Manal Corwin International Tax Counsel United States Department of the Treasury 1500 Pennsylvania Ave. NW

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1 June 7, 2011 Manal Corwin International Tax Counsel United States Department of the Treasury 1500 Pennsylvania Ave. NW Washington, D.C Steven A. Musher Associate Chief Counsel (International) 1111 Constitution Ave. NW Washington, D.C Michael Danilack Large Business and International Division Deputy Commissioner (International) 1111 Constitution Ave. NW Washington, D.C John J. Sweeney Senior Technical Reviewer (International) 1111 Constitution Ave. NW Washington, D.C CC:PA:LPD:PR (NOT ) Room 5203 P.O. Box 7604 Ben Franklin Station Washington, D.C Re: Comments in Response to IRS Notice Dear Ms. Corwin and Messrs. Musher, Danilack, and Sweeney: The Clearing House Association L.L.C. ( The Clearing House ), an association of major commercial banks, 1 and the American Bankers Association ( the ABA ) 2 appreciates the 1 2 Established in 1853, The Clearing House is the nation s oldest banking association and payments company. It is owned by the world s largest commercial banks, which collectively employ 1.4 million people in the United States and hold more than half of all U.S. deposits. The Clearing House Association is a nonpartisan advocacy organization representing through regulatory comment letters, amicus briefs and white papers the interests of its owner banks on a variety of systemically important banking issues. Its affiliate, The Clearing House Payments Company L.L.C., provides payment, clearing and settlement services to its member banks and other financial institutions, clearing almost $2 trillion daily and representing nearly half of the automated clearing house, funds transfer and check image payments made in the U.S. See The Clearing House s web page at The ABA represents banks of all sizes and charters, and is the voice for the nation s $13 trillion banking industry and its two million employees.

2 Ms. Manal Corwin 2 June 7, 2011 opportunity to jointly submit these comments with regard to Notice (the Notice ), which provides a second round of preliminary guidance with respect to the Foreign Account Tax Compliance Act ( FATCA ) provisions of the Hiring Incentives to Restore Employment Act of Executive Summary The Clearing House and the ABA recognize the monumental task that the Treasury Department (the Treasury ) and the (the IRS ) face in the implementation and administration of the new FATCA information reporting and withholding tax regime. We understand and appreciate the difficulty that Treasury and the IRS face in designing rules that strike the appropriate balance between the U.S. government s interest in receiving information and the need for the new rules to be practical, logical, and administratively manageable for both the IRS and the members of the banking industry who will have to apply those rules. To accomplish this, however, we believe that each rule must be analyzed individually. Specifically, we believe that creating a successful regime hinges on striking the right balance between a particular rule s value to the government and the corresponding burden on impacted entities charged with implementing the rule. While we acknowledge and appreciate the efforts Treasury and the IRS have made towards achieving this balance, we believe that certain provisions in the Notice do not strike that balance. The Clearing House and the ABA respectfully request that Treasury and the IRS consider the comments set forth below when drafting future notices, regulations, or other guidance (together, the Guidance ) implementing the provisions of FATCA. Specifically, the Clearing House and the ABA: propose that (i) the application of the passthru payment percentage ( PPP ) initially apply only to dividend payments made by a foreign financial institution ( FFI ), described in Section 1471(d)(5)(C) of the Internal Revenue Code of 1986 as amended (the Code ), to its investors (or to related custodial payments where the investment is held through a foreign custodian); and (ii) the PPP applied to such payments be based on a standardized formula; recommend that the rules requiring heightened due diligence with respect to documenting certain preexisting individual account holders (i) focus solely on account balance and not the type of relationship the account holder has with the institution; and (ii) clearly reference, and define the content of, the account information that is the subject of the heightened due diligence search for potential U.S. indicia;

3 Ms. Manal Corwin 3 June 7, 2011 recommend that Treasury and the IRS clarify the requirements for the Chief Compliance Officer s certification with respect to preexisting individual account documentation policies and procedures; and recommend that Treasury and the IRS (i) relax the requirements surrounding certain deemed compliant foreign financial institutions ( DCFFIs ); (ii) expand the DCFFI definition to include certain entities that do not maintain accounts ; and (iii) eliminate the need to formally apply for such status. DETAILED DISCUSSION OF RECOMMENDATIONS 1. Rules relating to passthru payments The asset based approach to the passthru payment rule set forth in Notice would be difficult, if not impossible, to implement for a number of reasons. The initial rules should provide that the only payments subject to the passthru payment provisions are dividend payments made by a Participating FFI ( PFFI ) described in Code Section 1471(d)(5)(C) to its investors (or to related custodial payments where the investment is held through a foreign custodian). Further, the rules should provide a standard PPP to be applied to all such payments. The treatment of all other types of payments that may fall within the definition of a passthru payment should be reserved until all interested parties (Treasury, the IRS, and impacted members of industry) have had an opportunity to fully analyze and jointly discuss all concerns. As set forth in the legislation, an FFI must impose FATCA s penal withholding on any passthru payment it makes to a recalcitrant account holder (i.e., one that refuses to sign a waiver permitting the FFI to disclose account information under the statute, as well as one that does not comply with documentation requests in a timely manner) or a nonparticipating foreign financial institution ( NPFFI ). Pursuant to the statute, the definition of a passthru payment includes a withholdable payment, as well as any amount attributable to a withholdable payment. This second prong, attributable to a withholdable payment, had not previously been discussed in formal guidance and has been the topic of much debate. Rejecting most commentary that we have seen, the Notice adopts a very expansive and complex asset tracing methodology (based on the ratio of a PFFI s U.S. assets to its total assets) for the calculation of a passthru payment. We believe this approach is problematic for three reasons. First, as mentioned, it requires a PFFI to calculate the ratio of its U.S. assets to its total assets to determine its relevant PPP for the stated period. When determining U.S. assets for purposes of this calculation, a portion of what would otherwise be considered a foreign asset (i.e., an interest in an entity described in Code Section 1471(d)(5)(C) that is also a PFFI) will be

4 Ms. Manal Corwin 4 June 7, 2011 treated as U.S. to the extent of the other PFFIs PPP. This means that existing platforms currently used to code and track the PFFI s global assets will be inadequate for purposes of this calculation, and redeterminations of asset sourcing would be required to be developed and implemented. This would be a very onerous, time consuming and costly exercise. Second, where the PFFI is a custodian, the PPP to be applied is that of the issuer. Thus, it will be imperative that the PFFI custodian know the FATCA classification of each issuer (i.e., PFFI, NPFFI, DCFFI, non financial foreign entity ( NFEE )) because, under the rules, the application of a PPP for each class of entity will differ. Given the volume of issuers globally, this exercise alone could take years. Once the custodian determines the initial classification and PPP of every issuer, the PFFI would need to re check the status of the issuer each calendar quarter and apply the newly published PPP, if different from the prior one. Third, assuming the above two problems could be overcome, the asset tracing methodology adopted in the Notice imposes a very manual procedure (i.e., searching the websites of PFFIs on a quarterly basis to determine their current PPP and retaining that information for withholding calculations on each payment made in the subsequent quarter) on an otherwise automated payment process. This might be manageable if the number of recalcitrant account holders was certain to be relatively small. However, because a PFFI must treat an account holder that has not responded timely to certain documentation requests as recalcitrant, large volumes of accounts may be subject to this manual procedure, especially in the initial years. In addition, different withholding rates will apply to different investments. As a result, under the proposed approach, every PFFI s payment processing system will be severely impacted. Time and expense aside, we believe the ability to successfully implement such a system is highly questionable. Notwithstanding the above, the Clearing House and the ABA acknowledge and understand that the passthru payment concept is an important component of the FATCA regime. After carefully considering its significance, and various alternative solutions, we recommend that passthru payments be defined to include only dividends paid by a PFFI described in Code Section 1471(d)(5)(C) and to related custodial payments where the investment is held through a foreign custodian. Further, in lieu of the complex asset tracing and separate calculation requirements based on the PPP of each individual PFFI, we believe that a workable system must include a standard percentage determined and announced by Treasury or the IRS that would be applicable to all dividend payments associated with each such entity. As mentioned above, the approach set forth in the Notice would require a foreign custodian that holds interests in Code Section 1471(d)(5) entities in custody to search the websites of these entities to obtain the relevant PPPs, and to repeat this exercise quarterly. Given the estimated number of PFFIs globally (hundreds of thousands of entities), this requirement will undoubtedly be burdensome especially for a large custodian that may be

5 Ms. Manal Corwin 5 June 7, 2011 holding large volumes of these type of securities at any given time. To address this administrative concern, we believe that Treasury and the IRS should adopt a standardized percentage, based on information obtainable from the Treasury Department (e.g., an estimated ratio of total U.S. securities to global securities) that would be used as the percentage for all payments subject to these rules. Finally, The Clearing House and the ABA strongly believe that Treasury and the IRS should not extend the passthru payment treatment to any other payments until such time as all interested parties have had the opportunity to fully consider and analyze this extremely complex issue. We believe it was Congress s intent to limit the application of withholding on passthru payments to the Code Section 1471(d)(5)(C) funds as this was an obvious area where one could circumvent the rules as originally drafted (e.g., a Code Section 1471(d)(5)(C) fund that was a PFFI could receive interest free of withholding and then immediately distribute that income as a foreign source dividend to recalcitrant account holders and NPFFIs without FATCA tax reporting and withholding consequences). 3 We believe that the intended application of this rule to other types of payments must be fully explored before such widespread application is warranted. Furthermore, we believe that the passthru payment rule should be applied only to payments on investments and not extended to payments for goods or services, wire transfers, and other non investment types of payments. 2. Documentation Requirements for Preexisting Individual Accounts The adoption of the risk based approach to the documentation and due diligence requirements relating to preexisting individual accounts is appropriate and we commend Treasury and the IRS for their efforts in revising the rules to reflect this methodology. We believe this approach can be successfully carried out, and the concerns of Treasury and the IRS addressed, by adopting a single criterion, the account balance threshold, for heightened scrutiny. In addition, we believe it is imperative that the rules clearly define those documents or systems that comprise the account information subject to the heightened due diligence searches for U.S. indicia. Pursuant to the Notice, heightened due diligence requirements must be imposed on private banking accounts, as well as any other accounts with a balance of $500,000 or more. With respect to private banking accounts, the account relationship manager is required to identify all accounts under his management where he has actual knowledge of U.S. ownership, and request Forms W 9 from those account holders. Where such knowledge is not present, the 3 See September 13, 2010 Letter from Congressman Wm. Lacy Clay to the Secretary of the Treasury, Timothy Geithner ( I believe it would be consistent with both the plain language and the intent of the legislation for Treasury to clarify that, except in the case of structures designed for avoidance of withholding taxes, a payment is considered attributable to a withholdable payment only where the payment is directly linked to a withholdable payment received by the FFI. ).

6 Ms. Manal Corwin 6 June 7, 2011 relationship manager must search the account information (paper and electronic) for specific listed indicia of U.S. status. We believe the significance of the private banking designation is overstated for the following two reasons. First, we believe that Treasury and the IRS might not fully understand the relationship between the account holder and the corresponding account relationship manager for the majority of accounts that would fall under the traditional private banking umbrella. Significantly, in many instances it is not uncommon for a relationship manager to have responsibility for several hundred accounts at any given time. Consequently, any personal knowledge relating to an individual account holder s tax status is likely gained from a review of routine account documents and not from personal contacts with the account holder. Further, where an account has been in existence for a significant period of time, as is common, the relationship manager may have changed since the account was opened, and the current relationship manager may have little, if any, knowledge of the account holder s past or current tax status. Second, the relationship manager is not likely to have the requisite expertise to undertake the due diligence search described in the Notice. A due diligence search related to FATCA likely would have to be conducted by trained personnel from an operational tax function (or similar unit) and not client facing personnel. We believe that the Notice s requirement that the relationship manager conduct the search further supports our belief that there may be a fundamental misunderstanding of the relationship manager s responsibilities. Because most private banking accounts are so designated because of the account balance, we do not believe it is necessary for Treasury and the IRS to subject private banking accounts to a separate set of rules to achieve the intended results. Instead, a straightforward approach of identifying accounts that should be subject to heightened documentation and due diligence standards by account balance only would yield similar results. To that end, the Clearing House and the ABA recommend the following documentation and due diligence requirements for any preexisting individual account with a balance of $500,000 or more: 1) Where the account file contains documentary evidence (e.g., government issued photo identification 4 ), the associated due diligence requirements should be limited to an electronic search of the FFI s systems for the listed indicia of potential U.S. status; and 2) Where the account file does not contain documentary evidence, the associated due diligence search should be expanded to include both an electronic and paper* file search for the listed indicia of potential U.S. status. 4 We note that it is imperative that the documentary evidence on file be treated as valid for FATCA documentation purposes even if it was provided to the FFI more than three years earlier.

7 Ms. Manal Corwin 7 June 7, 2011 *NOTE: For this purpose, the rules must clearly define the scope of the paper search. Specifically, the rules must define both the types of documents subject to the paper search, as well as time restrictions. This is especially significant where file documents have been updated over time and the new documents do not include such indicia (e.g., a change in power of attorney). Smaller accounts that would be within the very broad definition of private banking found in the Notice (including wealth management and similar activities) but would not meet the $500,000 account value threshold would nevertheless be subject to the electronic search for U.S. indicia described in Step 4 of the Notice. We believe that this electronic search, as opposed to the diligent review of the entire account file proposed for high value accounts, is sufficient to meet the objectives of Chapter 4. To require a more burdensome and extensive review of lower value pre existing accounts for U.S. indicia would likely very significantly increase the cost of compliance without resulting in the identification of U.S. accounts with sufficient U.S. tax revenue to justify the additional expense. 3. Chief Compliance Officer s Certification The certifications that must be made by a PFFI s Chief Compliance Officer ( CCO ) with respect to preexisting individual accounts, as set forth in the Notice, are vague. As a result, the management of a prospective PFFI may not be certain what policies and procedures it must prohibit. In turn, the CCO of the prospective PFFI may be unable to sign the certification. To remedy this, we recommend that the prohibitions be clearly described. In addition, we recommend that the certifications be based on the CCO s good faith belief. The Notice provides new certification requirements that must be made by the PFFI s CCO. Among others, the CCO (or equivalent) must certify to the IRS that the PFFI has not taken any measures between the publication date of the Notice and the effective date of the PFFI Agreement to circumvent the account identification requirements. In addition, the CCO must certify that the PFFI has written policies and procedures in place that prohibit employees from doing the same. We understand the concern of Treasury and the IRS (i.e., by adopting a risk based approach and disclosing the specific rules before the government has jurisdiction over the entity via the FFI Agreement) that certain actions could be taken to exclude accounts that otherwise would have been subjected to a higher documentation or review standard. We acknowledge that such certifications generally have a place in the sound administration of the tax laws. However, as described in the Notice, it is not clear exactly what actions should or should not be prohibited. Admittedly, there are many actions that clearly fall within those that the management of an FFI should prohibit (e.g., advising account holders to split their account balances among

8 Ms. Manal Corwin 8 June 7, 2011 multiple accounts to stay under a designated threshold). Others, however, may not be so easy for management to determine whether they are within the prohibition. For example, a PFFI may have a policy in place that mandates the purging of outdated file data after a specified period of time. Such data may include outdated information containing indicia of potential U.S. status. Here, it is not clear whether this policy would fall within those that should be prohibited. Because of this uncertainty, the CCO may conclude that he is unable to provide the requisite certification. To remedy this, we recommend that Treasury and the IRS clarify the certification language to eliminate possible interpretive concerns. In addition, we recommend that Treasury and the IRS make clear that the certifications are based on the CCO s good faith belief. 4. Deemed Compliant FFIs Similar to the new documentation rules for preexisting accounts, the adoption of the risk based approach relating to the possible deemed compliant status for certain local banks is appropriate and we are pleased to see Treasury and the IRS continue to respond to industry input in this area. Unfortunately, the requirements that these local banks must satisfy to qualify as deemed compliant are overly restrictive. As drafted, the requirements are such that few, if any, local FFIs will be eligible. These requirements should be relaxed so that institutions that are intended to fall within this deemed compliant classification can do so. In addition, certain FFIs that do not maintain accounts, as that term is defined, should also fall within the deemed compliant category. Finally, an FFI that is deemed compliant should not be required to submit a formal application for such status. Instead, a simple notification procedure should suffice. The Notice outlines several new classes of DCFFIs. The overly restrictive requirements for two certain local banks and local FFI members of participating FFI groups are confusing. The underlying rationale for the inclusion of these two new DCFFI designations appears to be based on the fact that the type of investor the FATCA rules are intended to target, sophisticated U.S. persons that invest through offshore accounts and/or entities in an attempt to evade tax, would not be doing so through local banks. That is, these institutions do not offer the products and services that these targeted persons are seeking. While this rationale is sound, the requirements that these institutions must meet are so restrictive that an institution seeking the described DCFFI status would need to significantly modify its current business structure and operations. For example, local banks seeking to comply with these requirements would need to have each member of the local bank group licensed as a bank, as well as organized in the same country. Further, no member could have operations outside that country. Finally, each member would have to adopt policies and procedures that would prohibit them from holding accounts for nonresidents, NPFFIs, or NFFEs

9 Ms. Manal Corwin 9 June 7, 2011 (unless the NFFE is organized and operating an active business in the same country as the local banks). The rules for the local FFI members of participating FFI groups are similarly restrictive. One area that requires clarification, in addition to several others of concern to us, relates to the excepted NFFE restriction. First, the restriction does not take into account the marketplace reality that companies operating in various jurisdictions are likely to need basic banking services in each of those jurisdictions. Second, if the local bank is a PFFI, this type of account would be excepted from the rules (as an active trade or business) regardless of where it is organized or operating. We would be pleased to discuss these rules further with you so that we can better understand their underlying rationale. Given the above, we recommend that Treasury and the IRS relax the requirements set forth in the Notice to ensure that the sound tax policy rationale with respect to institutions with localized operations is achieved. Alternatively, and we respectfully suggest more constructively, we recommend that Treasury and the IRS shift the focus from these institutions places of organization and account structure to the types of services they offer and whether they are generally of the type that a U.S. person seeking to evade tax would utilize. Institutions that provide only basic banking services, such as checking accounts, personal mortgage lending, traditional savings accounts, and the issuance of credit cards, should be deemed compliant. Along similar lines, there are many entities within an expanded affiliated group of FFIs through which U.S. persons and NPFFIs generally are not able to make investments. Examples would include pure bank holding companies, 5 investment advisory affiliates, and certain leasing companies. Since the business of these entities excludes such investors and investments, we recommend that Treasury and the IRS include them in the list of DCFFIs (as they were not entities included in the categories of DCFFIs listed in Notice ). We are also aware that there will be FFIs that must become PFFIs because they have a line of business that has U.S. accounts. However, that PFFI may also have lines of business that have no U.S. accounts or U.S. investments but will be required to comply with all the PFFI requirements for account documentation and associated due diligence because the PFFI status applies to the entire legal entity. We suggest that just as a Qualified Intermediary ( QI ) is able to designate accounts as QI accounts, a PFFI should be able to designate specific lines of business within the FFI as having DCFFI status and be exempt from the PFFI requirements. The PFFI would be responsible to ensure that such lines of business satisfy the DCFFI requirements. Finally, the Notice indicates that the IRS will require an FFI that meets the deemed compliant requirements to apply for such status, obtain an FFI EIN, and make a certification 5 A pure bank holding company means a bank holding company whose only activity is ownership of operating companies that are banks or affiliates. Such holding companies do not have any customers and do not enter into transactions to finance the operating companies.

10 Ms. Manal Corwin 10 June 7, 2011 every third year that it continues to satisfy the relevant requirements. We believe that these administrative mandates are not necessary to carry out the intent and purpose of the DCFFI designation. We recognize that Treasury and the IRS may have imposed these requirements out of concern that an FFI that does not have such status may inappropriately make such a claim. While we understand this concern, we believe it can be alleviated through a simple notification procedure. The IRS would then have the FFI s name for both verification and publication purposes. We thank you for considering our views. We would be happy to discuss our suggestions further at your convenience. If you have any questions or need further information, please contact the undersigned at ( david.wagner@theclearinghouse.org) or ( fmordi@aba.com). Sincerely, David Wagner Senior Vice President Financial and Tax Affairs The Clearing House Association L.L.C. Francisca N. Mordi Vice President and Senior Tax Counsel American Bankers Association cc: The Honorable Douglas Shulman Commissioner The Honorable William Wilkins Chief Counsel Heather Maloy Commissioner, Large and Mid Sized Business Michael Plowgian Attorney Advisor, Office of the International Tax Counsel Department of the Treasury Jesse Eggert Attorney Advisor, Office of the International Tax Counsel

11 Ms. Manal Corwin 11 June 7, 2011 Department of the Treasury Danielle Nishida Attorney Advisor, Office of Associate Chief Counsel (International) Ana Guzman Attorney Advisor, Office of Associate Chief Counsel (International)