advisor?’’ Unless the rules are clear and specifically 

targeted, they would extend beyond the scope of the problem and pull in unintended 

activities that have no direct relationship with the goal of combating offshore tax 

evasion. 

Furthermore, H.R. 3933 would repeal current law foreign-targeted bearer bond 

provision. This provision, which allows U.S. issuers to issue debt obligations in bearer form as long as they are foreign-targeted, will negatively impact U.S borrowers 

because it will cause serious disruptions in their access to non-U.S. bond markets. 

The ABA suggests that the impact of this provision be given a lot of scrutiny and 

any reasonable alternatives be seriously explored before it is enacted in order to 

avoid unnecessary disruptions in the business activities of U.S. bond issuers. 

The legislation would also require the U.S. withholding agent to pierce the corporate veil, i.e., look through a foreign corporation to its underlying owners. Thus, 

a foreign corporation (except for a publicly traded corporation) that provides a W– 

8BEN would be withheld on (at the 30% rate) until and unless the corporation certifies that it has no substantial U.S. beneficial owners. Clear guidance needs to be 

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provided addressing, among other things, rules on how the U.S. withholding agent 

should go about verifying this certification or how often this certification would have 

to be made. For example, would the verification be based on a form provided by the 

foreign company on which the U.S. withholding agent would be allowed to rely without further investigation? If ownership changed, or the percentage of ownership 

changed, is the full responsibility on the company to provide an updated form to the 

U.S withholding agent, or will this provision require re-solicitation similar to the 

current W–8 rules? In addition to the fact that current systems will have to be 

changed significantly in order to apply withholding based on more than one criterion 

(foreign status based on a W–8) as required under current law, obtaining this information will initially be very difficult for U.S withholding agents. The information 

that is required by the legislation is not information that is used or needed by financial institutions. Thus, Congress must allow sufficient time for the industry to understand the implications, the staffing resources needed, the systems changes needed, the data to be collected, the internal controls to be implemented, etc., so that 

the burdens on withholding agents to identify U.S. ownership in foreign companies 

can reasonably be accomplished within a reasonable time frame at reasonable costs. 

Treasury/IRS Should be Given Flexibility in Administering the Rules 

As noted above, H.R. 3933 is too broad and does not clearly define some terms. 

Furthermore, the effective date of the Legislation would be incredibly difficult for 

the industry to accomplish. As the Treasury and IRS are aware, it took a significant 

amount of time for the current Qualified Intermediary rules to be developed and put 

in place by the IRS. We believe that it will take a significant amount of time for 

the Treasury to get this program in place, and because many issues and terms still 

have to be further addressed and clarified, it is important that Treasury be given 

a significant amount of flexibility in the administration of the new rules. For instance, as mentioned above, the requirement that payments made to a foreign corporation (that is not publicly traded) be subject to the 30% withholding unless such 

entity provides information on its U.S. owners requires clarifying guidance from the 

Treasury—which could include the development of a new form for this withholding 

provision. As the details are developed, Treasury may uncover problems that it will 

need to resolve, and additional flexibility will be important. 

Conclusion 

Mr. Chairman and Members of the Subcommittee, the ABA supports the purpose 

and goal of H.R. 3933. However, unless it is properly and correctly administered, 

the intended purpose and goal may not be achieved without undue burdens, significant costs, unnecessary confusion and possible interruptions or impairment of some 

of the business activities of U.S. financial institutions and their foreign counterparties. The ABA applauds the Committee’s efforts to combat offshore tax evasion and 

looks forward to working with the Committee on this important issue through rules 

that are targeted and specifically geared toward achieving the stated purpose and 

goal without undue burdens and costs to the industry. 

f 

Letter of the American Citizens Abroad (ACA) 

Dear Sirs: 

American Citizens Abroad (ACA), the voice of Americans overseas, is a non-profit, 

non-partisan all-volunteer organization that represents the interests of Americans 

living and working outside the U.S. to the Executive Branch of the U.S. Government, the U.S. Congress, and the U.S. Federal Judiciary to insure that Americans 

overseas are treated with equality and fairness. ACA keeps Americans overseas informed and supports their role as informal representatives of the United States. 

More can be learned about ACA through our Web site, www.americansabroad.org. 

We are submitting this written comment to the hearings on HR 3933 which will 

take place on November 5, 2009 and request that this submission be included in 

the record. These comments are addressed to the four members of Congress who 

jointly issued the Congressional press release of October 27, 2009 supporting HR 

3933, as the close coordination between the Senate Finance Committee and the 

Ways and Means Committee on this issue is apparent. 

American Citizens Abroad is dismayed to see the contents of the proposed Foreign Account Tax Compliance Act which, if passed, will create a backlash from 

foreign governments in response to what is openly referred to overseas as the financial imperialism of the United States. This legislation aims to significantly expand 

the reach of the Qualified Intermediary (QI) regulations. Whereas the current QI 

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regulations are concerned principally with investment accounts, the Foreign Account Tax Compliance Act would apparently cover all bank activity, including 

current accounts. As stated in the joint press release, ‘‘The Foreign Account Tax 

Compliance Act would force foreign financial institutions, foreign trusts, and foreign corporations to provide information about their U.S. accountholders, grantors, 

and owners, respectively. The nonpartisan Joint Committee on Taxation has estimated the provisions of the Foreign Account Tax Compliance Act would prevent 

U.S. individuals from evading $8.5 billion in U.S. tax over the next ten years.’’ This 

legislation would significantly enhance the authority of the Treasury in imposing 

the QI regulations and, in fact, requires foreign financial institutions to become policemen for the IRS. The administrative burden and costs associated with compliance will be significant for foreign financial institutions. And the associated legal 

risk is perceived as high. 

As stated by Chairman Rangel in the Congressional press release, ‘‘This bill offers 

foreign banks a simple choice—if you wish to access our capital markets, you have 

to report on U.S. account holders. I am confident that most banks will do the right 

thing and help to make bank secrecy practices a thing of the past.’’ In the same 

press release, Ways and Means Select Revenue Subcommittee Chairman Neal stated: ‘‘I believe this bill provides the Treasury Department with the tools it needs to 

crack down on those Americans hiding assets overseas.’’ 

This legislation assumes that banks will submit passively to the U.S. rules and 

that business will go on as usual. But this will not be the case. UBS in Switzerland 

has already announced that it will no longer accept as a client any American person 

residing in the United States. Many other foreign banks are adopting the same policy in a more discrete way. 

With regard to American citizens residing abroad, a group of major UK banks has 

already stated that they will close accounts of American citizens if the proposed QI 

regulations of January 1, 2010 become effective. We know for a fact that Swiss, 

Dutch and Spanish banks are refusing American citizens residing in their countries 

as clients and are closing accounts. Do not forget that there are over 5 million 

American citizens residing abroad. These people need to maintain foreign bank accounts in the country where they reside to make current payments receive salaries 

and hold their investments. The proposed legislation and reinforced QI regulations 

will make it all the more difficult for overseas Americans to maintain a bank account where they reside. 

Although ACA understands and sympathizes with the efforts of the U.S. Congress 

to close the door to tax cheats, you must remember that most Americans working 

and living overseas are not tax cheats but are performing significant services for the 

United States in representing American companies and products. The proposed legislation specifically discriminates against one category of U.S. citizens—those residing overseas. Imagine the uproar if Congress passed a law that all residents of New 

York would have their bank accounts submitted to special investigation, including 

the total of debits and credits in a year and the maximum balance in the account. 

Closing accounts is just one reaction to the U.S. overreach. The United States imposing its laws on foreign countries is creating a poisoned atmosphere which will 

hinder the positive development of international trade and finance. One Swiss bank 

has already publicly announced that it will no longer invest in any American securities for any of its clients. Since that announcement, which received substantial press 

coverage, and the explanation of U.S. tax legislation behind that statement, foreigners are already beginning to divest of U.S. stocks. The U.S. Tax Code states that 

if a foreigner owns more than $60,000 of U.S. securities at the time of his death, 

his estate becomes subject to U.S. inheritance laws. At a time when the United 

States should aim to attract foreign capital, its legislation will discourage investment in the United States. As the United States government depends on foreign investors to purchase a large share of Treasury bills, the threat of a significant divestment out of the United States is not to be taken lightly. 

While there is no doubt that the United States remains a financial powerhouse, 

it is no longer the only option for investment purposes. With the U.S. dollar devaluing against other currencies, many individuals are focusing investments in currencies other than the U.S. dollar. The United States risks losing investment flows 

into the country and compromising free flow of trade if people located outside of the 

United States view compliance as administratively too burdensome. Furthermore, 

the probable restriction on access to bank accounts overseas by American citizens 

and corporations will put a restrainer on the free development of trade. The new 

movement away from the U.S. stock market is just one form of backlash on American policies, and all of the publicity linked to the bank secrecy issue has made foreigners sensitive to the implications of any relationship with the United States. 

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1 Announcement 2009–51 and IR–2009–58, released June 5, 2009; Notice 2009–62, released 

August 7, 2009; IR–2009–84, released September 21, 2009; ‘‘Frequently Asked Questions’’ 

(FAQs) on the Voluntary Disclosure Initiative, posted on the IRS website May 6, 2009, and 

modified July 31, 2009; additional FAQs added June 24, 2009, and August 25, 2009, FAQs on 

the FBAR form, posted on the IRS website March 13, 2009, and modified July 1, 2009; and the 

Voluntary Disclosure Initiative, announced March 26, 2009. 

The United States also risks facing measures of reciprocity from foreign governments. In fact, the perspective of the United States on bank secrecy and fiscal paradises is very hypocritical. On November 2, 2009, a Financial Secrecy Index was been 

published for the first time by the International network for fiscal justice, co-founded by the South Alliance and the Declaration of Bern. Ranking number one in the 

overall index of secrecy is Delaware in the United States with a heavy weight in 

international transactions. In terms of secrecy, Delaware ranks on a par with the 

Cayman Islands, Bermuda and Dubai. 

The U.S. one way approach has also been illustrated by the fact that when Mexico 

asked for United States assistance in providing the names of Mexican citizens with 

money hidden in the United States, the United States refused to collaborate. The 

OECD countries are also building up forces to obtain transparency of their nationals. This movement will extend to money held in the United States as well as to 

other foreign banks. 

American Citizens Abroad fears that the current Congressional approach to stop 

the few thousand American citizens that evade taxes by imposing its laws on other 

nations risks to open up Pandora’s box, to create suspicion and friction with many 

other governments and to have a long-term negative impact on U.S. trade and commerce in general. The costs to the United States could far exceed the $850 million 

annual revenue projected to be collected by the Joint Committee on Taxation due 

to the proposed HR 3933. Right now the United States should be encouraging more 

foreign trade to increase the nation’s exports, not develop legislation reaching beyond its borders, which will hinder that free movement of trade. 

American Citizens Abroad supports Congress in its efforts to eliminate tax evasion, but asks that the current legislation be revised and rewritten so as not to discriminate against Americans living and working abroad and not to negatively impact continued foreign investment in the US. ACA feels it imperative to warn Congress of the serious risks for the United States related to the current drafting of 

the Foreign Account Tax Compliance Act. 

We thank you for your attention. 

Sincerely yours, 

Marylouise Serrato Jacqueline Bugnion 

Executive Director Director 

cc: Americans Abroad Caucus 

The Honorable Timothy F. Geithner, Secretary of the Treasury 

The Honorable Paul Volcker, Chairman, Presidential Task Force on Tax-Code 

Review 

f 

Statement of the American Institute of Certified Public Accountants 

The American Institute of Certified Public Accountants thanks the House Ways 

and Means Committee for the opportunity to submit this statement for the hearing 

on November 5, 2009, on foreign bank account (Form TD F 90–22.1, Report of Foreign Bank and Financial Accounts (FBAR)) reporting and related tax compliance 

issues. 

The AICPA is the national professional organization of certified public accountants comprised of approximately 360,000 members. Our members advise clients of 

federal, state and international tax matters, and prepare income and other tax returns for millions of Americans. Our members provide services to individuals, notfor-profit organizations, small and medium-sized business, as well as America’s largest businesses. 

General Comments 

We thank the Internal Revenue Service (IRS) and the Department of Treasury 

(Treasury) for the various announcements 1 this year, providing FBAR form filing 

relief and extending the 2008 (and prior years) FBAR form due date for certain persons. We also appreciate the continuing dialogue we have had over the past several 

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years with various government officials responsible for the FBAR form and the Voluntary Disclosure Initiative. 

However, many of our members remain concerned about the potential breadth of 

the newly revised form, effective for the 2008 calendar year (i.e., filed starting on 

January 1, 2009), and are confused as to the specific application of the filing requirements to their clients’ circumstances. Because of the substantial penalties potentially applicable to taxpayers who do not comply with the FBAR form filing requirements and the lack of regulations and written guidance (other than the form 

instructions), we request written guidance addressing the issues discussed below. 

Specific Comments 

Based on member feedback on the FBAR form over the past few years, the AICPA 

suggests the following (elaborations on each are contained later in the letter): 

1. Taxpayers should be assured that until definitive FBAR regulations and rulings are issued, they can rely upon information on the IRS website, including 

FAQs and similar information, and Internal Revenue Code (IRC) definitions in 

complying with the FBAR form requirements. 

2. The FBAR form should be considered timely filed when timely mailed (or efiled), rather than when timely ‘‘received,’’ similar to the ‘‘mailbox’’ rule for filing all tax and information returns. 

3. The FBAR form due date should be changed from June 30 to October 15, or 

an automatic extension should be available for October 15 filing. 

4. The FBAR form should continue to apply only to U.S. persons, but if it is decided that non-U.S. persons must file FBAR forms, such requirement should 

be adopted prospectively and with clear definitions. 

5. An FBAR form filing requirement with respect to foreign accounts held by a 

trust should be imposed only on U.S. settlors/transferors and U.S. trustees of 

the trust. Also, any U.S. person who is considered to have control of the trust 

as a grantor under IRC Section 679 should be required to file an FBAR form 

if the trust has a foreign account. If it is nonetheless decided that additional 

reporting is required by foreign trust beneficiaries, only trust beneficiaries who 

receive a distribution from a foreign trust should be required to file an FBAR 

form, reporting the receipt of the distribution. 

6. When Treasury and IRS clarify the rules regarding a comingled account for 

FBAR form filing purposes, we recommend the FBAR form filing requirement, 

if any, be limited to the current year and applied prospectively, rather than 

retroactively, and that no FBAR form reporting be required for foreign financial accounts owned by any comingled account that is itself an entity and a reportable financial account. 

7. When Treasury and IRS clarify the rules regarding which taxpayers are considered to have signature authority over a foreign bank or financial account for 

FBAR form filing purposes, we recommend that the FBAR form filing requirement, if any, be limited to the current year and applied prospectively, rather 

than retroactively. 

8. Regarding delinquent FBAR forms, Treasury and IRS should provide guidance 

and relief regarding their filing, including reasonable cause for waiver of penalties. Guidance and relief are needed (consistent with FAQ# 9, posted on the 

IRS website on May 6, 2009) for those who reported all their income and paid 

all their taxes on the foreign accounts, but did not file FBAR forms, as well 

as for those with unreported income and taxes due who also did not file FBAR 

forms. 

9. The IRS Office of Professional Responsibility (OPR) should work with the tax 

practitioner community in formulating more comprehensive guidance for FBAR 

form purposes before the practitioner due diligence guidance under Circular 

230 goes into effect. 

Each of the above comments is explained in further detail below. 

1. Taxpayers should be assured that, until definitive FBAR regulations and rulings are issued, they can rely upon information on the IRS website, including 

FAQs and similar information, and IRC definitions in complying with the 

FBAR form requirements. 

If information on the IRS website is deleted or superseded prior to the issuance 

of more formal guidance, taxpayers should not be penalized for relying on information on the IRS website at the time they, or their advisors, access it. 

IRS and Treasury should establish a clear procedure for requesting FBAR form 

rulings (authorized by 31 C.F.R. Section 103.56(g)) that is similar to the existing 

ruling process/procedures for requesting tax private letter rulings (PLRs) from the 

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IRS, and the IRS should release sanitized FBAR form rulings similar to what is 

done with tax PLRs. 

Also, IRS and Treasury should use terms and definitions from the IRC with which 

taxpayers and practitioners already are familiar rather than developing a new set 

of definitions for FBAR form purposes. 

2. The FBAR form should be considered timely filed when timely mailed (or efiled), rather than when timely ‘‘received,’’ similar to the ‘‘mailbox’’ rule for filing all tax and information returns. 

If the ‘‘mailbox’’ rule is not adopted for FBAR form purposes, all IRS websites 

(and websites of U.S. embassies and consulates), publications, instructions, responses, and references to the filing of an FBAR form should be clarified to say ‘‘received by’’ rather than ‘‘filed by’’ or ‘‘mailed by.’’ The ‘‘received by’’ rule, as it currently stands, is a trap for the unwary since it differs from the filing requirements 

that apply to all tax and information return filing rules. 

IRS and Treasury should allow and encourage taxpayers to efile the FBAR form. 

A grace period of at least 10 days should continue to apply for FBAR form filings 

because there is no tax due. 

We recommend proof of timely filing include: (1) hand-delivery of the FBAR form 

with receipt of a date stamp at an IRS district office, and (2) use of USPS certified 

receipts or other proof of mailing alternatives available for tax forms. 

We also suggest that a street address and phone number (rather than just the 

current P.O. Box) be added to the instructions to enable a taxpayer (including a 

non-resident of the U.S.) to use an overnight delivery service to deliver the FBAR 

form to the IRS. 

3. The FBAR form due date should be changed from June 30 to October 15, or 

an automatic extension should be available for October 15 filing. 

Taxpayers with the financial resources to purchase offshore investments or business interests are very likely to request an extension of time to file their income 

tax returns. Complete filing information from foreign sources is rarely available 

until mid-summer or later. As a result, the amount and details of offshore accounts 

are often not known until after June 30. 

Taxpayers often do not have all the information (such as Schedules K–1 and footnotes thereto) that may be needed to complete the FBAR form by June 30. Many 

investors do not receive their Schedules K–1 until well after June 30 (many are received in September). Furthermore, if a taxpayer’s investment advisor purchases a 

foreign investment, such as a hedge fund, on behalf of the taxpayer, the investor 

may not be aware of this except to the extent that a short entry is included on a 

monthly statement. People who utilize investment advisors typically have multiple 

accounts, and each account has a monthly statement that can run tens of pages. 

The investor may, therefore, have no idea of the new investment in the foreign 

hedge fund and the taxpayer’s tax preparer may not be made aware of this until 

receipt of the Schedule K–1 for the initial year of investment, which will in many 

cases be well after June 30. 

Few taxpayers understand the full scope of the phrase ‘‘foreign financial account’’ 

or the concept of indirect (constructive) ownership. Thus, they are unlikely to inform 

their tax preparer of their need to file the FBAR form or to provide all information 

necessary to file by June 30. Because the definition of a foreign financial account 

is a complex determination, especially if indirect ownership is involved, preparers 

are more likely to discover that there is indirect ownership of a foreign financial account when they are preparing the income tax return for the individual later in the 

year. For example, an individual may own a controlled foreign corporation (CFC) 

that might have a foreign bank account; however, the individual generally files the 

Form 1040 after June 30 because of Schedules K–1 that are not yet received or the 

inability to obtain the CFC information for the individual’s Form 5471 by June 30. 

The tax practitioner might not even be aware of the CFC or be in a position to inform the client of the need to file an FBAR form until well after June 30. 

No other tax form is due on June 30, so many taxpayers are not aware of, or accustomed to, the need to provide their tax preparers with information by this June 

30 due date. In addition, taxpayers are not accustomed to having a filing requirement for which there is no extension. It also takes a lot of time for many taxpayers 

to gather the information required to prepare the FBAR form. For the above reasons, and in light of the potentially significant penalties involved, the FBAR form 

due date should be on or after October 15 to conform to the extended due date for 

the vast majority of individuals. This would also ensure that the FBAR form due 

date is after the extended filing deadline for calendar year-end entities, so most taxpayers will have reviewed their prior calendar year filing requirements and disclosures to ensure that complete and accurate FBAR forms are filed rather than havjoloto on DSK67XMDP1PROD with HEARING

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ing to file late or amended FBAR forms due to Schedules K–1 received after June 

30. 

4. The FBAR form should continue to apply only to U.S. persons, but if it is decided that non-U.S. persons must file FBAR forms, such requirement should be 

adopted prospectively and with clear definitions. The policy provided in Announcement 2009–51, adopting for 2008 and prior-year 

FBAR form filings the definition of ‘‘in and doing business in the U.S.’’ that was 

provided in the pre-October 2008 instructions for the FBAR form, should be adopted 

for 2009 FBAR form filings and all future years. The FBAR form should not apply 

to those meeting the IRC section 7701(b) definition of a non-U.S. person. Special 

elections to be treated as a U.S. person for non-FBAR form purposes and treatybased return filings should not require an FBAR form filing. 

Despite our urging to restrict FBAR forms to U.S. persons, if Treasury and IRS 

decide to require non-U.S. persons to file FBAR forms, we encourage careful thought 

and clear definitions, and that such treatment be adopted only prospectively. 

5. An FBAR form filing requirement with respect to foreign accounts held by a 

trust should be imposed only on U.S. settlors/transferors and U.S. trustees of 

the trust. Also, any U.S. person who is considered to have control of the trust 

as a grantor under IRC Section 679 should be required to file an FBAR form 

if the trust has a foreign account. If it is nonetheless decided that additional 

reporting is required by foreign trust beneficiaries, only trust beneficiaries who 

receive a distribution from a foreign trust should be required to file an FBAR 

form, reporting the receipt of the distribution. 

Beneficiaries of a foreign or domestic trust should not be required to file an FBAR 

form. Beneficiaries will in most cases not have access to a trust’s foreign account 

information. Beneficiaries often are not aware of, or able to calculate, their percent 

interest in trust current income and assets (and the trustees may not share that 

information) so it is often difficult or impossible for many beneficiaries to complete 

an accurate, timely, and complete FBAR form. In some instances, a U.S. person may 

not even be aware he or she is a beneficiary of a trust until a distribution is made. 

Form 3520 is required to be filed by U.S. persons receiving distributions from foreign trusts. Likewise, beneficiaries who receive a distribution from a domestic trust 

will receive a Form 1041, Schedule K–1 and are required to include any income arising from the distribution on their individual income tax return. Therefore, beneficiaries already are required to report any distributions, and income included in 

such distributions, from trusts. A U.S. settlor or transferor or a U.S. trustee to a 

trust which owns a foreign bank account is much more likely to have access to and 

knowledge of the trust’s assets than the beneficiary. 

If it is nonetheless decided that additional reporting is required by foreign trust 

beneficiaries, despite our recommendation and concerns mentioned above, only beneficiaries who receive a distribution from a foreign trust should be required to file 

an FBAR form, reporting the receipt of the distribution. This provides reporting 

when there is income involved and is easier and simpler to administer and with 

which to comply. If there is no distribution from the trust, an FBAR form should 

not be required unless the person is considered to have control of the trust as a 

grantor under IRC Section 679. 

In all cases, U.S. settlers/transferors, and trustees of trusts with a foreign account 

should be required to file an FBAR form. 

6. When Treasury and IRS clarify the rules regarding a comingled account for 

FBAR form filing purposes, we recommend the FBAR form filing requirement, 

if any, be limited to the current year and applied prospectively, rather than 

retroactively, and that no FBAR form reporting be required for foreign financial 

accounts owned by any comingled account that is itself an entity and a reportable financial account. 

We appreciate the IRS Notice 2009–62 delay until June 30, 2010, for the FBAR 

form filing for the 2008 and prior-year calendar year FBAR form filings for persons 

with signature authority over, but no financial interest in, a foreign financial account, and for persons with a financial interest in, or signature authority over, a 

foreign comingled fund. We note that both issues continue to concern our members. 

It would be extremely difficult and an administrative burden for taxpayers to go 

back multiple years and research whether an account would have required an FBAR 

form filing and gather the information required. The new definitions and clarifications should apply only prospectively. 

We also suggest that when taxpayers own an interest in a foreign pooled investment account that is an entity, such as a mutual fund or hedge fund that is itself 

a reportable financial account for FBAR form purposes, guidance clarify that FBAR 

form reporting is not required with respect to any financial accounts owned by the 

foreign pooled investment account. 

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1 i.e. the repeal of the rules permitting the issuance of foreign-targeted bearer bonds in compliance with the requirements of the Tax Equity and Fiscal Responsibility Act of 1982. 

7. When Treasury and IRS clarify the rules regarding which taxpayers are considered to have signature authority over a foreign bank or financial account for 

FBAR form filing purposes, we recommend that the FBAR form filing requirement, if any, be limited to the current year and applied prospectively, rather 

than retroactively. 

The signature authority requirement has created significant uncertainty and concern for entities who have assigned various rights over customers’ accounts to employees within their organizations. Guidance on this should be limited to the current 

year and applied prospectively, rather than retroactively. 

8. Regarding delinquent FBAR forms, Treasury and IRS should provide guidance 

and relief regarding their filing, including reasonable cause for waiver of penalties. Guidance and relief are needed (consistent with FAQ# 9, posted on the 

IRS website on May 6, 2009) for those who reported all their income and paid 

all their taxes on the foreign accounts, but did not file FBAR forms, as well as 

for those with unreported income and taxes due who also did not file FBAR 

forms. 

The Voluntary Disclosure Initiative served its purpose in bringing more taxpayers 

into the system. We encourage IRS and Treasury to continue that program and 

work with taxpayers to increase compliance in this area without unnecessarily 

harsh civil or criminal penalties for coming forward. We also request an extension 

of the relief provided by the IRS in FAQ #9 regarding delinquent FBAR forms when 

all income was reported and taxes paid. Finally, we urge the IRS and Treasury to 

provide an adjustment of the penalty when the amount of unpaid tax on the previously unreported income from the foreign bank account is less than the penalty. 

9. The IRS Office of Professional Responsibility (OPR) should work with the tax 

practitioner community in formulating more comprehensive guidance for FBAR 

form purposes before the practitioner due diligence guidance under Circular 230 

goes into effect. 

Although we appreciate the importance of due diligence in preparing tax and information returns, in view of the significant open questions and lack of clear definitions in the FBAR form context, in combination with the potentially onerous penalties involved, we recommend that OPR work with the tax practitioner community 

in formulating more comprehensive guidance before the due diligence guidance goes 

into effect. 

* * * * * 

We welcome the opportunity to discuss our comments further with you or others 

at the House Ways and Means Committee Select Revenue Subcommittee. 

f 

Jo Van de Velde, letter 

Dear Chairman Rangel and Chairman Neal, 

We, Euroclear Bank, welcome the opportunity to comment on the proposed Foreign Account Tax Compliance Act of 2009 (‘‘the Bill’’). 

Euroclear Bank is an International Central Securities Depositary (ICSD), and the 

world’s largest clearance and settlement system for internationally traded securities. 

We serve close to 1,500 major financial institutions located in more than 80 countries across the globe. Securities are accepted for deposit into Euroclear Bank if they 

are, or are expected to be, actively traded in the international markets or held in 

quantity by our clients. We have provided settlement and related securities services 

for cross-border transactions involving Eurobonds for more than 40 years. Over this 

time, we have acquired considerable experience in dealing with international products, financial institutions, and investors. The provision of an efficient withholding 

tax relief service is an important part of our extensive range of custody services: 

we are a therefore a Qualified Intermediary (QI) for U.S. tax purposes and have assumed primary Non-Resident Alien and backup withholding responsibility. 

We have seen the representations on the proposed new reporting and withholding 

obligations for Foreign Financial Institutions (FFIs) and the TEFRA repeal 1 made 

by market associations such as the International Capital Market Association 

(ICMA), the International Capital Market Services Association (ICMSA), the European Banking Federation (EBF) and the Securities Industry and Financial Markets 

Association (SIFMA). We confirm the prevailing sentiment that the Bill addresses 

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valid concerns but may be overlooking both the implementation complexity and the 

market impacts of the proposed changes. 

Section 101, Information Reporting and Withholding by Foreign Financial 

Institutions 

The proposed new reporting and withholding regime for FFIs contemplated by 

Section 101 of the Bill is of some concern to us (and indeed the other entities of 

the Euroclear group). Our detailed formal submissions on this point are being made 

through the European Banking Federation, but on a high level we would ask you 

to take the following considerations into account: 

• Timeframe: Implementing Section 101 will be very complex and thus very resource-consuming for industry players. We urge you to give the Treasury Department the necessary powers and time to propose a workable implementation plan. We consider that at least two years will be required from the time 

that definitive Treasury regulations are adopted; • Proportionality: Even those already acting as QIs today will face significant 

additional system developments, running and compliance costs, which may 

discourage them from entering an FFI agreement if the Bill is not carefully 

implemented in order to limit the additional burden to the smallest extent 

necessary to capture U.S. account information. On this note we would: 

(i) ask you to consider removing gross proceeds from the definition of 

‘‘withholdable payment’’ in proposed Sec.1473(1). Most FFIs simply do not 

have the systems in place to withhold on such payments (even QIs are not 

currently required to withhold on such payments). The inclusion of ‘‘gross 

proceeds’’ thus renders the FFI agreement more onerous than the existing 

QI agreement. This makes it less likely that FFIs will sign an FFI agreement, which we understand to be contrary to the aim of the legislation. 

Moreover, under the proposed information reporting requirements the IRS/ 

Treasury will obtain the requisite information on U.S. accounts (and persons): we consider therefore the burden created by the inclusion of gross proceeds to be disproportionate to the aim of the Bill; 

and 

(ii) propose that the Treasury Department be given the necessary flexibility to 

craft regulations which exclude certain payments and entities from the 

scope of the Act where there is a low risk of tax avoidance. 

Section 102, Repeal of Certain Foreign Exceptions to Registered Bond Requirements 

Our standpoint as ICSD gives us a unique overview of bond issuances in the 

international capital markets. We can see that the market has overwhelmingly 

adopted the bearer legal form as the preferred form for security issuance, moving 

from definitive bearer instruments at the market’s inception to a custody structure 

where global bearer notes are now immobilised with ICSDs such as Euroclear Bank 

and settle through a book-entry system. Approximately 80% of the securities held 

in Euroclear Bank have been issued in global immobilised bearer form under the 

TEFRA D rule, regardless of the nationality of the issuer (U.S. or non-U.S.). 

In the period from 2008–2009, admittedly a very difficult time for both the markets and the issuers, it may be of interest for you to note that as much as 85% of 

all Eurobond issues brought to the market was in immobilised bearer form. 

The issuance of global immobilised bearer bonds is thus the norm in the market 

and represents a very important and efficient funding vehicle for all issuers, U.S. 

or non-U.S. 

The proposed elimination of the foreign-targeted bearer bond exceptions, on which 

the market currently is based, would inevitably lead to wide-spread market disruption and would impose substantial costs and additional complexities on market actors in order to comply with the new requirements (different legal documentation, 

additional registration services, additional tax certification and tax processing procedures, etc). 

Given that these bond issues are foreign-targeted, that they are only bearer in a 

very technical sense, that the mechanisms in place under the TEFRA rules already 

provide safeguards against offering to U.S. persons, and that under the proposed 

Section 101 regime the Treasury/IRS should obtain enhanced information on investments held by U.S. persons, we consider that the TEFRA repeal may produce marginal benefits in terms of reducing U.S. tax avoidance compared with the disruption 

it may cause to the Ö8 trillion Eurobond market. 

In light of these considerations, we recommend that you reconsider the repeal of 

the foreign-targeted bearer bond exceptions (which exceptions appear to have helped 

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1SIFMA brings together the shared interests of securities firms, banks, and asset managers. 

SIFMA’s mission is to promote policies and practices that work to expand and perfect markets, 

foster the development of new products and services, and create efficiencies for member firms, 

while preserving and enhancing the public’s trust and confidence in the markets and the industry. SIFMA works to represent its members’ interests locally and globally. It has offices in New 

York, Washington D.C., and London and its associated firm, the Asia Securities Industry and 

Financial Markets Association, is based in Hong Kong. 2 A companion bill, S. 1934, was introduced on the same day by Senate Finance Committee 

Chairman Max Baucus (D–MT) and Senator John Kerry (D–MA). Also on October 27, an accompanying technical explanation prepared by the Staff of the Joint Committee on Taxation (the 

JCT Report) was released. 

maintain a level-playing field in terms of access to the international capital markets). 

Should the repeal of these exceptions be nevertheless adopted, Euroclear Bank 

supports the recommendation made by other industry groups that Congress requests a report regarding the potential consequences of the repeal of the foreigntargeted bearer bond exceptions. We also recommend that the final legislative provision limits clearly the repeal to securities issued by U.S.-incorporated entities, in 

order to avoid uncertainty over the extra-territorial application of U.S. tax laws and 

to avoid extending market disruption to non-U.S. issuers. If it were felt necessary 

to cater for the needs of U.S. issuers (while also recognising the global immobilised 

form in which most bearer bonds are now held), you might consider granting the 

Treasury Department discretion to issue regulations to determine the circumstances 

in which bearer debt held in a clearing system may be considered registered for U.S. 

tax purposes. 

We thank you for the opportunity to voice our concerns on the proposed legislation 

if it were to be passed in its current form. We hope the comments and the recommendations presented above will be considered and provide useful guidance in 

the drafting of the definitive Bill. 

Yours sincerely, 

Jo Van de Velde 

Managing Director, Head of Product Management 

Euroclear SA/NV 

f 

The Securities Industry and Financial Markets Association, letter 

Dear Chairman Neal and Ranking Member Tiberi, 

The Securities Industry and Financial Markets Association (SIFMA) 1 welcomes 

the opportunity to submit comments on the Foreign Account Tax Compliance Act 

of 2009, H.R. 3933 (the Bill), which was introduced on October 27, 2009, by House 

Ways and Means Committee Chairman Charles B. Rangel (D–NY) and House Ways 

and Means Select Revenue Measures Subcommittee Chairman Richard E. Neal (D– 

MA).2

SIFMA shares the objectives of the bill’s sponsors, and the Obama Administration, in improving offshore tax compliance. SIFMA also welcomes the fact that the 

Bill is responsive to a number of important concerns that were expressed in its earlier comment letter, dated August 31, 2009, regarding the related offshore tax compliance proposals included in the General Explanation of the Administration’s Fiscal 

Year 2010 Revenue Proposals. 

This letter comments on several aspects of the Bill primarily relating to the expansive new information reporting and withholding regimes that it would impose. 

These regimes would create a broad new definition of foreign financial institution 

(FFI) and require that these FFIs enter into agreements with the IRS and provide 

annual information reporting in order to avoid a new U.S. withholding tax on U.S. 

source dividends, interest, and other FDAP income, as well as U.S.-related gross 

proceeds. They would also impose related information reporting and withholding requirements in respect of payments made to non-financial foreign entities (FEs). 

In evaluating the Bill, SIFMA has proceeded on the basis of five core observations: 

• The principal goal of the Bill, which SIFMA supports, is to collect tax from 

U.S. taxpayers who have been evading their responsibilities by investing 

through FFIs and FEs that have thus far been generally free of reporting obligations to the IRS. 

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3Section 101(d) of the Bill. 

4For example, the new basis reporting rules of sections 6045(g) & (h), 6045A, and 6045B were 

first proposed by the Joint Committee on Taxation in its August 3, 2006, report on Additional 

Options to Improve Tax Compliance. They were eventually enacted into law in October 2008. 

Thus far, the Treasury Department and the IRS have not issued proposed versions of any of 

Continued 

• To achieve this goal, the Bill would impose the risk of a punitive withholding 

tax on a very broad class of U.S.-related payments (including gross proceeds) 

to a broad class of foreign investors, unless relevant FFIs and FEs agree to 

provide information to the IRS regarding their U.S. account holders and owners. Accordingly, the withholding tax would function as a hammer to encourage information reporting. • Although the withholding tax would hopefully not need to be utilized, if it 

were actually collected, it could cause a decline in inbound investment that 

would significantly increase the global financing costs of U.S. issuers (as described in more detail below). • Even if the Bill functioned as planned, and the withholding tax were not actually collected, the new information reporting and withholding regimes would 

require the development and implementation of extensive new compliance 

systems by FFIs, FEs, and withholding agents. • In order to achieve the Bill’s goals without causing market disruption, financial institutions and other market participants will need clear statutory rules 

as well as supporting legislative history that explains the rules’ context and 

intended meaning. They will also need precise regulatory guidance that is 

published in advance of the time that both the information reporting and 

withholding requirements of the Bill would take effect. 

SIFMA looks forward to working with the Congress and the Treasury Department 

in crafting the details of the Bill and its accompanying regulatory implementation. 

In the remainder of this letter, SIFMA proposes the following specific comments on 

the Bill, which are intended to assist the Congress and the Treasury Department 

in this effort: 

(1) Delay the effective date of the information reporting and withholding requirements. 

(2) Exclude short-term obligations from the withholding tax. 

(3) Defer repeal of the foreign-targeted bearer bond exception until it can be 

studied further. 

(4) Simplify and extend the grandfather rule for existing registered debt. 

(5) Provide a grandfather rule for existing securitization vehicles. 

(6) Exclude U.S. payors and Schedule K–1 filers from the FFI definition. 

(7) Provide workable procedures for reliance on certifications by FFIs. 

(8) Establish commercially reasonable standards for identifying U.S. accounts 

and foreign entities with substantial U.S. ownership. 

(9) Provide a uniform 10 percent test for substantial U.S. owner status. 

(10) Revise carve-outs for corporations and tax-exempt entities. 

(11) Exempt separate depository accounts not exceeding $50,000. 

(12) Allow simplified Form 1099 reporting by FFIs. 

(13) Allow FFIs to receive refunds or credits of the withholding tax in additional cases. 

(14) Coordinate with other withholding and information reporting provisions. 

(15) Provide for further limits to the definition of withholdable payment. 

(16) Address tiering issues. 

Comment 1: Delay the Effective Date of the Information Reporting and 

Withholding Requirements. 

The Bill should provide adequate time for the development of the extensive regulatory guidance and compliance systems that will be necessary to implement the new 

information reporting and withholding regimes.3

The information reporting and withholding provisions of the Bill applicable to 

FFIs and FEs are proposed to be effective for payments made after December 31, 

2010. SIFMA believes that this proposed effective date should be substantially delayed. These provisions of the Bill are by their nature not self-implementing, and 

will require the Treasury Department and the IRS to develop detailed and complex 

regulations, reporting agreements, certification forms, and other guidance. Based on 

recent experience, it is reasonable to expect that it will take more than one year 

for a proposed version of the implementing regulations to be produced and that substantial comments will be submitted on the proposed regulations by the affected 

parties.4 In this regard, the regulatory process will need to take into account the 

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the regulations that will be necessary to implement the rules. Unless otherwise indicated, section references herein are to the Internal Revenue Code of 1986, as amended (the Code). 5We note, for example, that the IRS did not provide a first draft of the much needed Model 

Qualified Intermediary Agreement until January 1999, despite the fact that the qualified intermediary (QI) regime was first introduced in proposed regulations issued in April 1996 and that 

final regulations were issued in October 1997. The absence of this Model Qualified Intermediary 

Agreement and the fact that necessary refinements to certain critical sections of the final regulations occurred after 1997 caused the effective date of the final regulations to be postponed 

multiple times to, eventually, January 2001. As another example, we note that the IRS introduced temporary regulations in November 1987 that required payors to send backup withholding notices (B–Notices) to payees informing them that they had provided an incorrect taxpayer identification number and that they would be subject to backup withholding tax if this 

failure were not timely rectified. The IRS did not provide payors with a model B–Notice, however, until August 1989. 6Proposed section 1473(1). 

large number of FFIs, FEs, and withholding agents who will be directly affected by 

the regulations (including a significant number of entities that have not previously 

had occasion to deal with U.S. tax compliance rules), as well as the many companies, investors, and depositors who will be indirectly affected. Moreover, once a substantial comment process has run its course and implementing regulations are finalized, it is reasonable to expect that the IRS will need a substantial amount of time 

to draft and then enter into the required reporting agreements with FFIs.5 Finally, 

but most importantly if the goals of the Bill are to be achieved, FFIs, FEs, and withholding agents will need a substantial amount of time to develop and implement the 

necessary compliance systems to perform their duties under the agreements and the 

Bill. 

The Bill will require an unprecedented level of U.S. tax information gathering and 

reporting by foreign entities that have not traditionally engaged in such efforts. 

Even for a seasoned U.S. financial institution, expanding existing U.S. tax information reporting systems to satisfy the requirements of the Bill would be time consuming and expensive. For an FFI that has no existing U.S. tax information reporting systems, complying with the requirements of the Bill will be a monumental task, 

which will require the hiring of numerous additional employees, the creation of extensive new information technology systems, and the training of large numbers of 

current workers. The ability of FFIs to engage in such efforts on a short time frame 

(or, indeed, at all) cannot be presumed. 

SIFMA believes that the implementation of the necessary compliance systems for 

the information reporting and withholding regimes will take at least two years from 

the date that all applicable regulatory guidance is finalized (including the publication of a model reporting agreement). Therefore, SIFMA recommends that the new 

information reporting and withholding regimes not enter into force until at least 

three years after the date of enactment of the Bill. In order to plan for unforeseen 

issues and avoid market disruption, SIFMA also believes that it is critical that the 

Bill authorize the Secretary of the Treasury to postpone the effective date of the information reporting and/or withholding regimes as needed. The delay in the effective 

date of the withholding provisions will also benefit the IRS, which will be required 

to establish and implement a system to provide refunds and credits for the withholding tax. 

Comment 2: Exclude Short-Term Obligations from the Withholding Tax. 

An exception from the withholding provisions of the Bill should be provided for 

short-term obligations, in order not to disrupt the ability of U.S. issuers to obtain 

funding from foreign investors that have historically invested in the United States 

for short-term liquidity purposes.6

Many large U.S. financial institutions and other U.S. issuers derive billions of dollars of funding through the issuance of short-term debt instruments (such as commercial paper) in foreign markets, to entities that would be treated as FFIs. These 

funding sources are relied on, in part, to support substantial domestic lending to 

large and small businesses, as well as to mortgagors and credit card holders. To the 

extent that these foreign lenders receive little or no other U.S. source income, they 

will likely not be willing to enter into information reporting agreements with the 

IRS. It can also be expected that they will be unwilling to incur any risk of a 30 

percent withholding tax on the principal amount of their investment, which the Bill 

would create. As a consequence, such investors could substantially decline as a 

funding source for U.S. financial institutions and other U.S. issuers. 

SIFMA believes that the Bill should carefully balance its tax compliance objectives against the need for U.S. financial institutions and other U.S. issuers to readily finance themselves. Although many U.S. issuers may be able to replace the affected borrowings with funds from other sources (at possibly higher rates), the 

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7For example, interest and original issue discount on an obligation with a term of 183 days 

or less are generally exempt from current nonresident gross income and withholding tax. See 

section 871(g)(1)(B)(i). 8Sections 102(d) and 101(d)(2)(A) of the Bill. 

weaker or less creditworthy U.S. issuers may suffer funding shortfalls. In the case 

of U.S. financial institutions, such shortfalls could significantly limit their lending 

into the domestic market or even challenge their viability. For this reason, SIFMA 

suggests that the definition of a withholdable payment contain an exclusion for interest and gross proceeds payments made in respect of obligations of U.S. issuers 

with a term not exceeding 183 days. Such an exclusion would be consistent with 

longstanding exemptions for short-term debt instruments in other provisions of the 

Code’s exemptions which reflect a long-held belief that such instruments do not lend 

themselves to tax evasion.7 In this regard, SIFMA believes that FFIs and FEs will 

be powerfully motivated to comply with the information reporting provisions of the 

Bill because the potential withholding tax would still apply to longer term obligations, Treasury securities, U.S. equity securities, and other obligations that pay U.S. 

source income. To allay any concerns that FFIs or FEs could abuse a short-term obligation exception by continuously rolling over short-term obligations, SIFMA would 

suggest that the Bill provide that a debt instrument would be considered short-term 

only if payments thereon would qualify under section 871(g) as exempt from nonresident gross income and withholding tax (for which the same abuse considerations 

apply). As an alternative, and at a minimum, SIFMA believes that the Secretary 

of the Treasury should be given authority to identify situations where short-term 

obligations may be exempted from the withholding tax because they do not create 

a significant opportunity for abuse. 

Comment 3: Defer Repeal of the Foreign-Targeted Bearer Bond Exception 

Until It Can Be Studied Further. 

The consequences of the repeal of the foreign-targeted bearer bond exception should 

be subjected to further study before such exception is repealed, in order to prevent 

restricting U.S. issuers’ access to non-U.S. markets. Additionally, the disparity between the repeal’s effective date and the effective date of the new information reporting and withholding rules should be eliminated. 8

Since 1982, the TEFRA rules generally have allowed U.S. issuers to issue debt 

obligations in bearer form, so long as the obligations are issued under arrangements 

reasonably designed to ensure their sale to non-U.S. persons (the foreign-targeted 

bearer bond exception). The Bill would repeal this exception to the registration requirement. 

SIFMA believes that the repeal of the foreign-targeted bearer bond exception may 

restrict access to a number of non-U.S. markets in a manner that would adversely 

affect U.S. borrowers. In a number of markets, securities traditionally have been 

issued in bearer form. In some of those markets (e.g., Japan), it may not be feasible 

to issue securities in registered form, or there may not be sufficiently well developed 

mechanisms in place to permit the effective collection of Form W–8s. Thus, U.S. 

issuers would be unable to issue debt in such markets under the Bill, or would be 

able to do so only in a manner that causes interest on the obligations to be subject 

to withholding tax at a 30 percent rate, effectively precluding them from raising 

funds in these markets. In addition, even in markets in which it is feasible to issue 

securities in registered form, the transition to such issuances may create substantial 

market disruptions if it is not the current market norm. 

In this regard, it is worth noting that most bearer bonds are currently bearer in 

only a very technical sense, since most beneficial interests in such bonds are held 

through Euroclear or other book-entry clearing systems. As a consequence, it seems 

unlikely that such instruments would pose any special risks of tax evasion under 

the Bill, since the information reporting and withholding provisions of the Bill could 

generally be applied to payments in respect of such securities in the same manner 

as for payments in respect of registered bonds (in each case for bonds issued after 

the applicable grandfather date). 

In order to prevent unwarranted disruption to the borrowing ability of U.S. 

issuers in situations where the risk of U.S. tax evasion seems miniscule, SIFMA recommends that the Congress direct the Treasury Department to study the potential 

consequences of the repeal of the foreign-targeted bearer bond exception and prepare a report regarding such a repeal before any action is taken. In this regard, one 

alternative to a complete repeal that the Treasury Department might wish to consider would be a more limited prohibition that focused solely on bearer bonds in definitive form (i.e., those not held through Euroclear or other book-entry clearing systems). 

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9Section 101(d)(2)(B) of the Bill. 

In addition to the foregoing considerations, there appears to be an inadvertent 

glitch in the effective date provisions of the Bill relating to the repeal of the foreigntargeted bearer bond exception. In general, the repeal of the foreign-targeted bearer 

bond exception would be effective for obligations issued more than 180-days after 

the date of the Bill’s enactment. The new information reporting and withholding 

rules, however, would apply to any bearer-form obligation that is issued by a U.S. 

issuer after the date of first Committee action. As a consequence, the Bill would create two categories of U.S.-issued bearer bonds, one that is subject to the new information reporting and withholding regimes and one that is not. SIFMA believes that 

this result was not intended, and suggests that, if the repeal of the foreign-targeted 

bearer bond exception is retained, the effective date of the information reporting and 

withholding rules should be conformed, by grandfathering bearer-form obligations 

issued prior to the effective date of the repeal of the foreign-targeted bearer bond 

exception. 

Comment 4: Simplify and Extend the Grandfather Rule for Existing Registered Debt. 

To avoid market confusion and disruption, the grandfather rule for existing registered debt should be simplified and extended to exempt all registered debt instruments that are outstanding on the effective date of the new information reporting and 

withholding regimes and that contain an issuer gross-up provision. 9

The FFI and FE information reporting and withholding regimes are proposed to 

be effective for all registered form debt instruments of U.S. issuers, unless the debt 

is outstanding on the date of first Committee action and includes a provision under 

which the issuer would be obligated to make gross-up payments by reason of the 

Bill. This grandfather provision has already led to substantial market uncertainty 

as to whether many instruments will or will not be eligible for its protection, and 

would be very difficult for withholding agents to apply. As one example, gross-up 

provisions frequently allow an issuer to elect either to make a required gross-up 

payment or to redeem a debt instrument early. In such a case, it may be questioned 

whether the issuer is obligated to make gross-up payments for purposes of the 

grandfather provision. As another example, gross-up provisions frequently contain 

carve-outs for withholding taxes that would not be imposed but for a failure by a 

holder or beneficial owner of an instrument to make a certification or comply with 

information reporting requirements. In such a case, because the information reporting obligations contemplated by the Bill would apply to intermediaries in a chain 

of ownership that may not be holders or beneficial owners for purposes of the grossup provision, it may be questioned in some instances whether a failure to enter into 

an information reporting agreement with the IRS under the Bill constitutes such 

a failure, and whether the issuer would be required to make gross-up payments for 

purposes of the grandfather provision. 

More generally, SIFMA notes that many large U.S. financial institutions and 

other U.S. issuers derive billions of dollars of funding through debt issuances to foreign investors. In some cases (e.g., debt issuances to foreign retail investors), it may 

be impossible to effect issuances while the application of the new information reporting and withholding provisions of the Bill remain uncertain, because the issuance 

structures will not tolerate the uncertainty neither as a reputational matter for the 

issuer and underwriters or oftentimes as a local securities law matter that an intermediary in a chain of payments could fail to comply with the information reporting 

provisions of the Bill with the result that a foreign investor would suffer a withholding tax through no fault of its own. If the grandfather rule for registered debt 

contained in the Bill continues to apply only up to the date of first Committee action, U.S. issuers may accordingly be required to cease some or all of their registered debt issuances in foreign markets after that date until uncertainties regarding the application of the information reporting and withholding provisions of the 

Bill are resolved. 

If retained in its current form, SIFMA anticipates that the grandfather rule for 

existing registered debt could lead to substantial market confusion and disruption. 

In order to minimize such confusion and disruption, and the legal and other disputes between issuers, holders, and withholding agents that could result, SIFMA 

recommends that the grandfather rule for existing registered debt be simplified and 

extended to exempt all registered debt instruments that are outstanding on the effective date of the new information reporting and withholding regimes and that contain an issuer gross-up provision, regardless of whether that gross-up provision 

would in fact be triggered by the Bill. Because even this simplified grandfather rule 

would place substantial compliance burdens on withholding agents needing to determine the status of numerous debt instruments, SIFMA further recommends that 

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10 A typical CDO is structured as an offshore corporation that invests in loans and other debt 

instruments issued by U.S. companies. Such CDOs in turn issue several classes of non-publicly 

traded debt and equity securities themselves, which divide up the cash flows on the underlying 

U.S. investments. Another example of a typical securitization vehicle is a grantor trust that invests in U.S. debt or equity investments and in turn issues pass-through certificates that represent the cash flows on those investments. Pass-through interests in U.S. investments could 

also be structured as shares of an offshore cell company. 11 Note that there is precedent for a targeted exception from otherwise applicable rules for 

securitization vehicles, including an appropriate limiting definition, in section 743(f). 12Proposed section 1471(d)(4). 

withholding agents be permitted to presume that a registered debt instrument outstanding on the grandfather date qualifies for the grandfather rule, unless the withholding agent knows or has reason to know that it does not qualify. 

Comment 5: Provide a Grandfather Rule for Existing Securitization 

Vehicles. 

The Bill should provide a grandfather rule for existing offshore securitization vehicles, under which such vehicles would be excluded from the FFI definition and 

exempt from the FE information reporting and withholding regime. 

A typical offshore securitization vehicle that holds U.S assets and issues its own 

equity and/or debt securities (such as a CDO issuer) would be considered an FFI 

under the Bill.10 As a result, such a securitization vehicle would be required to enter 

into an information reporting agreement with the IRS and report on U.S. holders 

of non-publicly traded debt and equity that it had issued, or otherwise be subject 

to the withholding tax on its U.S. investments. Foreign securitization vehicles currently in existence have invested billions of dollars in the United States, particularly 

in loans and other debt instruments issued by U.S. companies. 

Unfortunately, it is quite likely that many offshore securitization vehicles will 

simply be unable to enter into and comply with the required reporting agreement, 

which could lead to large scale disruptions in the markets. Offshore securitization 

vehicles have no employees and, in most cases, their activities are strictly controlled 

by a trust indenture. The trust indentures for existing securitization vehicles predate the Bill, and accordingly do not authorize or require any party on behalf of the 

securitization vehicle to perform the actions required of FFIs under the Bill. The 

trust indentures also do not provide a means of paying for such activities. Although 

it might in theory be possible for the trust indenture of a securitization vehicle to 

be amended by a vote of the investors in the vehicle to permit the vehicle to enter 

into an FFI information reporting agreement, no party is likely to be designated to 

initiate such an amendment process. In addition, different investors may have conflicting interests in permitting such an amendment. Some investors may in particular prefer for the vehicle to be prematurely wound up, which would be required 

in many cases if the investments of the vehicle became subject to the withholding 

tax imposed by the Bill. Finally, even if it were possible to amend a trust indenture 

to permit a securitization vehicle to enter into an information reporting agreement 

with the IRS and hire contractors to perform the required actions, there can be no 

guarantee that the vehicle would be able to force holders of its outstanding debt and 

equity interests to comply with applicable identification and documentation requirements that were not contemplated at the time the trust indenture was executed and 

the securities were issued. 

Taking these considerations into account, it appears very likely that many typical 

offshore securitization vehicles that have invested in U.S. assets would become subject to the withholding tax imposed by the Bill, which could lead to their required 

liquidation. A large scale liquidation of U.S. debt instruments by offshore 

securitization vehicles could result in a very significant disruption of the U.S. credit 

markets. Therefore, SIFMA believes that the Bill should provide a grandfather rule 

for securitization vehicles in existence on the date of first Committee action. The 

grandfather rule should provide that existing securitization vehicles are (i) excluded 

from the FFI definition; and (ii) exempt from the FE information reporting and 

withholding regime in respect of their U.S. assets.11

Comment 6: Exclude U.S. Payors and Schedule K–1 Filers from the FFI 

Definition. 

In order to avoid unnecessary duplication and confusion, the FFI definition should 

exclude certain foreign entities and branches that are considered U.S. payors required to file Form 1099 reports as well as certain foreign partnerships that are required to file Schedule K–1 reports.12

The FFI definition is extraordinarily broad, and there are a great many entities 

that could need to enter into information reporting agreements with the IRS under 

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13See Treasury regulations Section 1.6049–5(c)(5) for the complete list of entities that are considered U.S. payors for Form 1099 information reporting purposes. 14Proposed section 1471(c)(3). 15For example, the sharing of relevant information may be prohibited under the so-called Chinese Walls required under U.S. securities laws. See, e.g., 15 U.S.C. 78o(f) (2006) (requiring 

broker-dealers to adopt policies and procedures designed to prevent insider trading and tipping); 

15 U.S.C. 80b–4a (2006) (requiring investment advisors to establish policies and procedures reasonable designed to prevent insider trading and tipping). 16 Cf. Treasury regulations Section 1.1441–1(e)(4)(ix)(A). 

pants and the IRS to limit the scope of the FFI definition in the case of certain foreign entities that already have robust U.S. tax information reporting responsibilities, in order to reduce the potential for a flood of information reporting agreements. For example, foreign entities and branches that are considered U.S. payors 

under the current information reporting rules (e.g., U.S. branches of foreign banks 

and controlled foreign corporations) are already required to file full Form 1099 reports with respect to income paid to U.S. persons.13 In addition, foreign partnerships that derive gross income that is either U.S. source or effectively connected 

with the conduct of a U.S. trade or business are already required to file Form 1065 

and accompanying Schedule K–1 reports, which include extensive information regarding both U.S. and foreign source income allocable to all partners. SIFMA believes that the Form 1099 and Schedule K–1 information reporting regimes generally provide the IRS with sufficient tax information where they apply. Keeping 

such foreign entities within their existing information reporting regimes would also 

reduce the very substantial burden that the IRS will bear as it enters into the new 

information reporting agreements with FFIs. As a consequence, SIFMA recommends 

that U.S. payors and Schedule K–1 filers be excluded from the FFI definition. 

Comment 7: Provide Workable Procedures for Reliance on Certifications 

by FFIs. 

The proposed standard for knowledge of an incorrect certification is unworkable 

in the context of global financial institutions. Instead, FFIs should be permitted to 

rely on certifications from account holders so long as they implement procedures reasonably designed to identify incorrect certifications. 14

The Bill provides that, in fulfilling its information reporting obligations, an FFI 

may rely on a certification from an account holder only if neither the FFI nor any 

entity which is a member of the same expanded affiliated group knows, or has reason to know, that any information provided in such certification is incorrect. The 

expanded affiliated group of a large FFI may include tens of thousands of employees 

in hundreds of different branches, business entities, and segments, located in numerous jurisdictions. FFIs do not currently maintain systems that can monitor and 

compare the knowledge of these vast numbers of employees across such branches, 

business entities, and segments. The creation of such systems would be extremely 

expensive and difficult to implement and, even if the construction of such systems 

were practically achievable, their use may be impermissible under U.S. and nonU.S. securities, data protection, and other laws.15

In order to make the certification reliance provision workable in the context of 

global financial institutions, SIFMA recommends that the Bill provide that an FFI 

may rely on a certification from an account holder so long as the FFI has implemented procedures reasonably designed to identify incorrect certifications. The 

Treasury Department and the IRS would then be expected to craft safe harbors that 

are deemed to satisfy the requirements. In general, SIFMA believes that the development of these safe harbors is best left to the regulatory process, in which SIFMA 

would be pleased to participate. It would be helpful, however, if the Treasury Department and the IRS could be directed in legislative history to focus the safe harbor procedures on the knowledge of employees of an FFI that directly establish an 

account or perform direct client-facing services in respect of the account, together 

with any information actually contained in a universal account system,16 and to 

avoid any procedures that could be in conflict with U.S. and non-U.S. securities, 

data protection, or other laws. Potential abuse concerns could then be addressed 

with a targeted anti-abuse rule to prevent an FFI from structuring an account relationship in a manner that avoids the purposes of the Bill. 

Comment 8: Establish Commercially Reasonable Standards for Identifying 

U.S. Accounts and Foreign Entities with Substantial U.S. Ownership. 

The Bill and its legislative history should direct the Treasury Department and the 

IRS to establish commercially reasonable standards for identifying U.S. accounts 

and foreign entities with substantial U.S. ownership, and should confirm that, until 

such standards are adopted, FFIs and U.S. withholding agents may rely on existing 

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17Proposed section 1471(d)(1). 18 Under the current QI program, QIs have long been able to rely on KYC documentation in 

lieu of obtaining certifications in appropriate cases. See Revenue Procedure 2000–12. 19Such investment fund FFIs have invested billions of dollars in the United States, and it 

will be very important to their decision to continue such investments that they have a clear idea 

from the outset as to how the new information reporting and withholding regimes will apply 

to them. 20Proposed section 1473(2). 21Proposed sections 1472(c)(1)(A) and 1473(3)(A) & (C). 

documentation, account information, and KYC and AML procedures for such purposes. 17

SIFMA understands that the Bill does not mandate any particular method or procedure to identify U.S. accounts, and welcomes the JCT Report’s reference to the 

use of existing know-your-customer (KYC) and anti-money-laundering (AML) procedures as a method of account identification.18 Nevertheless, it is important that the 

Treasury Department and the IRS be directed to adopt identification and documentation standards that are commercially feasible and utilize existing documentation and account information wherever possible. Until more complete guidance is 

issued, the Bill and its legislative history should also confirm that FFIs and U.S. 

withholding agents may rely on existing documentation, account information, and 

KYC and AML procedures for purposes of identifying U.S. accounts and foreign entities with substantial U.S. ownership. SIFMA believes that confirmation of this intended result will be particularly critical in the case of certain investment fund FFIs 

(e.g., foreign mutual funds) that hold U.S. securities and that have beneficial owners 

that hold their interests in the investment fund through other entities (e.g., a mutual fund distributor), where such other entities are not themselves reporting FFIs 

(see additional discussion of foreign mutual funds under Comment 16).19 SIFMA 

also believes that, in all cases, the applicable identification and documentation 

standards should apply equally to FFIs (whether or not U.S. controlled) and U.S. 

withholding agents (e.g., for purposes of determining whether a foreign entity has 

substantial U.S. ownership under the FE information reporting and withholding regime), and regardless of whether the account is on-shore or offshore, in order not 

to put either U.S. or non-U.S. financial institutions at a competitive advantage. Furthermore, in utilizing existing documentation and account information, FFIs and 

U.S. withholding agents should not be required to perform due diligence that would 

require aggregating the knowledge of all members of their expanded affiliated 

groups, for the same reasons noted above with respect to aggregating knowledge 

that could potentially cause an FFI to question the correctness of a certification. 

SIFMA looks forward to assisting the Treasury Department and the IRS in adopting 

more complete guidance in this area during the regulatory process. 

Comment 9: Provide a Uniform 10 Percent Test for Substantial U.S. Owner 

Status. 

The substantial United States owner definition should apply a uniform 10 percent 

test.20

The Bill provides that an FFI must report on substantial United States owners 

of foreign entities that hold financial accounts with the FFI. The Bill also requires 

FEs to provide information regarding their own substantial United States owners 

to withholding agents for provision by such withholding agents to the IRS. For these 

purposes, the Bill defines substantial U.S. ownership to be 10 percent or more with 

respect to foreign corporations and foreign partnerships that are not foreign investment entities, but any U.S. ownership with respect to a foreign investment entity. 

SIFMA does not believe that any currently existing or contemplated KYC or AML 

procedures investigate entity ownership below a 10 percent level (and, indeed, only 

the more advanced KYC and AML procedures investigate entity ownership at that 

level). In addition, the proposed dual standard would be extremely difficult to implement in practice, particularly as the determination of the correct percentage test 

would require an FFI to study and identify the business of each such account holder 

to determine whether it is a foreign investment entity. SIFMA accordingly believes 

that the Bill should adopt a uniform 10 percent test for substantial United States 

ownership for all foreign entities. 

Comment 10: Revise Carve-outs for Corporations and Tax-Exempt Entities. 

The carve-out for corporations whose stock is regularly traded on established securities markets should be replaced with a carve-out for foreign entities that are per 

se corporations under Treasury regulations Section 301.7701–2(b)(8). In addition, 

certain foreign tax-exempt entities should be fully carved out from the FFI and FE 

information reporting and withholding regimes. 21

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22Proposed section 1471(d)(1). 23Proposed section 1471(c)(2). 

ing and withholding in the case of corporations whose stock is regularly traded on 

an established securities market, presumably because the risk of tax evasion in connection with a publicly traded corporation is low. It would be extremely difficult and 

expensive, however, for an information reporting or withholding agent to determine 

whether the stock of large numbers of corporations is regularly traded. Accordingly, 

SIFMA recommends that the Bill instead provide a carve-out for foreign entities 

that are per se corporations under Treasury regulations Section 301.7701–2(b)(8), 

subject to such exceptions as the Secretary of the Treasury determines are necessary to prevent avoidance of the purposes of the Bill. Per se corporations (e.g., 

U.K. public limited companies) generally present a low risk of being used to facilitate U.S. tax evasion, because they are generally subject to tax filing requirements 

and/or more extensive corporate regulation, and because they are not eligible to be 

flow-through entities for U.S. tax purposes. Moreover, although there may be certain 

situations where a particular per se corporation presents greater risks, SIFMA believes that the Treasury Department and the IRS should be able to identify relevant 

abuse factors and provide exceptions for this purpose in regulations. 

The Bill also provides a carve-out from the account holders that are subject to FFI 

information reporting (but not from the entities that are subject to FE information 

reporting and withholding) in the case of an organization that is exempt from tax 

under section 501(a), again presumably because such entities pose a low risk of 

being used to facilitate U.S. tax evasion. As such, and in order to preserve a level 

playing field between U.S. financial institutions dealing with foreign entities 

through the FE regime, on the one hand, and FFIs dealing with foreign entity account holders through the FFI regime, on the other, the exception should be expanded to apply equally to the FE information reporting and withholding regime. 

(Otherwise, FFIs would have a competitive advantage over U.S. withholding agents 

in providing account services to such entities.) This could be done by adding such 

entities to the list, in Proposed section 1472(c), of the entities that are exempt from 

the requirements of Proposed section 1472(a). In addition, however, SIFMA believes 

that there are many additional foreign pension funds and other tax-exempt entities 

that similarly pose a low risk of being used to facilitate U.S. tax evasion, but that 

may not meet the definition of section 501(a) (or have any idea whether they do or 

do not meet that definition). Accordingly, SIFMA would recommend that the carveouts for foreign tax-exempt entities be expanded to include all foreign tax-exempt 

entities that are entitled to treaty benefits under a comprehensive income tax treaty 

with the United States. 

Comment 11: Exempt Separate Depository Accounts Not Exceeding $50,000. Depository accounts that do not exceed $50,000 on a non-aggregated basis and that 

have not been structured to avoid the purposes of the Bill should be excluded from 

the definition of United States account. 22

The Bill provides two de minimis thresholds, one at $10,000 for new accounts and one at $50,000 for existing accounts, to determine whether a depositary account 

held by an individual may be exempt from FFI information reporting. In applying 

the thresholds, all accounts throughout an FFIO ̃ s expanded affiliated group must 

be aggregated. SIFMA believes that it would not be practical or perhaps legal for 

FFIs to collect the information necessary to aggregate the value of all depositary accounts across their expanded affiliated groups for purposes of applying the de minimis test, for the same reasons noted above with respect to aggregating knowledge 

that could potentially cause an FFI to question the correctness of a certification. In 

addition, having two tests would make compliance substantially more difficult, since 

an FFI would have to implement two different tracking mechanisms in addition to 

the many other compliance systems that it would be required to develop to comply 

with the Bill. As a consequence, SIFMA would suggest that the de minimis threshold be revised to a uniform level of $50,000, applied on a non-aggregated basis, and 

that potential abuse concerns be addressed with a targeted anti-abuse rule that aggregates accounts that have been structured to avoid the purposes of the Bill. 

Comment 12: Allow Simplified Form 1099 Reporting by FFIs. 

The alternative reporting election available to FFIs should allow simplified Form 

1099 reporting, rather than full Form 1099 reporting, in order to induce more FFIs 

to elect this more useful reporting alternative. 23

The Bill is responsive to many of the concerns expressed in SIFMA’s prior comment letter on the Obama Administration’s offshore tax compliance proposals. 

SIFMA in particular welcomes the Bill’s simplified reporting regime for FFIs that 

would apply as a default matter (the default reporting regime). SIFMA also welcomes the flexibility provided by the election to opt for full Form 1099 reporting if 

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24Proposed section 1474(b). 25Section 101(b) of the Bill. 26Proposed section 1473(1). 

an FFI so desires. The latter election would be much easier for FFIs to implement, 

however, and thus much more likely to be adopted, if it provided for simplified Form 

1099 reporting that contains more information than the default reporting regime, 

but less than full Form 1099 reporting would require. SIFMA would be pleased to 

work with the Treasury Department and the IRS to develop a process for such simplified Form 1099 reporting. In general, SIFMA contemplates that such reporting 

would be limited to cash payments, and would not require an FFI to, e.g., report 

any income on an accrual basis, deemed income, adjusted tax basis, or any supplemental information that might otherwise be required. This would mean that an FFI 

would report cash payments of dividends, interest, royalties, and gross proceeds 

from the sales of securities, but would not be required to report accruals of original 

issue discount on long-term obligations, foreign tax withheld, deducted investment 

expenses, adjusted issue price, market discount information on REMICs or CDOs, 

imputed income or supplemental information on a widely held fixed income trust, 

or similar tax information. This would obviate the need, among other things, to reclassify income paid, track holding periods, make complicated tax calculations to determine income amounts, or perform tax lot accounting for securities sold in order 

to prepare Form 1099s. SIFMA believes that these simplifications would not significantly impair the IRS’s ability to combat offshore tax evasion, and that the simplified Form 1099 information would indeed be substantially more useful to the IRS 

than the information that it would receive under the default reporting regime. As 

a consequence, SIFMA believes that the goals of the Bill would be advanced by providing for a simplified Form 1099 reporting alternative. 

Comment 13: Allow FFIs to Receive Refunds or Credits of the Withholding 

Tax in Additional Cases. As a matter of fundamental fairness, an FFI should be allowed to receive a refund 

or credit with respect to amounts withheld in the same circumstances as other investors. 24

The Bill provides that, except to the extent required by a treaty, no refund or 

credit of the withholding tax imposed by the Bill will be available if the beneficial 

owner of a withholdable payment is an FFI. This rule is punitive in nature (since 

other beneficial owners are permitted to receive such refunds and credits where they 

disclose their beneficial ownership). Its purpose is presumably to induce FFIs to 

enter into reporting agreements with the IRS, in order to avoid the withholding tax 

in the first instance. As a matter of fundamental fairness, SIFMA believes that FFIs 

should be allowed the same refund and credit possibilities as other investors if they 

disclose their beneficial ownership of a withholdable payment. At a minimum, the 

Treasury Department and the IRS should be authorized and directed to provide 

such refunds where the withholding tax results from an inadvertent or temporary 

disqualification of an FFI that is otherwise compliant, and where an FFI subsequently enters into or reestablishes an information reporting agreement with the 

IRS within a certain period after the withholding. 

Comment 14: Coordinate with Other Withholding and Information Reporting Provisions.25

Although the Bill provides appropriate coordination language with respect to the 

existing withholding provisions of Section 1441 (withholding tax on nonresident 

aliens) and Section 1445 (withholding tax on dispositions of U.S. real property interests), additional coordination language should be added with respect to other sections, including but not limited to Section 1442 (withholding tax on foreign corporations), Section 1446 (withholding tax on foreign partnersO ̃ share of effectively connected income), Section 3402 (wage withholding), Section 3405 (withholding tax on 

pension, annuities, and other deferred income), Section 3406 (backup withholding 

tax), and Section 4371 (foreign insurance excise tax). 

In addition, the Bill should provide for appropriate coordination language with respect to existing information reporting provisions, including but not limited to Section 6041 (information at the source), section 6041A (returns regarding payments 

of remuneration for services and direct sales), Section 6042 (returns regarding payment of dividends), Section 6045 (returns of brokers), and Section 6049 (returns regarding payment of interest). 

Comment 15: Provide for Further Limits to the Definition of 

Withholdable Payment. 26

The definition of withholdable payment is extremely broad, and appears to include 

many items that pose a very low risk of facilitating U.S. tax evasion (including, e.g., 

payments for services performed in the United States; adjustments required under 

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27 Compare proposed section 1472(c)(2) with proposed section 1471(f)(4). 

section 482; issuances of stock in tax-free reorganizations; and intercompany payments between a U.S. company and a foreign affiliate). Although the FE information 

reporting and withholding regime provides a mechanism for the Secretary of the 

Treasury to exclude certain payments from the withholding tax, the FFI information 

reporting and withholding regime does not contain a similar payment-based carveout mechanism.27

SIFMA recommends that the Bill authorize the Secretary of the Treasury to exclude from the entire definition of withholdable payment any payments that pose 

a low risk of tax evasion, and that the Treasury Department and the IRS be directed to consider the exclusion of the above-noted payments (and others) under this 

authority. 

Comment 16: Address Tiering Issues. 

The Bill or its legislative history should provide guidance to the Treasury Department and the IRS regarding tiered ownership issues. 

In addition to the points raised in the foregoing comments, there are a number 

of other more mechanical issues raised by the Bill. For the most part, a discussion 

of these issues would be beyond the scope of this letter, and is better left to the 

regulatory process. One particular area of concern, however, will be the application 

of the new information reporting and withholding rules in the case of tiered FFIs 

and withholding agents. SIFMA believes that it would be helpful if the Treasury Department and the IRS could be given some direction, in either the text of the Bill 

or legislative history, regarding the way that certain tiered ownership situations are 

intended to be addressed. 

One important situation that will need to be addressed concerns a payment made 

by one FFI to another FFI. In this case, SIFMA would suggest that primary information reporting responsibility should be placed on the recipient FFI, since that FFI 

will have the closer relationship to the beneficial owner (or will be the beneficial 

owner), and will accordingly be in the best position to provide appropriate information to the IRS. As a consequence, the payor FFI should be exempted from any information reporting or withholding requirements in respect of the payment so long 

as the recipient FFI confirms that it has entered into an information reporting 

agreement with the IRS. SIFMA believes that clarification of this intended result 

will be particularly critical in the case of certain investment fund FFIs (e.g., foreign 

mutual funds) that hold U.S. securities and that have beneficial owners that hold 

their interests in the investment fund FFI through other entities (e.g., a mutual 

fund distributor), where such other entities are themselves reporting FFIs. 

Another tiering issue that will need to be addressed concerns the case where an 

FFI establishes an account on behalf of a customer directly with a U.S. payor that 

files Form 1099 reports. In that case, SIFMA would recommend that the U.S. payor 

be given primary information reporting responsibility with respect to the account, 

and that the FFI should be exempted from any information reporting or withholding 

requirements in respect of the account so long as the U.S. payor confirms that it 

will undertake that responsibility. 

We appreciate the opportunity to comment on the Bill and to provide our recommendations for improving offshore tax compliance. We would welcome the opportunity to discuss our recommendations in more detail and hope to provide further 

comments and suggestions as the legislation progresses. If you have any questions 

or need more information, please do not hesitate to contact Ellen McCarthy, or Scott 

DeFife. 

Best Regards, 

Kenneth E. Bentsen, Jr. 

Executive Vice President, Public Policy and Advocacy 

f 

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Statement of The Financial Services Roundtable 

Overview 

Both Congress and the Administration are focusing considerable attention on addressing the potential for U.S. tax evasion through the inappropriate exploitation 

of foreign financial accounts. This is part of an overall effort aimed at ensuring that 

the IRS has the tools needed to enforce the U.S. tax laws fully and fairly. We are 

committed to working with lawmakers to assist in the accomplishment of these important compliance goals. 

The recent introduction of The Foreign Account Tax Compliance Act of 2009 (the 

‘‘Bill’’) is an element of this effort. One major focus of the Bill is tax compliance by 

U.S. persons that have accounts with foreign financial institutions. The Bill would 

impose substantial new reporting and tax withholding obligations on a very broad 

range of foreign financial institutions that could potentially hold accounts of U.S. 

persons. The reporting and withholding obligations imposed on the foreign financial 

institutions would serve as a backstop to the existing obligations of the U.S. persons 

themselves, who have a duty to report and pay U.S. tax on the income they earn 

through any financial account, foreign or domestic. These new reporting and withholding obligations for financial institutions would be enforced through the imposition of a 30 percent U.S. withholding tax on a very broad range of U.S. payments 

to foreign financial institutions that do not (or cannot) satisfy the reporting obligations. This withholding tax would apply without regard to whether the payment relates to a U.S. customer’s account, a foreign customer’s account, or the institution’s 

own account. 

This proposed new reporting and withholding tax regime would be in addition to 

the vital role many foreign financial institutions currently play in contributing to 

U.S. tax compliance and enforcement through their participation in the Qualified 

Intermediary (‘‘QI’’) program. Foreign financial institutions that are part of the QI 

program take on responsibility for ensuring the proper imposition of U.S. withholding tax with respect to the foreign persons that hold accounts with such institutions. The additional obligations under this proposed new regime would substantially increase the U.S. reporting and withholding responsibilities of those foreign 

financial institutions that currently participate in the QI program. Specifically, it 

would require the determination of the tax status of all customers in order to identify any U.S. persons and the reporting of all payments to, or activity in the accounts of, any U.S. customers. In addition, the proposed new regime would extend 

to thousands of foreign financial institutions, including very small institutions, 

which are not within the coverage of the QI program either because they do not 

handle the kinds of U.S. investments that are covered by the QI rules or because 

they have not entered into a QI agreement. 

Given the high priority of this Bill for both Congress and the Administration, we 

are limiting our comments to the foreign financial institution provisions (and to how 

such provisions apply to banks and other traditional financial institutions). Within 

those provisions, we focus on five key areas as described in more detail below. In 

addition, we include two further suggestions regarding issues related to particular 

aspects of the operation of the proposed provisions. However, we would stress that 

the burden and uncertainty of obligations that would be imposed under the Bill 

could lead some foreign financial institutions to conclude that they have no choice 

but to divest themselves of all their U.S. investments, to the severe detriment of 

the U.S. financial markets and the U.S. economy. Therefore, we urge policymakers 

to work closely with the financial services industry to ensure that the proposed new 

regime operates in a way that is clear and workable and that will ensure that it 

accomplishes the objective of improving U.S. tax compliance by U.S. persons while 

not inappropriately discouraging U.S. investment. 

Additional Time Needed for Development and Implementation of the 

Proposed New Reporting and Withholding Regime 

The Bill provides that the new regime would take effect for payments made after 

December 31, 2010. However, development and implementation of the new regime 

will require a tremendous amount of work by the foreign financial institutions that 

will be subject to the regime (in terms of customer investigation and information 

gathering, as well as systems and process changes), by U.S. persons that make covered payments to foreign financial institutions (in terms of systems modifications 

and implementation of new processes), and by the Treasury Department and IRS 

(in terms of detailed substantive and procedural guidance, development and implementation of agreements, and development and implementation of internal review 

processes). Therefore, in order to give sufficient time to accomplish all the necessary 

preliminary work, we believe that the effective date of the new regime should be 

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delayed by at least three years so that the regime would apply no earlier than for 

payments made after December 31, 2013, and then phased in as discussed in more 

detail below. We also believe it is important to authorize the Secretary of the 

Treasury to delay the effective date to avoid unforeseen issues that may 

disrupt financial markets. 

The statutory provisions in the Bill delegate substantial responsibility to the 

Treasury Department to develop detailed rules for the operation of the regime, to 

establish compliance thresholds and mechanisms, and to provide exceptions and 

special rules for appropriate situations. Treasury and the IRS will need time to develop the required overall guidance with respect to the regime and to address the 

specific areas where Treasury action is explicitly contemplated in the statutory language. Treasury and the IRS should work closely with the industry in developing 

this guidance. Moreover, the guidance should be issued in proposed form in order 

to provide an opportunity for public comment. 

The Bill also contemplates that Treasury and the IRS will develop an agreement 

to be executed by foreign financial institutions to reflect their commitment to accept 

information reporting responsibilities in lieu of being subjected to the U.S. 30 percent withholding tax on U.S. payments received. The government will need time to 

develop this agreement, the specifics of which likely will need to be coordinated with 

the detailed guidance developed with respect to the new regime. Again, it is important that Treasury and the IRS work with the industry in developing this agreement. In addition, once the form of agreement is finalized, the government will need 

to execute agreements with the many thousands of foreign financial institutions affected by the new regime. As a practical matter, this process will take time and resources for the government to complete. It should be noted that it took multiple 

years to introduce and implement the QI program, which involved vastly fewer foreign financial institutions. 

When the detailed guidance specifying the applicable operational rules is issued 

and the required agreements are executed, foreign financial institutions will need 

to put in place numerous new systems to ensure compliance with the new reporting 

obligations. For those financial institutions that are part of the QI program currently, this will require a complete overhaul of existing systems to capture the new 

information required to be tracked and reported. For many such institutions, new 

systems also will need to be put in place in order to cover all the accounts that are 

not covered by the QI program. In all cases, the number of additional accounts to 

be covered will be many multiples of the number of accounts covered by the QI program. For those foreign financial institutions that are not currently part of the QI 

program, the required systems development and implementation work will be a new 

undertaking to be started from scratch. 

For these reasons, we respectfully urge the further delay of the effective date of 

the new regime (so that the regime would not apply any earlier than payments 

made after December 31, 2013) and then the phase in of the new regime over time. 

A Phased-In Approach Should be Used for Implementation of the New 

Reporting and Withholding Regime 

The burdens involved in implementation of the new regime, and the processes 

that will be required in order to obtain the information needed to comply with the 

reporting requirements, will be very different for different types of financial accounts. In particular, the burdens associated with compliance with respect to deposit 

accounts will be disproportionately high. Therefore, a phased-in approach should be 

used for implementation of the new regime. 

The QI program covers custodial accounts in which the foreign financial institution holds U.S. securities for its account holders and receives payments with respect 

to those securities. Those foreign financial institutions that are part of the QI program have processes in place for obtaining and reporting information with respect 

to the holders of these accounts. While the new regime would require significant additional information, existing processes potentially could be overhauled and expanded to gather this additional information. Moreover, the relationship between 

the financial institution and the account holder is particularly close in the case of 

a custodial account due to the required interaction between the institution and the 

account holder regarding investment instructions and other matters. Thus, even for 

those foreign financial institutions that are not in the QI program, the relationship 

and regular interaction with the account holder should help facilitate the obtaining 

of the required information in order to implement the new regime. 

In contrast, the QI program does not cover deposit accounts held by foreign financial institutions, such as checking or savings accounts. Foreign financial institutions 

that are part of the QI program will not have processes in place to gather the required customer information or to report under the new regime with respect to their 

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deposit accounts. The number of such accounts in most cases will be many multiples 

higher than the number of custodial accounts currently covered by the QI program. 

The tax status of every checking and savings account holder would need to be determined in the manner required by the Treasury Department and then would need 

to be input into the foreign financial institution’s deposit and customer information 

systems. In addition, there are many foreign financial institutions that do not have 

custodial accounts but that do have large numbers of deposit accounts. Finally, the 

interactions between the financial institution and the deposit account holder are 

much more limited—often to ATM or on-line transactions only. Therefore, obtaining 

the required information would be much more difficult, particularly given the natural caution (due to concern about identity theft) about providing detailed personal 

information in response to unexpected inquiries that purport to be from a financial 

institution. 

For these reasons, we respectfully urge that the new regime be phased in so that 

it applies initially only to custodial accounts and that the regime be extended to 

apply also to deposit accounts over a period of years (such as over a four year period). This will allow additional time for the necessary groundwork with respect to 

the huge number of deposit accounts that would be affected. It also will allow foreign financial institutions and the government to gain experience with respect to the 

new regime, and to make any necessary refinements in the implementation requirements, before the regime is vastly expanded in its application. 

In addition, we respectfully urge that the requirements of the regime be phased 

in over this additional period of years so that the customer documentation requirements apply first to newly-opened accounts and then over time to pre-existing accounts so that financial institutions have additional time to obtain this documentation with respect to such accounts. Given the often limited interaction between the 

institution and its deposit account holders, the gathering of this information with 

respect to pre-existing accounts likely would require multiple mailings and repeated 

follow up by telephone. In contrast, in the case of new accounts, once the necessary 

forms, systems and processes are developed for reporting the information, the customer documentation could be requested as part of the account opening procedure. 

The New Reporting and Withholding Regime Should be Coordinated with 

the QI Program 

Under the proposed new regime, a foreign financial institution that cannot enter 

into an agreement with Treasury regarding compliance with the new reporting and 

withholding requirements would be subjected to 30 percent U.S. withholding tax on 

U.S. payments received, without regard to whether those payments relate to U.S. 

customers’ accounts, foreign customers’ accounts, or the financial institution’s own 

account. Thus, a financial institution that is a participant in good standing in the 

QI program could be subjected to this withholding tax on payments with respect to 

its foreign accounts for which it properly satisfied all the required reporting obligations under the QI program. Thus, this Bill would essentially abrogate the QI program. 

The QI program is critically important to ensuring that the United States collects 

the proper amount of withholding tax with respect to payments on U.S. investments 

held by foreign persons through foreign financial accounts. Thus, foreign financial 

institutions in the QI program serve a vital role with respect to U.S. tax compliance 

by foreign persons. The government should not risk sacrificing this important aspect 

of tax compliance in the interest of shoring up tax compliance by U.S. persons. 

In order to avoid that potential conflict and to maximize the beneficial impact on 

tax compliance across the board, the Bill should be modified to provide for coordination between the proposed new regime and the existing QI program. Under this coordination, a foreign financial institution that is a participant in good standing in 

the QI program should not be subject to 30 percent U.S. withholding tax with respect to payments it receives on behalf of foreign accounts properly reported under 

the QI rules. 

Therefore, we respectfully urge that the new regime be fully coordinated with the 

existing QI program. 

The New Withholding Tax Rules Should Not Apply to Payments Made for the 

Foreign Financial Institution’s Own Account 

Under the proposed new regime, foreign financial institutions that cannot enter 

into an agreement with Treasury regarding compliance with the new reporting requirements with respect to potential U.S. accounts would be subjected to 30 percent 

U.S. withholding tax even on payments that are received with respect to its own 

account. Such payments are income of the foreign financial institution and are subject to withholding tax or reporting on a tax return as required under existing provijoloto on DSK67XMDP1PROD with HEARING

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sions of the tax law (or are excluded from income and are exempt from U.S. tax 

under applicable provisions). 

By definition, payments received for the foreign financial institution’s own account 

cannot relate to any possible account of a U.S. person. Therefore, there is no direct 

compliance goal served by subjecting these payments to this 30 percent withholding 

tax. Such tax serves solely as an unrelated penalty to try to force foreign financial 

institutions to comply with the reporting obligations with respect to any unrelated 

accounts of U.S. persons. Moreover, this penalty will force those foreign financial institutions that simply cannot comply with the new reporting obligations to divest 

all their U.S. investments. 

The imposition of a 30 percent withholding tax on payments received for a foreign 

financial institution’s own account would be confiscatory. The amount of such withholding tax would bear no relation to the amount of tax actually owed by the institution with respect to such payments. The amount of such withholding tax also 

would bear no relation to the amount of tax that might be owed by U.S. persons 

that have accounts with the institution (which accounts would be unrelated to these 

particular payments). The burden of this imposition of the withholding tax on payments for the foreign financial institution’s own account would far outweigh any 

compliance benefits to be achieved through this penalty. 

Therefore, we respectfully urge that payments received by a foreign financial institution for its own account not be subjected to the 30 percent U.S. withholding tax 

as contemplated by the Bill. 

The New Withholding Tax Rules Should Not Apply to Tax-Exempt Payments 

Under the proposed new regime, foreign financial institutions that cannot enter 

into an agreement with Treasury would be subjected to 30 percent U.S. withholding 

tax even on payments that are of a type that otherwise are exempt from U.S. withholding tax under long-standing substantive provisions of the U.S. tax law. 

Specifically, the proposed new withholding tax would apply to payments to foreign 

persons that qualify as portfolio interest, short-term original issue discount, and interest on bank deposits. In addition, the proposed new withholding tax would apply 

to payments that are considered effectively connected with a U.S. business and that 

therefore would be subject to net-basis income taxation and otherwise would be exempt from withholding tax. (In each case, the foreign person is required under existing law to provide the appropriate Form W–8 to obtain the exemption.) Finally, the 

proposed new withholding tax would apply to payments of interest on tax-exempt 

bonds that otherwise would be exempt from any U.S. tax, even if the beneficial 

owner is a U.S. person. 

Application of the withholding tax with respect to payments received for the account of a foreign person that are of a type that otherwise would be exempt from 

withholding tax should not be subjected to the new 30 percent withholding tax regime. Such application of the regime would impose an unnecessary burden on the 

foreign account holders, who would be required to file a claim for refund simply to 

obtain the statutory tax exemption. Similarly, application of the withholding tax 

with respect to any payments of tax-exempt interest would be particularly inappropriate as such amounts are never taxable regardless of the identity of the beneficial 

owner. 

In addition, in the case of payments received by a foreign financial institution for 

its own account, the limited credit/refund rules contained in the Bill mean that the 

potential application of this 30 percent withholding tax would effectively eliminate 

the tax exemption provided by statute. The refund process under the Bill applies 

only to the extent that an applicable tax treaty gives the institution the benefit of 

reduction in the withholding tax and does not apply to allow the benefit of a statutory exemption. Moreover, a foreign financial institution from a country with which 

the United States has not concluded a tax treaty cannot obtain any refund or credit 

with respect to amounts withheld. At a minimum, foreign financial institutions 

(wherever located) should be entitled to file claims for refund or credit with respect 

to amounts that are over-withheld because the underlying payment is tax-exempt 

under applicable statutory provisions. 

If the new regime continues to be structured to apply a 30 percent withholding 

tax to payments received by a foreign financial institution for its own account and 

to payments received for the accounts of foreign customers properly reported under 

the QI program, we respectfully urge that an exception from such withholding tax 

be provided for amounts that are exempt from withholding tax under other existing 

provision of the U.S. tax law. 

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1More information on the association can be found on www.capmktserv.com. 

Additional Suggestions Regarding the Operation of the Proposed New Reporting and Withholding Regime 

In addition to the foregoing comments relating to the overall structure and implementation of the proposed new reporting and withholding regime, we would like to 

make suggestions with respect to two aspects of the operation of the new regime. 

Compliance Under the Proposed New Reporting and Withholding Regime 

The Bill would provide the Treasury Department with broad authority to establish verification and due diligence procedures with respect to a foreign financial institution’s identification of any U.S. accounts (or its determination that it has no 

U.S. accounts). We believe it is critically important that Treasury and the IRS work 

with the industry in designing these requirements and in establishing the approach 

for assessing compliance with such requirements. 

In this regard, we believe that the compliance assessment approach should focus 

on the establishment of proper procedures by each foreign financial institution and 

its implementation of such procedures on an ongoing basis. The IRS should work 

with foreign financial institutions to establish the agreed procedures the institution 

will follow on a day to day basis. Once these procedures are in place, the institution 

should be able to make periodic representations to the IRS that the procedures have 

been followed and that there have been no breaches. Moreover, it would be appropriate to establish a further streamlined representation approach in the case of a 

foreign financial institution that has determined it has no U.S. accounts and that 

has put in place procedures to prevent any U.S. accounts from being created. 

Interaction of Proposed New Reporting and Withholding Regime with Proposed Changes to the Foreign Trust Rules 

In addition to the foreign financial institution provisions that are the focus of this 

submission, the Bill includes a proposed modification to the rules with respect to 

foreign trusts. This section of the Bill would create a new presumption rule that 

could have the effect of causing a U.S. person that makes a transfer of property to 

a foreign trust to be deemed to be an owner of the trust if under the thrust instruments a U.S. person could ever receive a distribution from the trust. If this occurs, 

a foreign financial institution that holds an account for such trust could suddenly 

be subject to reporting and withholding obligations with respect to that trust. 

As a result of the potential interaction of this provision with the new reporting 

and withholding regime, a foreign financial institution could be required to continuously monitor all activity with respect to the foreign trusts that are account holders 

to determine if any U.S. person makes any transfer to a trust and then to further 

analyze the trust instruments themselves to determine if that transfer would trigger 

the application of these presumption rules that would treat the U.S. transferor as 

an owner of the trust. It would be virtually impossible for a foreign financial institution, which may have thousands of trust accounts, to undertake such efforts. 

Therefore, we respectfully request that the Bill be modified so that the proposed 

modification to the foreign trust rules does not interact with the proposed new reporting and withholding regime in a manner that would subject a foreign financial 

institution to this onerous and impractical additional responsibility with respect to 

its trust accounts. 

f 

Graham Cox, letter 

Dear Mr. Buckley and Ms. Mueller, 

Comments on the Foreign Account Tax Compliance Act of 2009 (H.R. 3933, 

S. 1934) 

On behalf of the members of the International Capital Markets Services Association (‘‘ICMSA’’), we thank you for the opportunity to comment on the proposed Foreign Account Tax Compliance Act of 2009 (‘‘the Bill’’). 

ICMSA 1 is a London-based self regulatory organization representing international 

financial and non-financial institutions active in the provision of services to the 

International Capital Markets. Our membership includes universal banks, registrars, stock exchanges, law firms, International Central Securities Depositories 

(‘‘ICSD’’s) and other service providers specialised in specific product segments such 

as the processing of tax reclaims. The primary purpose of the association is to foster 

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2 i.e. securities primarily issued and deposited with the ICSDs, Clearstream Banking and 

Euroclear Bank. 3 BIS Quarterly Review, September 2009 

4Tax Equity and Fiscal Responsibility Act, which requirements and procedures are designed 

to ensure that the concerned securities are not offered to or acquired by U.S. persons. 5Whether or not these non-U.S. issuers would then be exposed to U.S. sanctions such as the 

Excise Tax is linked to the question of U.S. tax laws extra-territoriality. 

the highest standards in the practice and management of international capital market services, thereby facilitating the efficient functioning of the market. In its dayto-day activities, the ICMSA is predominantly focusing on the operation of the International Securities Market,2 which has outstanding issuance levels exceeding U.S. 

Dollar (USD) 13 trillions, i.e. about half of the overall international debt securities 

outstanding volumes reported by the Bank for International settlements.3

We wish first to confirm our full support to the overall objective of the Bill which 

we understand is intended to prevent the avoidance of tax by U.S. persons. We however would like to express our serious concerns regarding Section 102 of the proposed Bill (Repeal of Certain Foreign Exceptions to Registered Bond Requirements) 

which, we fear, could result in a severe disruption of the international capital markets’ current economic fundamentals and operating practices at a time when global 

access to cost-efficient funding is pivotal to achieve economic recovery. Please note 

that many of our members have also expressed serious concerns over other aspects 

of the Bill (for example the new ‘‘foreign financial institution’’ regime in Section 101, 

which will affect the financial community worldwide and may deter foreign investment from U.S. securities). These concerns have been and will be addressed by 

members either individually or through other industry groups. 

The International Securities Market has overwhelmingly adopted the bearer legal 

form as the preferred form for security issuance, moving from definitive bearer instruments at its inception to a custody structure where global bearer notes are now 

immobilized with the ICSDs and settle through a book-entry system. Approximately 

80% of the securities in the International Securities Market have been issued in 

global immobilised bearer form under the TEFRA 4 D rule, regardless of the nationality of the issuer (U.S. or non-U.S.), effectively becoming the norm in the market 

and representing therefore a very important and efficient funding vehicle for all 

issuers, U.S. or non-U.S.. 

An elimination of the foreign-targeted bearer bond exemptions, as we understand 

the current draft of the bill is proposing, on which the market is based would inevitably lead to wide-spread market disruption and would impose substantial costs and 

additional complexities (different legal documentation, restricted placement opportunities due to a more limited investor base, additional registration services, additional certification and tax processing procedures, etc) to those actors, across the entire chain from issuers to investors, forced or willing to comply with the new requirements. This would ultimately translate into a higher cost of borrowing for 

those issuers forced to adopt the registered format for their international securities 

issuances and thus expose them to sub-optimal funding conditions. This could therefore put U.S. issuers seeking foreign funding at a disadvantage compared to their 

non-U.S. peers, who chose to continue issuing in the global bearer format.5

U.S.-incorporated issuers represent today a significant portion of the International 

Securities Market. These entities mostly tap this market to raise funds in Euros and 

British Pounds (i.e. alternative funding to USD) with European- and Asian-based 

investors, thereby diversifying their funding base, and they do so very efficiently 

and effectively through the issuance of global bearer notes immobilized with the 

ICSDs. Because these transactions are foreign-targeted and that the mechanisms in 

place under the TEFRA rules already provide appropriate safeguards against offering to U.S. persons, we believe that the measures proposed in Section 102 will 

produce marginal benefits in terms of reducing U.S. tax evasion compared to the 

disruption they will provoke. 

Moreover, we note that, in some markets, it is simply not feasible to issue obligations in registered form, which would leave some foreign issuers with no choice but 

to be exposed (at least in principle) to a very significant excise tax. 

In light of these elements, we urge the U.S. House of Representatives and the 

U.S. Senate to re-consider the possibility to maintain the existing exceptions for foreign-targeted bearer bond until such time as the potential impact has been thoroughly investigated. Over time these exemptions have served issuers, intermediaries 

and investors worldwide very well and that have helped maintain a level-playing 

field access to the international capital markets. In our view, the repeal of these 

exceptions needs to be carefully planned and considered to avoid a major disruption 

in a multi-trillion dollar market which would affect U.S. issuers, non-U.S. issuers, 

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1http://www.icmagroup.org/about1/isma1/legal_and_documentation.aspx and http:// 

www.icmagroup.org/about1/isma1/primary_market_practices.aspx. 

many market intermediaries including the major U.S. banks, and, ultimately, the 

investors. To this effect, the ICMSA supports the recommendation made by other 

industry groups that Congress requests a report regarding the potential consequences of the repeal of the foreign-targeted bearer bond exceptions. 

We thank you again for the opportunity to present our understanding of the proposed legislation and of its likely consequences should the current draft be adopted. 

We hope the arguments and recommendations we have put forward in this letter 

will be considered and will provide useful guidance in the elaboration of any proposed legislation. 

Yours Sincerely, 

Graham Cox 

Chairman 

ICMSA 

f 

Letter of Martin Egan and Kate Craven 

Dear Sirs, 

The Foreign Account Tax Compliance Act of 2009 

1. We write in relation to the bill (the ‘‘Bill’’) currently before the U.S. Congress 

concerning the above. 

2. The International Capital Market Association (‘‘ICMA’’) is a self regulatory 

organisation representing a broad range of capital market interests including 

global investment banks and smaller regional banks, as well as asset managers, exchanges, central banks, law firms and other professional advisers 

amongst its 400 member firms. ICMA’s market conventions and standards 

have been the pillars of the international debt market for over 40 years, providing a self regulatory framework of rules governing market practice which 

have facilitated the orderly functioning of the market. ICMA’s primary debt 

market committees 1 gather the heads and senior members of the syndicate 

desks and legal transaction management teams of around 20 ICMA member 

banks most active in lead-managing syndicated bond issues in Europe. 

Eurobond issuance so far this year has reached approximately USD 2.4 trillion 

(about half of total global debt issuance). 

3. We understand the Bill is intended to clamp down on U.S. tax evasion and improve U.S. taxpayer compliance by giving the U.S Internal Revenue Service 

(‘‘IRS’’) new administrative tools to detect, deter and discourage offshore tax 

abuses. We fully support Congress in this respect. ICMA does, however, have 

concerns that the Bill in its current form may have some serious side effects 

not intended by Congress and regarding which we would like to assist Congress. 

4. In particular, we understand that one of the Bill’s provisions would end the 

practice of selling bearer bonds to foreign investors under the ‘TEFRA C’ and 

‘TEFRA D’ exemptions pursuant to the Tax Equity and Fiscal Responsibility 

Act. This would inter alia purport to cause non-U.S. borrowers issuing bearer 

bonds outside the U.S. to non-U.S. persons to be subject to a U.S. excise tax 

equal to 1% of the principal amount of such bonds multiplied by the number 

of years to their maturity. 

5. We fear some of the Bill’s other provisions that impose substantial new compliance requirements on non-U.S. institutions might cause some such institutions 

to reconsider their involvement with U.S. securities and/or U.S. market participants. 

6. Like other international markets, the Euromarket has developed along historically different lines to the U.S. market and ever since it became established 

in the 1960’s it has been a bearer bond market. Since then, the Euromarket, 

through the various TEFRA exemptions, has co-existed successfully with the 

U.S. market. 

7. The overwhelming majority of Euromarket securities are held through the 

Euroclear and Clearstream depositaries, which operate on a book-entry basis 

effectively similar to French, Italian and Spanish ‘dematerialised’/‘immobilised’ 

bonds that are deemed to be in registered form for U.S. tax purposes. We note 

IRS Notice 2006/99 in this respect. Congress’s aim on tax evasion seems rather 

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to primarily relate to bearer bonds in ‘definitive’ form that are physically held 

by individual investors—we wish to assist Congress in this aim. 

8. From the above, it seems the timeline for passing and implementing of the Bill 

needs to be revised to allow further evaluation of its potential impact. In particular, Congress may wish to consider: 

• market stability (as mentioned above)—the proposed changes may affect 

issuers’ willingness to go to market and may affect stability of bond markets 

generally; 

• the increased compliance cost burden on the international debt markets— 

aside from the above, there would be consequential changes to clearing systems, tax treatments (including impacts on many tax treaties), documentation 

etc.; 

• potential fragmentation of markets and corresponding lack of global liquidity; 

• restricting U.S. borrowers’ and investors’ ability to access international funding and investment; 

• practicalities for transitional arrangements, including re-financing and other 

transitional issues and, in relation to U.S. issuers, allowing sufficient time for 

the relevant markets to put systems in place to collect and deliver the relevant IRS forms (failing which U.S. issuers may be at a significant albeit 

temporary competitive disadvantage to non-U.S. multinational issuers); and 

• the practicality of the Bill’s stated 180 day implementation timetable. 

9. ICMA would be happy, at your convenience, to explain its concerns and suggestions (including possible clarification that book-entry bearer bonds are not 

treated as bearer debt for the Bill’s purposes) in more detail. 

Yours faithfully, 

Martin Egan, BNP Paribas—Chair, ICMA Primary Market Practices Committee 

Kate Craven, Barclays Capital—Chair, ICMA Legal & Documentation Committee 

f 

Statement of Investment Fund Institute of Canada 

On behalf of The Investment Funds Institute of Canada (IFIC), I would like to 

provide some preliminary comments on the proposed Foreign Account Tax Compliance Act (the ‘‘Bill’’), published on October 27, 2009. IFIC is the voice of Canada’s 

investment funds industry, including fund managers, distributors and industry service organizations with assets under management of $471 billion ($US)—the eighth 

largest mutual fund market in the world after that of the United States. The U.S.- 

Canadian relationship is unique—as notes the U.S. Department of State: ‘‘Since 

Canada is the largest export market for most States, the U.S.-Canada border is extremely important to the well-being and livelihood of millions of Americans. . . . 

The U.S. is Canada’s largest foreign investor . . . and Canada is the fifth largest 

foreign investor in the U.S.’’ (November 2008). 

The following are general comments only as our members are currently reviewing 

the Bill to determine if there are other legal impediments to our members complying 

with the legislation. We will forward any such additional specific comments to you 

at a later date. 

1. In principle, we believe that matters addressed in the Bill (that is, the exchange of information and withholding tax issues) should be addressed under the 

Convention between The United States of America and Canada with respect to Taxes 

on Income and on Capital, signed at Washington on 26 September 1980 as Amended 

on 21 September 2007. The latest Protocol to the Convention came into force on December 15, 2008—less than 12 months ago. 

2. In terms of specifics, we would like to bring the following practical concerns 

to your immediate attention: 

a. We believe that the effective date of the Bill—for years beginning after December 31, 2010—is not feasible given the lack of precision in certain aspects 

of the Bill, the expectation of extensive new procedural requirements in asyet-undrafted regulations and the global reach of the Bill. We believe the effective date should be postponed to two years following finalization of required regulations governing procedural matters. 

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b. We have serious concerns with the requirement to share personal client information between affiliated companies on a worldwide basis as contemplated in the Bill, given that it may be contrary to privacy legislation of 

countries that may, in fact, have privacy laws similar to those enacted in the 

U.S. Canada has a strong commitment to maintaining the privacy of personal records, as exemplified by its Personal Information Protection and Electronic Documents Act (PIPEDA) legislation. Given the nature of the information that is required to be disclosed, we believe that the Secretary should 

continue to rely on longstanding formal bilateral agreements between the 

U.S. and Canadian government agencies that provide for mutual co-operation 

and the exchange of relevant information. The U.S. government itself has extensive concerns about cybersecurity, and the Bill’s proposal for additional 

sharing of information across countries presents risks that the confidentiality 

of personal information will be breached. To address some of these concerns, 

we recommend that consideration be devoted to giving the Secretary of the 

Treasury the right to provide exceptions and grant relief from disclosure in 

appropriate cases. 

c. Gross proceeds, including invested capital, appear to be caught in the ambit 

of the Bill and would be subject to the 30% withholding tax. We believe that 

these amounts should be grandfathered. 

d. We believe that the legislation is unclear with regard to third-party intermediaries in the case of entities acting for clients holding their investments 

in nominee form. We think that third-party intermediaries should be responsible for reporting. 

We hope that the Bill will be amended as requested above to avoid negative repercussions on Canadians’ investment in the U.S. As noted above, our members continue to review the documentation and seek guidance, after which point we may 

provide additional comments. We would appreciate being including in any further 

communications on this subject and would be pleased to elaborate on our comments 

at your convenience. 

Yours sincerely, 

Original signed by J. De Laurentiis 

President and CEO 

f 

Statement of The Investment Industry Association of Canada 

The Investment Industry Association of Canada (IIAC) would like to take this opportunity to submit comments to the House Ways and Means Select Revenue Measures Subcommittee with regard to the draft legislation impacting foreign financial 

institutions (FFIs) contained in HR 3933, the Foreign Account Tax Compliance Act 

of 2009 (the Act) filed by Chairman Rangel on October 27, 2009. We would kindly 

ask that you consider these comments, and include them in the record for the hearing held on November 5, 2009. 

BACKGROUND INFORMATION 

The IIAC is Canada’s equivalent to the Securities Industry and Financial Markets 

Association (SIFMA) in the United States, and represents over 200 investment dealers across Canada. 

In June 2000, the Department of Finance Canada reported that there were 188 

securities firms in Canada at the end of 1999 and that the 7 largest firms accounted 

for approximately 70% of the industry’s capital. At that time, all but one of Canada’s 

large, full-service securities firms were bank owned. The landscape of the Canadian 

securities industry has not changed significantly since that time. 

In August 2001, the Department of Finance Canada estimated that banks accounted for approximately 70% of the total domestic assets held by the financial 

services sector, and that the six major domestic banks accounted for over 90% of 

the assets held in the banking industry. 

GENERAL CONCERNS REGARDING THE ACT 

The IIAC understands the U.S. government’s concerns regarding the use of offshore accounts and entities by certain persons to evade U.S. tax. This is a concern 

shared by the governments of many countries, and we have observed increased global efforts and inter-governmental cooperation through the inclusion of tax information exchange provisions in many new income tax treaties and protocols to existing 

treaties, as well as an increase in the number of tax information exchange agreements between countries that do not have income tax treaties in effect. 

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We recognize that an opportunity exists for the Internal Revenue Service (IRS) 

to use its influence over FFIs in the U.S. government’s efforts to identify U.S. persons that may be evading U.S. taxation of income earned, directly or indirectly, 

through offshore accounts. Implementing the Act as proposed would allow the IRS 

to receive information automatically from FFIs and avoid having to make requests 

to foreign governments under tax information exchange agreements or under exchange of information provisions contained in income tax treaties. However, we believe that a more appropriate means to address tax evasion is by the use of international solutions developed through negotiations between governments, not 

through negotiations and agreements between the IRS and private entities. 

We are extremely concerned that compliance with the Act will impose a significant level of additional cost and operational risk on FFIs that will be disproportionate to the amount of additional U.S. tax revenue generated. In particular, we 

are concerned that many FFIs will not find it economically feasible to enter into 

agreements with the IRS under proposed section 1471(b) (FFI Agreements) and 

to continue to operate as Qualified Intermediaries (QIs). It would be unfortunate 

to see foreign financial institutions forced to exit the QI regime into which they and 

the IRS have invested significant resources. 

Foreign financial institutions will also need to consider the impact on their clients. It will be difficult to justify additional burdens and costs being placed on nonU.S. account holders with no investment in U.S. securities. Ultimately, this will 

likely have a detrimental impact on U.S. capital markets generally by creating disincentives for Canadians and other foreign investors to invest in the U.S. The 

‘‘green shoots’’ of economic recovery in the U.S. could be stunted by the disproportionately onerous provisions of the Act. It could also result in a loss of opportunity 

for American investors by creating disincentives for U.S. persons to open accounts 

in Canada and elsewhere, disrupting the flow of global capital markets. 

If the Act is enacted, it is critical that the Department of the Treasury (Treasury) and the IRS work closely with FFIs to ensure that the detailed requirements 

strike a reasonable balance between increasing U.S. tax revenue by identifying tax 

evasion by U.S. persons, and the additional financial burden and operational risks 

being imposed upon FFIs, in an effort to maximize the continued participation of 

such institutions in the QI regime and the number that enter into FFI Agreements 

with the IRS. 

CONCERNS REGARDING SPECIFIC PROVISIONS OF THE ACT 

Below we have summarized our concerns regarding specific provisions of the Act. 

Our comments are limited to the proposed new Chapter 4 of the Internal Revenue 

Code. 

1. Effective Date 

The Act provides that new Chapter 4 will generally apply to payments made after 

December 31, 2010. 

We strongly believe that the implementation of the Act’s requirements with respect to the identification and reporting of certain foreign accounts will require a 

substantially longer timeframe, especially given that much of the detail about implementation will be contained within regulations to be developed by Treasury, and 

within the FFI Agreements to be negotiated between FFIs and the IRS. 

Once the Act is enacted, Treasury and the IRS will need to develop detailed regulations, model FFI Agreements, reporting forms, and other guidance. Until these details are finalized, an FFI will not be in a position to fully assess the costs and risks 

associated with compliance, and ensure that there are no legal or operational restrictions which would impede the FFI’s ability to comply with the terms of the FFI 

Agreement. 

An FFI cannot make the business decision to enter into such an agreement without completing this internal review and analysis. 

Once an FFI has confirmed that it can and will enter into an FFI Agreement with 

the Secretary, it needs time to make the necessary systems and operational changes 

to gather and record the additional information required for the purposes of identifying United States accounts, as well as accounts that are excluded from the requirements, and to modify systems to be able to produce the necessary reporting information. For most large FFIs, the minimum period required to make the necessary changes will be at least two years. 

If FFIs are not given enough time to make the changes necessary to be able to 

comply with the terms of the FFI Agreement, there is a risk that they will delay 

entering into such agreements until they are able to comply, even if this is after 

the effective date. If this results in the application of the 30% withholding on payments to the FFI in the interim, it could be extremely disruptive to the flow of U.S. 

withholdable payments and investment in the U.S. market. 

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Withholding agents will also need to identify their FFI clients and determine 

which ones have entered into FFI Agreements. Those FFIs that do not currently 

have the capability to withhold 30% tax on withholdable payments made to other 

FFIs or applicable non-financial foreign entities will need to implement the necessary changes. For many such FFIs, withholding on gross proceeds may present 

the greatest challenge. 

Significant IRS resources will also be needed to process large numbers of FFI 

Agreements in a very short time period. A large affiliated group of FFIs could easily 

be operating in more than 50 countries and may have multiple legal entities within 

each of those countries that might enter into FFI Agreements. Whereas there are 

currently approximately 5,500 entities that have QI Agreements with the IRS, given 

the broad definition of FFI, there are potentially hundreds of thousands of entities 

that could be in position to enter into FFI Agreements with the IRS. 

We recommend that the effective date of December 31, 2010 be removed from the 

Act and replaced with a provision giving power to the Secretary to devise a flexible 

or staggered effective date under the accompanying regulations. The effective date 

should be determined with regard to finalization of regulations, guidance and agreements. 

2. Authority of the Secretary of the Treasury 

The Act provides that the ‘‘Secretary shall prescribe such regulations or other 

guidance as may be necessary or appropriate to carry out the purposes of this chapter.’’ Throughout proposed new Chapter 4, there are numerous provisions that give 

the Secretary the authority to define exceptions and exclusions from the requirements, as well as the detailed requirements. 

However, there are certain additional areas where we would like to see greater 

authority given to the Secretary: 

• Authority to define exceptions to the requirement in section 1471(b)(1)(A) to 

obtain information from each holder of each account maintained as is necessary to determine which accounts are ‘‘United States accounts’’. 

For example, it may be appropriate for the Secretary to provide exceptions for 

accounts existing on the effective date or accounts that are regarded as posing 

a low risk of tax evasion. 

• Authority under section 1471(b)(1)(E)(ii) to provide alternatives to closing 

United States accounts for which the FFI is unable to obtain a valid and effective waiver under section 1471(b)(1)(E)(i) where foreign law prohibits the 

closing of such accounts. • Authority to define the thresholds under which depository accounts for individuals are excluded from the definition of ‘‘United States account’’. See additional comments under point 5 below. 

3. Information to be reported on United States Accounts 

Section 1471(c)(1) sets out very specific requirements with respect to the information to be reported on United States accounts, including the following: 

• Name, address and TIN of each account holder that is a ‘‘specified United 

States person,’’ and in the case of an account for a ‘‘United States owned foreign entity,’’ the name, address and TIN of each ‘‘substantial United States 

owner’’ of the entity. 

• Account number. 

• Account balance or value (determined at such time and in such manner as 

the Secretary may provide). 

• Gross receipts and gross withdrawals or payments from the account (determined for such period and in such manner as the Secretary may provide). 

With respect to account balance or value, and gross receipts, withdrawals or payments, our understanding is that the Secretary only has the authority to determine 

the time or reporting period, and the manner in which such information is to be 

provided, but not whether or not such information must be reported. 

There may be situations in which reporting such information may be extremely 

onerous and/or not particularly meaningful or useful to the IRS. For example, in 

some financial institutions, clients may have a depository account to hold cash and 

a custody account to hold securities. In such situations, purchases, sales and income 

transactions will be reported in both the depository account and the custody account. If both of these accounts report the proposed amounts, the information provided to the IRS will be overstated and misleading. We recommend that section 

1471(c)(1) be amended to delete (D) and replace the current requirement under (C) 

with a more general requirement for such additional information and in such manner as the Secretary may provide. 

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4. Reliance on Certification from Account Holders 

Although the Act does not set out specific requirements regarding the methods 

that an FFI is to employ for purposes of identifying its United States accounts, there 

is a degree of protection provided to the FFI in section 1471(c)(3), allowing them 

to rely on a certification from an account holder ‘‘if neither the financial institution 

nor any entity which is a member of the same expanded affiliated group as such 

financial institution knows, or has reason to know, that any information provided 

in such certification is incorrect.’’ 

Most FFIs that belong to an affiliated group will not be able to make use of the 

protection that this provision is intended to provide, primarily for the following reasons: 

• Most affiliated groups of financial institutions do not have common operating 

systems or systems that have the ability to communicate with one another. 

In many cases, groups have grown and expanded through acquisitions, with 

each new acquisition bringing their legacy systems with them. Even within 

a single legal entity, there are frequently a number of different systems being 

used to support the diverse range of products and services that the FFI offers. • In most jurisdictions, there are legal restrictions which prevent the sharing 

of information between separate legal entities without explicit client consent. 

We recommend that section 1471(c)(3) be amended to limit the FFI’s knowledge, 

or purported knowledge, that any information provided in a certification is incorrect 

to the information that the FFI has in its own electronic files. We understand the 

concern that an account holder could provide information to one entity within an 

affiliated group indicating that they are not a United States account holder, and 

they could also have an account with another member of the affiliated group that 

has information on file indicating that the account holder is a U.S. person. However, 

given that information about the account with the second affiliated entity would be 

reported to the IRS, the IRS is already being provided with adequate information 

regarding the U.S. person which could then be used to request additional information for this person under income tax treaties or tax information exchange agreements. 

5. Exception for Certain Accounts Held by Individuals 

The definition of ‘‘United States account’’ provides an exception for depository accounts held by natural persons where the aggregate value of all depository accounts 

held does not exceed $10,000, or $50,000 where all such account were already in 

existence on the date of enactment. 

While we understand that this ‘‘de minimis’’ type exception was likely created 

with the intention of providing some relief to FFIs, the exception as currently drafted is operationally impractical, and would provide little or no relief to FFIs that 

would need to build the exception into their reporting systems. It would be extremely difficult and costly for an FFI to identify all accounts held by an individual, 

particularly where the individual only has a partial interest. In addition to the practical considerations, as discussed above under point 4, most jurisdictions impose 

legal restrictions which restrict the sharing of information between legal entities. 

We recommend that the provision be amended to apply on an account by account 

basis and that authority be given to the Secretary to define the thresholds. 

6. Termination of the Agreement 

The Act provides that the FFI Agreement to be executed by the FFI and the Secretary may be terminated by the Secretary upon a determination that the FFI is 

out of compliance. A reciprocal provision should be added allowing the termination 

of the agreement by the FFI upon notice to the Secretary. 

The IIAC appreciates the opportunity to provide you with this submission and 

would very much like to meet with your committees and staff to discuss our position 

and recommendations. To arrange a meeting, please contact the undersigned or Andrea Taylor, Assistant Director. 

Yours sincerely, 

Ian Russell 

President 

f 

Statement of the Organization for International Investment 

The Organization for International Investment (OFII) is a business association 

representing the U.S. subsidiaries of many of the world’s largest international companies. The U.S. subsidiaries of companies based abroad directly employ over 5 miljoloto on DSK67XMDP1PROD with HEARING

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lion Americans and support an annual U.S. payroll of over $364 billion. As evidenced by the attached OFII membership list, many OFII members are household 

name companies with historic and substantial U.S. operations. On behalf of these 

companies, OFII advocates for the fair, non-discriminatory treatment of U.S. subsidiaries. We undertake these efforts with the goal of making the United States an 

increasingly attractive market for foreign investment, which will ultimately encourage international companies to conduct more business and employ more Americans 

within our borders. Given the recent global financial turmoil, as well as companies 

increasing ability to conduct worldwide operations through other jurisdictions, 

OFII’s mission is more critical than ever to sustaining and rebuilding the American 

economy. 

On October 27, 2009, the Chairman of the Senate Finance Committee, Max Baucus, and Senator John Kerry, and the Chairman of the House Ways and Means 

Committee, Charles Rangel, and Representative Richard Neal, released proposed 

legislation titled the Foreign Account Tax Compliance Act of 2009 (FATCA). The 

proposed legislation adopts and revises many of the proposals set forth in President 

Obama’s Administrative Proposal titled Leveling the Playing Field: Curbing Tax Havens and Removing Tax 

Incentives for Shifting Jobs Overseas that was released in May 2009. 

OFII welcomes the initiative of Congressional leaders to enhance the ability of the 

Internal Revenue Service to police tax evasion perpetuated by U.S. persons through 

the use of offshore accounts and entities. All legitimate business enterprises benefit 

from a tax system that is respected by taxpayers and key to that respect is confidence that everyone is paying their fair share. Accordingly, OFII not only endorses 

the aims of the proposed legislation but is anxious to work with Congress to formulate rules that aid the Internal Revenue Service in the detection of tax evasion and 

increases the flow of information to the Internal Revenue Service while, at the same 

time, does not impede the orderly conduct of legitimate business commerce nor disrupt or discourage foreign investment into the United States. 

Our comments below are limited to those aspects of the proposed legislation that 

are most relevant to our members, the U.S. subsidiaries of foreign multinational corporations, and to their parent companies. We stand ready to offer our assistance in 

refining the legislation to achieve its important goals without disrupting legitimate 

business activities. 

We have organized are comments as follows: 

Section I—Limiting the Scope of New Chapter 4 to Target Circumstances in 

Which the Most Realistic Potential for Abuse Exists Without Unnecessarily Impeding International Commerce. 

Section II—Refining the New Rules to Maintain Equitable Treatment. 

Section III—Preserving the Ability of Multinational Corporations to Access the 

Eurobond Market. 

Section IV—Making the New Rules More Workable. 

Section I 

Limiting the Scope of New Chapter 4 to Target Circumstances In Which the 

Most Realistic Potential for Abuse Exists Without Unnecessarily Impeding International Commerce. 

1. Targeting the Section 1472 Documentation Requirements to Areas of Concern—Section 1472 imposes burdens on foreign enterprises that can be difficult, and, in some cases, impossible to meet. Determining the U.S. tax status of minority owners and tracing indirect ownership through private equity 

funds can place an impractical burden on business enterprises that are not 

the logical targets for offshore tax evasion. Any foreign corporation that does 

not qualify for the exception for corporations publicly-traded on an established securities market (or that could become non-public in the future) could 

be seriously impacted by this part of the legislation. 

• The category of foreign entities subject to the increased documentation requirements should be narrowed—We believe that the category of foreign 

entities subject to this burden be narrowed as follows: 

• The exclusion for publicly-traded companies should be expanded. Many countries have not developed their capital markets to the level of the United 

States. As a result, many widely-held foreign enterprises may be within the 

spirit of the exclusions in Section1472(c) but do not meet the requirement of 

being traded on ‘‘an established securities market.’’ 

OFII Recommendation: Section 1472(c) should be modified to address alternative markets, similar to Section 7704(b)(2), by adding at the end: ‘‘or is readily 

tradable on a secondary market (or the substantial equivalent thereof).’’ 

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• Section 1472 can be further refined to exclude companies that are unlikely 

to be candidates for utilization by tax evaders. This can be best accomplished 

by using precedent in the tax law to identify the appropriate category of corporations that are most susceptible to improper use and can most readily 

apply the operative rules. 

OFII Recommendation: An exception to the application of Section 1472, patterned after the original Code section aimed at inappropriate use of offshore companies—the now-obsolete foreign personal holding company regime, should be added. 

Section 552(a) included an ownership test which was met if 5 or fewer individuals 

who are U.S. citizens or residents owned over 50% of the company, by vote or value, 

at any time during the taxable year. This test is appropriately aimed at the right 

class of companies and is a test that would be practical for foreign companies to 

apply. Utilizing an ownership test that is relatively easy for the company to apply 

is likely to be more effective than using a more expansive standard that may not 

be practical for many companies to apply. 

• Foreign pension funds and sovereign wealth funds are major sources of foreign investment in the United States and generally are exempt from U.S. taxation on U.S. source investment income under Section 892. 

OFII Recommendation: Foreign pension funds and sovereign wealth funds 

should be excepted from Section 1472. 

• The category of payments to which expanded documentation applies should be 

narrowed—Many foreign business enterprises may have a high volume of 

payments receivable from payors in the ordinary course of business that 

would be subject to the increased documentation obligations, including broad 

disclosure of ownership information to the payors. For example, a UK company licensing software to U.S. users may have thousands of customers making royalty payments. Section 1472(b) would require the software company to 

provide every U.S. customer with the name, address, and U.S. taxpayer identification number of each of its U.S. substantial owners (including indirect 

ownership) or certify that there is no U.S. ownership. 

OFII Recommendation: The intent of Section 1472 can be achieved by limiting 

its application to payments of dividends and interest without disrupting the ordinary course of commerce. 

2. Clarify That Internal Holding and Finance Companies Are Not Financial Institutions Within the Scope of Section 1471—Section 1471(d)(5)(C) includes in 

the definition of a financial institution any entity that is engaged in the business of investing in securities. Many foreign multinational enterprises have 

holding and finance companies within the corporate, whose sole purpose is 

to hold shares of affiliates or to act as an internal central financing vehicle 

for intercompany loans. These internal special purpose entities may exclusively operate to hold securities—equity of affiliates or notes from affiliates. 

The Section 1471(d)(5)(C) definition could be read to treat these internal 

holding and finance companies as foreign financial institutions. 

OFII Recommendation: The Section 1471(d)(5)(C) definition of a ‘‘financial institution’’ should be clarified to make clear that a holding or finance company (including the parent of an affiliated group that holds the shares of its subsidiaries) 

that predominantly holds securities of affiliates does not fall within this definition. 

Section II 

Refining the New Rules to Maintain Equitable Treatment 

1. Maintain Parity of Treatment for U.S. Subsidiaries of Foreign Multinationals 

• The definition of ‘‘specified U.S. person’’ should treat subsidiaries of publiclytraded foreign corporations comparably to subsidiaries of publicly-traded U.S. 

corporations—Section 1473(3) defines ‘‘specified United States person’’ which 

defines the category of accounts subject to the new proposed reporting rules 

of Chapter 4. The first exclusion is any U.S. person that is a publicly-traded 

corporation. The second exclusion is any corporation that is a member of the 

same expanded affiliated group as the publicly-traded corporation. This formulation could be read as not including U.S. affiliates of foreign publicly-traded corporations. This potential discrimination between a U.S. subsidiary of a 

U.S. publicly-traded corporation and U.S. subsidiary of a foreign publiclytraded corporation is not justified. It is not clear this distinction is intended. 

OFII Recommendation: Section 1473(3) should be clarified to make clear that 

U.S. subsidiaries of foreign corporations are treated comparably to U.S. subsidiaries 

of U.S. corporations. This could be accomplished by adding to the end of Section 

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1473(3)(B) the following: ‘‘without regard to whether the corporation described in 

subparagraph (A) is domestic or foreign.’’ 

2. Foreign Financial Institutions That Do Not Enter Into Chapter 4 Agreements 

Should Not Be Denied Statutory Tax and Treaty Benefits—In addition to requiring 30% withholding on the expanded category of withholdable payments 

for financial institutions that do not enter into an agreement with the IRS, 

Section 1474(b)(2) would further burden these foreign financial institutions 

with the denial of interest on refunds and the denial of current statutory exemptions from tax with respect to income beneficially owned by the institution. These additional burdens imply that if a foreign financial institution 

does not enter into a Chapter 4 agreement, it is unwilling to cooperate on 

combating tax evasion. However, the Chapter 4 agreement can be quite burdensome on a financial institution and some institutions may make a business judgment, based on their customer base and operations, that the benefits of entering into an agreement with the IRS are outweighed by the burdens that the agreement would impose on them. This is a ‘‘benefits and burdens’’ business decision; not typically motivated by willingness to aid in the 

perpetuation of tax evasion. The burden of a 30% withholding tax on all 

withholdable payments to the foreign financial institution achieves the basic 

compliance goal of Section 1471. The additional burdens respecting withholdable payments made to a foreign financial institution for its own account are 

punitive in nature, unjustified, and set a dangerous precedent. 

OFII Recommendation 1 (No impairment of treaty benefits): The disallowance of interest with respect to a credit or refund of over withheld tax (under Section 1474(b)(2)(A)(i)) if the beneficial owner of the payment is entitled to a reduced 

rate of tax under a U.S. income tax treaty would impose an effective tax penalty 

on the treaty benefit—an unprecedented partial clawback of treaty benefits. This 

would be a dangerous precedent and should be eliminated. 

OFII Recommendation 2 (Reinstate statutory tax benefits): The denial 

(under Section 1474(b)(2)(A)(ii)) of the benefit of tax reductions for several types of 

payments that are currently statutorily exempt from tax, including the exemptions 

for bank deposit interest, short-term original issue discount, and portfolio interest, 

and payments representing effectively connected income that may otherwise be subject to a lower net income tax should be eliminated. Denial of any reduction from 

the 30% tax on gross proceeds, to account for return of basis, is particularly penal 

in nature. We are very concerned about the impact the denial of the portfolio interest exemption would have on the ability of issuers of portfolio debt instruments, as 

it would interfere with an important secondary market for the sale of these debt 

instruments within the banking community. 

3. The Proposed Override of the existing Withholding Rules Should Be Limited 

in Scope—The existing withholding rules under Chapter 3 of the Code (Sections 1441–1446) have been developed over a long period of time and contain 

numerous exceptions, limitations, and coordination rules that further the 

policies behind the withholding rules and assure their proper interaction 

with other Code provisions. Section 101(b) of the proposed legislation provides coordination rules that would appear to override all the above limitations and exceptions. For example, current law Section 1441 excludes from 

its scope U.S. FDAP that is effectively connected with the conduct of a U.S. 

trade or business (which must be evidenced by the payee providing Form W– 

8ECI) whereas the proposed Chapter 4 definition of a withholdable payment 

appears to include FDAP that is also effectively connected income. Other examples include rules coordinating the interaction of Sections 1441, 1445, and 

1446 and the waiver of interest and penalties for underwithholding where 

the withholding agent establishes that the full substantive tax liability has 

been satisfied. 

OFII Recommendation: The legislative history should make clear the expectation that Treasury will apply the exceptions, limitations, and other coordination 

rules that currently exist under Chapter 3 withholding rules to the extent not in 

conflict with the purpose behind new proposed Chapter 4. 

Section III 

Preserving the Ability of Multinational Corporations to Access the 

Eurobond Market 

We believe that Section 102, repealing tax benefits for foreign-targeted bearer 

bonds should be stricken and Treasury be instructed to review the foreign targeting 

rules to determine whether they need to be revised to minimize the risk of these 

bonds being utilized as a vehicle for U.S. tax evasion. In today’s market place, the 

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distribution and transfer of bearer bonds is carried out through a regimented system in which these bonds typically are not physically transferred but are ‘‘immobilized’’ by being physically held by the major clearing houses. Ownership interests 

are transferred through a largely book entry system maintained by clearing houses, 

brokers and dealers. The use of foreign-targeted bearer bonds is the traditional 

means by which bonds are floated in the Eurobond market. The repeal of the U.S. 

tax benefits for issuers and holders of these bonds could be a major impediment to 

the ability of U.S. corporations to float debt in the Eurobond market. Any perceived 

concern about bearer bonds could be addressed by Treasury regulations treating immobilized obligations as either registered or as the only acceptable form of bearer 

bonds. We note that, in order to claim the portfolio interest exemption for registered 

bonds, the beneficial owners have to provide IRS Form W–8BEN to the payor of the 

interest. Requiring every holder of a Eurobond to submit a U.S. tax form would be 

a significant impediment to floating Eurobonds that would put U.S. corporations, 

and some foreign corporations (see immediately below), at a substantial disadvantage. 

In addition, foreign corporations that are entitled to the benefit of a U.S. income 

tax treaty typically are able to loan funds to their U.S. affiliates and obtain the benefit of the reduced rates of tax, or exemption from tax, on interest paid by the U.S. 

affiliate. However, if the lender of the funds (or a related party) to the U.S. affiliate 

has borrowed funds and the interest on the borrowed funds would not be entitled 

to a comparable U.S. tax reduction had the borrowed funds been lent directly to the 

U.S. affiliate, the treaty benefit may be denied under the U.S. anti-conduit regulations under certain circumstances. Currently, if the foreign affiliate borrowed funds 

in the Eurobond market by the common practice of issuing foreign-targeted bearer 

bonds, the anti-conduit rules would not be applicable because, had the U.S. affiliate 

issued the bearer bonds directly, the interest would have been exempt from tax 

under the portfolio interest exemption. The repeal of the exemption for foreign-targeted bearer bonds would mean that this protection from the application of the anticonduit regulations would no longer be available. 

Section IV 

Making the New Rules More Workable 

1. The Proposed Effective Date Rules Are Unrealistically Short—The new proposed Chapter 4 withholding rules are proposed to be effective for payments 

made after December 31, 2010. Neither the government nor taxpayers are 

likely to be able to comply with this effective date. Most financial institutions 

have sophisticated and complex systems in place, many of which have been 

adapted over time to conform to U.S. tax compliance requirements. A great 

deal of time, expense, and energy will be required to alter, or replace, these 

systems and operating procedures. Financial institutions with retail banking 

operations that have documented their account holders based on local identification cards or by employing know-your-customers procedures will have no 

reliable means of determining whether account holders are U.S. citizens or 

residents without requesting new documentation from every customer. New 

procedures will be required to determine which foreign entity account holders are themselves foreign financial institutions under the expansive definition of a foreign financial institution and, once that determination is made, 

which foreign entities have substantial U.S. owners, which will require determining both the direct and indirect U.S. ownership of the foreign entity 

by both vote and value. The challenges foreign financial institutions will face 

with regard to account holders that are trusts is discussed in Paragraph 5, 

below. Similarly, it will require time to educate foreign entities that are not 

financial institutions to the new compliance requirements and to put adequate procedures in place. Foreign financial and non-financial institutions 

that will want to become compliant with the requirements of the new legislation, which is proposed to become effective for payments made after December 31, 2010, would not have sufficient time to ensure that their systems are 

adequate to provide the required information. 

OFII Recommendation: The statute should delay the effective date of new proposed Chapter 4 for at least an additional year with express authority vested in the 

Secretary to delay the effective date to assure adequate time for both the government and taxpayers to adapt to the new rules. 

2. The FATCA Provisions Should Not Apply to Transactions Already in Place— 

Effective dates for many provisions of the proposed legislation do not take 

into account existing financial arrangements. For example, under Section 

501, the treatment of certain notional principal contract payments made to 

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foreign persons as U.S. source dividends for U.S. tax purposes applies to payments made on or after a date that is 90 days after the date of enactment. 

Even if the scope of the rule were specifically defined, which it is not, as the 

Secretary would have broad authority to prescribe its scope, the effective 

date is unrealistically short to permit the orderly unwinding of existing contracts. 

OFII Recommendation: The effective date rules should be revisited with a view 

to a more equitable transition to the new rules. As in the case of the above recommendation with regard to the effective date of Chapter 4, the Secretary should 

be given the discretion to delay the prescribed effective dates. 

3. Individual Reporting Requirements for Interests in Foreign Financial Assets 

Should Not Be Duplicated—New Section 6038D would add new information 

reporting by individuals that hold any interest in a ‘‘specified foreign financial asset.’’ The new reporting would overlap with the reporting of foreign financial accounts under the TD F 90–22.1 (FBAR) reporting regime. 

OFII Recommendation: One or the other regime, but not both, would allow filers to conform to a rational set of rules. If Section 6038D reporting is selected, care 

should be taken to ensure that individuals with only signature authority and no financial interest in the account are not considered to ‘‘hold an interest in a foreign 

financial asset.’’ As noted in the comments made by OFII in relation to FBAR reporting in the 2009 letter concerning Notice 2009–62, the administrative burden and 

complexity must be reduced as a matter of encouraging compliance. 

4. Making Compliance by Foreign Financial Institutions Workable—Chapter 4 

impacts every foreign financial institution that exists outside the United 

States, including a great many entities that do not traditionally fall into the 

category of a financial institution. Below we include two specific recommendations to make the rules more workable for these institutions and entities, 

brought to our attention by OFII members. We expect that many impacted 

entities and trade associations will provide Congress with more extensive 

input on the practical implications of Chapter 4 for foreign financial institutions. The two recommendations below are not intended to be a comprehensive identification of all the practical hurdles these institutions may face. • Workable due diligence and verification procedures need to be established.— Section 1471(b)(1)(B) provides for verification and due diligence procedures as 

the Secretary may require with respect to the identification of United States 

accounts. If such procedures include an external audit, it would add a significant cost for foreign financial institutions, especially if it required a regular 

audit process rather than the existing QI agreed-upon procedures. 

OFII Recommendation: We suggest that the financial institutions should have 

the option to be able to make representations to the IRS concerning their 

verification and due diligence procedures and that there have been no breaches of 

such procedures under an internal rolling risk evaluation program that the institution has agreed with the IRS. 

• Application of Chapter 4 rules to trusts needs to be practical—There is a practical issue caused by the interaction between Bill sections 101 and sec. 402, 

which introduces a new presumption rule for foreign trusts under new sec. 

679(d). The new presumption rule states that if a U.S. person directly or indirectly transfers property to a foreign trust (other than a trust established for 

deferred compensation or a charitable trust), the trust shall be presumed to 

have a U.S. beneficiary, unless such person can demonstrate to the satisfaction of the Secretary that pursuant to the trust deed: (1) no income or corpus 

of the trust may be paid or accumulated during the tax year to or for the benefit of a U.S. person; and (2) if the trust were terminated during the taxable 

year, no part of the income or corpus could be paid to or for the benefit of 

a U.S. person. In addition, the U.S. transferor must submit all information 

required by the Secretary to avoid the U.S. beneficiary presumption. 

As a result of the U.S. beneficiary presumption, existing section 679(a) would 

treat the U.S. transferor as an owner with respect to the portion of the trust attributable to such property and thus treat the trust as a grantor trust. Under new section 1473(2), a ‘‘substantial United Sates owner’’ is defined to include any specified 

United States person treated as an owner of any portion of a grantor trust. Hence, 

it will be necessary for a foreign entity to monitor all transfers to all trusts to determine if they were made by a U.S. person and examine the trust documentation to 

determine if no income could be paid to or for the benefit of a U.S. person, in order 

to see whether it must apply the presumption and be required to treat the trust 

as a grantor trust with a U.S. owner and thus a substantial United States owner. 

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1The members of The Clearing House are: ABN AMRO Bank N.V.; Bank of America, National 

Association; The Bank of New York Mellon; Citibank, N. A.; Deutsche Bank Trust Company 

Americas; HSBC Bank USA, National Association; JPMorgan Chase Bank, National Association; 

UBS AG; U.S. Bank National Association; and Wells Fargo Bank, National Association. 

Accordingly, a foreign financial institution would be required to withhold or report, 

obtain the necessary certification, etc. and a non-financial foreign entity would be 

required to treat all trusts as a ‘‘substantial U.S. owner.’’ Such monitoring and review of trust documentation will be nearly impossible. Foreign financial institutions 

may have thousands of trust accounts, which would place the foreign financial institution at risk. 

OFII Recommendation: Either the presumption rule should be eliminated or 

section 1473(2)(iii) should be modified to exclude the applicability of the new presumption rule in determining whether a trust is a grantor trust (e.g., add to the 

end of clause (iii) the words ‘‘without regard to section 679(d)’’ or similar verbiage). 

We also note that the definition of substantial United States owner does not address other types of trusts such as complex and simple trusts, which perhaps implies that there is no requirement to look through such trusts. 

f 

Clearing House Association L.L.C., letter 

Dear Chairman Neal and Ranking Member Tiberi: 

The Clearing House Association L.L.C. (‘‘The Clearing House’’), an association of 

major commercial banks,1 welcomes the opportunity to present comments on the 

Foreign Account Tax Compliance Act of 2009 introduced by the Chairmen of the 

House Ways and Means and Senate Finance Committees on October 27, 2009 (the 

‘‘Bill’’). We believe a detailed and thoughtful comment letter that represents the 

views of our members will be the most helpful to you. Therefore, we intend to submit a more detailed comment letter that will express our members’ views and concerns once we have had the opportunity to fully review and discuss these matters. 

In recognition of the November 19th deadline for submitting written comments to 

be included in the record of the November 5th hearing on the Bill we wanted to 

inform you of the provisions of the Bill upon which we expect to comment, including: 

(i) the provisions in Section 101 of the Bill that impose a 30% withholding tax on 

all US-source payments received by a foreign financial institution unless that institution (and each of its foreign affiliates) enters into an agreement with the Treasury 

Department to report certain customer information; (ii) the provisions in Section 101 

of the Bill that require withholding on payments to foreign entities that have not 

identified their substantial U.S. owners; (iii) the provisions of Section 102 of the 

Bill, which would repeal the exception to registration for foreign targeted issuances 

(i.e., the bearer debt provisions); (iv) the provisions of Section 301 that would require a ‘‘material advisor’’ to notify the IRS if they assist a U.S. individual in the 

direct or indirect acquisition of a foreign entity; (v) the provisions in Sections 201, 

202 and 203 of the Bill that relate to newly proposed FBAR-like reporting by holders of foreign assets; and (vi) the provisions in Section 501 of the Bill that would 

impose a withholding tax on dividend equivalent amounts. Perhaps most importantly we expect to comment on, and suggest several changes to, the effective dates 

in the Bill as the Bill would impose substantial new reporting requirements that 

would take substantially more time to implement than the current effective dates 

contemplate. We expect that our comments will include suggestions that further the 

policies espoused by the Bill’s sponsors while minimizing the burdens that would 

be placed upon financial institutions and others by the Bill as currently drafted. 

We would also like to express our concurrence and support of the views set forth 

in the November 19, 2009 letter sent to you by Securities Industry and Financial 

Markets Association. 

We appreciate your consideration of these comments and those to be set forth in 

our upcoming letter. If you have any questions or if the members of The Clearing 

House can assist you in considering these important issues, please contact me at 

(212) 612–9234. 

Sincerely, 

f 

JRA:kp 

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1Our membership’s concerns and comments on other sections of the Bill have been expressed 

by other commenters. 

European Banking Federation’s Letter 

Dear Chairman Neal and Ranking Member Tiberi: 

The European Banking Federation (‘‘EBF’’) and the Institute of International 

Bankers (‘‘IIB’’) appreciate the opportunity to comment on the Bill’s proposed new 

reporting and withholding tax system (Section 101 of the Bill, which would add new 

Chapter 4, containing Sections 1471–1474, to the Internal Revenue Code).1

The EBF is the voice of the European banking sector (EU and EFTA countries). 

The EBF represents the interests of some 5,000 European banks, and encompasses 

large and small, wholesale and retail, local and cross-border financial institutions. 

The IIB represents internationally headquartered financial institutions from over 30 

countries, including Europe, the Americas and Asia, with banking and securities operations in the United States. Together, the EBF and IIB represent most of the nonU.S. banks and securities firms around the world that are affected by the Bill. 

OVERVIEW 

We understand and support the Bill’s goal of tackling offshore tax evasion by U.S. 

persons. We offer the recommendations herein to further that goal in a manner that 

takes account of the structure and operations of financial intermediaries and the 

markets that they serve, as well as compliance costs and burdens. 

We have worked closely with the Treasury Department and the Internal Revenue 

Service (the ‘‘IRS’’) for over a decade in seeking to improve the U.S. reporting and 

withholding tax rules, including the development and implementation of the qualified intermediary (‘‘QI’’) system. Our member banks have expended enormous 

amounts of money to implement the QI system and other reporting rules, and believe that overall the system works well and achieves its objectives. 

Nonetheless, it is evident that there are gaps in the existing rules that need to 

be addressed. The Bill builds on the Treasury’s May 2009 Green Book proposal for 

closing the perceived gaps, and we are grateful that the Bill takes into account a 

number of practical administrability and market impact concerns that we expressed 

regarding the Green Book proposal. 

In our discussions with the Congressional tax-writing staffs and the Treasury Department and IRS this past summer regarding the Green Book proposal, we focused 

on two very difficult issues—(i) how, as a practical matter, can a financial institution identify its U.S. accountholders within its vast number of worldwide accounts 

and business lines if the scope of U.S. tax reporting is expanded beyond the discrete 

custodial business involving investments in U.S. securities that is the realm of the 

existing QI and other U.S. tax reporting rules and (ii) how to address the problem 

of getting information regarding U.S. persons that hold accounts or other investments through a foreign entity or through multiple tiers of foreign entities, including investment vehicles and non-QIs (‘‘NQIs’’). 

The Bill’s approaches to resolving these issues raise serious concerns regarding 

the practicality, feasibility, costs and burdens of implementation as well as their potential impact on capital flows into the United States. We accordingly provide below 

eight key recommendations of changes in the statutory language and legislative history of the Bill that are intended to improve the likelihood that it will succeed in 

achieving its objectives. Recommendation 1 deals with the effective date; recommendations 2 and 3 deal with the problem of identifying U.S. accountholders; recommendations 4 and 5 deal with the issue of indirect U.S. ownership through foreign entities; and recommendations 6, 7 and 8 deal with certain administrability 

and refund concerns. 

The Bill appropriately provides substantial flexibility to Treasury and the IRS to 

issue regulations to fill in the numerous details on how the new reporting and withholding tax rules will work. We stand ready to work closely with them to try to 

strike the delicate balance between the compliance goal of the Bill to combat U.S. 

tax evasion and the inevitable costs and burdens associated with that goal that 

could cause many non-U.S. institutions to opt out of the new system. 

The challenges in achieving that balance should not be underestimated. Indeed, 

one might reasonably conclude that the goals of the Bill are unattainable absent a 

multilateral agreement regarding uniform, universal identification and reporting 

standards that reflect an appropriate balance between implementation costs, the associated risks of such a system, and the compliance goal of providing taxpayer specific information to a variety of countries. 

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In any event, the development and implementation of this new regime will require 

a substantial commitment of human resources and funding by both the financial 

and investment industries and the Government. We respectfully urge Congress to 

provide the IRS with sufficient funding to enable it to fulfill this challenging mandate in a timely and efficient manner. 

RECOMMENDATIONS 

1. Effective Date 

Recommendation: 

We recommend that new Chapter 4 (Sections 1471—1474) should be effective only 

when and to the extent provided in Treasury regulations. We understand that Congress may wish to express in legislative history an appropriate timetable for the 

Treasury Department to issue any such implementing regulations. In addition, it 

would be helpful if the legislative history encourages the Treasury Department to 

adopt regulatory effective dates that will allow for an orderly transition by the financial industry and the IRS to the new withholding tax regime envisioned by 

Chapter 4 after final regulations are issued. 

In particular, the legislative history should clarify that Congress anticipates that 

Treasury will adopt effective dates that enable financial institutions to put in place, 

or adapt, automated systems to effectuate the new rules, and to train personnel in 

applying the new rules. Likewise, the legislative history should encourage the 

Treasury Department to consider the time necessary for the IRS to publish a form 

of agreement with foreign financial institutions (‘‘FFIs’’) under Section 1471(b) (an 

‘‘FFI agreement’’) and to finalize such agreement; to sign up those FFIs deciding to 

enter into such agreements and to publish a list of such qualifying FFIs; to revise 

Forms W–8 to better collect data related to the new rules; and to put in place 

streamlined refund and credit processes for any over-withholding that results from 

the new rules. (Based upon the financial industry’s experience with the implementation of the QI regime, we believe it likely that three years from the time the implementing regulations are finalized will be required to accomplish the above tasks.) 

Rationale: 

Proposed section 1474(d)(1) provides that new Chapter 4 will generally apply to 

payments made after December 31, 2010. Chapter 4, however, simply sets forth a 

framework that requires extensive guidance by the Treasury Department before it 

can be implemented, and grants to Treasury substantial flexibility in issuing regulations detailing how those rules will work in practice. 

We support the approach of providing Treasury with the flexibility to work with 

the financial industry and the IRS to find an appropriate balance between the compliance goal of the Bill to combat U.S. tax evasion and the inevitable costs and burdens associated with that goal. Such a balancing effort is crucial in order to try to 

minimize the disruptions to the U.S. capital markets if a critical number of FFIs 

were not to ‘‘buy in’’ to the new regime because the costs and risks associated with 

FFI status were disproportionate to the compliance goal. 

We believe that the sort of flexible approach envisioned by the Bill necessarily 

calls for an effective date that is tied to the issuance of regulations and a sufficient 

time period to permit their orderly implementation by the financial industry. No 

FFI will be in the position to determine if it should sign an FFI agreement without 

understanding what costs and risks are associated with that agreement as detailed 

in the implementing regulations. Furthermore, a failure to provide sufficient time 

for the financial industry to build the systems and processes to comply with any 

final regulations could lead to massive amounts of over-withholding, contrary to the 

intent of the Bill. Accordingly we strongly urge Congress to provide the Treasury 

Department with the authority to design an appropriate timetable for implementation and not tie its hands with a statutory effective date as of a date-certain. 

2. Identifying U.S. Accounts Through Available Databases 

Recommendation: 

The legislative history should clarify that in issuing guidance as to how an FFI 

or other withholding agent may determine whether an account is a ‘‘United States 

account,’’ the Treasury Department should take into consideration the practical, political and commercial difficulties of obtaining certifications or other representations 

of non-U.S. tax status from a vast number of non-U.S. accountholders serviced by 

an FFI (and its affiliates) in order to identify a relatively small number of potential 

U.S. persons. Most of an FFI’s non-U.S. customers will have no reason to provide 

such a certification or representation since they are not expecting to earn any material amounts of U.S. source FDAP income or gross proceeds from investments that 

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give rise to U.S. source dividends or interest. Accordingly, an FFI or other withholding agent generally should be allowed to rely on its existing procedures, systems 

and electronic database entries to reasonably identify potential U.S. persons (for example, by conducting automated searches of residence or address fields or any applicable residency or citizenship codes that might indicate U.S. status), without a requirement that it solicit additional information, such as a Form W–9 or W–8 or an 

explicit statement of non-U.S. status, from the accountholder in the absence of indicia of a U.S connection. To reflect this intention, proposed Section 1471(b)(1)(A) 

should be revised to say, ‘‘to obtain such information regarding each holder etc.’’ instead of ‘‘to obtain such information from each holder etc.’’ (emphasis added). 

Rationale: 

Proposed Sections 1471 and 1472 will apply to virtually every customer relationship of an FFI, including a bank’s entire depositor base, as well as to many transactional or investment relationships that give rise to non-public debt or equity interests in the financial institution. In the case of many non-U.S. financial institutions, 

this may cover tens of millions of non-U.S. owned accounts per institution. It is untenable for an FFI to request confirmation of non-U.S. status from such a huge 

number of existing non-U.S. accounts in order to prove the negative presumption 

of U.S. status contained in the Bill. 

Moreover, even as to new accounts, it is commercially and politically impractical 

for a financial institution to request U.S. tax-specific information from an overwhelmingly non-U.S. client base that is not investing in U.S. securities. For example, a European bank wanting to comply with the FFI regime would likely find 

many of its accountholders refusing to provide a certification that they (and in the 

case of an entity, its owners) are not U.S. persons as a condition to opening a bank 

account at a local branch that has no connection with any U.S. investment or account. 

Under existing regulations, a certification (e.g., on IRS Form W–8BEN) provides, 

in effect, a safe harbor for establishing that a person is not a U.S. person; in lieu 

of obtaining a certification, a withholding agent may rely on certain documentary 

evidence (see Treasury regulation Section 1.6049–5(c)). However, the Bill would require an FFI to obtain information that typically is not available under applicable 

KYC and AML rules or account opening procedures, including as to any substantial 

U.S. ownership of each accountholder that is a foreign entity (applying a 0 percent 

threshold for U.S. owners of foreign investment entities described in Section 

1471(d)(5)(C) and a 10 percent threshold for other entities). 

While it is generally feasible to obtain a certification or other documentation as 

to U.S. tax status from accountholders and investors that expect to invest, directly 

or indirectly, in U.S. securities, as noted above it is not practicable to do so from 

an overwhelmingly non-U.S. client base that is not investing in U.S. securities. This 

problem will be greatly exacerbated under the new rules’ requirement that the FFI 

identify substantial U.S. owners of foreign entities that are accountholders. 

Accordingly, many FFIs will not be able to comply with the new requirements unless the Treasury Department issues guidance—targeted especially to accounts that 

are not expected to invest, directly or indirectly, in material amounts of U.S. securities—that allows an FFI to rely on its existing procedures to capture relevant 

accountholder information (for example, address information or applicable residency 

or citizenship information) in the absence of indicia of a U.S connection. For those 

accountholders that do have such indicia of a U.S. connection, the FFI would solicit 

Forms W–9 or W–8 from them to establish either their U.S. or non-U.S. status and 

provide the information on any U.S. persons so identified in their annual report to 

the IRS. 

3. Due Diligence for Determining U.S. Accounts 

Recommendation: 

In light of Comment 2 and the impracticality of collecting certifications from 

largely non-U.S. customer bases, we recommend that proposed Section 1471(c)(3) be 

removed from the Bill, and instead that Treasury issue appropriate identification 

rules under section 1471(b)(1)(A) as revised per our recommendation. However, if 

proposed Section 1471(c)(3) remains, the clause ‘‘if neither the financial institution 

nor any entity which is a member of the same expanded affiliated group as such 

financial institution knows, or has reason to know, that any information provided 

in such certification is incorrect’’ should be replaced with ‘‘if the financial institution 

does not know, or have reason to know, that any information provided in such certification is incorrect, applying the due diligence procedures required by the Secretary pursuant to paragraph (b)(1)B).’’ The legislative history should clarify that in 

the absence of reckless disregard of information or a pattern of recording (or omitjoloto on DSK67XMDP1PROD with HEARING

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ting to record) information in a manner designed to make it difficult to identify 

United States accounts, a financial institution generally will not be deemed to know 

or have reason to know that information provided in a certification is incorrect 

where any information to the contrary is contained on a database that is not readily 

accessible to the business unit in which the account is held or is contained in paper 

files. 

Rationale: 

We discuss in Comment 2 above our view that a certification requirement that 

applies to an FFI’s entire non-U.S. customer base will be so commercially, and even 

politically, impractical that few if any FFIs could ever make use of it. However, Section 1471(c)(3) additionally envisions that a financial institution collecting such a 

certification from an account holder to satisfy Section 1471(b)(1)(A) could only rely 

on that certification by determining that none of its worldwide affiliates or branches 

has information contradicting the certification. We believe that Section 1471(c)(3) 

likewise implies strongly that it would be appropriate for Treasury to issue due diligence and verification procedures under Section 1471(b)(1)(B) to provide for such 

‘‘worldwide due diligence’’ even if a financial institution did not collect a certification 

but used other means to reasonably identify its U.S. customers. 

We do not believe that a ‘‘worldwide due diligence’’ standard is feasible. Few, if 

any, multinational financial institutions have integrated databases and automated 

systems that would allow a business unit servicing an account to determine if one 

of its related affiliates or branches—or even separate business units in the same location—had information contradicting its assessment that an account were non-U.S. 

Such a worldwide due diligence standard becomes even more impracticable if the 

business unit would also be charged with ‘‘knowing’’ the contents of paper files, especially (but not only) if they are held outside the business unit itself. Finally, in 

many jurisdictions, information on account holders simply may not be shared between entities or business lines due to relevant privacy, securities and other regulatory rules. 

Accordingly, a worldwide due diligence standard would present FFIs with potentially unacceptable systems integration costs, unmanageable risks for a business 

unit failing to know what information held by a related entity or business line 

might contradict its assessment of the U.S. status of an account, and legal impediments preventing it from being able to comply. Given these substantial problems, 

we believe that a worldwide due diligence approach would cause most FFIs, including even some large QIs, to opt out of the system envisioned by Chapter 4. Such 

FFIs would have little option, not because they would not want to comply, but because they could not comply. 

4. FFI Agreements with the IRS 

Recommendation: 

The legislative history should clarify that Congress expects that the Treasury Department will issue guidance exempting categories or classes of FFIs from the requirement that they enter into FFI agreements with the IRS provided that such 

FFIs either comply with the requirements of proposed Section 1472 or present a sufficiently low risk of tax evasion that they should be totally exempted from the new 

Chapter 4 rules. 

Rationale: 

Proposed Section 1471(b) would require the approximately 5,500 financial institutions that currently are QIs, as well as the several tens of thousands of financial 

institutions that are eligible to become QIs but have not done so (i.e., NQIs), to 

enter into agreements with the IRS. In addition, hundreds of thousands of foreign 

investment entities—including hedge funds, private equity funds, mutual funds, 

securitization vehicles and other investment funds (whether publicly held or privately owned, and even if they have only a handful or fewer investors)—would be 

required to enter into agreements with the IRS. 

While the precise responsibilities of an FFI under an FFI agreement are unclear 

at this time, at a minimum an FFI would need to set up identification, reporting 

and withholding systems and procedures covering virtually every business line 

around the world, and may be subject to outside verification obligations. Even existing QIs (few of whom have today assumed primary withholding responsibility) 

would need to revise their systems to address potential withholding tax on gross 

sales proceeds from U.S. securities, which requires a transaction-based architecture 

that is completely different from the systems that have been developed to capture 

information regarding U.S. source interest, dividends and other FDAP income. The 

enormity of this task—both for individual FFIs and across the financial and investjoloto on DSK67XMDP1PROD with HEARING

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2 In practice, many investors may not take the affirmative steps to maintain their U.S. investments due to deference to the recommendations of their investment advisers, inertia or other 

reasons. One of the unfortunate consequences of this new regime, which may contribute to such capital 

flow shifts, is that it will result in withholding tax on payments to a beneficial owner who fully 

complies with the U.S. tax rules (e.g., by providing a W–8BEN to a QI in which he/she holds 

an account) if any entity in the chain of FFIs through which it invests in U.S. securities fails 

to enter into an FFI agreement. Many investors may regard the prospect of eventually receiving 

a refund if the investor files, and is able to substantiate, a claim as more theoretical than real. 3Depending on the country, the applicable KYC and AML rules and account opening procedures do require that an FFI obtain information concerning an entity accountholder’s substantial owners that would be useful for U.S. tax compliance, although typically the thresholds are 

above the 0 percent threshold for U.S. owners of foreign investment entities and a 10 percent 

threshold for other entities, and these rules and procedures generally are focused on the identity 

of the owner rather than the person’s tax status. 

ment industries—cannot be overstated, nor can the risk of a broad application of 

the new 30% withholding tax on withholdable amounts, with potentially disruptive 

effects on the U.S. capital market. 

We would expect that most large international banks that are QIs and that have 

substantial U.S. operations, as well as large investment fund groups with significant 

U.S. investments, will enter into FFI agreements and make every effort to comply 

with these new requirements, despite the significant costs. We are very concerned, 

however, that many other QIs, NQIs and foreign investment entities will not be able 

and/or willing to enter into such agreements, either because of the costs and burdens of compliance, as well as the exposures from an inability to comply, or—especially in the case of smaller FFIs—because of a concern about entering into an 

agreement with a distant tax authority. 

If, as we fear, more than an insubstantial number of FFIs do not enter into FFI 

agreements with the IRS, there is a risk of considerable shifts in capital flows, as 

many FFIs (including possibly some large institutions) move investments from the 

United States in order to avoid the withholding tax while investors that wish to continue to invest in the United States move their investments to qualifying FFIs.2 We 

are not in a position to quantify the potential extent of any disinvestment from the 

United States or other market disruptions, but we urge Congress and the Treasury 

Department to carefully evaluate these risks. In this regard, we note that these adverse results, were they to occur, would be very detrimental to the business of international financial institutions, and thus our memberships share a strong common 

interest with the U.S. Government in ensuring that the new rules do not produce 

material adverse consequences to financial markets and capital flows (in addition 

to our common commitment to combat tax evasion). 

Moreover, we are concerned that if more than an insubstantial number of FFIs 

do not ‘‘buy into’’ the new regime, a two-tier financial system will emerge, in which 

some financial institutions that are non-qualifying FFIs may become a haven for 

U.S. tax evaders. 

In our experience, a very high percentage of NQIs are fully compliant with the 

existing reporting rules. These institutions have not become QIs not because they 

wish to facilitate U.S. tax evasion but, rather, because their U.S. investment base 

is too small to justify the costs and burdens of being QIs. We would expect that 

these NQIs would be prepared to comply with expanded requirements that they 

identify their direct U.S. accountholders as well as the substantial U.S. owners of 

their accountholder entities, if these requirements are properly and reasonably designed. 

As noted elsewhere in this letter, developing a workable system for identifying 

substantial U.S. owners is itself a very challenging task, particularly given that 

there are often multiple tiers of FFIs. However, we would expect that FFIs will 

more readily be able to obtain the necessary U.S. tax-specific information regarding 

substantial U.S. owners from accountholder entities that are investing in material 

amounts of U.S. securities, whereas in the case of accountholder entities that are 

invested in non-U.S. accounts and securities, the FFIs will necessarily need to rely 

on information that is already in their databases.3

We have no experiential basis to be able to determine whether foreign investment 

entities that are unable or unwilling to enter into FFI agreements would nonetheless be able and willing to comply with a Section 1472-type reporting regime. However, based on the fact that many NQIs and partnerships do comply with the requirements under existing law that they obtain and pass on certifications from their 

accountholders and beneficial owners, there is reason to believe that many such foreign investment entities would be prepared to comply with expanded requirements 

that they determine substantial U.S. owners of their accountholder entities, if these 

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4We acknowledge that one potential challenge in successfully applying a Section 1472 regime 

to tiers of FFIs may be a reluctance of one FFI to disclose its customer (or investor) base to 

another; similar concerns contributed to the development of the QI system. Giving FFIs a choice 

between a Section 1471 or 1472 regime may mitigate this challenge. 5More generally, in order to allay any concerns regarding the scope of Treasury’s authority 

to provide guidance regarding Chapter 4, it may be advisable for Section 1474(d) (granting authority to Treasury to ‘‘prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this chapter’’) or its legislative history to explicitly state 

that the grant of authority includes the authority to provide such exclusions from the terms of 

Chapter 4 as Treasury deems appropriate. 

requirements are properly and reasonably designed (as discussed above). In any 

event, we believe that a significantly higher percentage of such foreign investment 

entities will be able to comply with the rules (and will therefore remain invested 

in U.S. securities) if they are given the choice of a Section 1471 or 1472 regime 

(which is similar to the choice that financial institutions have today to either become a QI or to report under the NQI rules) than if they are forced to enter into 

FFI agreements in order to avoid withholding tax.4

We also stand ready to work with Treasury and the IRS to identify those foreign 

entities that should be exempted from both the Section 1471 and 1472 requirements 

on the basis that they do not present the United States with a substantial risk of 

tax evasion activity. 

5. Adjusting the Threshold for Determining Substantial United States Own- ers 

Recommendation: 

The statute should give the Treasury Department the flexibility to set the appropriate threshold (or thresholds) for determining whether a foreign entity has a ‘‘substantial United States owner,’’ which is now set at ‘‘more than 0%’’ in the case of 

foreign investment entities and ‘‘more than 10%’’ in the case of most other foreign 

entities. 

Rationale: 

We understand the rationale behind the Bill’s requirement that FFIs and other 

withholding agents obtain information regarding substantial U.S. owners of foreign 

entities, and we agree that the failure of the existing rules to look behind corporate 

entities and certain trusts present unacceptable opportunities for tax evasion by 

U.S. persons. 

However, as indicated above, the requirements of the Bill relating to the identification of U.S. accounts and FFI agreements raise extraordinarily complicated implementation issues, which may dissuade FFIs from entering into FFI agreements. 

To a great extent, these issues are magnified by the requirement that FFIs and 

other withholding agents obtain information regarding substantial U.S. owners of 

foreign entities. We are very concerned that, in many cases, FFIs simply will not 

be able to apply the 0%/10% thresholds, because such information is not required 

to be gathered for AML/KYC purposes and is impractical to secure otherwise. Also, 

having separate thresholds for foreign investment entities and other foreign entities 

introduces an additional complication of having to distinguish between those two 

categories of entities. 

Striking a balance between the important objective of combating tax avoidance 

and practical administrability considerations in this context is best done by Treasury after due evaluation of the relevant factors. In view of the reported cases of U.S. 

individuals setting up foreign shell companies to hold offshore accounts, we respectfully submit that perhaps a threshold that requires, say, at least 50% ownership 

would better target the tax compliance objective of the United States to identify U.S. 

persons controlling offshore entities for tax evasion purposes. 

6. Add an Exclusion for U.S. Branches of Foreign Banks and Clarify Treasury Authority to Provide Other Exclusions 

Recommendation: 

The definition of ‘‘withholdable payment’’ for purposes of Section 1471 should be 

amended to exclude payments to a U.S. branch (or agency) of a foreign bank. In addition, the statute and/or legislative history should clarify that the Treasury Department has the authority to exclude other payments.5

Rationale: 

U.S. branches (and agencies) of foreign banks conduct extensive operations in the 

United States and engage in hundreds of millions of financial services and other 

transactions each year. Unless payments to such branches are excluded from the 

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definition of ‘‘withholdable payments,’’ each payor of a withholdable payment to 

such a branch would need to ensure that the bank has entered into an FFI agreement before making payments to the branch. Such a requirement would place U.S. 

branches of foreign banks at a competitive disadvantage compared to U.S. banks. 

Moreover, U.S. branches of foreign banks are treated as U.S. persons for most information reporting rules and thus, for example, file IRS Forms 1099 with respect to 

payments to non-exempt recipients. Consequently, they should be treated as U.S. 

withholding agents that are not FFIs for purposes of Sections 1471 and 1472. 

7. Contents of an FFI’s Annual Report 

Recommendation: 

Section 1471(c)(1) requires that an FFI that has entered into an FFI agreement 

must provide the IRS with an annual report providing details about accounts owned 

by its direct and indirect U.S. customers and lists the items that must be provided 

in the report with respect to such U.S. accounts. We recommend either that section 

1471(c)(1)(D) be removed from the Bill (our preferred approach), or that the phrase 

‘‘To the extent required by the Secretary’’ be added as a modifier at the beginning 

of section 1471(c)(1)(D), which requires the FFI to provide the ‘‘gross receipts and 

gross withdrawals or payments from the account (determined for such period and 

in such manner as the Secretary may provide).’’ 

Rationale: 

New chapter 4 presents many operational challenges and expenses for financial 

institutions. We believe that such expenses should be minimized in those instances 

where the compliance goal of the IRS would not be adversely affected and each data 

element that must be captured and reported necessarily increases the cost of compliance. With respect to the annual report, most of the account details required in the 

annual report are ‘‘static’’ in nature, such as name, address, TIN, account number 

and account balance at a specified time (presumably year-end). An FFI should be 

able to capture such data elements even if it must prepare an ‘‘exceptions’’ report 

to do so. However, tracking flows into and out of accounts is a much different matter 

and for some FFIs (or some business lines thereof) would require potentially far 

greater systems changes. We also question whether this information is necessary in 

all instances to provide the IRS with the necessary tools to identify potential U.S. 

tax evaders, given that the annual report will otherwise identify U.S. persons invested in non-U.S. accounts and securities and which of those U.S. persons have accounts large enough to merit closer IRS examination. Accordingly, we suggest either 

that section 1471(c)(1)(D) be removed from the Bill or, at a minimum, that the 

Treasury Department be granted flexibility to determine the circumstances in which 

this information must be provided. 

8. Expand Availability of Credits and Refunds to FFIs 

Recommendation: 

Proposed Section 1474(b)(2) denies a credit or refund to an FFI that is the beneficial owner of a payment except if and to the extent that the FFI is eligible to a 

reduced treaty rate of withholding. We recommend that the statute be amended to 

permit the Treasury to provide for credits and refunds in appropriate circumstances. 

The legislative history should indicate Congress’ intention that such credits and refunds be available where the withholding was done inadvertently or as a result of 

a technical ‘‘footfault’’ on the part of the FFI or the withholding agent, where the 

FFI has acted in good faith, or where the Treasury concludes that permitting such 

credit or refund is in the best interest of fostering compliance with Chapter 4. The 

legislative history should also indicate Congress’ intention that Treasury set up procedures permitting FFIs and other withholding agents to obtain refunds on behalf 

of their direct or indirect account holders. 

Rationale: 

We understand that the intention of the new rules under Chapter 4 is to encourage FFIs to disclose their U.S. accounts, not to collect additional withholding tax. 

However, we are concerned that due to the complexity of the rules and the difficulty 

in achieving 100% compliance across the vast number of financial market participants, there inevitably will be a substantial amount of over-withholding. Moreover, 

by imposing withholding tax also on gross proceeds (which are exempt from substantive tax) and on payments to foreign financial institutions that have no material 

economic stake in those payments the withholding tax can be harsh and punitive 

in its impact, especially if the opportunity to obtain refunds or credits of such overwithheld amounts is restricted. Investors and FFIs will be evaluating their potential 

exposures under these rules in determining whether to invest in U.S. securities and 

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1Government Accountability Office, International Taxation: Large U.S. Corporations and Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy 

Jurisdictions, Dec 2008. 2https://www.uspirg.org/home/reports/report-archives/campaign-finance-reform/campaignfinance-reform/who-slows-the-pace-of-tax-reforms 3http://www.bloomberg.com/apps/news?pid=20601110&sid=a6bQVsZS2_18 4 Committee on Homeland Security and Governmental Affairs, Permanent Subcommittee on 

Investigations. TAX HAVEN BANKS AND U.S. TAX COMPLIANCE STAFF REPORT 

to enter into FFI agreements. Accordingly, we recommend that every effort be made 

to have refund and credit procedures that maximize the ability to rectify over-withholding situations. 

We look forward to continuing to work with the Congressional tax-writing committees, the Treasury Department and the IRS to achieve an effective, balanced and 

workable approach to addressing the gaps in the existing reporting and withholding 

tax rules. 

EUROPEAN BANKING FEDERATION INSTITUTE OF INTERNATIONAL 

BANKERS 

Guido Ravoet Lawrence R. Uhlick 

Secretary General Chief Executive Officer 

f 

Statement of the U.S. Public Interest Research Group 

The following testimony represents the views of the U.S. Public Interest Research 

Group (PIRG), the federation of state Public Interest Research Groups, which is a 

non-profit, non-partisan public interest advocacy organization. 

The Need for Real Reforms, and Why They Matter to Taxpayers 

Even as many American families are struggling to make ends meet and businesses are fighting to keep their doors open, Main Street still manages to pay their 

taxes. 

Taxpayers have also made an unprecedented investment in the banking, auto and 

insurance industries. These industries have made increasing use of complex 

schemes to avoid paying their own taxes. For instance, over 80% of the biggest U.S 

corporations maintain revenues in offshore tax haven countries.1 The names on the 

list are familiar: American Express, A.I.G, Boeing, Cisco, Dow, Hewlett-Packard, 

J.P. Morgan Chase and Pfizer—among others. 

In U.S. PIRG’s report, ‘‘Who Slows the Pace of Tax Reforms,’’ it’s been found that 

even a modest number of corporations—just twelve—that oppose tax reforms of any 

kind, have over 440 subsidiaries in tax haven countries.2

These corporations move their revenues, manipulate their costs and take generous 

deductions in order to pay minimal, if any, U.S. taxes. In fact, Goldman Sachs, 

which received $10 billion in federal bailout dollars, paid just a 1% tax rate in 

2007.3

The Senate’s Permanent Subcommittee on Investigations concluded that the U.S Treasury loses up to $100 billion per year because of tax haven abuse.4 U.S. PIRG 

has further analyzed that figure to establish the state shares of these revenue losses 

in its April 15, 2009 Report, ‘‘Tax Shell Game: The Cost of Offshore Tax Havens 

to Taxpayers.’’ 

The massive losses in revenue must ultimately be made up by taxpayers. When 

companies ‘‘change the geography’’ of their earnings, their headquarters or their 

subsidiaries to tax haven countries—the taxpayers must pick up the tab by paying 

higher taxes themselves or suffering from reduced public services. 

When big businesses abuse tax havens, it puts ordinary businesses—especially 

small businesses—without elaborate tax schemes and access to havens at a competitive disadvantage. Businesses should thrive based on their ability to be efficient and 

innovative, not their access to the best tax lawyers or their aggressiveness in hiding 

assets offshore. Companies that create jobs here in the United States should not be 

at a competitive disadvantage against other companies that are nominally registered in tax havens or that move their earnings to such places. Companies that 

share the same access to U.S. markets and U.S. consumers should compete on a 

level playing field. 

The negative impact of offshore tax havens extends beyond the burden it places 

on other taxpayers. According to the IRS, ‘‘At least 40 countries aggressively market 

themselves as tax havens. Some have gone so far as to offer asylum or immunity 

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5 Internal Revenue Service website. Viewed 4 April 2009 http://www.irs.gov/businesses/small/ 

article/0,,id=106568,00.html 6 ‘‘Economist calls for tax havens to be closed down.’’ Cayman News Service. 26 Aug. 2008 

http://www.caymannewsservice.com/business/2008/08/26/economist-calls-tax-havens-be-closeddown 7 ‘‘Economist calls for tax havens to be closed down.’’ Cayman News Service. 26 Aug. 2008 

http://www.caymannewsservice.com/business/2008/08/26/economist-calls-tax-havens-be-closeddown 8 Huang, Chye-Ching. Putting U.S. Corporate Taxes in Perspective. Center on Budget and Policy Priorities. 27 Oct. 2008 9Government Accountability Office, Effective Tax Rates Are Correlated with Where Income Is 

Reported. Aug. 2008 10Government Accountability Office, Comparison of the Reported Tax Liabilities of Foreignand U.S.-Controlled Corporations, 1998–2005. July 2008 

to criminals who invest sufficient funds. They permit the formation of companies 

without any proof of identity of the owners, perhaps even by remote computer connection.’’ 5 Corporate and bank secrecy set up breeding grounds for money laundering, drug trafficking and terrorism—both offshore and here in the United States. 

Similar alarm has been sounded by Nobel-prize winning economist Joseph 

Stiglitz, who chairs the Commission of Experts of the U.N. General Assembly on reforms of the international monetary and financial system. He makes clear that tax 

havens are a losing proposition on all sides. ‘‘Secret tax havens . . . are bad for developing countries, bad for money laundering, drugs corruption—bad in every dimension.’’ 6 Mr. Stiglitz indicates that the secrecy assists terrorists using these 

shadow markets to finance their agenda.7

Finally, many bills making their way through Congress so far this year could use 

the additional revenue that would be retained in this country by restricting tax havens as a way to pay for other programs. U.S. PIRG does not advocate using revenues that would be recaptured from shedding light on tax haven abusers for any 

particular program. However, when Congress is struggling to find ways to find revenue sufficient for two wars, an economic recovery effort, and other major reforms, 

how can it look the other way when companies that benefit heavily from government contract work and government bailouts fail to pay their fair of taxes? 

Corporate Tax Rates and Competition 

When lobbyists defend the existence of offshore tax havens, they typically argue 

that American corporations are already taxed enough. They refer to a claim that 

corporations pay a statutory tax rate of 35%, which is simply based on the law or 

‘‘statute.’’ However, the amount corporations actually pay is instead indicated by 

their effective tax rate, which is the percentage of their profit that they actually pay 

in taxes. And after corporations use myriad deductions, credits for business-related 

expenses and depreciation allowances, the amount of tax they actually pay on profit 

decreases dramatically—in some cases to nothing at all.8

In 2008 the GAO reported that effective taxes rates end up varying greatly across 

corporations depending on their ability to use such tax-reduction techniques.9 Another 2008 GAO study showed that 25% of U.S. corporations with more than $250 

million in assets or $50 million in sales paid no federal income taxes at all in 2005, 

the most recent year for which such data is available.10 It has been widely reported 

that Goldman Sachs paid an effective tax rate of just 1% in 2008, citing they had 

made ‘‘changes in geographic earnings mix.’’ 

But this is really a separate issue. Whatever one thinks is the proper rate of corporate taxation, there should not be a parallel shadow system of tax avoidance that 

leaves other taxpayers shouldering the burden. When secrecy keeps individuals, 

governments and other banks from knowing exactly what is on the books and behind bank assets, it creates a false sense of security, making businesses more susceptible to the downward spiral we’ve seen over the last year. 

The mythical threat of ‘‘double taxation’’ is often re-circulated by businesses that 

oppose reform. This is a baseless threat, because the foreign tax credit already protects against double taxation—and no one is proposing repealing that. There’s a proposal by the Obama Administration to make this tax credit reflective of the average 

of all the tax rates that apply to a business so businesses cannot effectively choose 

which rate they want to pay, regardless of where they do business. 

Reforming the Broken System 

The Foreign Account Tax Compliance Act is a step in the right direction to 

reform a broken system where tax dodging individuals and corporations offload their 

burden on ordinary taxpayers. Holding foreign banks and corporations accountable 

for their clients can only help the process of ending bank secrecy. 

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11http://www.reuters.com/article/pressRelease/idUS210981+28-Oct-2009+PRN20091028 

However, the bill can certainly be improved through even stronger enforcement 

mechanisms for the U.S. government, aggressive measures to tax shell companies 

and making sure that transactions have some economic purpose other than tax 

avoidance. 

When it is reported that Cayman Island financiers are breathing a giant sigh of 

relief and making official gestures of ‘‘congratulations to Chairman Baucus and 

Chairman Rangel,’’ then Congress should stop to see what’s missing.11 The following 

are U.S. PIRG’s recommendations for comprehensive reform. 

Codify the Economic Substance Doctrine 

The bill should change the IRS code to ensure that a transaction has a purpose 

aside from reduction of tax liability in order to be considered valid. This covers any 

tax avoidance scheme into the future—which is a critical tool for law enforcement. 

Address the Offshore Shell Companies and Collect Taxes 

Companies that exist only on paper or via a Post Office box in the Cayman Islands—but take advantage of American markets, have access to our consumer base, 

use our physical and financial infrastructure and are protected by the U.S. military—should pay U.S. taxes. 

Specific quantitative standards can be established to determine if a company is 

owned and controlled here in the United States in order to apply the correct level 

of taxation. 

Repeal ‘‘Check the Box’’ 

A provision should be added to keep companies from being able to simply check 

a box on a form to determine their business entity classification (to be most advantageous based on their location and tax treatment). This loophole has been abused 

in order to have the advantages and protections associated with incorporation, but 

not have to be taxed as such. 

Ban ‘‘Tax Strategy’’ Patents 

As we said in a coalition letter to this Committee earlier this year, U.S. PIRG 

supports banning patents on complex tax transactions and strategies used to avoid, 

reduce or defer taxes. 

Our government should not be in the business of rewarding tax lawyers who help 

clients dodge their taxes. There is no patent protection for finding new ways to steal 

cars, and there shouldn’t be protection for finding new ways to dodge taxes. These 

patents pose a significant threat to taxpayers and their advisors. 

Legislation to accomplish this was passed in the House last year by a vote of 220 

to 175 as part of larger patent reforms. As of the writing of the letter, 82 tax strategy patents had been issued, with 133 pending. 

Conclusion 

By taking on this issue in a serious way Congress can demonstrate that it puts 

taxpayers first. 

Tax haven abuse is only legal because the law has not caught up to reality. It 

used to be legal to use other people’s credit card numbers, dump raw sewage in rivers, and import radioactive materials—until we updated laws to stop it. 

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Swiss Bankers Association, statement 

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1 EFAMA is the representative association for the European investment management industry. It represents through its 26 member associations and 44 corporate members approximately 

EUR 11 trillion in assets under management of which EUR 6.4 trillion was managed by approximately 53,000 funds at the end of June 2009. Just over 37,000 of these funds were UCITS (Undertakings for Collective Investments in Transferable Securities) funds. For more information 

about EFAMA, please visit www.efama.org. 

Statement of the EFAMA 

Additional Comments on the Foreign Account Tax Compliance Legislation 

introduced by Chairmen Rangel and Baucus 

1. EFAMA 1 recognizes and supports the intent of the Rangel-Baucus Bill of 

better detecting and discouraging offshore tax evasion by U.S. persons. Our 

comments set forth below are intended to contribute to solutions in this respect that are workable in the context of prevailing intermediated investment structures and that take into account the specific characteristics of investment funds. 

Our concerns 

2. The new regime brings into scope fund entities, and fund managers, who 

were not within the scope of the USQI regime. The Foreign Account Tax 

Compliance Act 2009 (‘‘the Bill’’) will go beyond the QI regime in imposing 

a new withholding tax or a new information reporting requirement that applies for the first time directly to funds and fund managers, as opposed to 

their custodian banks. The new, very broad, definition of a ‘‘foreign financial 

institution’’ (‘‘FII’’) and the requirement that such an FII enter into agreements with the IRS and provide annual reporting in order to avoid new withholding tax rules on U.S. source investment income and on U.S. related gross 

proceeds will have profound implications. 

It has taken some time since the publication of the Bill on 27 Oct to assess 

all the implications and consequences it potentially has for our industry, especially within organizations which have no experience of the similar, albeit 

narrower, QI rules, and the impact analysis is still ongoing. Please note 

there are 53.000 funds represented by EFAMA’s member national bodies. 

The technical position under the new rules will typically involve an interplay 

between the custodian, broker, fund entity and fund manager. 

3. The current effective date of the bill is December 31 2010. The provisions 

laying down information reporting and withholding requirements will apply 

for payments made after that date. The scale of this task for FFIs that have 

no existing U.S. tax information reporting systems is very substantial, and 

we are concerned this timeline is not achievable. 

4. As pointed out in our previous letter of 20th November 2009, many investment funds will usually encounter real difficulty entering into an agreement 

with the IRS that requires the fund to report details on every U.S. account 

holder. The reason for this difficulty arises from the little that is usually 

known at fund level about the investors of the fund. 

• In most of the European market, the process of subscribing to investment 

funds is heavily intermediated. In most European countries, the standard 

distribution model for retail and other widely held mutual funds is via 

local bank branch networks. 

• In other countries (such as the UK) distribution is increasingly intermediated through independent fund advisers who access funds through socalled ‘‘platforms’’. Platforms themselves can in some circumstances be 

accessed directly by end investors which enables the investors to purchase the funds directly. Typically this will be via an automated sales 

process, i.e. via the internet. This process of often results in the creation 

of two layers of nominee, i.e. the register of the fund will show the platform as nominee, and platform’s records will often just provide the financial adviser’s name. It will be the financial adviser who will have a record 

of the beneficial owner. 

• Share or unit purchases are only rarely made by retail investors directly 

with the Collective Investment Vehicle (CIV) or its transfer agent (and 

in some European markets, never). In the overwhelming majority of cases 

CIVs will enter into distribution arrangements with distributors who will 

themselves enter into further arrangements with downstream distributors or ‘‘intermediaries’’ in the distribution chain (such as banks, insurance companies or independent advisors). 

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• Intermediated purchases of CIV shares or units are typically held in an 

omnibus or nominee account. The use of omnibus or nominee accounts 

has developed for a variety of reasons. It can for example assist intermediaries in terms of simplifying their computerized administration and 

reporting systems and thus gives rise to economies of scale. 

• In addition, as mentioned above individual customer information is generally regarded as valuable proprietary information. Therefore this information will not be passed up the chain of intermediaries to the CIV, a 

problem compounded by the additional costs this would entail, which 

might well eliminate the economies of scale arising from the use of omnibus/nominee accounts. In an omnibus account sales and purchases are 

usually made on behalf of collections of investors on a net purchase or 

net sales basis. Those transactions can thus not be attributed to individual investors behind the nominee. 

• An additional difficulty arises from the fact that the investor base of a 

widely-held CIV changes on a daily basis. 

5. Significant practical difficulties will arise because of local country data protection legislation in a number of countries. Under these laws, no financial 

institution is allowed to submit client details to another institution or person 

without the formal approval of the relevant client. In order to prove that the 

approval procedure has been correct, usually the client approval is asked for 

in written form. 

6. Against this background serious consideration should be taken with regard 

to how to address the problem of identifying U.S. persons that hold accounts 

or other investments through multiple tiers of foreign entities such as investment vehicles. For the reasons given above it will in many cases simply not 

be possible for funds or their managers to identify such persons. As you may 

be aware, this problem is one of the issues which is being addressed as part 

of the OECD’s project on the Taxation of Collective Investment Vehicles and 

Procedures for Tax Relief for Cross-Border Investors in the context of Double 

Taxation Agreement benefits for CIVs. The U.S. government of course is one 

of the participants in that project. This project has been ongoing for many 

years not least because of the complexity of the task of taking into account 

the intermediated investment landscape and in particular the fund environment with its vast distribution channels for purposes of enabling treaty relief 

and reporting. We look forward to working constructively in the course of 

2010 with the IRS to address these issues. 

7. We believe it will be a very challenging and onerous task for the non-US 

funds industry to introduce a wholly new U.S. tax reporting system that affects several times more financial institutions than USQI. But an additional 

concern is the aggregate practical burden for millions of investors and the 

financial intermediaries who act for them. This seems out of proportion to 

the small number of targeted U.S. account holders. Non U.S. investors with 

no connection to the U.S. will be reluctant to make declarations relevant only 

for U.S. federal tax purposes, particularly in the case of funds which have 

little or no direct U.S. investment. This will make it difficult to achieve compliance even where there is no U.S. tax evasion. 

8. Even where adaptations to the current proposed mechanisms are foreseen, 

it is likely that many widely-held investment funds simply cannot comply 

with the remaining requirements. Where disinvestment in the U.S. capital 

markets is not an option, the punitive withholding, including the 30% withholding on gross proceeds, will not be commercially viable for the concerned 

investment funds. There is a reasonable prospect of many of the concerned 

vehicles facing the alternative of having to close down or eject a significant 

proportion of their investor base (and thus shrink its investment volume). 

We genuinely believe the medium term impact could be to cause a measurable outflow from U.S. capital markets, especially if insufficient transitional 

reliefs are made offered. 

Our suggestions 

1. Exemptions In part to avoid U.S.C reporting requirements, many Collective 

Investment Vehicles (‘‘CIVs’’) established in European countries go to some 

lengths to avoid U.S. persons investing in such funds. In such cases the prospectus will typically provide that the fund is not open to U.S. investors and 

the application form will contain a representation to this effect too. If a U.S. 

investor incorrectly states that he is eligible to invest and the fund manager 

subsequently discovers that the investor is a U.S. citizen then the investor 

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will be required to redeem his investment immediately, at net asset value 

at that time. As such, we would urge that investment funds that specifically 

prohibit investment by U.S. persons be exempted from the new reporting regime. In the enclosed appendix we include two typical examples of prospectus wording. 

We would also ask the IRS to consider a more general exemption from the 

new regime for widely held and regulated collective investment vehicles, especially in situations where particular administrative difficulties apply. EU 

countries typically have very wide-ranging regulatory rules which determine 

the nature of investments, risk profile, diversification strategies and levels of 

gearing which a fund can have, and highly prescriptive rules as to the nature, 

content and distribution of fund legal financial and marketing documentation. 

In the case of UCITS, the pan European regulated retail fund product, these 

rules are very onerous. With such funds an individual investor can have no 

control over the investment strategy or the continued existence of the fund, 

which would make such a fund a less attractive vehicle for tax evasion by 

larger investors. 

2. In our view also the treatment of pension funds needs to be clarified. 

EFAMA does not represent pension funds. However, it would be an odd outcome of such funds, which could not be used as investment vehicles for U.S. 

tax evaders, were to be included; no doubt other bodies are making representations on their behalf. 

3. Tiering As pointed out in our letter, investors typically invest through layers of intermediaries, with the legal ownership held by nominees. The intended application of the new regime to these multiple tiers is not sufficiently clear. Guidance should be developed that a fund that needs to enter 

into the reporting regime can accept any one of four formal certifications 

from each registered unitholder: 

a. That the unitholder is a registered reporting agent under the new regime. This would typically apply to fund of funds and distributors (such 

as branch banks and fund platforms). 

b. That the unitholder is an entity that does not have substantial U.S. 

ownership. In the case of an ‘ordinary corporate’ that would mean <10% 

U.S. ownership (and at 7. below we request this 10% threshold be extended to investment vehicles also). This would typically apply to unlisted companies that are not themselves FFIs.. 

c. In the case of direct investments in the fund by individuals: That the 

unit holder is a non-US person. 

d. In the case of direct investments in the fund by individuals or entities: 

That the unit holder’s interest is to be treated as a U.S. account 

4. Direct reporting on request. Where a.) above applies, it should be clarified in the final regulations and in the model agreements issued by the IRS 

that the distributor with direct client contact should report details of U.S. 

accounts directly to the U.S. government and not to the fund. This distributor will be closer to the investors in the fund and will thus be in a better position to respond to the information requirements. We further suggest 

that, to make the scheme more practical for the IRS to administer, such data 

should be provided in response to a request by the IRS (i.e. in areas of particular interest to them) rather than automatically. 

5. Withholding as a solution to the ‘cliff edge problem’. The bill as currently 

drafted means that any FFI that needs to become a reporting agent must 

provide information as to all accounts. Failure to obtain information about 

just one out of possibly thousands (or hundreds of thousands) of accounts 

means the FFI has failed in its duties as reporting agent; the penalty for this 

is not currently clear, but could presumably extend to the re-imposition of 

the 30% withholding on all of that FFI’s U.S. source receipts. We believe it 

should be sufficient remedy for the U.S. government’s purpose that the FFI 

withholds 30% from payments to just the small minority of non-compliant accounts, and remits that amount to the US. 

6. Documentation We would urge Treasury to introduce commercially reasonable standards for identifying U.S. accounts. A great difficulty would be connected with obtaining certifications or other evidential material on the nonUS tax status from thousands of non-US account holders for the purpose of 

identifying a small number of potential U.S. persons. The vast majority of 

accountholders which are non-US persons not seeking in particular U.S. investments or U.S. source investment income would see no grounds for providing such certification, in particular where such certification consisted in 

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U.S. tax forms. We note that under the USQI system it is possible to obtain 

IRS rulings to allow reliance on KYC and AML procedures. We suggest it 

should be possible for CIVs to obtain similar rulings from the IRS that KYCbased procedures for excluding U.S. persons are sufficiently robust that the 

CIV need not enter into a full reporting agreement. We would suggest that 

an FFI should have the possibility to fulfill obligations under the new regime 

more generally by using information in its possession or relying on existing 

procedures. 

7. Where such an IRS ruling were not be granted we believe that neutral investor self declaration forms should be used. It will be an extra deterrent that 

investors are asked to complete a U.S. form, just as the average U.S. investor 

would be reluctant to complete say a French or German government form. 

We therefore believe that short of IRS ruling allowing the reliance on KYC 

and AML procedures the form of Investor Self Declaration envisaged in the 

OECD process would better achieve the universal compliance the U.S. seeks 

than the use of U.S. tax forms. This would have the additional advantage 

of allowing authorised, industry standard, local language versions to be produced. 

8. De minimis threshold. The bill as drafted defines a corporate to have ‘substantial U.S. ownership,’ such that any account belonging to that corporate 

is a ‘US account,’ where U.S. ownership exceeds 10%. In the case of an ‘investment vehicle,’ however, that limit is reduced to zero. We believe that 

adds to the difficulty of the tiering problem, and will result in entities that 

could otherwise have simply certified as ‘non-US owned’ instead entering 

into reporting agreements. We suspect the number of such reporting agreements the IRS will have to administer is very large, and any measure to reduce their number will enhance the workability of the overall system. We 

would therefore suggest that the differential limit for ‘investment vehicles’ 

is either abandoned altogether, or at the very least set at a figure higher 

than 0%. 

Transitional and administrative measures 

1. Effective date. We would urge that this proposed effective date be delayed 

in order to allow adequate time for the substantial number of Foreign Financial Institutions (FFIs) directly affected by the new regime to implement the 

required complying mechanisms and associated systems changes. Further 

impact analysis and industry consultation will be required to define the date 

by which compliant systems could be built; but the degree of delay needed 

will also be a function of the willingness of the U.S. authorities to grant the 

transitional reliefs requested below. 

2. Transition We would urge that a transition relief and implementation 

schedule be introduced in order to allow sufficient time for introducing necessary industy practice and systems changes. The bill would require foreign 

financial institutions, among other things, to obtain such information from 

its clients ‘‘as is necessary’’ to determine the accounts of U.S. persons and 

to report items including the person’s name and taxpayer identification number. Because the local jurisdictions in which many of these institutions operate have client identification rules that may not comply in all respects with 

what the U.S. may deem ‘‘necessary,’’ it is important that these institutions 

be able to rely on their existing know your customer and other client identification rules while they gather the information necessary to comply with the 

new U.S. rules. 

a) Such transition relief could include reliance on existing client identification information for all current accounts with the new rules applying 

only to accounts opened after an agreed future date. 

b) Alternatively, if additional information must be collected from existing 

clients to meet the new ‘‘as is necessary’’ standard, institutions should 

be given a number of years to collect this information, with a gradually 

increasing percentage requirement for each year of the old accounts for 

which the new ‘‘as is necessary’’ information test must be met. 

We would suggest that consideration be given at least initially to applying the legislation on a duty of care/best endeavours basis, whereby for 

example it is reasonable to assume that if the investor does not have 

a U.S. address or a U.S. bank account, then it is reasonable to conclude 

that the relevant individual is not a U.S. person. 

3. Group filing election We believe that in many cases it will be necessary 

for the fund manager, and each fund in the fund manager’s range, to enter 

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into reporting agreements if the punitive withholding is to be avoided. Typically, a fund manager will of course run tens or hundreds of funds. We believe it would be to the benefit of both the fund management industry and 

to the IRS to allow the fund manager to elect that a single reporting agreement, and reports of U.S. Accounts under it, should cover both the fund management company and all funds managed by it on a consolidated basis. 

4. Small accounts The bill as currently drafted allows a reporting exemption 

for accounts of less than $10,000 (with a grandfathering at $50,000 for preexisting accounts) where these accounts are held by individuals. We believe 

this exemption could be extended to accounts held other than by individuals, 

without obviously exposing the U.S. to greater risk of tax evasion. This 

would again reduce the volume of reporting the IRS must deal with, and also 

make this exemption much easier for FFIs to operate. 

Appendix 

Examples of selling restrictions: 

• The Company is a recognised scheme under Section 264 of the United Kingdom Financial Services and Markets Acts 2000. 

‘‘The shares have not been and will not be registered under 1933 Act or the securities 

laws of any of the States of the United States. The Shares are being offered and 

sold solely outside the United States to non-US. persons in reliance on regulation 

5S? of the 1933 Act. The company has not been and will not be registered under 

the 1940 Act but will be exempt from such registration pursuant to Section 3  

(7) thereof. The outstanding securities of issuers relying on Section 3 c 7, to the 

extent that they are owned by U.S. persons (or transferees of U.S. persons), must 

be owned exclusively by persons who, at the time of acquisition of such securities, 

are ‘‘qualified purchasers’’ within the meaning of Section 2 a 51 of the 1940 Act. 

Any U.S. purchaser of the Company’s shares must therefore be both a ‘‘qualified 

institutional buyer’’ under Rule 144 A under the 1933 Act, the 1933Zct, the CEA, 

or U.S. income tax unless prior consent is obtained from the manager. Please see 

Appendix IV for the definition of U.S. persons and additional information on the 

restrictions pertaining to U.S. persons. 

Applicants for shares will be required to certify that they are not a U.S. person.’’ 

• Specimen declaration included in the application form of an Irish investment 

fund which prohibits investment by U.S. persons. 

‘‘The Applicant represents that the Applicant understands that (i) the Fund will not 

be registered under the U.S. Investment Company Act of 1940, as amended, (ii) 

the Shares have not been and will not be registered under the U.S. Securities 

Act of 1933, as amended (the ‘‘1933 Act’’), or under the securities laws of any 

State or other jurisdiction within the United States, (iii) the Shares may be resold only in transactions that are not subject to or are exempt from the registration requirements of the 1933 Act, and (iv) the Shares may not be offered, sold 

or delivered, directly or indirectly, in the United States, or to or for the account 

or benefit of any ‘‘U.S. Persons,’’ as such term is defined in the Prospectus. 

The Applicant represents that (i) the Applicant is not, and the Shares will not be purchased or held for the account or benefit of, or purchased with funds obtained 

from, a U.S. Person, as defined in the Prospectus, (ii) the Applicant has not used, 

to effect the purchase of Shares, any funds obtained in gross income from any 

U.S. Person, (iii) the Applicant will not transfer or deliver, directly or indirectly, 

any of the Shares or any interest therein to a U.S. Person, (iv) the Applicant was 

not solicited to purchase and did not acquire any of the Shares while present 

in the United States, (v) the Applicant is acquiring the Shares for investment 

purposes only, (vi) the Applicant will notify the Fund in the event the Applicant 

becomes a U.S. Person at any time that the Applicant holds any of the Shares, 

(vii) the Applicant will not transfer or redeem any of the Shares while present 

in the United States, its territories or possessions, or areas subject to its jurisdiction, and (viii) if the Applicant is a bank, broker or dealer, and the Applicant 

is acquiring Shares on behalf of clients for investment purposes, that such clients 

are not U.S. Persons, that the Applicant will notify the Fund if it shall come to 

the Applicant’s knowledge that any such client has become a U.S. Person, that 

the Applicant will not at any time knowingly transfer or deliver Shares or any 

part thereof or interest therein to or for the account or benefit of a U.S. Person 

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and that the Applicant will not make any transfer of delivery thereof directly 

orindirectly into the United States. 

Definition of a U.S. Person per Prospectus 

‘‘U.S. Person’’ means a ‘‘U.S. Person,’’ as defined by Rule 902 of Regulation S 

under the U.S. Securities Act of 1933, as amended (the ‘‘Securities Act’’), including: 

(i) any natural person resident in the United States; 

(ii) any partnership organised or incorporated under the laws of the United States; 

(iii) any estate of which any executor or administrator is a U.S. Person; 

(iv) any trust of which any trustee is a U.S. Person; 

(v) any agency or branch of a non-U.S. entity located in the United States; 

(vi) any non-discretionary account or similar account (other than an estate or 

trust) held by a dealer or other fiduciary for the benefit or account of a U.S. 

Person; 

(vii) any discretionary account or similar account (other than an estate or trust) 

held by a dealer or other fiduciary organised, incorporated, or (if an individual) resident in the United States; and 

(viii) any partnership or corporation if: 

(a) organised or incorporated under the laws of any non-U.S. jurisdiction; and (b) 

formed by a U.S. Person principally for the purposes of investing in securities 

not registered under the Securities Act, unless it is organised or incorporated, 

and owned, by accredited investors (as defined in Rule 501(a) of Regulation D 

under the Securities Act) who are not natural persons, estates or trusts. 

Notwithstanding the preceding paragraph, ‘‘U.S. Person’’ shall not include: 

(i) any discretionary account or similar account (other than an estate or trust) held 

for the benefit or account of a non-U.S. Person by a dealer or other professional 

fiduciary organised, incorporated, or (if an individual) resident in the United 

States; 

(ii) any estate of which any professional fiduciary acting as executor or administrator is a U.S. Person, if: 

(a) an executor or administrator of the estate who is not a U.S. Person has sole 

or shared investment discretion with respect to the assets of the estate, and (b) 

the estate is governed by non-United States law; 

(iii) any trust of which any professional fiduciary acting as trustee is a U.S. Person if a trustee who is not a U.S. Person has sole or shared investment discretion with respect to the trust assets and no beneficiary of the trust (and no 

settlor if the trust is revocable) is a U.S. Person; 

(iv) an employee benefit plan established and administered in accordance with the 

law of a country other than the United States and customary practices and 

documentation of such country; 

(v) any agency or branch of a U.S. Person located outside the United States if: 

(a) the agency or branch operates for valid business reasons, and (b) the agency 

or branch is engaged in the business of insurance or banking and is subject 

to substantive insurance or banking regulation, respectively, in the jurisdiction 

where located; 

(vi) certain international organisations (and their agencies, affiliates and pension 

plans) as specified in Rule 902(k)(2)(vi) of Regulation S under the Securities 

Act; or 

(vii) an entity excluded or exempted from the definition of ‘‘U.S. Person’’ in reliance 

on or with reference to interpretations or positions of the U.S. Securities and 

Exchange Commission or its staff.’’ 

[09–4107] 

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