SIFMA believes that the reason to know standard is excessively broad and should be substantially revised or its implementation delayed. The industry association also asked for further clarification regarding reliance on documentation collected by or certifications provided by other persons and also requested that the rules regarding electronic transmissions be relaxed and expanded. SIFMA also asked the IRS to grandfather in the “eyeball” test for presuming exempt recipients.FATCA creates a new reporting and taxing regime for foreign financial institutions with U.S. accountholders. FATCA adds a new Chapter 4 to the Internal Revenue Code, essentially requiring foreign financial institutions to identify their customers who are U.S. persons or U.S.-owned foreign entities and then report to the IRS on all payments to, or activity in the accounts of, those persons. The Act broadly defines foreign financial institution to comprise not only foreign banks but also any foreign entity engaged primarily in the business of investing or trading in securities, partnership interests, commodities or any derivative interests therein. According to the Joint Committee on Taxation, investment vehicles such as hedge funds and private equity funds will fall within this definition. Firms meeting the definition must enter into agreements with the IRS and report information annually in order to avoid a new
Reason to know standard. In the letter, the securities association pointed out that a FATCA withholding agent is liable for up to the entire amount of FATCA withholding, plus interest and penalties if the agent fails to withhold the correct amount. IRS regulations define "reason to know" very broadly to include constructive knowledge of a wide variety of information that may be stored in paper or electronic files of the withholding agent, including documentation collected for anti-money laundering due diligence purposes, account opening or other customer account files. Interpreting and relating such information to claims of FATCA status requires not only ready access to a large volume of information, noted SIFMA, but a comprehensive understanding of the FATCA regulations and all of the relevant intergovernmental agreements on FATCA compliance and their respective annexes. The standard also requires that withholding agents exercise judgment in cases where information in the possession of the withholding agent might conflict with the payee's claim of FATCA status.
Under an example provided in the regulations, withholding agents would be required toassess the significance of information contained in financial statements, credit reports, or
other documentation that might be considered by a "reasonably prudent person" to be
inconsistent with an entity's claim to be a non-financial foreign entity (NFFE).
In SIFMA’s view, these new regulations place an extremely high burden on withholding agents and represent a dramatic departure from the existing reason to know standards under Chapter 3 of the Internal Revenue Code, which in the case of financial institutions are generally limited to address checks.
Consequently, because of this extremely burdensome new requirement, and the lack of time or resources to hire and train personnel, connect information systems, and develop protocols for the handling and interpretion of large volumes of information under the still evolving standards of FATCA, and because of the size of penalties for which withholding agents are liable, SIFMA predicts that withholding agents will be compelled to withhold I in many cases because of their inability to establish a payee's FATCA status with sufficient certainty. Thus, SIFMA urged the IRS to substantially narrow, abandon, or delay the implementation of the reason to know standard in the final regulations.