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 to
assess
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.