DERIVATIVES & FINANCIAL INSTRUMENTS

Volume 13 - Number 2 - 2011

Articles /International • Multi-Jurisdictional Reactions to the US HIRE Act Withholding International • The Brittle Reincarnation of VAT Saving Schemes • Regulatory and Aspects of Short Selling • New Tax Rules:Highlights of 2011 Finance Bill, Fourth Amended Finance Bill for 2010 and 2011 Social Security Finance Bill • Cash Drain Transactions and Tax Deductibility of Certain Expenses

Recent Developments ; ; ; United States

INTERNATIONAL TAXATION, REGULATION AND v Articles

sAL,131 Multi-Jurisdictional Reactions to the US HIRE Act Withholding

The US Hiring Incentives to Restore Employment as a substantial portion of its business, holds financial as- Act of 2010 made a number of changes to the US sets for the account of others; or is engaged (or holds withholding tax laws in an attempt to improve itself out as being engaged) primarily in the business of tax compliance with respect to foreign accounts investing, reinvesting or trading in securities,' partnership held by US persons and cross-border , commodities 6 or any (including a futures transactions. One of the most significant or forward contract or option) in such securities, part- changes was the introduction of a new nership interests or commodities. Thus, a financial insti- withholding tax that will apply to US-source tution would include a hedge fund, a private equity fund payments after 31 December 2012 unless the or other collective investment vehicle, as well as a bank. non-US recipient complies with certain US 30% withholding on payments to non-financial foreign entit- reporting and disclosure rules. Not surprisingly ies. Sec. 1472 imposes a 30% withholding tax on payments the shift in US withholding has to most non-financial non-US entities .' after 31 December created a variety of reactions among US partners. This article focuses on some of those and describes the reactions there, * Wilem Bongaerts, Senior Attorney, Loyens & Loeff N.V., Eindhoven; as well as some issues relating to compliance Paul Carman, Partner, Chapman and Cutler LLP, Chicago; Albert Col- with the new US law. lado, Partner, Garrigues, Barcelona; Eric Fort, Partner, Arendt & Med- ernech, ; Wilhelm Haarmann, Partner, Haarmann, Frank- furt; Jidesh Kumar, Managing Partner, King, Stubb & Kasiva, ; 1. Introduction Peter Maher, Partner, A&L Goodbody, Dublin; Raul-Angelo Papotti, Associate, Chiomenti Studio Legale, Milano; Alain Ranger, Senior On 18 March 2010, the US Hiring Incentives to Restore Partner, Fasken Martineau DuMoulin LLP, Mon treal and George Employment (HIRE) Act of 2010 made a number of Ribeiro, Partner, Ribeiro Hui, . changes to the US withholding tax laws in an attempt to 1. The new withholding provisions are generally referred to as FATCA pro- improve tax compliance with respect to foreign accounts visions, in reference to the Act that originally introduced the provisions held by US persons and cross-border transactions. One in the US Congress. 2. Original issue discount includes both the deemed accrual on instru- of the most significant changes was the introduction of a ments that are sold at a discount to face and the deemed accrual that new withholding tax that will apply to US-source pay- occurs with regard to debt instruments in respect of which all or a portion ments after 31 December 2012 unless the non-US recip- of the interest is contingent. 3. The IRS has taken the position that swap income is fixed and determinable ient complies with certain US reporting and disclosure income even though it may not be US-source income. TD 8734, 62 Fed. rules.' Reg. 53387 (14 October 1997). 4. Sec. 1473(1)(A) IRC. 5. In this context, "security" means any share of stock in a corporation, a 2. New Withholding Provisions partnership or beneficial ownership interest in a widely held or publicly traded partnership or trust; a note, bond, debenture or other evidence of 30% withholding on payments to foreign financial institu- indebtedness; an interest rate, currency or equity notional principal con- tions. Sec. 1471 of the (IRC) im- tract; evidence or an interest in, or a derivative financial instrument in, poses a 30% withholding tax on withholdable payments any security described in the previous parts of this definition or any cur- rency, including any option, forward contract, short position and any sim- to non-US financial institutions after 31 December 2012, ilar financial position in such a security or currency or a position which in respect of obligations in existence on 18 March 2012, is a hedge with respect to a security and is clearly identified in the dealer's unless the non-US financial institution agreed to certain records as being a hedge under Sec. 475(c)(2)(F)(iii) of the IRC. 6. In this context, "commodity" means any commodity which is actively US reporting and disclosure rules. In general, a withhold- traded (within the meaning of Sec. 1092(d)(1) of the IRC); any notional able payment includes: principal contract with respect to any actively traded commodity; any ev- - any payment of interest (including original issue dis- idence of an interest in, or a derivative instrument in, any actively traded commodity or any notional principal contract with regard to an actively count2), , rent, salaries, wages, premiums, traded commodity, including any option, forward contract, futures con- annuities, compensation, remuneration, emoluments tract, short position and any similar instrument in such a commodity; and other fixed or determinable annual or periodic and any position which is a hedge with respect to a commodity and is clearly identified in the 's records as being described in Sec. gains, profits and income' if such payment is from 475(e)(2)(D)(iii) of the IRC. sources within the United States; and 7. Excepted non-financial foreign entities include (1) any corporation the - any gross proceeds from the sale or other disposition stock of which is regularly traded on an established securities market, (2) any corporation which is a member of the same expanded affiliated group of any property of a type that can produce interest as a corporation the stock of which is regularly traded on an established or dividends from sources within the United States. 4 securities market, (3) any entity which is organized under the laws of a US and which is wholly owned by one or more bona fide residents A financial institution is any entity which accepts deposits (as defined in Sec. 937(a)) of such US territory, (4) any forcign government, in the ordinary course of a banking or similar business; any political subdivision of a foreign government or any wholly owned agency or instrumentality of any one or more of the foregoing, (5) any in-

36 I DERIVATIVES & FINANCIAL INSTRUMENTS MARCH/APRIL 2011 IBFD Multi-Jurisdictional Reactions to the US HIRE Act Withholding 2012, in respect of obligations in existence on 18 March would be required to apply 30% withholding tax on all 2012, unless the payee or the beneficial owner of the pay- US-source payments. ment either provides the withholding agent with a certi- As with financial institutions, non-financial institutions fication that the non-US entity does not have a substantial would need to obtain consent to disclose information un- US owner' or provides the withholding agent with the less required by Canadian law. Under the Proceeds of name, address and taxpayer identification number of each Crime Money Laundering and Terrorist Financing Act substantial US owner. and Regulations (PCMLTFA), financial institutions and -equivalent payments. In another change made securities dealers are required to collect certain prescribed by the HIRE Act, the United States will impose withhold- information regarding their customers, including infor- ing on dividend-equivalent payments that are deemed to mation regarding the beneficial owners of the customers. be from US sources. For these purposes, "dividend-equi- However, the information collected pursuant to valent payment" means (1) any substitute dividend pay- PCMLTFA is not entirely the same as the information re- ment made pursuant to a securities lending or a sale-re- quired by the IRS under the FATCA provisions. Further, purchase transaction that (directly or indirectly) is PCMLTFA and its regulations do not authorize the shar- contingent upon, or determined by reference to, the pay- ing of the information collected with the IRS. ment of a dividend from sources within the United States, Foreign non-business paid generally qualify for a (2) any payment' made pursuant to a specified notional foreign tax to the extent that they do not exceed principal contract" that (directly or indirectly) is contin- the Canadian otherwise payable on the non- gent upon, or determined by reference to, the payment business income. However, as further discussed below, if of a dividend from sources within the United States and an applicable provides for a lower than (3) any other payment determined by the Treasury to be the rate imposed by the foreign , the lower similar. rate would apply for purposes of the foreign . A further limitation provides that any amount of tax paid 3. Multi-Jurisdictional Reactions to a foreign government in excess of the amount required Not surprisingly the shift in US withholding tax policy, to he paid under an applicable tax treaty may be consid- which will affect payments to jurisdictions with which ered a voluntary payment for Canadian the United States has existing tax , has created a and deduction purposes, and therefore would not qualify variety of reactions. This article focuses on some specific as foreign taxes paid. For example if the United States ap- jurisdictions and describes the reactions of those juris- plies a 30% withholding tax at source and then requires dictions, as well as some issues relating to compliance the taxpayer to claim a refund for the' excess withheld with the new US law. over the applicable tax treaty rate, the Canadian tax authorities might not allow a deduction for the excess 3.1. over the treaty rate if the taxpayer chooses not to seek a refund of the excess withheld. This would generally mean As with many other jurisdictions, Canada generally re- that FATCA withholding taxes in excess of the rates per- uires consent for disclosure of information about in- vestors or depositors. In particular, Canadis Personal In- formation Protection and Electronic Documents Act (PIPEDA) is intended to protect personal information ternational organization or any wholly owned agency or instrumentality thereof, (6) any foreign central bank of issue and (7) any other class of that is collected in certain circumstances. Disclosure of persons identified by the Treasury for purposes of Sec. 1472(c). investor or depositor information is permitted in Canada 8. A"substantial US owner" is a specified US person that directly or indirectly with client consent. Without client consent it is highly owns more than 10% of the stock of a corporation, 10% of the profits or capital of a partnership or 10% of the beneficial interests of a trust. For an uncertain whether disclosure would be permitted under entity that is a financial institution because it is in the business of investing PIPEDA because FATCA provides alternatives — with- in stocks or other securities or commodities, any US owner is a substantial holding or disclosure — and, thus, disclosure may not be US owner (without regard to the percentage of ownership). A 'specified US person" is any person other than a publicly traded corporation, an af- considered "required by law" (which would make the dis- filiate of a publicly traded corporation, an exempt organization or retire- closure eligible for an exception to the requirement that ment plan, the United States, a state or any political subdivision thereof, a consent must be obtained). Also, under PIPEDA, client bank, a real estate investment trust, a common trust fund and certain other exempt trusts. consent must be "informed" consent and is revocable at 9. The term "payment" in this context includes any gross amount which is any time. Further, services cannot be withheld where a used in computing any net amount which is transferred to or from the client refuses to provide consent or revokes prior consent. taxpayer. 10. The term "specified notional principal contract' means (1) any notional The combination of these factors under PIPEDA means principal contract if (a) in connection with entering into such contract, that financial institutions and securities dealers, as with- any long party to the contract transfers the underlying security to any holding agents, would need to obtain from their clients, short part to the contract, (b) in connection with the termination of such contract, any short party to the contract transfers the underlying security the vast majority of which are Canadian, their consent to any long party to the contract, (c) the underlying security is not readily to disclose their personal information to the US Internal tradable on an established securities market, (d) in connection with en- Revenue (IRS) in order to substantiate that they tering into such contract, the underlying security is posted as collateral by any short party to the contract with any long party to the contract or are a non-US person or a non-US entity with no substan- (e) such contract is identified by the Treasury as a specified notional prin- tial US owners. Where a client refuses to provide consent, cipal contract; or (2) in the case of payments made after 18 March 2012, or consent is subsequently revoked, the withholding agent any notional principal contract unless the Treasury determines that such contract is of a type which does not have the potential for .

0 IBFD DERIVATIVES & FINANCIAL INSTRUMENTS MARCH/APRIL 2011 I 37 Willem Bongaerts, Paul Carman, Albert Collado, Eric Fort, Wilhelm Haarmann, Jidesh Kumar, Peter Maher, Raul-Angelo Papotti, Alain Ranger and George Ribeiro mitted under the treaty with the United States would be acter and composition as the underlying payment on the subject to credit limitations in Canada. trust units for Canadian non-resident withholding tax The excess foreign tax (i.e. the foreign tax which exceeds purposes. the Canadian tax otherwise payable) could potentially It should be noted that the Canadian non-resident with- be claimed as a deduction in the computation of the tax- holding tax rules apply to securities lending arrangement payer's income for Canadian income tax purposes. compensation payments where the underlying securities lending arrangement relates to shares of any corporation If 30% is withheld on gross sales proceeds, which is one — Canadian or non-Canadian. However, the Canadian type of withholdable payment under the FATCA rules, non-resident withholding tax that would otherwise apply only a portion of the tax withheld might actually qualify to a securities lending arrangement compensation pay- for a foreign tax credit because the Canadian income tax ment in respect of a dividend on the shares of a foreign otherwise payable is based on the net gain arising from corporation is subject to a significant exemption from the disposition of the property. withholding tax where the lending or repurchase trans- Canada does have a concept similar to "dividend-equi- action is entered into in the course of the Canadian bor- valent amounts". In the Canadian context, this type of rower (or repo buyer) carrying on business outside payment is generally referred to as "substitute payment" Canada. or "dividend compensation payment". "Substitute pay- ments" or "dividend compensation payments" are cur- The Canadian statutory provisions do not generally apply to payments made pursuant to swaps or other derivatives rently not defined statutory terms. However, draft legis- transactions. However, depending on their specific char- lation recently released by the Canadian government acteristics, payments under certain derivative transactions, provides for "securities lending arrangement compensa- such as total return swaps, may fall within the statutory tion payment' as part of a package of income tax technical definition of "securities lending arrangement" and there- amendments. This draft legislation will be retroactively fore, payments made between the parties may be consid- effective to 2002 when enacted, and therefore it is com- ered to be securities lending arrangement compensation monly relied on by Canadian today as if it had payments. Generally speaking, the broad language of already been enacted. "Securities lending arrangement Canada's securities lending arrangement rules would compensation payment" is defined to mean an amount cover some, but far from all, the derivatives transactions paid pursuant to a securities lending arrangement as com- pensation for an underlying payment."Securities lending falling within the definition of "specified notional princi- arrangements" are generally defined to be transactions in pal contract". respect of certain qualified securities where the lender Accordingly, the Canadian rules for taxing securities lend- expects to be returned an identical security by the bor- ing arrangement compensation payments in the hands rower and the borrower is obliged to pay to the lender of non-residents of Canada cover many of the situations amounts equal to and as compensation for all amounts, contemplated by the dividend-equivalent rules, but far if any, paid on the security that would have been received from all, especially when the latter rules will apply to di- by the borrower if the borrower had held the security vidend-equivalent payments made after 18 March 2012 throughout the term of the transaction. Most repurchase pursuant to any notional principal contract. agreements (so-called "repo transactions") would be in- cluded in the definition of "securities lending arrange- 3.2. Germany ment". Transactions that qualify as a securities lending arrangement are treated as though the lender (or repo Compliance with the new US withholding system may seller) has not disposed of the underlying securities for be problematic for German financial institutions. In gen- eral, financial institutions may disclose investor or deposit Canadian tax purposes. information only with the consent of the depositor. Oth- With two exceptions, securities lending arrangement com- erwise, financial institutions are not allowed to disclose pensation payments paid by a Canadian resident bor- the relevant information. However, under specific condi- rower (or repo buyer) are deemed to be interest for pur- tions, German tax authorities may request the disclosure poses of Canadian non-resident withholding tax. The of investor or deposit information, in which case the first exception applies where a securities lending arrange- banks may not deny this request. ment is fully collateralized (under certain statutory rules), This would put German financial institutions in the po- in which case a securities lending arrangement compen- sition of asking consent of the US persons having deposits sation payment made to the non-resident lender (or repo or other investments in the institutions to disclose the seller) of a share in the capital stock of a corporation in respect of an underlying dividend paid on the loaned tax information of the depositors to the US tax authorities. Of course, many US depositors would already be making share (or sold under a repurchase agreement) is treated disclosures to US tax authorities of foreign accounts, and as a dividend for Canadian non-resident withholding tax such depositors are likely to grant consent. However, the purposes. The second exception applies where the under- US depositors that are not already disclosing the foreign lying securities of a securities lending arrangement are accounts to US tax authorities (in other words, the people certain qualifying trust units, in which case the draft leg- that the IRS is most interested in) maybe hesitant to grant islation provides that any securities lending arrangement compensation payment is deemed to have the same char- such consent.

38 I DERIVATIVES & FINANCIAL INSTRUMENTS MARCH/APRIL 2011 IBFD Multi-Jurisdictional Reactions to the US HIRE Act Withholding Non-financial entities in Germany are not in a much bet- Case law has recently clarified the nature of this obligation ter position than financial institutions to comply with to professional secrecy, and confirmed that such obliga- the new US withholding. Only information contained in tion is to be considered as a public policy provision (ordre public domains (e.g. in the commercial register) may be public). Consequently, the professional secrecy obligation disclosed. Other information may be disclosed only with incumbent upon a bank or a PFS may not be waived by the consent of the customer. the client. The courts have also held that it is an absolute obligation (obligation de résultat). As a consequence, if a Germany would generally allow a credit for the US with- bank or a PFS is sued by a client for breach of its obligation holding tax either under the tax treaty with the United to professional secrecy before the civil courts, said bank States or under German domestic law. However, a tax or PFS will automatically be held liable if it is established credit is only granted if the foreign tax was withheld in that information relating to such client has been disclosed, line with the law, for instance in line with an applicable irrespective of the fact that best endeavours to ensure the income tax treaty. Pursuant to Art. 10 of the Germany- confidentiality of such data have been used by the PFS United States tax treaty, for instance in the case of divi- or that the disclosure of information was not deliberate. dends, withholding tax may be levied up to 15%. If a tax credit is allowed under the tax treaty, the tax would be Pursuant to Art. 41, Para. 2 of the Law on the Financial creditable only to the extent that the United States may Sector, a bank or PFS may be released from its obligation levy withholding tax under the tax treaty to professional secrecy where expressly provided so by law. If the dividend or interest is subject to final withholding tax (Abgeltungssteuer), also then withholding tax may be Furthermore, the discharging effect of a client consent credited at the maximum amount of a withholding tax sparked controversial debates in relation to the obligation of 25% (in a separate procedure). to professional secrecy of a bank or a PFS. In that context, the Commission for Supervision of the Financial Sector Germany does impose withholding on dividend-equival- (Commission de Surveillance du Secteur Financier, CSSF) ent payments, so that aspect of the new US withholding Legal Committee (Comité des Juristes, CODEJU) has held laws would not create surprise in Germany. that, even though the professional secrecy may not The reactions to the new withholding provisions in Ger- be waived by a client due to the public policy nature of many have been mixed. Some German entities have ex- such duty, a bank or PFS would, from its perspective, not pressed disbelief that the new law will ever go into effect, violate its professional secrecy duty when transferring and so are taking no steps to comply. Other entities are confidential information to a third party, provided that in the process of examining the choices between collect- it was instructed to act alike in the name and on behalf ing the necessary consents to comply with the required of its customer, by the latter on the basis of a specific disclosures or restructuring activities with US-source in- agency agreement or proxy. The CODEJU further requires come so that any payments received would be effectively that the information exchange be in the interest of the cus- connected with a US or business. tomer and has laid down specific criteria which the rele- vant client's instruction must fulfil in order to be eligible 3.3. Luxembourg for an exemption from professional secrecy. Luxembourg financial institutions, including banks and The instruction of the client must in particular be specific professionals of the financial sector (PFSs) are bound by in the following respects: banking secrecy requirements, which prevent financial - specificity as to the content of the information: the institutions from disclosing information on the identity client must be aware of the content of the information and/or the transactions of account holders to third parties, to be disclosed. Any general waiver of professional including states. In this respect, Art. 41 of the Law on the secrecy in relation to personal information is forbid- Financial Sector of 1993 provides that: den; All administrators, members of managing and supervisory bodies, specificity as to the addressee of the information: the directors, employees and other persons in the service of credit addressee of the information disclosed must be institutions, other professionals of the financial sector, settlement known and accepted without ambiguity by the client; entities, central counterparties, clearing houses and foreign op- - specificity as to the purpose: the client must be in- erators of systems authorized in Luxembourg, as referred to in formed of the purpose of the transmission of infor- Part I of this Law, shall be required to keep secret any information confided to them in the context of their professional activities. mation should the initiative of the instruction come Disclosure of such information shall be punishable by the penal- from the professional, and such purpose must be in ties laid down in Article 458 of the Penal Code." line with the client's interests; and - time specificity: the client may not give its consent for As a result of this restriction, banks and PFSs are subject an unlimited period of time. to a professional secrecy obligation — the infringement of which is punished by the criminal sanctions laid down It is important to bear in mind that the position outlined in Art. 458 of the Criminal Code. Banks and PFSs are above reflects only the current opinion of the CODEJU, therefore bound by an obligation not to reveal to third but has not yet been tested before Luxembourg courts. parties any client confidential information confided to them in the context of their activities. 11. All translations in this section are the author's.

IBFD DERIVATIVES & FINANCIAL INSTRUMENTS MARCH/APRIL 2011 I 39 Willem Bongaerts, Paul Carman, Albert Collado, Eric Fort, Wilhelm Haarmann, Jidesh Kumar, Peter Maher, Raul-Angelo Papotti, Alain Ranger and George Ribeiro On the basis of the above and given the fact that non- method. Therefore, only in the limited cases where the compliance with the professional secrecy obligation en- applicable treaty provides for withholding taxes, is the tails criminal sanctions, it is important that whenever a Luxembourg resident taxpayer allowed to credit the taxes Luxembourg bank or PFS has recourse to such a proxy, withheld at source." In particular, Art. 25(2)(b) of the the highest degree of prudence with regard to compliance Luxembourg—United States treaty provides that where a with the criteria set out above be observed. resident of Luxembourg derives income which, under Art. 10 (Dividends) and Art. 12(6)(b) (Interest) may be In the light of the above, Luxembourg financial institu- taxed in the United States, Luxembourg will allow as a tions may not disclose information on US account holders deduction from the tax on the income of that resident and their transactions on a general basis, including to a an amount equal to the tax paid in the United States. US payer or the IRS. As indicated, it is, however, possible under the guidelines issued by CODEJU that the account To the extent that US withholding taxes are not in relation holder itself agree to the transmission of confidential to dividends or interest, it should thus generally not be data to a third party in a specific situation. In this respect, possible to credit withholding taxes in Luxembourg that a practice for the purpose of the qualified intermediary were imposed as a consequence of non-compliance with obligations has become established in Luxembourg. Un- FATCA rules. With regard to FATCA-related withholding der the qualified intermediary practice, banks will usually taxes imposed on dividends and interest, the question ask the US account holder whether it agrees that the bank arises as to the amount of the credit that will be allowed. may pass on the relevant account information to the IRS. Under Arts. 10 and 12 of the Luxembourg—United States If the US account holder agrees, an informal written agree- treaty, the United States has the right to impose a max- ment between the bank and the US account holder to imum withholding tax of 15%, whereas the FATCA re- that end will be set up. A similar appro'ach could therefore lated withholding taxes would be 30%. It thus remains to be taken with regard to the FATCA legislation. Agree- be seen to what extent the Luxembourg tax authorities ments would need to be drafted for each US account will allow the tax credit, as a strict interpretation of Art. holder or any entity that is covered by the FATCA legis- 26 of the Luxembourg—United States treaty would have lation. as a consequence that only 15% (as those are in accord- ance with Arts. 10 and 12 of the Luxembourg—United Under Luxembourg law, no distinction is made between States treaty) could be credited in Luxembourg. types of financial institutions with regard to the require- ments of banking secrecy. It is irrelevant whether the fi- Finally, the credit would be available only against the tax- nancial institution is a bank, an manager or another payer's effective income tax liability. No refunds will be PFS. Consequently, Luxembourg has a very broad banking given by the Luxembourg tax authorities if the withhold- and professional secrecy that is secured by both adminis- ing tax exceeds the income tax liability. Instead, Luxem- trative and criminal provisions. bourg would allow the withholding taxes to be deducted from . By doing so, the paid with- For Luxembourg entities not covered by the banking and holding taxes would enter into the taxpayer's loss carry- professional secrecy as outlined above (such as ordinary forward for coming years. holding companies and non-financial corporations), no secrecy rules as to the shareholding structure or owner- Based on this author's understanding the new Sec. 871(m) ship of such companies exist. Rather, all corporations un- of the IRC, for payments effective on or after 14 Septem- der Luxembourg law must be in a position to disclose ber 2010, a "dividend equivalent" is treated for US with- their shareholding. In the case of private liability com- holding tax purposes as US-source income. Simply speak- panies, ownership information can usually be retrieved ing, dividend equivalents include substitute dividend from the register of commerce or the Official Gazette, payments pursuant to (1) a securities lending contract, where all modifications to articles of incorporation are (2) a sale-repurchase transaction, (3) a special notional published. principal contract whereby the return under the contract is contingent on or determined by reference to the pay- Luxembourg domestic tax law provides for a credit system ment of a US-source dividend or (4) any substantially for withholding taxes paid abroad. Withholding taxes similar contracts. may usually be credited when the Luxembourg company has a corporate income tax liability, and only to that extent. Under Luxembourg tax law, payments made under a stock As Luxembourg taxpayers are in general taxable on their lending or repo transaction are generally not subject to a worldwide income, to the extent that Luxembourg has withholding tax in Luxembourg. Depending on the terms not entered into an income tax treaty with the country and conditions of a contract where the underlying is Lux- of residency of the payer, Luxembourg tax law provides embourg stock, however, the economic ownership of the a credit systemu which distinguishes neither between the stock may be transferred to the counterparty, in which types of income on which the withholding tax was paid case the dividend payment is deemed to be made to the (e.g. interest, dividends, royalties, gross- sale proceeds, li- quidation proceeds) nor between the type of entity from which the payment was received. Contrary to this domes- tic relief (if no income tax treaty exists), 12. Art. I34bis Income Tax Law (ITL). 13. See e.g. Art. 25(2) b) of the Luxembourg—United States income tax treaty under an applicable income tax treaty is, from a Luxem- signed on 3 April 1996 (United States—Luxembourg treaty) and Art. 134ter bourg tax perspective, generally based on the exemption ITL.

40 I DERIVATIVES & FINANCIAL INSTRUMENTS MARCH/APRIL 2011 IBFD

Multi-Jurisdictional Reactions to the US HIRE Act Withholding

counterparty (then potentially triggering a 15% withhold- 3.4. ing tax). For Italian financial institutions, regulatory restrictions O Luxembourg tax law provides for a 15% withholding tax would apply limiting the ability of the financial institution • on dividend and certain equivalent payments.' 4 This with- to communicate and transfer the information necessary holding tax may be reduced (1) by specific withholding to avoid FATCA withholding. tax rates provided for in an applicable income tax treaty As a general rule, the communication of a customer's per- or (2) if the parent-subsidiary regime for dividend pay- sonal data to third parties is allowed either with the data ments to qualifying EU corporations applies. subject's consent or if any of certain conditions for dis- The definition of "dividend-equivalent payments" under closing the data without consent are fulfilled. Except Luxembourg domestic tax law is contained in Art. 97(1) where data are communicated because this is instru- of the ITL and reads as follows: mental to the activities requested and/or the services pro- 1. Dividends, profit shares and other benefits allowed, in re- vided — in which case the data subject's consent is not spect of shares, members' interests, profit-sharing interest necessary — as a general rule banks and their staff must or any other interest in a corporate entity ..., in whatever keep confidential all the data at issue. In some cases it is form they may be; permitted to communicate a data subject's data without 2. The profit share received in respect of the funds introduced infringing the relevant data protection provisions, as cer- into a business ... by a silent partner who is rewarded in proportion to the profit of the enterprise; tain communications are mandatory under the law, for 3. The interest and any other income whatsoever arising on example: bonds and other equivalent securities, including any profit - communications of personal data in pursuance of share and redemption premium. anti-money laundering legislation; Art. 146 of the ITL then stipulates that all items under - communications for the purpose of countering ter- Art. 97(1) points 1 and 2 of the ITL are subject to with- rorism by financial means and/or the marketing of holding tax. In addition, the items under point 3 are sub- child pornography items; ject to withholding tax if they provide, in addition to - communications of personal data to detect and fixed interest, variable interest that is linked to the profits counter taxation offences, under the limitations pro- of the borrower. Furthermore, Art. 146(2) of the ITL pro- vided by the law; and vides that"income subject to withholding tax also includes - communications to judicial authorities in pursuance special allowances and advantages allowed as well as, or of the law and/or to creditors in connection with en- in place of, the amounts specified under Article 146(1) forcement proceedings. [of the Income Tax Law]' An additional exception would provide that a bank would US withholding tax paid on dividend-equivalent pay- not violate its duty of protecting the privacy of informa- ments would be creditable in Luxembourg, subject to the tion if relevant information is communicated by the bank conditions and limits set out in the general discussion of in order to pursue a legitimate interest of the account the creditability of withholding taxes, above. holder or of a third party which is requesting the data; it is worth noting that this exemption (1) applies only in The Luxembourg financial industry has shown substantial the specific cases set out by the data protection authority interest in the US HIRE Act and the FATCA provisions. (Garante per la protezione dei dati personali)pursuant to While banks are generally already iccustomed to docu- legal principles and (2) does not apply if any fundamental mentation, reporting and withholding obligations under rights or freedoms of the account holder are limited or the qualified intermediary rules, the obligations under restricted. FATCA represent a new challenge, in particular for PFSs and fund managers. At present, major consulting and law In addition to restrictions on disclosure of information, firms are following the developments in this area closely Italy also has restrictions on the transfer of information and are dedicating a number of staff in order to acquire by financial institutions. A transfer of a customer's per- specialist knowledge on the implications of FATCA. Firms sonal data to the IRS may be made if: are increasingly organizing internal as well as external - the transfer is necessary for the performance of obli- seminars on the impacts of FATCA. The general reaction gations resulting from a contract to which the data of the Luxembourg financial industry accordingly goes subject is a party, or to take steps at the data subject's in the direction of accepting the new challenges brought request prior to entering into a contract, or for the about by FATCA and adapting the infrastructure of fi- conclusion or performance of a contract made in the nancial institutions and fund managers, as well as training interest of the data subject; employees on the issue. As of today, this author has no - the transfer is necessary for safeguarding a substantial knowledge about financial institutions and/or fund man- public interest that is referred to by laws or regula- agement companies systematically rejecting US cus- tions; tomers, although many structured products and funds - the transfer is necessary to safeguard a third party's available on the Luxembourg market are not open to US life or bodily integrity; investors, and banks do accept US clients only reluctantly. 0 14. Art. 146 ITL.

0 1BFD DERIVATIVES & FINANCIAL INSTRUMENTS MARCH/APRIL 2011 I 41 Willem Bongaerts, Paul Carman, Albert Collado, Eric Fort, Wilhelm Haarmann, Jidesh Kumar, Peter Maher, Raul-Angelo Papotti, Alain Ranger and George Ribeiro - the transfer is necessary for carrying out investiga- lated under a "per-country/per-company" mechanism, i.e. tions by defence counsel pursuant to Italian law, or such amount is calculated separately for each of the con- to establish or defend a legal claim, provided that the solidated companies and for each foreign state where the data are transferred exclusively for said purposes and income is sourced. This could represent a notable limita- for no longer than is necessary in compliance with tion to the effective possibility to benefit from a tax credit the legislation in force applying to business and in- in the case under analysis. dustrial secrecy; The notion of"dividend-equivalent payment" is not specif- - the transfer is carried out in response to a request for ically provided for under Italian tax law. This being said, access to administrative records or for information several tax provisions have the effect of imposing a with- contained in a publicly available register or list; holding tax on certain payments that are regarded as hav- - the transfer is necessary, pursuant to the relevant ing a similar nature; as an example in any case in which codes of conduct referred to in the Data Protection the underlying property is shares, any remuneration paid Code; or under repos and securities lending transactions is gener- - the disclosure concerns data relating to legal persons, ally subject to the higher 27% withholding tax rate pro- bodies or associations. vided for the payment of dividends (in lieu of the ordi- Although the Italian regulatory authorities have not yet narily applicable 12.5% tax rate). expressed a direct opinion, it is uncertain as to whether any of the exceptions allowing the transfer of information 3.5. would be met in regard to an attempt to make disclosures Financial institutions may disclose certain information under the FATCA rules. concerning a client's depositary accounts, but they are The Italian resident payee would generally be entitled to limited by the banking secrecy principle. Broadly, banking a foreign tax credit in respect of withholding taxes levied secrecy is embodied in Spanish law as a legal principle on such payments. In particular, Art. 165, Para. 1 of the under which banks and financial institutions are not al- Income Tax Act provides, as a general rule, that foreign lowed to provide personal and account details of their taxes are creditable up to the amount of the Italian taxes customers unless certain circumstances are met. due on the foreign-source income (i.e. up to the portion The banking secrecy principle is regulated in the Addi- -of Italian taxes corresponding to the ratio between the tional Provision One of Financial Institutions (Discipline foreign-source income and the overall taxable income, and Control) Act 26/1988, of 29 July 1988. In this regard, net of any previous losses which may be available to offset this provision states as follows: taxable income). Among the other requirements, the law explicitly states that in order to be creditable, the foreign The institutions and other persons subject to the legislation are under obligation to keep secret all information relating to the taxes must be borne on a final basis (i.e. no foreign tax balances, positions, transactions and other operations of their credit would be granted for advance payments of taxes customers which cannot be disclosed to third parties or distrib- or for other refundable tax payments); final withholding uted. taxes paid abroad would therefore fall within the scope This duty of confidentiality does not include any information of application of the foreign tax credit provisions, pro- which the customer or the law allows to be disclosed or distrib- vided that they are not subject to possible re-determina- uted to third parties or which is requested by, or must be sent to, tion or refund in the foreign state. That the tax must be the respective regulatory authorities. In this case, the transfer of final in order to be creditable raises questions as to the information shall be in line with the directions given by the whether FATCA withholding would be eligible for a for- customer or in the law. eign tax credit. The duty of confidentiality shall also not apply to exchanges of information between credit institutions belonging to the same Sec. 1474 of the Internal Revenue Code provides that a group eligible for consolidation. financial institution which is eligible for the benefits of a Failure to comply with this provision shall be deemed a serious tax treaty with the United States may apply the FATCA breach and attract a penalty on the terms and under the procedure tax as a credit against other US taxes due, or may apply provided in Title 1 of Financial Institutions (Discipline and Con- for a refund for any excess amount withheld over the in- trol) Law 2611988, of 29 July 1988. 15 stitution's US tax liability. The potential ability to obtain In regard to this, the Bank of Spain (Banco de Espana) in a credit or a refund from the United States would gener- several publications has stated that the main principles ally mean that, in order to obtain a tax credit in Italy, the of bank secrecy regulated in the above-mentioned provi- financial institution would need to apply for a refund in sion subject Spanish financial institutions to a secrecy the United States and then only the amount not refunded obligation such that they may not disclose any informa- would be eligible for a credit in Italy. tion on their clients' and transactions except when Additional limitations may apply to the availability of a so requested by "the respective supervising authorities" foreign tax credit in group consolidation situations (as it (e.g. the Spanish tax authorities). It is very doubtful that would likely be the case when an Italian bank is the payee). this concept may be extended to foreign, non-EU author- In particular, in such cases the overall taxable income is ities. Notwithstanding the above, bank secrecy cannot be determined as the algebraic sum of each consolidated company's overall income; moreover, the amount of the Italian taxes due on the foreign-source income is calcu- 15. Author's translation.

42 I DERIVATIVES & FINANCIAL INSTRUMENTS MARCH/APR1L 2011 0 IBFD Multi-Jurisdictional Reactions to the US HIRE Act Withholding claimed in the case of responding to the Spanish tax on "dividend-equivalent" payments to authorities' requirements or a tax audit. non-resident companies if such amounts are considered as Spanish-source income subject to the non-resident in- However, nothing prevents customers from voluntarily come tax under the Revised Non-resident Income Tax waiving their rights to secrecy and allowing Spanish fi- Act approved by Royal Decree 5/2004, of 5 March 2004. nancial institutions to provide information to US author- ities, if required. Thus, it can be said that fmancial insti- Generally, a "dividend-equivalent" payment could fall un- tutions could not comply with any US disclosure der the concepts of either "dividends" or "interest" under requirements without the consent of each depositor. Spanish law. On the one hand, although the term "divi- dend" is not specifically defined in such Act, as a general Under the mechanisms to avoid double taxation envis- rule, any income received from the participation in an- aged by the United States—Spain income tax treaty con- other entity's equity will be regarded as a dividend pay- cluded on 22 February 1990 (United States—Spain treaty), ment. Spanish law considers this income taxable where Spain, subject to the Spanish domestic law provisions, such entity is a Spanish tax resident. will allow as a deduction from the income tax of a Spanish tax resident, an amount equal to the income tax paid in On the other hand,"interese is defmed as any income ob- the United States (the so-called "ordinary tax credit tained on the assignment of own capital to third parties. method"). Any other kind of income derived from the transfer, re- imbursement, redemption, exchange or conversion of any In this regard, the ordinary credit method has been in- kind of assets representing the use of third-party capital corporated into Spanish domestic law, provided that cer- will be regarded as interest for non-resident income tax tain requirements are met under Art. 31 of the Revised purposes as well. This income would be Spanish-source Corporate Income Tax Act approved by Royal Decree if it is paid by a Spanish tax resident or used in Spain. 4/2004 of 5 March 2004, which states as follows: When the taxpayer's taxable income includes income obtained If the income were Spanish source, it would be subject to and taxed abroad, the lesser of the following two amounts will a 19% non-resident income tax, via a withholding, al- be deducted from the gross tax due: though the rate may be reduced under an applicable in- The actual amount paid abroad due to a tax which is identical or come tax treaty if the non-resident fulfils certain Spanish analogous to the corporate income tax. Taxes that are not paid formalities. by virtue of exemption, tax allowance or any other tax benefit will not be allowed as a deduction. If a treaty for the avoidance Businesses in Spain are still analysing in depth the new of double taxation is applicable, the tax credit may not exceed US rules before adapting their internal compliance meth- the corresponding tax in accordance with that double taxation ods. Specifically, they seem to be reviewing the position treaty. taken by other relevant financial institutions within the The amount of the gross tax due which would be payable in Spain and by any bank dealers. on the afore-mentioned income if it had been obtained in Spanish territory. 3.6. In order to apply such tax credit, three requirements must For recipients of US-source payments in China, the ability be fulfilled: to comply with the new US law may depend upon the - the taxes paid in the United States must be considered status of the recipient as a financial institution. as identical or analogous to the corporate income tax (i.e. a calculated on an income basis); Under the Chinese Commercial Banking Law, commer- - the tax credit may not exceed the Spanish corporate cial banks may refuse enquiries from a third party con- income tax liability that would result from the ap- cerning information in respect of the bank account of a plication of the general corporate income tax rate customer, unless it is otherwise prescribed by laws and (i.e. 30%) to the relevant income; and administrative regulations. For individual depository ac- - the tax paid in United States must not exceed the tax counts, banks should keep the accounts information con- which would be due under the United States—Spain fidential. Although the law does not impose confidential- treaty ity obligations on commercial banks for non-individual bank accounts (e.g. corporate bank accounts), in practice, Bearing in mind the above, the amounts deducted for banks will not disclose information of non-individual Spanish corporate income tax purposes may never exceed bank accounts to a third party unless the information is an amount equal to the percentage established by the required by the government or courts. United States—Spain treaty. Therefore, any amount with- held in the United States under Sec. 1471 of the IRC ex- For other financial institutions, such as securities com- ceeding the maximum withholding rates applicable under panies and trust companies, Chinese law may be unclear the United States—Spain treaty if any, would be considered in respect of whether disclosure of a client's information as not creditable against the Spanish corporate income is permitted. In practice, an investor's information has tax, and therefore could not be recovered either through been viewed as confidential and is not disclosed unless a carry-forward or as a deduction from the taxable base. required by law or regulations. Under Spanish tax law, there is no concept of "dividend- Because of the existing restrictions on the disclosure of equivalent" payment as such. However, Spain may impose information, it may be necessary for a fmancial institution to seek guidance or an opinion of the relevant supervisory

CIBFD DERIVATIVES & FINANCIAL INSTRUMENTS MARCH/APRIL 2011 I 43 Willem Bongaerts, Paul Carman, Albert Collado, Eric Fort, Wilhelm Haarmann, Jidesh Kumar, Peter Maher, Raul-Angelo Papotti, Alain Ranger and George Ribeiro authority, such as Chinese Banking Regulatory Commis- a year, details of the ownership of the company are also sion or the Chinese competent authority when the infor- provided. Thus, by virtue of being a part of the "public mation is required by another country document", information on ownership of a company is a On the other hand, non-financial entities within China permitted disclosure. may be able to comply with the FATCA reporting rules Apart from filing annual returns, companies registered under existing laws without obtaining addition consent in India are also mandated by law to maintain a register or approvals. There is no Chinese law that expressly pro- of members and a register of transfers which are periodi- hibits or permits the disclosure of the identities of the cally updated. Therefore, it would be normal for an Indian owners of a non-financial institution in China. Histori- company to collect and maintain ownership information. cally, the decision to provide such information about the Where a resident of India derives income which, under owners of a non-financial institution would have been the India—United States tax treaty, may be taxed in the made by the owners, but information about the owners United States, the Indian tax authorities will allow as a would generally be available in public databases and so deduction from the tax on the income of that resident would not be viewed as confidential. In addition, the com- an amount equal to the income tax paid in the United pany would normally collect information about the own- States, whether directly or by deduction. However, such ership of its shares, so it would have the information avail- deduction may not exceed that part of the income tax able. which is attributable to the income which may be taxed There would not appear to be any issue regarding the in the United States. Thus, for income taxed in accordance creditability of the US withholding tax in China, so long with the India—United States treaty, a deduction from do- as the withholding is made pursuant to the terms of the mestic tax is allowed. treaty. Indian direct tax law does not provide for the concept of The imposition of US tax on a dividend-equivalent a "dividend-equivalent" payment However, dividends de- amount would not cause surpris.e within China because clared, distributed or paid by a domestic company on or of regulatory and tax rules within China. There is no def- after 1 June 1997 are exempt from tax. Similarly, income inition of"dividend-equivalent payments" under Chinese from units of mutual funds and from venture capital law. However, if the transaction is to pay a dividend in a funds are exempt. disguised form, tax should be payable. Also, in practice, if the transaction involves a payment from an entity in 3.8. Ireland China to an offshore party, that may not be possible due to foreign exchange control. 3.8.1. General Information held by Irish financial institutions and Irish 3.7. India non-financial institutions is generally protected by Irish privacy or data protection laws which are a combination The Banking Regulation Act, 1949, which is the nodal of rules found in the Irish constitution, in the Data Pro- law governing banking in India, states that a banker tection Acts 1988 and 2003 and derived from common should take scrupulous care not to disclose the state of law. Under data protection laws, an owner must be in- his client's or customer's account. Banks in India have tra- formed, so far as practicable, of the purposes for which ditionally held client or customer information sacrosanct their information will be disclosed, to whom it will be and divulged information only upon request by Indian disclosed and the nature of the information concerned. law enforcement agencies. More specifically, the duty to The consent of the owner is also required unless, for ex- hold client or customer information confidential is quali- ample, the information is considered non-sensitive or the fied by the duty to obey an order under the Bankers' Books information is being disclosed to comply with a legal ob- Evidence Act, 1891 and specific instances where a higher ligation of that financial or non-financial institution. duty than the private duty is involved, such as a threat to the state. Case law indicates as a general rule of law, that a bank owes a duty of confidentiality to its customers. This duty Therefore, in light of the above, banks in India are not under any obligation to disclose client or customer infor- was originally stated in Tournier v. National Provincial and Union Bank of England 16 to be an implied contractual mation directly to US tax authorities. All financial insti- duty which has developed into the duty arising also by tutions are governed by the Reserve Bank of India and way of public policy. In addition, it appears that a cus- are subject to the same or similar restrictions. In other tomer has an implied right to privacy in the context of words, no distinction is made between types of financial institutions with regard to the requirements of banking his or her financial affairs." secrecy. The general privacy rights are not absolute and owner in- formation may be disclosed where: Regarding non-financial entities, Sec. 610 of the Com- panies Act, 1956 provides for inspection by any person — there is legal compulsion to do so; of the public documents filed with the Registrar of Com- panies by any registered Indian company. An annual re- turn of the company is one such public document. In the 16. (1925) 1KB461. annual return that must be filed by every company once 17. Haughey v. Moriarty (1999) 31R28.

44 j DERIVATIVES & FINANCIAL INSTRUMENTS MARCH/APRIL 2011 0 IBFD Multi-Jurisdictional Reactions to the US HIRE Act Withholding — the owner consents to the disclosure; with the excess potentially available as a deduction — the information is already in the public domain; or in the computation. — there exists a public duty to disclose the information. Where the Irish resident recipient does not receive the In relation to the FATCA reporting obligations, it is nec- interest in the course of carrying on a trade, unilateral essary to look at the position of the Irish financial insti- credit relief will not be available and the credit will there- tution and the Irish non-financial institution separately. fore be dependent on treaty relief. Depending on whether In relation to an Irish financial institution, it would seem the withholding is levied in accordance with the Ireland- that the financial institution could be in breach of the United States income tax treaty, credit should be available, right to privacy of a customer, or data protection rules, if subject to the usual qualifying requirements. If tax is with- it were to disclose some or all of the information required held and a refund in accordance with the financial insti- under the FATCA rules unless (1) the customer has con- tution's entitlement under the treaty is denied, then, on a sented to such disclosure or (2) it can be demonstrated strict basis, there is no statutory entitlement to a credit, that the Irish financial institution is compelled by law to although a deduction should be allowed for the tax with- disclose the information. held in the Irish computation. Non-financial institutions would also be in breach of pri- The position with regard to dividends is somewhat similar vacy rights or the data protection rules if they were to in that relief may be available under a unilateral credit disclose the information required by FATCA unless, again, provision (which requires, among other things, that the the owner has consented to the disclosure and transfer recipient hold at least 5% of the ordinary share capital of of its information to the IRS or the disclosure is made the dividend paying company) or under the terms of the under compulsion of law. applicable treaty. If a credit is not available under the uni- lateral credit provision, the availability of a credit under While compliance with a legal obligation is an exception the treaty will depend on whether any tax withheld, which to the requirement to obtain owner consent to the dis- is not refunded, is a tax levied in accordance with the closure of information, the concept is narrowly inter- treaty. Subject to that, a credit should be available but Will preted. Quite apart from the fact that the law concerned be computed in accordance with the complex Irish rules. is the tax law of a jurisdiction (i.e. the United States) which may have no territoriality over the institution, it is under- In the case of withholding tax on any gross proceeds from stood that there is no actual compulsion under FATCA the sale or other disposition of any property of a type to report the required information. Rather, failure to do that can produce interest or dividends from sources so will result in certain income streams being subject to within the United States, such withholding is likely to be withholding tax. In those circumstances, it is most un- creditable in Ireland only if relief is available under the likely that the FATCA reporting obligations constitute a treaty. If the proceeds (1) form part of the business profits compulsion of law imposed on an Irish financial or non- of the recipient and the recipient has no permanent es- financial institution. Therefore, the Irish financial or non- tablishment in the United States or (2) are treated as pro- financial institution should only disclose information ceeds from the disposal of a capital asset, it would seem with the consent of the investor or depositor. that the credit would not be available in Ireland, but a de- duction would be allowed for the tax withheld in the Irish In relation to the certification required under the FATCA computation of the chargeable gain. rules that an Irish non-financial institution does not have any substantial US owners or, in the alternative, the insti- The current trends developing in Ireland in response to tution reports US owner information, this certification the FATCA legislation must be considered separately by may be difficult to give. Information contained on the industry. In particular, the funds industry and the banking register of a company incorporated in Ireland is a matter industry act and respond independently of each other. of public record and could therefore be reported without any breach of privacy rights. However, the company reg- 3.8.2. Funds industry ister will not necessarily disclose the beneficial owners The FATCA legislation is of concern to the Irish funds of shares in the company. industry, and representations to the IRS have been made The ability to claim a credit for the tax withheld may de- through the European Fund and Asset Management As- pend on: sociation (EFAMA). The Irish Funds Industry Association — the nature of the income stream; and had some input into that submission. EFAMA represen- — the status of the Irish recipient of the income. tatives attended a meeting in December 2010 with repre- sentatives from the FATCA guidance team from the US In the case of interest payments, where the recipient is Treasury and the IRS, and has prepared draft FATCA reg- an Irish resident company receiving the interest in the ulations which it intends to forward to the US authorities course of carrying on a trade, credit should be available for consideration. under either an Irish unilateral credit provision or under the terms of the applicable treaty, provided that the with- Following discussions in mid-January 2011, EFAMA has holding has not been refunded. Having regard, however, indicated that the US authorities favour broad-based com- to the low Irish corporate income tax rate of 12.5% on pliance that would bring all entities within the FATCA trading income and the measure of the income in calcu- regime, with funds falling into certain categories being lating the amount of the credit, the credit may be limited,

IBFD DERIVATIVES & FINANCIAL INSTRUMENTS MARCH/APRIL 2011 I 45 Willem Bongaerts, Paul Carman, Albert Collado, Eric Fort, Wilhelm Haarmann, Jidesh Kumar, Peter Maher, Raul-Angelo Papotti, Alain Ranger and George Ribeiro able to benefit from less onerous procedures. proadly, cannot be secured, there is a concern that the banks would EFAMA is seeking that: be required to close affected accounts. low-risk funds (e.g. pension funds) would be able to provide certain confirmations to comply with FATCA and have no withholding or reporting obligation; and 4. Conclusion publicly traded funds, widely held funds (i.e. those JtirisdictiOns will vafy in their ability to cOmply with with over 100 investors plus US investors subject to the rieW US teporting and disclosure requirements. investment limits) and restricted funds (i.e. those ex- Entities in jurisdictions that will have difficulty- cluding US investors through agreed procedures) complying May need to anticipate the new 30% would be deemed to be compliant funds, not have to withholding tax if they continue to do business with apply withholding tax on investors and be subject to US persOns. In some circurnstances it is believed that only limited reporting through certifications received non-US,taxpayers already collect the information from distributors further down the chain of inter- riecessarY to complY with tile requirements -of IRC mediaries. Se'cs. 1471 and 1472. EFAMA is also encouraging its members to contact their The markets are still in the process of adjusting to national governments, noting that the fund industry is the new taii provisions, in part because of the supportive of the basic objectives of FATCA but is con- proSpective effective date. However, certain cerned about the practicalities of implementing the leg- agreements, such as revolving credit facilities and islation. long-term leases, may eventually be subject to the new provisions even though the agreement is issued 3.8.3. Banking industry prior to the effective date, although representatives of the Treasury have indicated that they are It is understood that the Irish Bankers Federation, on be- half of its members, contributed through the European considering grandfathering such contracts. On the Banking Federation in making a submission to the IRS. other hand, the provisions dealing with dividend- There is concern that Irish national law could prevent equivalent amounts may have changed the US compliance with FATCA reporting obligations and there- taxation of agreements existing on 14 September fore require banks to seek waivers from account holders 2010. to provide information to the IRS. Where those waivers

46 I DERIVATIVES & FINANCIAL INSTRUMENTS MARCH/APRIL 2011 IBFD