Manal Corwin Deputy Assistant for International Tax Affairs United States Department of the Treasury 1500 Pennsylvania Ave, NW Washington, DC 20220
Steven A. Musher Office of the Associate Chief Counsel (Int’l) Internal Revenue Service 1111 Constitution Avenue, NW Washington, DC 20220
Michael Caballero International Tax Counsel United States Department of the Treasury 1500 Pennsylvania Ave, NW Washington, DC 20220
Michael Danilack Deputy Commissioner (Int’l) LB&I Internal Revenue Service 1111 Constitution Avenue, NW Washington, DC 20220
CC:PA:LPD:PR (REG-121647-10), room 5205 Internal Revenue Service PO Box 7604 Ben Franklin Station Washington, D.C. 20044
Comments on the Foreign Account Tax Compliance Act and Proposed Regulations Issued Thereunder
Dear Ms. Corwin and Messrs. Cabellero, Musher and Danilack: I am writing to you on behalf of the Private Equity Growth Capital Council (the “PEGCC”) to provide comments regarding the implementation of the Foreign Account Tax Compliance Act (“FATCA”)1 as it relates to the investment fund industry in general, and the private equity industry in particular. The PEGCC, based in Washington D.C., is an advocacy, communications and research organization and resource center established to develop, analyze and distribute information about the private equity and growth capital investment industry. Currently the PEGCC has 34 members,2 including some of the largest and most economically significant private equity firms operating in the United States today.
The provisions of FATCA were entered into law on March 18, 2010 as part of the Hiring Incentives to Restore Employment Act (the “HIRE Act”). 2 The members of the PEGCC are: American Securities; Apax Partners; Apollo Global Management LLC; ArcLight Capital Partners; The Blackstone Group; Brockway Moran & Partners; The Carlyle Group; CCMP Capital Advisors, LLC; Crestview Partners; Francisco Partners; Genstar Capital; Global Environment Fund; GTCR;
The PEGCC fully supports FATCA’s overarching policies of ensuring transparency and compliance with the tax laws, and we are committed to working with the Treasury Department (“Treasury”) and the Internal Revenue Service (the “IRS”) to further those policies. There are, however, several aspects of the recently issued proposed regulations under FATCA (the “Proposed Regulations”) that we believe should be revised to make the implementation of FATCA more administrable (and therefore more effective) without impacting its substantive goals. The PEGCC’s interest in the FATCA regime is significant, because many of our member firms are responsible for hundreds of entities each within their respective fund families that are expected to become participating foreign financial institutions (participating “FFIs”), and numerous others that will need otherwise to comply with FATCA reporting or certification procedures. Accordingly, to the degree you believe it would be useful, I would be pleased to organize a meeting of representatives of the PEGCC with Treasury and the IRS to discuss further the issues raised in this letter, and any other issues you may consider appropriate or useful. Given the enormous undertaking required to administer FATCA, we believe that it is imperative ─ both from the government’s point of view and from the point of view of those taxpayers that will take part in administering FATCA ─ that the procedures under FATCA be streamlined without sacrificing the scope and accuracy of the information made available to the IRS. The single most significant comment we can offer in this regard (which lies at the heart of several of the recommendations below) is that the Proposed Regulations should be amended to take better account of the differences between investment fund families and global banking groups ─ most importantly by allowing fund families to comply with FATCA on a more centralized basis than currently appears to be contemplated. Notice 2011-343 indicated that Treasury and the IRS at one point considered providing a “centralized compliance option” for investment fund groups that could be monitored centrally. However, this concept does not appear in the Proposed Regulations. We hope that a centralized compliance option can be resurrected and introduced into the regulations along the lines discussed in this letter. Section A of this letter provides some background regarding the differences between fund families and global banking groups that we believe are important for purposes of implementing FATCA, and explains why centralized compliance is particularly appropriate for fund families. Section B then provides five recommendations, which are: (i)
allow fund families to enter into FFI agreements on a consolidated basis, where one entity (the “Compliance Member”) is authorized by other entities within the family to act on their behalf and to bind them all to the terms of a single FFI agreement;4
allow the Compliance Member to comply with the FATCA reporting requirements on behalf of the members of its group on a centralized basis, such that the Compliance Member would interact directly with the IRS on
Hellman & Friedman LLC; Irving Place Capital; The Jordan Company; Kelso & Company; Kohlberg Kravis Roberts & Co.; KPS Capital Partners; Levine Leichtman Capital Partners; Madison Dearborn Partners; MidOcean Partners; New Mountain Capital; Permira; Providence Equity Partners; The Riverside Company; Silver Lake; Sterling Partners; Sun Capital Partners; TA Associates; Thoma Bravo; TPG Capital (formerly Texas Pacific Group); Vector Capital; and Welsh, Carson, Anderson & Stowe. 3 IRB 2011-19, dated April 8, 2011, at Section VI.D. 4 As noted above, a very similar concept was suggested in Notice 2011-34, but does not appear in the Proposed Regulations.
behalf of the group and would take legal and financial responsibility for the group’s compliance with FATCA;
do not require investment funds (particularly private equity funds, which are subject to practical and legal constraints regarding the redemption of their investors’ interests, as explained below) to incur the potentially severe financial hardship of redeeming investors that are recalcitrant account holders as a condition of avoiding a default under an FFI agreement, but rather use alternative means of incentivizing investors not to become recalcitrant account holders;
rationalize the rules for information reporting in tiered partnership structures and adapt them better to investment fund structures; and
integrate FATCA reporting for partnerships with current obligations of some foreign partnerships to file Form 1065 and related Schedules K-1.
Differences Between Investment Funds and Banking Groups; Need for Centralized Compliance.
By way of background, a typical investment fund takes the form of a central limited partnership (the “main fund”) that serves as the primary vehicle through which investments are made. The main fund operates, however, in conjunction with a large complex of special purpose vehicles (“SPVs”) that are formed to hold different investments and to meet the structuring needs of different investors. Foreign and certain tax-exempt investors, for example, may wish to invest in the main fund through a corporate entity in order to avoid the attribution of effectively connected income (“ECI”) or unrelated business taxable income (“UBTI”) from the main fund. SPVs known as “coinvestment entities” are employed if certain investors choose to invest in specific assets directly alongside the main fund, which they might do to hold a more concentrated exposure to certain assets than the more diversified main fund would provide. “Parallel investment entities” may also be used for particular classes of investors that invest on different terms than other investors. Furthermore, various other SPVs known as “alternative investment vehicles” may be employed to achieve a wide number of differing objectives as investments are structured specifically to address the circumstances of particular investors and particular investment opportunities. Generally, it is those SPVs that are foreign that will make up the FFIs within the fund family. Although such entities can be quite numerous, they almost always are passive and, more importantly, are controlled by the management and investment professionals of the fund family. As noted above, we believe that investment fund families should have the ability to appoint a single entity to represent the interests of multiple other entities within the fund family. In this regard, SPVs within a fund family are different in several important respects from the active subsidiaries in global banking groups, and those differences make fund families more suited to centralized compliance than global banking groups might be. Banking subsidiaries generally are engaged in active banking and financing businesses in their respective jurisdictions, where they employ numerous personnel, and provide services to customers. Such entities thus may be subject to local regulatory and legal restrictions that could limit their ability to comply with FATCA or to be bound by the terms of a central FFI agreement. By contrast, a private equity fund family generally consists of a collection of passive and centrally managed SPVs with a small, dedicated team of
investor relations specialists that would make the task of implementing centralized compliance procedures relatively straightforward. Although we believe that a fund family should be given the ability to appoint a single Compliance Member for the entire fund family (full consolidation), it is likely that many families would consider it more appropriate to aggregate subsets of entities and organize them into a relatively small number of reporting groups. For example, entities could be grouped by reference to the main fund around which they are organized. Alternatively, as the process of determining how best to comply with FATCA develops further, other more appropriate criteria may emerge for grouping entities. For that reason, we believe that fund families should be allowed to elect to comply with FATCA on a centralized basis, and in addition should be afforded the opportunity to organize centralized “reporting groups” as they believe best will serve the purpose of providing accurate and useful information in an efficient manner. Although the preamble to the Proposed Regulations suggests that future guidance will require “expanded affiliated groups” to appoint a “Lead FFI” to manage and coordinate the registration process for the group, the Lead FFI concept, as it is currently drafted, presents three significant difficulties for investment fund families. Again, a concept similar to the centralized compliance option mentioned in Notice 2011-34 is more appropriate. First, the term “expanded affiliated group” refers only to parent-subsidiary chains of legal entities where at least 50 percent of the equity of each member of the group other than the parent is owned by another group member. The definition does not capture investment fund families where the majority of the equity of specific funds is owned by third-party investors, but where the entities are under the management and control of a single group of managers. Specifically, the investment entities within private equity fund families typically are formed either as: (i) limited partnerships of which the general partner is controlled by the fund family’s managers and investment professionals, or (ii) foreign corporations of which the board of directors is similarly controlled.5 In addition to formal control of the funds’ governance mechanics through control of general partners and boards of directors, the actual management of the funds’ assets is delegated, by means of a management contract, to a management company that also will be controlled by these same parties. This level of centralized control exists generally for all investment entities, regardless of whether they are main funds, alternative investment vehicles, co-investment entities, parallel investment entities, or any other type of investment entity within the fund family. The result of these arrangements is that a single group of individuals working for the fund family will control all significant decisions made by these entities.6 Again, we believe that fund families ─ even though they are not included in the definition of “expanded affiliated group” ─ are likely to be more capable of implementing centralized reporting and compliance systems under FATCA than would global banking groups (the groups that we believe the definition of “expanded affiliated group” is intended primarily to capture).
When investors choose to invest through foreign corporations, typically they do so indirectly by investing through a limited partnership that owns the stock of the corporation, and of which the general partner is controlled by representatives of the fund family. 6 Funds often have advisory committees through which certain investors are entitled to review information regarding fund performance and to be consulted in respect of investment strategies and potential conflicts of interests. Other investors are entitled to information and similar rights on an individual basis through “side letter” contracts. None of those investors’ rights, however, expand to questions related to FATCA compliance.
Second, the concept of centralized compliance should not be limited to FFIs, but should be expanded to all investment entities within a family that are potentially subject to FATCA reporting ─ such as passive non-financial foreign entities (“passive NFFEs”). Although the regime that applies to passive NFFEs is different than that which applies to FFIs, both types of investment entities exist for the benefit of the same group of fund investors. We therefore see no reason why reporting for both types of entities could not be combined and provided on a centralized basis. We also note that the entity best suited to the role of Compliance Member may be a management company that does not itself qualify as an FFI. 7 Third, even if the concept of a Lead FFI as currently contemplated were to apply to investment fund families and to entities other than FFIs, the role of the Lead FFI as described in the preamble strikes us as unnecessarily limited. At least in the context of investment fund families, an entity similar to a Lead FFI ─ the Compliance Member ─ usefully could do much more than coordinate the registration process for the other members. We believe that fund families should be allowed to appoint a Compliance Member to enter into a single FFI agreement on behalf of all of the family members that are FFIs (or an appropriate subset thereof), and thereby relieve those members of having to enter into separate FFI agreements with the IRS and send reports directly to the IRS. As discussed above, we believe that fund families should be given the ability to organize themselves for these purposes as they deem most appropriate once the process of implementing FATCA is further underway, and thus a single fund family could designate several Compliance Members representing different groups within the family. Whichever way the fund families choose to organize themselves, however, we anticipate that any Compliance Member would be both legally and financially responsible for any failure on the part of the entities represented by it to comply with the requirements of FATCA. Instead of allowing a centralized approach such as that described above, the Proposed Regulations treat each separate legal entity qualifying as an FFI more or less on a standalone basis. For example, consider a foreign investor in a fund family that, for tax or regulatory reasons, chooses to hold certain U.S. investments though a passive foreign limited partnership, other assets through a passive domestic corporation, and still other assets through an off-shore corporation that also is passive. Such configurations are common. The current approach described in the Proposed Regulations would require each of these investment vehicles that is foreign to provide the IRS with a separate report and to enter into a separate FFI agreement. In addition to requiring the taxpayers to expend considerable resources to generate an excess of paperwork relating to what properly is viewed as a single investment relationship, this approach also provides the IRS with multiple reports on narrow aspects of that relationship. That situation in turn will produce a fractured picture of economic reality that we believe would be less useful than a more centralized, consolidated report.
In addition, allowing a broad range of types of entities to be included in a centralized compliance procedure could obviate the need to determine how certain specific entities are classified. For example, proposed Treasury regulation section 1.1471-5(e)(5)(i) treats certain nonfinancial holding companies as excepted FFIs but excludes investment funds, including private equity funds, from such treatment. However, a distinction can be made between a private equity fund itself and an intermediate entity through which the fund owns a portfolio company. A centralized compliance regime would have the administrative benefit of eliminating the need to determine which entities in a portfolio company’s ownership chain are qualifying nonfinancial holding companies and which must be participating FFIs. Such a determination has little practical significance once the fund is allowed to report on a consolidated basis in respect of both classes of entities. Unless indicated otherwise, all section references herein are to the Internal Revenue Code of 1986, as amended (the “Code”) or Treasury regulations promulgated thereunder.
In considering the value of consolidated reports, it is worth noting that proposed Treasury regulation section 1.1471-4(c) requires aggregation of accounts held within a single FFI or within a single expanded affiliated group for purposes of determining account balances to the extent that: (i) the accounts are otherwise linked in the FFI’s internal information systems; or (ii) there is a relationship manager8 who is aware that the accounts are controlled by the same person or persons. The evolution of that rule as it was formulated originally in Notice 2010-60,9 and then revised in Notice 2011-34, shows that the IRS and Treasury wished to achieve the maximum amount of aggregation possible, but ultimately softened the aggregation requirements in recognition of the fact that full aggregation of all related accounts may not be feasible as a systems matter among the different FFIs within a single expanded affiliated group. By contrast, the different “accounts” held in a fund will almost always be linked and consolidated as an internal systems matter, and the production of standalone reports would require a deviation from that norm. We are cognizant of the IRS’s potential concern that all entities within an affiliated group that are subject to the provisions of FATCA must be visible to the IRS and that centralized compliance should not limit that visibility. No entities within a group should serve as safe havens for recalcitrant account holders. We believe these concerns, and the corresponding desire on the part of the IRS to interact directly with each participating FFI, likely underlie the standalone approach to legal entities discussed above. We also believe, as discussed above, that the IRS is aware of the challenges to centralized compliance that exist for global banking groups, where, for example, a nonU.S. banking subsidiary of a global banking group is engaged in the active conduct of a banking business, and is subject to extensive regulation in its local jurisdiction. Under the laws of such a subsidiary’s home country, it may be that the subsidiary is not able to honor an FFI agreement signed by the group parent (e.g., because the terms of the FFI agreement violate banking privacy laws in that country). Fund families do not present a similar concern, or at least not to the same degree. Because the SPVs are subject to centralized control and are not engaged in active businesses, the fund managers have a great deal of latitude in choosing where to form them. Generally, SPVs are formed in jurisdictions that: (i) will not impose significant additional tax costs on their investments, (ii) are administratively convenient, and (iii) allow a great deal of flexibility in how such entities are governed. As a result, the SPVs will have more freedom to comply with FATCA without running afoul of conflicting rules in their home countries. In considering the usefulness of centralized administration of FATCA on the part of fund families, it also bears repeating that the number of SPVs can be quite large, so that the inefficiencies from treating each SPV as a separate, independent entity for FATCA purposes would be considerable. This problem is particularly acute in the private equity context, where investments tend to be large, heavily negotiated transactions for which deal-specific structures involving multiple legal entities must be tailored to address the various tax and non-tax requirements of the fund group’s various constituencies. Such constituencies might include, among others: on-shore taxable investors; on-shore tax-exempt investors; pension plans subject to ERISA; off-shore investors entitled to the 8
The concept of an FFI’s “relationship manager” employed by the FFI also is ill-suited to investment companies as currently defined in the Proposed Regulations. The concept seems to arise out of the idea that FFIs are standalone businesses that employ one or more individuals to handle the business’s client relations, as would be the case in most commercial banking businesses. Most of the entities in a private equity fund family are passive and have no employees at all. To the extent someone performs the role of relationship manager, that person most likely would be employed by a related management company or service company. 9 IRB 2010-37, dated Sept. 13, 2010.
benefits of section 892 so long as they are not treated as being engaged in “commercial activity”; offshore investors that wish to avoid realizing ECI; and off-shore investors that want a structure allowing them to maintain their entitlement to treaty benefits. In addition, legal structures also can be required to address a wide range of regulatory issues, issues under the Investment Company Act, and issues that may arise under non-U.S. laws. These different issues often are addressed through structuring that requires the formation of additional legal entities, many of which may qualify as FFIs. As a result of the process described above, it would not be unusual for a fund family to have hundreds of entities that will need to be classified under FATCA and that will need to comply with various certification and reporting requirements. For the reasons discussed above, we do not believe that it is sensible to treat each legal entity within a private equity fund family on a standalone basis for purposes of FATCA compliance. Section B, below, provides specific recommendations as to how compliance with FATCA could be centralized, as well as other recommendations that we believe are central to developing a workable regulatory regime under FATCA. B.
1. Centralized FFI Agreement. The first area in which we believe that the FATCA regime should be streamlined for private equity funds relates to the process by which entities enter into an FFI agreement with the IRS. As discussed above, we believe that a fund group should be able to appoint a single Compliance Member to enter into an FFI agreement on behalf of all relevant SPVs within the group (or an appropriate subset thereof). We do not believe that the IRS need be concerned about the enforceability of such an agreement, because, as discussed above, the SPVs are non-regulated entities under centralized control. Presumably, such a system would require that each SPV covered by a centralized FFI agreement provide the Compliance Member with a valid power of attorney to bind the SPV to the terms of the FFI agreement. In addition, the Compliance Member could provide the IRS with representations to the effect that: (i) the Compliance Member is legally able to act on behalf of the relevant SPVs in signing the FFI agreement, and (ii) the Compliance Member has the ability to cause the SPVs to honor the terms of the FFI agreement. The Compliance Member also would undertake to be legally and financially accountable to the IRS for any breach of such representations (including for a failure to withhold amounts from payments to an entity that turns out not to be in compliance with the centralized FFI agreement). To provide the IRS with full transparency to each FFI under the Compliance Member’s mandate, the Compliance Member would provide the IRS with a list of all entities bound by the terms of the centralized FFI agreement, which list would be updated as needed to take account of new entity formations, liquidations, etc. 2. Centralized Reporting. In addition to allowing groups to enter into omnibus FFI agreements, as discussed above, we also believe that the Compliance Member within a fund group should be allowed to provide centralized reports regarding investments in the group as a whole (or an appropriate subset thereof). As discussed above, this approach to reporting would provide the IRS with a better view of economic reality, since it would aggregate investments that may be held though different legal entities pursuant to a single relationship. It would also comport better with how investments are viewed by the fund managers. Similarly, proposed Treasury regulation section 1.1471-3(c)(6)(vi) should be amended to allow all investment fund families to collect Forms W-8 and W-9 on a centralized basis, as the rule currently would do for brokers, certain coordinated account systems and for mutual funds.
To be clear, however, it is not our intention to limit the IRS’s visibility as to the activities of specific SPVs or assets held through specific SPVs. To the degree the IRS believes it appropriate to receive a breakdown of the consolidated investments on an entity-by-entity basis, that information could be provided. Such information will be provided most usefully and most efficiently, however, through a single report prepared and presented by a single Compliance Member acting for multiple commonly controlled entities. Similarly, questions or concerns regarding the reports would be addressed to the Compliance Member. 3. Procedures for Recalcitrant Account Holders. In light of the special circumstances described below, we believe that a legal entity should not lose its status as a participating FFI because of a failure to close out the accounts of recalcitrant account holders. Section 1471(b)(1)(F) requires that an FFI wishing to be a participating FFI must be prepared to close accounts of recalcitrant account holders that do not provide the necessary legal waivers of relevant financial privacy laws. In addition, Notice 2011-34 suggested that a participating FFI with more than a specified number of recalcitrant account holders could be deemed to be noncompliant with the terms of its FFI agreement, and this requirement would have provided a powerful incentive for FFIs to close the accounts of recalcitrant account holders. Although the Proposed Regulations do not specifically endorse that concept, proposed Treasury regulation section 1.14714(a)(7) states that an FFI that fails to comply with its obligation under the FFI agreement in more than limited circumstances may be considered to be in default of the agreement. In considering the circumstances under which a private equity fund might be considered to be in breach of an FFI agreement, it is worth noting that closing accounts or punishing recalcitrant account holders through means other than withholding may not be feasible. Certainly in other contexts, commentators have mentioned that the requirement to close accounts is likely to be in conflict with local law (e.g., in jurisdictions where access to banking services is viewed as a fundamental civil right). In the case of private equity funds, that difficulty is compounded by the fact that the term “accounts” is a misnomer. Investors do not have accounts similar to accounts in financial institutions. Instead, private equity investors have legal and contractual interests in the fund entities themselves. At a general level, these interests provide the investors with: (i) economic rights with respect to existing investments, and (ii) as described below, obligations to fund future investments. As a result, it generally is not possible for a fund legally or contractually to “close the account,” as that would require an acquisition of the relevant interest against the investor’s will without legal or contractual authority to do so. More importantly from the perspective of a private equity fund, an attempt to expel an investor can create serious financial hardship for at least two reasons. First, unlike many other types of investment funds, private equity funds typically do not have large amounts of liquid assets on hand and may not have the necessary liquidity to acquire an investor’s interest prematurely through an “account closing” process. Because private equity transactions tend to be large investments completed over a relatively long period of time, private equity investors are not expected to fund their investments fully at the time the fund is formed. Rather, the investors commit to provide the fund with a certain amount of capital, which the fund “calls” in increments as needed over a period that typically range from seven to ten years. Accordingly, private equity funds generally are expected by their investors to avoid holding large amounts of cash or cash equivalents, and to not have a readily available source of liquidity with which to redeem the accounts of particular investors. In fact, such funds are often prohibited for business reasons under the terms of their
constituent documents from raising the necessary capital from other current investors or from borrowing in order to fund such an account closing. Second, if a fund’s investors have not yet contributed all of their committed capital to the fund, the fund, and compliant investors in the fund, may suffer a significant economic detriment if the fund is required to acquire an investor’s interest and thus relieve the investor of its commitment to provide additional capital. That burden would be borne not only by the Fund’s management but also by the other investors in the fund, who may be required to make up the funding shortfall themselves or to end up investing in a fund with less capital than they originally supposed. These other investors thus could end up with a greater percentage of the fund than they originally intended, which could violate their own legal or policy restrictions or create adverse tax or regulatory effects. In an extreme case, these issues could require a fund to wind down and liquidate prematurely. For these reasons, we do not believe that a fund should be considered to be in breach of an FFI agreement because of its inability to close out “accounts” of this sort. In addition, we believe that the threat of closing investor accounts is unnecessary. Once the rules regarding “passthru payments” are finalized, the threat of withholding should certainly be sufficient to incentivize investors to comply with FATCA, and even before those rules are finalized, withholdable payments made by a U.S. withholding agent will retain their character as such in the hands of a partnership as they are distributed out to the partners. Those payments therefore will be subject to FATCA withholding even before the rules regarding passthru payments are finalized.10 4. Reporting for Upper-Tier Entities. As discussed above, by virtue of the definition of “payee” in proposed Treasury regulation section 1.1471-3(a), payments made by a withholding agent to an FFI will be treated under the FATCA regime as payments to the FFI’s equity holders if the FFI is a partnership for U.S. federal income tax purposes. Accordingly, the partnership receiving a withholdable payment will be required to provide the withholding agent with a W-8 IMY to which the names of all of the partners are attached, or to become a “withholding partnership,” in which case the FFI is allowed to take the burden of withholding upon itself. In cases where upper-tier partnerships invest in lower-tier partnerships, the issue will replicate itself at each step up the chain. The concern faced by investment funds is that both the choice of providing a W-8 IMY and that of becoming a withholding partnership present serious challenges. The concern with providing a W-8 IMY is that, in many cases, an upper-tier partnership may represent a group of investors that are investing in a lower-tier fund family through a “feeder” structure, where the bank or other entity responsible for forming the feeder will not want to share the names of its customers with the lower-tier entities. The procedures for becoming a withholding partnership require the partnership in question to enter a formal agreement with the IRS, and to become subject to annual audits and other costly compliance procedures. The process thus requires a commitment of resources that typically is not viewed as commercially reasonable for an SPV whose primary purpose is to hold a passive investment in a lower-tier entity for a finite time period. The problem of withholding in the case of tiered partnership structures has been the source of considerable difficulty and frustration in the case of funds trying to meet their information 10
We would of course be happy to discuss the issues related to forced account closings in greater detail with Treasury and the IRS should they consider such a discussion useful; we believe these specific concerns are particularly crucial to the private equity industry.
reporting and withholding obligations under current law. Given that the issues appear likely to be compounded by the new FATCA rules, we suggest that it may be appropriate for the IRS and Treasury to consider trying to rationalize the withholding partnership regime for investment fund groups, which often have to deal with multiple tiers of SPVs in the form of partnerships. Specifically, it may be desirable for the IRS to institute a regime whereby an upper-tier partnership that does not wish to be a withholding partnership has the option of delivering its W-8 IMY directly to the withholding agent without providing the information to the lower-tier entity. The withholding agent could then withhold tax from amounts paid to the lower-tier partnership and instruct the partnership regarding how to apply the withholding tax to the accounts of the upper-tier entities. Another possibility might be to develop a “withholding partnership” regime for SPVs that requires fewer resources to administer and monitor. For example, instead of an annual audit, perhaps a certification from the relevant person as to compliance could suffice. Such a rule would reflect the similar judgment made in Proposed Regulations regarding verification for FATCA compliance. 5. Integrate FATCA Rules With Current Partnership Reporting. The Proposed Regulations quite sensibly adopt a policy of integrating FATCA reporting as much as possible with reporting procedures that already are in place. This policy of course is evidenced by Treasury and the IRS’s undertaking to revise Forms W-8 and W-9 so that taxpayers can provide on one form the information required under the information reporting regimes of both Chapter 3 and Chapter 4 of the Code.11 We request that Treasury and the IRS also consider ways of integrating FATCA reporting with partnership reporting that is required under section 6031. As you know, FFIs that are partnerships are required in many cases to file tax returns on Form 1065, with attendant Schedules K1 for each partner. Those forms, in turn, provide detailed information about the identity of the partners in the partnership, the items of income and loss allocated to each partner, capital account balances, etc. Although Form 1065 currently does not provide all of the information that might be required under FATCA (e.g., FATCA status of partners, the substantial U.S. owners of partners), we believe that it should be feasible to amend Form 1065 to include that information. So amended, Form 1065 could allow taxpayers to leverage significantly off of already existing procedures and avoid a substantial duplication of work. We also note that the annual reporting deadlines for U.S. accounts and recalcitrant accounts are in March under the Proposed Regulations. However, most reports to the Securities and Exchange Commission (“SEC”) and to Treasury from investment funds are due around that time or slightly later, creating a significant strain on compliance personnel. Since the same teams of individuals generally will be preparing and verifying SEC, Treasury and FATCA reports, it may streamline the reporting process to move the deadlines into June so as to harmonize the FATCA deadlines with reporting cycles already in place. It is also worth recognizing that Treasury regulation section 1.6031(a)-1(b) generally requires foreign partnerships to file returns if they have U.S.-source income or ECI and therefore conform reasonably well to the FATCA withholding regime. The two exceptions to that general requirement are for: (i) foreign partnerships with no ECI and only a de minimis amount of U.S.source income, and (ii) foreign partnerships with no ECI and no U.S. partners. To the degree that FFIs that are partnerships are not required to file Form 1065, however, the IRS of course could 11
We note that it would be helpful if draft versions of such revised Forms W-8 an W-9 were released with a brief comment period prior to the release of final versions, as Treasury and the IRS may benefit particularly from input provided by the compliance personnel with the most direct knowledge of the procedures and technical issues surrounding the implementation of FATCA.
require them to file under the same procedures applicable to entities other than partnerships (to the extent such entities are not already captured in a centralized procedure). The PEGCC sincerely appreciates the opportunity to provide Treasury and the IRS with comments on the Proposed Regulations, and we are available to discuss the recommendations provided in this letter and any other matters that may be helpful in achieving the effective implementation of FATCA. Please do not hesitate to contact us if you have any comments or questions.
Steve Judge President and CEO Private Equity Growth Capital Council
Jesse Eggert Associate International Tax Counsel, United States Department of the Treasury Mark Erwin Office of the Associate Chief Counsel (Int’l), Internal Revenue Service Kay Holman Office of the Associate Chief Counsel (Int’l), Internal Revenue Service Quyen Huynh Office of the Associate Chief Counsel (Int’l), Internal Revenue Service Kate Hwa Office of the Associate Chief Counsel (Int’l), Internal Revenue Service Mae Lew Office of Associate Chief Counsel (Int’l), Internal Revenue Service Heather C. Maloy Commissioner, LB&I, Internal Revenue Service Emily McMahon Assistant Secretary (Tax Policy), United States Department of the Treasury Danielle Nishida Attorney-Advisor, Internal Revenue Service Michael Plowgian Office of International Tax Counsel, United States Department of the Treasury Douglas Shulman Commissioner, Internal Revenue Service John Sweeney Office of Associate Chief Counsel (Int’l), Internal Revenue Service William Wilkins Chief Counsel, Internal Revenue Service
SUBMITTED ELECTRONICALLY April 30, 2012