British Bankers’ Association Preliminary Response to the ‘Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities’

1. The British Bankers’ Association (“BBA”) is the leading association for banking and financial services in the United Kingdom (“UK”). We represent 230 banking organisations from 60 countries and have 40 professional service firms within our associate membership.
2. The BBA welcomes the opportunity to comment on the proposed regulations under chapter 4 of Subtitle A (section 1471 through 1474) of the Internal Revenue Code of 1986 (Code) regarding information reporting by foreign financial institutions (“FFIs”) with respect to U.S. accounts and withholding on certain payments to FFIs and other foreign entities.
3. The BBA re-affirms its commitment to transparency and openness in its dealings with the U.S. Authorities and the observations and comments that follow are provided in that light. Priority Issues of the British Bankers’ Association

Partnership Agreements

4. The BBA welcomes the intergovernmental approach to the Foreign Account Tax Compliance Act (“FATCA”) implementation that was announced on 8 February 2012 and which sets out to overcome some of the existing legal impediments to compliance. We appreciate the understanding, in paragraph 6 of the Joint Statement regarding an Intergovernmental Approach to Improving International Tax Compliance and Implementing FATCA (“Joint Statement”), of the recognition to keep compliance costs as low as possible, and achieve common reporting and due diligence standards, via a common approach. The intergovernmental approach proposed in the Joint Statement is a necessary development that we hope will form the basis of a universal model agreement to implement FATCA, to be adopted by other jurisdictions.
5. To achieve the successful worldwide implementation of FATCA, it is an essential requirement that the conclusion of the EUG5 and future partnership agreements deliver consistent data requirements and reporting frameworks. In recognition of different legal regimes and financial products, where there is a need to accommodate jurisdictional variations, we would propose that this is achieved by means of a country specific attachment as established with the partnership Government.
6. There is a lack of clarity regarding the interaction of partnership agreements and the requirement, or otherwise, for an FFI to enter into a direct agreement with the Internal Revenue Service (“IRS”). In order to provide certainty for FFIs, the BBA’s preferred approach would be as follows:
i.The single model partnership agreement, as developed by the Joint Statement negotiations, is adopted by the partner Government, thereby establishing an inter-governmental relationship between the U.S. and the adopting partner country.
ii. Upon publication of a joint Memorandum of Understanding (“MoU”) between the U.S. and a partner Government, FFIs operating in these territories would then be required under local law to obtain an FFI Employer Identification Number (“EIN”) from the IRS. As a consequence, these FFIs would be immediately treated as deemed compliant under FATCA.
iii. A country specific attachment could then be established if required with the partnership Government which would deal with any jurisdictional variations.
iv. The IRS will build and maintain a central FFI register, identifying participating FFIs (“PFFIs”) and deemed compliant FFIs.
v. Obtaining an FFI EIN from the IRS will establish a relationship between the FFI and IRS which will ensure the requirements of the responsible officer sign off are consistent across multiple partner jurisdictions.
We envisage that this process would provide clarity and certainty for FFIs, withholding agents, foreign governments and the IRS while the FATCA intergovernmental and legislative framework is finalised.
7. Additionally, there is a lack of clarity regarding the interaction of partnership agreements and the impact on the Qualified Intermediary (“QI”) regime as the draft regulations propose that existing QIs become PFFIs1 whereas they also refer to the discretion of the Secretary of the Treasury2. The BBA’s preference would be for QIs within a partnership territory to be automatically recognised as deemed compliant under the partnership agreement.

Limited FFIs

8. FFI groups operating in partner countries which have Limited Affiliates3 in jurisdictions not covered by partnership agreements face an untenable and substantial risk of non-compliance if the legal challenges in these jurisdictions are not resolved. If this is not addressed by the end of 2015, this would pose a major risk to the compliance of the entire FFI group and would jeopardise the FATCA status of all the partnership territories.
9. The BBA also recognises the challenge of concluding the partnership agreements in the timescale envisaged. The partnership agreement forms the legal basis on which FFIs can adopt and comply with FATCA reporting requirements. In the event of any unexpected delay in implementing the legislative changes, we would request that transitional arrangements are extended for FFIs in affected jurisdictions.
10. In view of the issues raised above, the BBA would request that consideration is given to further transitional relief arrangements regarding the envisaged withholding requirements in order to provide the necessary level of certainty for FFIs operating in these jurisdictions.
11. We would welcome clarification on the interaction of the Joint Statement and the proposed regulations as to the FATCA compliance status of the expanded affiliate group. It is our view that:
i. An FFI operating in a partnership territory should not experience withholding and its status should not be affected by the FATCA status of any other expanded affiliate group member, including foreign branches.
1 Regulations relating to information reporting by foreign financial institutions and withholding on certain payments to foreign financial institutions and other foreign entities, Section 1.1471-2(a)(2)(iii)
2 Hiring Incentives to Restore Employment (HIRE) Act, Section 1474(d) and 1474(f)
3 Regulations relating to information reporting by foreign financial institutions and withholding on certain payments to foreign financial institutions and other foreign entities, Section 1.1471-4(b)(1)
ii. A PFFI operating in a territory where a partnership agreement is not necessary for compliance with FATCA should not experience withholding and its status should not be affected by the Limited FATCA status of any other expanded affiliate group member.
iii. Only a NPFFI within the expanded affiliate group operating in a territory without a partnership agreement, or who could otherwise comply, should face an appropriate sanction.
12. bThe BBA would also propose that the transition period for limited affiliate status should be extended where FFIs are in territories which are engaged in active discussions about achieving FATCA partner status.

Draft FFI Agreement

13. As the draft FFI agreement and revised W-8/W-9 forms have not yet been published, the BBA trusts that its comments will be taken into consideration during the drafting of these documents, insofar as this is possible.
14. Notwithstanding the Joint Statement approach, there remains a problem with the current FFI agreement, as envisaged in the proposed regulations. As passthru has been ‘reserved’ in the proposed regulations, FFIs would be unable to sign an FFI agreement in the absence of a legal resolution to the withholding issue and data protection concerns.
15. The BBA would recommend that passthru withholding is removed from the proposed regulations and not included in the FFI agreement.
16. We believe that the goals of FATCA are best addressed by an effective reporting regime. Until this is established, and its effectiveness can be assessed, passthru provisions should be excluded from any FFI agreement currently envisaged.

Documentation and Due Diligence

17. The proposed regulations align the requirements for FATCA compliance with the procedures that financial institutions currently follow for AML/KYC rules. The BBA welcomes that the U.S. has agreed to reliance on domestic standards, as endorsed by the Financial Action Task Force (“FATF”).
18. The proposed FATCA regulations are generally in line with existing AML/KYC procedures. However, there remain certain cases where the proposed regulations impose significant, additional actions by participating FFIs, and in these cases we would urge that the regulations are modified to allow implementation as follows:
i. The classification and verification standards for entities are currently overly complex, requiring over thirty pages of description in the proposed regulations. As a result, there is currently no consistent view within the industry, or professional advisory firms, as to the definitive list of classifications. The current multiple classifications and documentation requirements will be burdensome to administer for FFIs, increasing the complexity for all in the FATCA regime, including U.S. withholding agents. This is likely to lead to the erroneous application of withholding and a high volume of potential reclaims. The current approach requires FFIs to classify and exclude entities and individuals who are not reportable; however a more proportionate and targeted approach focusing on entities which pose a real risk would be simpler and more effective. The BBA would propose that an FFI should be able to rely on existing AML/KYC information where this is sufficient to establish the classification of entities. Where further information is required FFIs should be able to place reliance on the self-certification of entities and collect their documentation, signed under penalty of perjury, unless there is a reason to know the classification is inappropriate. Where no certification is received the presumption rules will apply. We also believe that an FFI should be able to rely on self-verification for individuals signed under penalties of perjury. Furthermore, and specifically in regard to PFFIs, we would propose that where the IRS has established a register of PFFIs and issued EINs, an FFI or withholding agent should be able to place reliance on this without the need for further documentation.
ii. Monitoring the expiry of documentation, and requiring renewal, would not identify additional U.S. persons beyond those currently identified by existing AML/KYC processes and is an overly burdensome additional requirement. Customers are already required under existing AML/KYC to notify an FFI about any changes in circumstance which would trigger a change in their classification for FATCA purposes; these requirements are generally included within the product terms and conditions.
iii. Assessing actively trading by the 50% income and balance sheet statement standard is not a current AML requirement and would require annual, substantial manual intervention. For example, this would involve obtaining and analysing the financial statements of these entities in addition to significant further questioning and documentation to enable a robust classification. The BBA believes that this analysis would be burdensome and potentially inconclusive because of the scope for subjective interpretation and insufficient granularity of account information. The BBA would propose that an FFI should be able to rely on existing AML/KYC information where this is sufficient to establish the classification of entities. Where further information is required, FFIs should be able to place reliance on the self-certification of entities and collect their documentation, signed under penalty of perjury, unless there is a reason to know the classification is inappropriate.
iv. The requirement outlined in the proposed regulations to search for U.S. telephone numbers as U.S. indicia poses logistical and system issues. A telephone number in itself is an unreliable indicator and there is currently no database against which an FFI can validate these numbers.
v. FFIs should have the option to document an account at the customer or the account level so that for a customer opening a new account an FFI can use existing AML/KYC information. Documentation should be at customer level where it is within an FFIs ability to consolidate information. Documenting accounts individually should be restricted to cases where it is not possible or practical to document the customer. KYC/AML documentation establishes the identity of a person and is normally relied upon when the same customer opens new accounts with a bank; accordingly, therefore, the BBA proposes that the regulations be modified to require documentation only when a new customer to the bank establishes a new account. In cases where an existing customer opens a new account, FFIs should rely on existing documentation.
vi. The BBA would be grateful for confirmation that in accordance with existing AML/KYC procedures that FFIs are able to rely upon third party due diligence processes. For example those undertaken by certain regulated entities such as solicitors, health care providers and Independent Financial Advisors (IFAs) for their customers.
vii. The proposed regulations provide an exception for documenting offshore obligations whereby foreign status can be established with government-issued identification and where none of the documentation associated with such status contains U.S. indicia. The BBA would be grateful for confirmation that this exception also applies to new accounts and therefore a PFFI would not be required to obtain Form W-8 to establish foreign status unless U.S. indicia is found within any documentation associated with such a new account.

Withholding Requirements

19. The BBA welcomes the expressed intention to “eliminate U.S. withholding under FATCA on payments to FFIs established in the FATCA partner [country]”4, which acknowledges that all FFIs operating in the territory will be PFFIs and that no withholding should be required domestically. The BBA considers that the FFI withholding requirements for FFIs established in the FATCA partner countries have not been fully eliminated, as outlined below.
20. First, FFIs operating in the partner countries would still be subject to the application of U.S. source FDAP withholding, and be required to apply it to other FFIs, from January 1 2014 if acting as an intermediary in respect of a transaction involving a non-partner jurisdiction.
21. Second, FFIs operating in the partner countries would be obliged to withhold on payments made to NPFFIs in non-partner countries requiring the development, build and operation of withholding engines. Applying the withholding also potentially violates local legal regimes.
22. As noted above, the BBA recognises the challenge of concluding partnership agreements in the timescale envisaged. We are concerned that as a consequence of any delay, FFIs in partner countries could be subject to and responsible for passthru withholding.
23. The BBA is further concerned that FFIs operating in jurisdictions that are endeavouring to conclude partnership agreements would be required to withhold, perhaps in the absence of a legal power to do so, and where so empowered would have insufficient time to build the withholding engines required at the stage where it becomes evident the agreement would not be concluded in time. We would further recommend that a reporting solution is adopted in place of withholding, with a review period to assess the effectiveness of reporting and any residual need for the future introduction of targeted withholding requirements.

FATCA Scope

24. The BBA welcomes the move towards a risk based approach in the proposed draft regulations. We believe that the underlying principles of FATCA can be achieved more effectively by focusing on those entities and products which pose the greatest risk of tax evasion. As currently drafted, the proposed regulations do not exclude products and entities which pose a low risk of tax evasion from the scope of FATCA reporting.
25. Within each jurisdiction there are a variety of products and entities which are regulated, often tax exempt and subject to additional controls which pose a low risk of tax evasion. To ensure consistency between partner jurisdictions, the BBA would propose that the regulations are modified to include the following non-exhaustive examples:
i. Broad categories of low-risk entities such as charities, savings clubs, quasi-government entities and associations.
4 ibid, Section 1.1471-4(b)(1)
ii. Broad categories of low-risk products such as Government sponsored savings accounts and retirement products.
Including these broad categories would minimise the amount of detailed exclusions contained in the country specific attachment to the single model agreement. Any additional clarification or classification could be provided within a country specific attachment to the partner agreement envisaged by the Joint Statement.
26. As the BBA has previously advised, it is uncertain whether UK sited trusts should be treated as FFI or NFFE as, depending on the trust, either status may be appropriate and it may also change through the lifetime of the trust, adding further operational complexity and burdens for the FFI holding the trust account. We are aware that there are similar problems in other jurisdictions. Absent a better definition of trusts eligible for exclusion, we propose that a residency-based carve out be made available in the regulations. For example, trusts should be classified as exempt NFFEs where they are organised in a partner country and where the trust is required to file annual tax returns. In non-partnership countries or where trusts may not be subject to tax, a de minimis rule of $1 million, which is in line with the current de minimis rule for high value accounts, would be appropriate.

Self-Verification

27. The BBA welcomes the approach to self-verification outlined in paragraph 1471-4(a)(6) of the proposed regulations. We suggest the verification procedures in partner countries should be risk based, rely on internal controls, internal testing, internal audit, and certification of compliance.
28. The proposed regulations envisage that where a material deficiency in an FFIs verification processes is identified an FFI could engage an external auditor to assess and report on the problem area. The BBA believes that in this situation, under the FATCA partnership agreement, an external auditor will be appointed and provide a report to the IRS. The tax authority in the partner country will not be involved in the assurance process.
29. As described above at Paragraph 18. i., the classification and verification standards for entities are currently overly complex, requiring over thirty pages of description in the proposed regulations and multiple forms of documentation. The BBA believes that the Responsible Officer Certification could be extended to cover classification of entities allowing other FFIs to rely on these classifications without further validation.
30. The BBA welcomes the proposed self-verification model for Chapter 4 compliance and would propose that this is also extended to cover the existing Chapter 3 requirement to undergo external audit, and that this requirement under Chapter 3 is removed. The responsible officer sign off envisaged for Chapter 4 could be extended to include compliance with the requirements of Chapter 3 reporting.

U.S. Financial Institution obligations

31. The BBA notes that the timeline for the requirements imposed on U.S. financial institutions differ from those for FFIs. FFIs are required to enter into an agreement with the IRS effective from July 2013 and as such responsible officers of these organisations would also expect the U.S. financial institution requirements to commence from July 2013 at the earliest. We would propose that these are aligned so that international financial institutions operating in the U.S. are able to align systems and process modifications to a single timetable.

British Bankers’ Association
Tuesday 17th April 2012