Foreign Account Tax Compliance Act.


October 19, 2010

On October 19, 2010, Tax Executives Institute filed the following comments on IRS Notice 2010-60, which provided preliminary guidance on the Foreign Account Tax Compliance Act. The comments were filed under the aegis of the Institute's IRS Administrative Affairs Committee, whose chair is Mark C. Silbiger of the Lubrizol Corporation. Paul Heller of the Royal Bank of Canada headed the project. Contributing materially to the development of the comments were Robert B. Huey; John Lisi of Cunningham Lindsey; Janice L. Lucchesi of Akzo Nobel, Inc.; Joan E. Nolting and Angie Boohar of Hallmark Cards, Inc.; Patrick J. O'Brien of Joy Global, Inc.; Alan Richer of General Electric Co.; and Janell M. Strube of Kerzner International North America, Inc. Mary Lou Fahey, General Counsel and legal staff liaison to TEI's International Tax Committee, coordinated preparation of the comments.

On March 18, 2010, the Hiring Incentives to Restore Employment (HIRE) Act of 2010 (1) was enacted. Subtitle A of Title V of the HIRE Act includes several provisions relating to foreign bank accounts, account holders, and cross border transactions, referred to as the Foreign Account Tax Compliance Act (FATCA). (2)

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

* Section 1471, Withholdable payments to foreign financial institutions;

* Section 1472, Withholdable payments to other foreign entities;

* Section 1473, Definitions; and

* Section 1474, Special rules.

FATCA was enacted in response to the contention that U.S. persons were escaping tax on their worldwide income through the use of unreported offshore accounts and structures. (3) The goal of FATCA is to require non-U.S, financial institutions to provide the Internal Revenue Service with information on U.S. persons that invest in accounts outside the United States and for non-U.S. entities to provide information about U.S. owners to the withholding agents. Chapter 4 imposes a withholding tax requirement if due diligence and reporting requirements are not met in respect of specified foreign accounts owned by certain U.S. persons or by U.S.-owned foreign entities. In effect, the withholding requirement is the consequence of not providing information relating to U.S. holders of foreign accounts and assets. The provisions are generally effective for payments made after December 31, 2012.

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


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

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

Definitions and Exceptions to FATCA

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

(4) Foreign Financial Institution. The term "foreign financial institution" means any financial institution which is a foreign entity....

(5) Financial Institution. Except as otherwise provided by the Secretary, the term "financial institution" means any entity that--

(A) accepts deposits in the ordinary course of a banking or similar business;

(B) as a substantial portion of its business, holds financial assets for the accounts of others; or

(C) is engaged ... primarily in the business of investing, reinvesting, or trading in securities ..., partnership interests, or commodities ... or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.

These definitions may require tens of thousands of entities to enter into FFI agreements with the IRS, especially under the third prong of the definition. (5) We commend the government for recognizing in Notice 2010-60 that certain classes of entities should be excluded from the definition of "financial institution" under FATCA to limit the burdens imposed on compliant taxpayers.

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

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

Additionally, the Secretary may provide exceptions for certain classes of institutions. Such exceptions may include entities such as certain holding companies, research and development subsidiaries, or financing subsidiaries within an affiliated group of non-financial operating companies. It is anticipated that the Secretary, may prescribe special rules addressing the circumstances in which certain categories of companies, such as certain insurance companies, are financial institutions, or the circumstances in which certain contracts or policies, for example annuity contracts or cash value life insurance contracts, are financial accounts or United States accounts for these purposes. (6) TEI recommends that the Treasury Department fully exercise the authority granted to provide exceptions to FATCA's withholding rules, and thus we are pleased that the government intends to issue guidance exempting certain classes of entities from withholding under sections 1471 and 1472. These entities include certain holding companies, start-up companies, non-financial entities that are liquidating or emerging from reorganization or bankruptcy, and hedging/financial centers of a non-financial group, as well as most property and casualty insurance companies or reinsurance or term-life insurance contracts. The Treasury and IRS requested comments on how these classes may be more specifically defined, what mechanisms withholding agents can use to identify such entities (including self-certification), and whether other classes of entities should be similarly...

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