27 April Michael Danilack Deputy Commissioner (International) Internal Revenue Service 1111 Constitution Avenue, NW Washington, DC 20224

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1 27 April 2012 Manal S. Corwin Deputy Assistant Secretary (International Tax Affairs) U.S. Department of the Treasury 1500 Pennsylvania Avenue, NW Washington, DC Michael Danilack Deputy Commissioner (International) Internal Revenue Service 1111 Constitution Avenue, NW Washington, DC Steven Musher Associate Chief Counsel (International) Internal Revenue Service 1111 Constitution Avenue, NW Washington, DC Sent electronically: (IRS REG ). Dear Ms. Corwin, Mr. Danilack and Mr. Musher FATCA Implementation Proposed Treasury Regulations IMA represents the investment management industry operating in the UK. Our Members include independent investment managers, the investment arms of retail banks, life insurers and investment banks, and the managers of occupational pension schemes. They are responsible for the management of around US$5.5 trillion of assets, which are invested on behalf of clients globally. These include authorised investment funds (i.e. regulated mutual funds), institutional funds (e.g. pensions and life funds), private client accounts and a wide range of pooled investment vehicles. In particular, our Members represent 99% of funds under management in UK-authorised investment funds, most of which are Undertakings for Collective Investments in Transferable Securities (UCITS). IMA is a member association of the European Fund and Asset Management Association (EFAMA) and has participated in the EFAMA working group on FATCA. We have been heavily involved in the EFAMA submission on the proposed regulations, which will be sent to you shortly, and fully support its comments and proposals for modifications. We were also heavily involved in the EFAMA submission of 7 June 2011 and subsequent correspondence with John Sweeney. We welcome changes that are made in the regulations to expand the categories of deemed compliant entities to include categories of collective investment vehicles and other local FFIs. We believe that with the minor 65 Kingsway London WC2B 6TD Tel:+44(0) Fax:+44(0) Investment Management Association is a company limited by guarantee registered in England and Wales. Registered number Registered office as above.

2 modifications suggested below these can be made to reduce the compliance burden for the many funds established in the UK that do not target US investors. Intergovernmental approach to implementing FATCA IMA welcomes and supports the US government s collaboration with other countries in implementing FATCA through intergovernmental agreements. The benefits highlighted in the Joint Statement - the removal of legal impediments to compliance, reduced compliance costs and simplified practical implementation - are significant. We believe that the following points are critical to ensuring that the aims of the joint statement are met. 1. FATCA compliance should not require FFIs in partner countries to introduce significant, burdensome new processes for client identification and documentation. The intergovernmental agreements should make clear that client identification and documentation should be carried out pursuant to existing local AML/KYC requirements (see point 2.1 below). 2. The intergovernmental agreements should ensure that the requirement to withhold on passthru payments is eliminated or significantly reduced. 3. Intergovernmental agreements should be harmonised to ensure that multinational FFIs are not subject to different regimes in each partner country. Many of our members are international organisations with operations outside countries currently in negotiations with you on FATCA implementation. It is of high importance that local data protection impediments to complying with FATCA are dealt with in as many jurisdictions as possible prior to the commencement of FATCA obligations. In the light of the above and our comments on the proposed regulations below, we believe that the current dates for the implementation of FATCA are too soon for either FFIs or governments to work through the detailed requirements and implement changes to systems and procedures. We therefore urge you to consider deferring the implementation of FATCA. Our comments on the regulations below deal first with points for clarification on the scope of FATCA for funds generally, follow with comments regarding those FFIs that would want to be participating FFIs and end with comments regarding those FFIs that may want to be within the deemed compliant categories. Comments on the proposed regulations 1 Scope of FATCA for funds 1.1 Application of FATCA to umbrella funds In its letter of 7 June 2011, EFAMA requested confirmation that the provisions of FATCA should apply at the sub-fund level where a fund is constituted as an umbrella fund (a single legal entity) split into various sub-funds that operate separately from a functional and economic perspective. 2

3 Concern about the uncertainty in how the FATCA provision should apply to umbrella funds is widespread in the UK as well as many European jurisdictions. We therefore request clarification that FFI agreements and the provisions of FATCA generally will apply at the sub-fund level and not at the umbrella level. 1.2 Definition of financial account as applied to UK individual pension plans 6(f)(1)(i) 5(b)(2)(i)(A) UK occupational pension schemes should fall within the definition of exempt beneficial owner in 6(f). However we believe it should be made clear that this definition also applies to individual pension plans established under contract with an insurer. Notwithstanding the above, individual pension plans and occupational pension schemes may also fall within the exception to the definition of financial account in 5(b)(2)(i)(A) (retirement and pension accounts). However, in the UK contributions to personal pension plans are not limited by reference to earned income. Instead tax relief on contributions to a pension plan is limited to 100% of earned income, and no tax relief is available for contributions in excess of 50,000. Therefore we request that of 5(b)(2)(i)(A)(2) is modified so that either tax relief is limited by reference to earned income, or tax relief on annual contributions [...] is limited to $[...]. This limit would need to accommodate requirements for different countries in the UK the limit is 50,000. Moreover, the requirement that contributions are employer, government or employee contributions precludes any selfemployed or unemployed person from contributing to a pension plan that satisfies this condition, and is within the exception to the definition of financial account. We request the removal this condition. These requests are also relevant to the conditions in (f)(1)(ii) and to the definition of certified deemed compliant retirement fund in (f)(2)(ii). 1.3 Definition of financial account as applied to UK Individual Savings Accounts (ISAs) 5(b)(2)(i)(B) In the UK, Individual Savings Accounts (ISAs) are tax incentivised saving schemes targeted to appeal to a broader range of the population and which are intended to encourage citizens to raise their level of long term savings. There were over 15 million ISA accounts subscribed to during the year to April 2011, representing in excess of 50bn 1. Contributions to ISA accounts are limited on an annual basis. The limit for contribution in the 2012/2013 tax year is 11, HMRC statistics at 3

4 We believe that ISAs represent a low risk, mass market savings product that should fall within the exceptions to the definition of financial account in 5(b)(2)(i)(B). However, an ISA would not meet requirement (1) as contributions are not limited by reference to earned income. Neither would it meet condition (3) as there are no limits or penalties for withdrawing amounts. As there is already a hard limit of $50,000 of annual contributions in requirement (2), we do not think it is necessary to require a further limit by reference to earned income. Therefore, we request that requirement (1) is removed altogether. We also believe that requirements (3) and (4) serve the same purpose, and therefore we request also removing requirement (3). In this way, UK ISAs would fall within the exception to the definition of financial account. 1.4 Definition of financial account as applied to funds traded on a recognised stock exchange 5(b)(3)(iv) There is a risk that the exclusion from the definition of financial account for interests in funds that are regularly traded on an established securities market could results in interest in those funds changing chapter 4 status from year to year. This is because changes in market conditions and liquidity may result in a fund meeting the condition one year but breaching it the next. We believe that this condition could be modified better to meet the intended objective by allowing a fund to meet the condition in any one of the last three years. This would be sufficient in most cases to counter market cyclical impact on liquidity, and allow the fund to make contingency plans for FATCA compliance in the event of a breach. If this is not acceptable, an alternative might be to measure turnover on an average basis over a number of years. We also support alternative options suggested by the Association of Investment Companies for ensuring that the compliance burden for closed ended funds is reduced. 2 Comments in relation to participating FFIs (4) 2.1 Account identification and documentation 4(c)(4)(i) IMA welcomes the relaxation of identification requirements for pre-existing accounts outlined in 4(c)(7). We believe this is a workable rule for identification of pre-existing accounts. We note that the preamble states that the proposed regulations generally do not require an FFI to make significant modifications to the information collected on customer intake, other than with respect to account holders identified as FFIs, as passive investment entities, or as having US indicia. 4

5 In relation to new accounts 4(c)(4)(i) crossrefers to 3(c)(5), which states that documentary evidence is only reliable if it contains sufficient information to support the payee s claim of chapter 4 status. In many cases, client on-boarding procedures that are required under local law to comply with anti-money laundering (AML) and know-your-customer (KYC) rules are not going to be sufficient to enable an FFI to determine the chapter 4 status of the account. For example, for fund distribution in the UK, in most cases it is sufficient for AML/KYC purposes to verify a client s name, current address and date of birth online through a credit reference agency. We understand that similar rules exist in the US and that do not necessarily require the collection of physical documentation such as passports and residency certificates. We believe there is a conflict with the stated intention expressed in the preamble and the detail of the regulations. We believe that a solution to this apparent conflict is best sought between governments negotiating intergovernmental agreements for the implementation of FATCA. Governments should look to implement remedies based on local AML/KYC practices that would meet the objective of not requiring significant modifications of current account take-on procedures and other objectives expressed in the joint statement of minimising disruption to business and costs of implementing FATCA. Notwithstanding the above, we request clarification on what, in IRS s view, would be sufficient documentation to determine chapter 4 status, and that would meet the requirement of Reg (c). In addition, we request clarification that the period of validity rules in 3(c)(6)(ii) do not also apply for the purpose of identification of offshore obligations in Reg (c), but that instead 4(c) requires a participating FFI only to maintain records pursuant to the regulatory requirements of its own local jurisdiction. 2.2 Responsible officer in the context of UK Authorised Unit Trusts and Open Ended Investment Companies 4(c)(10) In our letter of 7 June 2011, we pointed out that UK-authorised funds are constituted as either Open-Ended Investment Companies (OEICs) or Authorised Unit Trusts (AUTs). Neither an AUT nor an OEIC has employees or directors that can sign an FFI agreement, fulfil the role of a responsible officer or provide certifications required under the regulations. 5

6 The Trustee of an AUT is the legal owner of the assets but is under an obligation to hold the assets for the benefit of the unit holders. Under UK regulatory law (the Financial Services and Markets Act 2000) it is a requirement that the Trustee of a unit trust is a body corporate. Such a corporate trustee will invariably act as trustee for a wide range of unit trusts. UK regulatory law provides that day-to-day management of a unit trust cannot be carried out by the Trustee but by the fund manager (a term used in UK law to define the fund controller, who has the power to act as investment manager and fund administrator, but who will invariably delegate these functions to different specialist entities). The fund manager is also signatory to the trust deed of a unit trust (and is therefore a trustee with signing authority capacity). However, there are certain responsibilities of the Trustee, which must remain with the Trustee, such as the safekeeping of assets and the monitoring of the activities of the fund manager. An OEIC is a body corporate but is not the legal owner of the assets. Instead, UK regulatory rules require each OEIC to have a depository. The policy rationale behind the requirement for a depository was to create an identical set of rules as those which are imposed on a Trustee of an AUT. UK regulatory law also provides that day-to-day management of an OEIC cannot be carried out by the depository but by the Authorised Corporate Director (ACD). In the FATCA regulations IRS will need to ensure that FATCA obligations in respect of a fund are not duplicated by virtue of the fact that, for regulatory purposes, a fund structure requires more than one entity to be involved in its operation. Therefore we request that it should be made clear that a fund should be governed by a single FFI agreement. Where that fund has no legal personality itself, or no employees or officers, the signatory of the FFI agreement, and the role of the responsible officer should be provided by a single entity acting on behalf of the fund, with an employee of that entity taking the role of the responsible officer.. UK tax legislation ensures that AUTs and OEICs are treated the same in the UK and we believe this principle should be preserved for FATCA. Moreover, we believe that it should be the fund manager of an AUT, or the ACD of an OEIC, that acts as signatory to an FFI agreement and provides the responsible officer function. This would ensure that the FATCA compliance function is more directly linked with the promotion and distribution of fund interest. Furthermore, where an AUT fund manager or an OEIC ACD acts for various funds, it will be able to coordinate FATCA compliance in a single operational function (see below). 6

7 FATCA regulations should also make clear that, where a fund is a participating FFI, other entities in the fund structure other than the signatory to the FFI agreement (such as the depository or trustee) should not have any obligations under FATCA in respect of the FFI fund s accounts. 2.3 Centralized compliance option for funds Section VI D of Notice outlined a suggested approach for centralised compliance for funds, under which a fund manager or other agent of a fund could enter into a single FFI agreement on behalf of those funds which it manages (or is otherwise authorised to act for) and which wish to become participating FFIs. The proposed regulations make no reference to this. We believe that the option to centralise FATCA compliance in the hands of the fund manager is critical to reducing the compliance burden and costs for funds. We therefore urge you to make regulations to implement this proposal as outlined in Notice Application of $50,000 threshold to financial accounts of funds Reg (a)(4) Where retail investment funds have large numbers of small investors (often tens of thousands), all those existing accounts will be financial accounts under the proposed regulations, no matter how small an account. As a consequence, such funds face a significant compliance cost in reviewing all those existing accounts compared to the risk of tax loss to the U.S. Treasury. The reason being that the accounts are equity interests and will be financial accounts under Reg (b), hence the $50,000 exception for depository accounts (as defined in Reg (b)(3)(i)) provided by Reg (a)(4) will not apply to an individual holding shares or units in an investment fund. Therefore, we request that those existing accounts (being equity interests in an FFI) below $50,000 should be dealt with on a similar basis to depository accounts. This would facilitate compliance by funds as resources could be targeted at existing accounts over $50,000 and all new accounts. 2.5 Role of transfer agent 5(a)(3)(iii) One of the roles of the fund manager of an AUT or ACD of an OEIC is to keep a register of unitholders, process subscriptions and withdrawals, and pay dividends and distributions. This function is invariably delegated to a transfer agent (that may or may not be the same entity as the fund administrator). We request that IRS clarifies that where the transfer agent of a fund acts in an agency capacity only, it falls under the provisions of 5(a)(3)(iii) i.e. that it is not an 7

8 accountholder of the fund or otherwise treated as an FFI solely on account of its contractual relationship with the FFI fund. 2.6 Identification of certified deemed compliant nonprofit organisations and section 501(c) entities 3(d)(6) 3(d)(9)(v) The account identification requirements stipulate that any such organisation that has not received a determination letter from the IRS under section 501(c) must provide a letter from counsel concluding it qualifies for such a status under all the options given. Such a letter would have to be periodically renewed by the non-profit organisation in order to maintain its validity. This is a burdensome and costly obligation for many small charitable organisations to comply with. We therefore request that for smaller organisations it should be sufficient for them to provide a withholding certificate, or certification under penalties of perjury, of their status. 3 Comments in relation to deemed compliant categories of FFIs (5) 3.1 Qualified collective investment vehicles (QCIV) permissible investors 5(f)(1)(C)(2) The QCIV category of deemed compliant FFI is helpful to the funds industry. However, we believe it can be improved if certified deemed compliant FFIs are also included as permissible investors. This would enable retirement funds and non-profit organisations that are not otherwise classified as exempt beneficial owners to be investors. Certain funds that have only institutional investors and that would otherwise be able to benefit from this category could be impeded from doing so because they would not know whether a pension fund investor is an exempt beneficial owner or a certified deemed compliant FFI. By allowing both, this impediment falls away. 3.2 Qualified collective investment vehicles (QCIV) regulation requirement 5(f)(1)(C)(1) In the UK, the management of any collective investment vehicle is a regulated activity under the Financial Services and Markets Act Likewise, in the EU the Alternative Investment Fund Management Directive (AIFMD) now regulates the activity of managing any collective investment vehicle (other than funds already under the regulatory framework of UCITS), including imposing liquidity and risk management requirements on the funds themselves. However, strictly speaking, this does not mean that the funds themselves are regulated. In the UK, Authorised Investment Funds (which include UCITS) are regulated, but other funds are not. However, all funds operate in a regulated environment afforded by the Financial Services and Markets Act For example, Exempt Unauthorised Unit Trusts are a type of UK collective investment vehicle open only to institutional investors 8

9 (those that are exempt from UK capital gains tax other than by reason of residence). Because of the restriction on the type of investors they can operate as unauthorised funds, affording them greater flexibility in terms of investment strategy and asset types. However, they should not be characterised as unregulated because operating a fund (whether an authorised or unauthorised fund) is a highly regulated activity in the UK. Therefore we request clarification that the requirement that a fund is regulated in its country of incorporation or organization extends to the regulation of its manager in respect of the fund. 3.3 Restricted fund accountholder identification 5(f)(1)(D)(6) Test 6 of the restricted fund conditions requires a restricted fund to adopt the same account identification and documentation policies as a full participating FFI. This significantly reduces the appeal of this category of deemed compliant FFI because the documentation requirements are amongst the most onerous to meet for participating FFIs. Once an FFI determines to complete the account identification and documentation requirements in 4(c) there is little benefit to opting for deemed compliant restricted fund status (and thereby having to meet the additional conditions on distribution agreements) over opting for participating FFI status, where the additional requirement to report US and recalcitrant accounts is comparatively straightforward. Accountholders in a restricted fund are restricted by virtue of the prospectus of the fund and its distribution agreements (under tests 2, 3 and 4). We believe that the additional account documentation and identification requirements of test 6 are unnecessary and we urge you to consider removing this requirement altogether. Otherwise, we do not believe there will be widespread take-up of this category of deemed compliant FFI. 3.4 Restricted funds direct investors 5(f)(1)(D)(1) A strict reading of the last sentence of 5(f)(1)(i)(D)(1) might suggest that investors cannot invest into a restricted fund directly, but only through a distributor. However, because the restrictions on distribution (tests 2, 3 and 4) apply to both distribution agreements with distributors and to fund prospectuses, we believe that both direct accountholders and accountholders entering into the fund through a distributor (meeting the conditions in test 2) should be permitted. Therefore we suggest the removal of the word redeemed from the last sentence. 3.5 Restricted fund distribution agreements In order for a fund to meet the conditions relating to its distribution agreements, it will need to change the agreement with every distributor, as well as its prospectus. These changes 9

10 5(f)(1)(D)(3) take time to negotiate and implement. For example, our members report that a typical fund has hundreds of distribution agreements and that it would take at least 18 months to change all of them. Funds will need time to redraft distribution agreements and make changes to prospectuses (which require regulatory approval). We request that this is recognised within 5(f)(1)(D)(3) by allowing an FFI that registers as a restricted fund (thereby expressing an intention to change all distribution agreements and the prospectus) up to 24 months from the date of registration to effect the change in all distribution agreements. 3.6 Restricted fund 5(f)(1)(D)(3) &(4) The conditions require that each agreement governing the distribution of interests of a restricted fund contains relevant prohibitions on sale. In practice an FFI can have control only over distributor agreements to which it is a party. We request that the condition should be clarified by adding the words to which it is a party in tests 3 and 4 and clarifying that the FFI can cease an agreement only to which it is a party in test 4. It is possible for a distributor to enter into a sub-distribution agreement with another party. In these cases the restrictions on the first-tier distribution would require it to include similar restrictions on its distribution agreements with sub-distributors. If necessary this can be clarified in the regulations. In any case we believe that it would be unnecessary to impose requirements on the restricted fund in relation to any subdistribution agreements. This is because where more than one level of distributors exist, this is almost certainly because the distributors are holding fund assets on behalf of the investor, and are therefore an FFI themselves (and subject to FATCA requirements on its own account). An example of this would be a platform that distributes fund interests through independent financial advisers. The platform itself is an FFI and would need to comply with account identification and documentation requirements, etc. It would be unheard of for a fund to be distributed through tiers of advice-only distributors because an advice-only distributor would invariably have access to the fund directly or through a fund intermediary. 3.7 Restricted distributor 5(f)(4) There are two different types of fund distributors. Those that hold the assets on behalf of their clients as nominees (for example, a fund platform), and those that act only in an advisory capacity (but may also have responsibility for AML/KYC checking under local laws) (for example, most independent financial advisers in the UK would fall into this type). 10

11 Both are very different for FATCA purposes because the first is an FFI and the second is not. It is unclear whether the intention behind the definition of restricted distributor was to catch either or both of these types of distributors and we believe that this limits its usefulness. If the intention was that this should apply to distributors that act as nominee in the holding chain, then that distributor would need to be itself a participating or registered deemed compliant FFI. Therefore a restricted fund can make no use of the distributor being a restricted distributor because it is already a permitted distributor under 5(f)(1)(i)(D)(2). If the intention was that this should apply to distributors that act on an advisory-only basis, then the holder of record of the fund interest will be the ultimate investor, and the restricted fund will already have needed to perform account identification and documentation procedures to ensure that it is not a US account under 5(f)(1)(i)(D)(6). In addition, some of the tests for restricted distributors do not appear to be consistent with an agent acting in an advisory-only capacity. For example, an advisory-only distributor would not have assets under management (5(f)(4)(v)) or be able to redeem accounts (5(f)(4)(viii)). We believe this can be easily remedied in two steps that would ensure that the restricted distributor is a workable classification for a distributor. First, a restricted distributor meeting all the current conditions of 5(f)(4) should be a deemed compliant FFI. As the conditions in 5(f)(4) are more onerous than that for a local FFI, we believe that a restricted distributor should be a certified deemed compliant FFI. This would ensure that those fund distributors that hold client money, but are small and with a genuinely local footprint and no US customer, do not have to register with the IRS. Secondly, because a restricted fund is already subject to account identification and documentation requirements of 4(c), we believe there should be no restriction on the distribution of a restricted fund if the distributor acts only in an advisory capacity and therefore the investor is itself the holder of record. This would require a modification of the definition of distributor in (f)(1)(i)(D)(2) such that a distributor has to be also a direct accountholder of the fund. 11

12 However, if as suggested at 3.4 above, the identification and documentation requirements for a restricted fund were lifted (by removing the conditions at 5(f)(1)(D)(6)), then this would justify imposing additional requirements on fund distributors acting on an advisory-only basis. In this case, a further category of non-ffi distributor would be required with the following modifications of the conditions in 5(f)(4). (i) Diversification of clients If the distributor is acting only as advisor, it seems unnecessary to have a restriction related to a minimum number of clients. This would be a problem in the UK for the smallest of financial advisors, who may have only a handful of clients. However, as the distributor holds no client money, there is little risk associated with the diversification of its own clients. (v) Size As above, as the distributor has no client assets, its size should be irrelevant. Furthermore, the concept of assets under management is not relevant, as the distributor does not manage of hold assets. (vii) and (viii) Redemption of interests As the distributor acts only as advisor, it does not have accounts that it can redeem, and it would not be able to cause the investor to redeem its account with the FFI. This would be relevant only if the distributor held the account itself. 3.8 Local restrictions for local FFIs and restricted distributors 5(f)(1)(i)(A)(2), (3) and (7); and (f)(4)(iii) and (iv) The local restrictions in the definition of local FFI and restricted distributor have a disproportionate impact on FFIs of smaller countries, particularly in the EU where the principles of the Single Market apply not only in law, but also often in practice. For example, an FFI in a smaller EU member state will often have a presence (an office or branch) in another EU member state and there will be no legal or logistical impediment to operating across borders. 5(f)(1)(i)(A)(5) recognises this in order to deal with the legal impediment of a local FFI in the EU not being able to refuse customers from another EU member state purely on the basis of residency. We believe that this principle should be extended to other local restrictions in all cases where the country of organization is within the EU to include all EU member states, as otherwise this may limit the usefulness of these categories of deemed compliant FFI and could be contrary to EU law. 12

13 3.9 Local FFI requirement to report and withhold 5(f)(1)(i)(A)(4) A Local FFI must be required to perform information reporting and withholding. We request clarification that this applies only where information reporting or withholding is relevant to the local tax regime. For example, in the UK there is no reporting or withholding on equity interests. But this should not, in itself prevent a UK FFI that otherwise meets the conditions of Reg (f)(1)(i)(A) from being a deemed compliant local FFI. We look forward, in our twin capacity as an EFAMA member and as the representative of the UK investment management and fund management industry, to continuing to engage with the US Treasury and the IRS on these issues. Yours sincerely Jorge Morley-Smith Head of Tax cc: Mr. Michael Caballero International Tax Counsel U.S. Department of the Treasury 1500 Pennsylvania Ave., N.W. Washington, DC Mr. Michael Plowgian Office of International Tax Counsel U.S. Department of the Treasury 1500 Pennsylvania Ave., N.W. Washington, DC Mr. Jesse Eggert Office of International Tax Counsel U.S. Department of the Treasury 1500 Pennsylvania Ave., N.W. Washington, DC Ms. Patricia McClanahan Special Counsel to the Deputy Chief Counsel (Technical) Internal Revenue Service 1111 Constitution Ave, N.W. Washington, DC

14 Mr. John Sweeney Attorney Office of the Associate Chief Counsel (International) Internal Revenue Service 1111 Constitution Ave, N.W. Washington, DC Ms. Kathryn Holman Attorney, Office of the Associate Chief Counsel (International) Internal Revenue Service 1111 Constitution Ave, N.W. Washington, DC Ms. Danielle Nishida Attorney Office of Associate Chief Counsel (International) 1111 Constitution Ave., N.W. Washington, DC