Letter on H.R. 3933/S. 1934, the “Foreign Account Tax Compliance Act of 2009"

November 24, 2009

The Honorable Max Baucus                                           The Honorable Charles Rangel
Chairman                                                                           Chairman
Committee on Finance                                                    Committee on Ways & Means
United States Senate                                                       U.S. House of Representatives
Washington, DC 20510                                                   Washington, DC 20515

The Honorable Charles Grassley                                 The Honorable Dave Camp
Ranking Member                                                              Ranking Member
Committee on Finance                                                    Committee on Ways & Means
United States Senate                                                       U.S. House of Representatives
Washington, DC 20510                                                   Washington, DC 20515

Dear Chairmen Baucus and Rangel and Ranking Members Grassley and Camp:

The U.S. Chamber of Commerce, the world’s largest business federation representing more than three million businesses and organizations of every size, sector, and region, appreciates the opportunity to provide comments on H.R. 3933/S. 1934, the “Foreign Account Tax Compliance Act of 2009.”

While the Chamber applauds measures to improve taxpayer compliance and to curb tax evasion, we are concerned that certain provisions in this legislation would limit the flow of foreign capital into the United States and cause disruptions to the international capital markets. The Chamber believes access to credit is crucial to economic recovery.

Section 101, Increased Reporting and Withholding Obligations on Foreign Financial Institutions

Effective for payments made after December 31, 2010, §101 of this legislation would impose extensive new reporting and tax withholding requirements on foreign financial institutions (FFIs) that could potentially hold the accounts of U.S. persons. Despite the existing obligation of U.S. persons to report and pay U.S. tax on income earned through both domestic and foreign financial accounts, this provision would create a second layer of reporting on these transactions. To enforce these new requirements, a 30 percent U.S. withholding tax would be imposed on certain U.S. payments to FFIs that do not, or that simply could not, satisfy these reporting obligations. Further, this tax would apply broadly regardless of whether these payments relate to a U.S. customer’s account, a foreign customer’s account, or the institution’s own account.

Many FFIs already participate in the Qualified Intermediary (QI) program. Under the QI program, participating FFIs are responsible for withholding U.S. tax with respect to foreign persons that hold accounts with the FFI. These new reporting and withholding requirements would add another layer of responsibility to FFIs who already comply with requirements under the QI program. Further, these proposed new requirements would extend to much smaller institutions which are generally excluded from the QI program.

The Chamber is concerned that these new requirements are unnecessarily onerous and broad and thus could result in foreign persons, including certain FFIs, divesting themselves of their current U.S. investments and avoiding future U.S. investment entirely. This would be severely detrimental to the U.S. financial markets and the U.S. economy, currently struggling to get on the road to economic recovery.

To ensure that this new reporting and withholding regime is administrable but also is not unduly burdensome and does not discourage U.S. investment, the Chamber recommends:

1. That the effective date of this provision be delayed both to give the Treasury Department the appropriate time to develop and implement regulations to create a workable compliance system, and to allow FFIs and their withholding agents the time to develop systems to comply with their duties under this provision. Further, the Chamber recommends this provision be modified to authorize the Treasury Department to further delay the effective date of this provision if necessary to avoid disruptions to financial markets.

2. That this provision be modified to better coordinate with the existing QI regime so as to avoid conflicts with that regime and to ensure these new requirements meet their objectives in the least onerous manner possible.

3. That this provision be modified to avoid duplicative reporting by multiple FFIs.

Section 102, Repeal of the Foreign-Targeted Bearer Bond Exception

Since 1982, the “TEFRA” rules have generally allowed U.S. issuers to issue debt obligations in bearer (i.e., nonregistered) form and still receive an interest deduction, as long as these obligations are not offered or sold to U.S. persons (the “foreign-targeted bearer bond exception”). Applicable to debt obligations issued more than 180 days after the date of enactment, §102 of this legislation would repeal the foreign-targeted bearer bond exception.

The Chamber is concerned that repeal of this exception could limit, if not potentially eliminate, U.S. issuer’s access to funds in certain foreign markets. In many foreign markets, issuance of securities in bearer form is currently the international norm where as registered securities, as would be required under this provision, are unusual or unknown. In these markets, it would be unworkable to issue securities in registered form; U.S. issuers would be precluded from issuing bearer bonds in these markets as a financing mechanism and, thus, effectively precluded from raising funds in these jurisdictions.

To prevent a disruption of the financial markets and to prevent unnecessary limits on access to capital, the Chamber recommends that the Committees and Congress direct the Treasury Department to study and report on the potential consequences of the repeal of the foreign-targeted bearer bond exception before any such repeal is undertaken.

Section 501, Dividend Equivalent Payments Received by Foreign Persons Treated as Dividends

Under current law, payments to foreign persons pursuant to equity swap transactions are not subject to U.S. withholding. Applicable to payments made 90 days or more after the date of enactment, §501 of this legislation would provide that “dividend equivalent payments” on such equity swap transactions would be subject to a 30 percent U.S. withholding tax. The Chamber is concerned that this proposal would cause market disruptions as a result of the fact that the provision is not clear on which transactions could be subject to this new withholding requirement. Without further clarification, the Chamber is concerned that this provision could wind up governing transactions not intended to be targeted by this proposal, such as where equity swap transactions are structured to comport with the practices of foreign markets. Further, the Chamber is concerned that this provision could result in outstanding transactions being terminated and future transactions not being entered into.

The Chamber recommends that the enactment of this proposal or its effective date be delayed until clear specific guidance can be provided by the Treasury Department. Such guidance should set forth the transactions and payments governed by this provision and allow interested parties sufficient time to implement systems which ensure proper compliance with this provision.

The Chamber appreciates the opportunity to offer comments on this proposed legislation and looks forward to working with Congress to improve it so that it achieves its objective of curbing tax evasion while avoiding unnecessary limits on access to capital and minimizing capital market disruptions.

Sincerely,

R. Bruce Josten

Cc: The Members of the House Committee on Ways & Means
The Members of the Senate Committee on Finance