May 16, 2012

TO: Distribution

FROM: Burt, Staples & Maner, LLP

RE: IRS Hearing on U.S. Foreign Account Tax Compliance Act ("FATCA") Reveals Major Themes

The IRS hearing yesterday on the proposed FATCA regulations included 20 speakers over three-and-a-half hours. IRS and Treasury Department representatives asked no questions, so those hoping the government would tip its hand regarding the direction of the final regulations and foreign financial institution ("FFI") Agreement went away disappointed. However, it was easy to see the main issues of concern to the witnesses, who emphasized and reemphasized the following issues:

  1. Timeline. Speakers were unanimous in indicating that the current effective date of January 1, 2013, was far too aggressive. The consensus view was that January 1, 2014, was a more realistic date (perhaps with withholding pushed into 2015). Speakers also generally endorsed the idea that staggering the starting dates for U.S. financial institutions and FFIs was not the right approach, and that the "new account" date should be the same for all financial institutions.

  2. Inter-governmental Agreements ("IGAs") as a Way to Resolve Local Law Conflicts. It is clear that many jurisdictions have laws that facially conflict with FATCA. Common ones include data privacy laws and banking access laws. Speakers from Australia, Canada, Japan, and Sweden all said that their laws as currently constituted would not permit full compliance with FATCA. The speakers look with hope to IGAs to solve this problem. Several speakers anticipated that the IGA negotiation/ratification process and the implementation of local laws would take longer than the currently planned sunset of "limited FFI" status at the end of 2015, and asked that FFIs in those jurisdictions be considered in compliance with FATCA once a memorandum of understanding has been signed.

  3. Reliance on Local AML/KYC Rules. Many speakers said that the documentation rules proposed by the IRS were too rigid and failed to sufficiently take into account local AML/KYC practices. In particular, retail accounts opened online are frequently not accompanied by documentation, and third-party information is used to verify identities. Several speakers also noted that AML/KYC rules may not require that copies of documents be retained by the institution, and that requirement would be a major impediment to compliance. Speakers also noted that the expiration of documents like passports should not require the submission of new documentation because it is quite rare for the expiration to indicate anything about the U.S. status of the account holder. Reexamination of documents every three years also was met with resistance. Rather, the IRS should require the renewal of documentation only when there is a change in circumstances, the speakers said.

  4. Use a Cost/Benefit Approach. Several speakers said the IRS needs to more carefully weigh the benefits of additional documentation and the risks of U.S. noncompliance versus the costs being imposed on financial institutions. Institutions in countries with tax rates comparable to the U.S., such as Canada and Japan, noted that they are not likely to be used to evade U.S. taxes. Speakers from Australia noted that "superannuation" retirement plans, while not technically within the exemptions of the proposed regulations, are not good vehicles for tax avoidance and should be excluded from FATCA.

  5. Too Many Entity Classifications. The exact number of entity classifications under FATCA depends on how one counts, but all speakers agreed there are too many different types. Speakers noted that operations personnel, who may not even speak English, will have a difficult time distinguishing and properly classifying entity customers.

The silence of the government representatives at the hearing should not be taken as a bad sign. In our private meetings with them, they have been receptive to many of the changes suggested at the hearing, and there is reason to believe some of these suggestions will be adopted in the final regulations, which are due by the end of the summer.

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