World Council Makes Oral Comments at U.S. Internal Revenue Service Public Hearing on FATCA - May 16, 2012

Number 4
May 16, 2012

World Council of Credit Unions (World Council) yesterday made oral comments at the Internal Revenue Service (IRS) Public Hearing on the agency’s proposed Foreign Account Tax Compliance Act (FATCA) regulation.Representatives from 21 global financial organizations spoke at the hearing, including bank trade associations from Australia, Brazil, Canada, Japan, and Switzerland. World Council was the only organization speaking on behalf of credit unions and financial cooperatives, and was represented at the Public Hearing by Chief Counsel and Vice President for Advocacy and Government Affairs Michael Edwards. 

The IRS is the bureau of the United States Department of the Treasury responsible for implementing the FATCA statute passed by the U.S. Congress in 2010.  Congress enacted FATCA in order to make it harder for U.S. taxpayers to avoid U.S. income taxation by placing funds in overseas accounts.The proposed FATCA rules would regulate “foreign financial institutions” (FFIs)—including non-U.S. credit unions—as well as U.S. credit unions to some degree.FATCA would subject international electronic funds transfers that involve not-yet-taxed income attributable to U.S. investments and deposits (such as interest, dividends, and proceeds from sales of investments) to a 30% “withholding” for tax compliance purposes.World Council’s long and short summaries of the FATCA proposed regulation are available here.

World Council filed a detailed comment letter in response to the proposed FATCA regulations with the IRS on April 30^th and participated in the FATCA Public Hearing to raise further the agency’s awareness about how to limit FATCA’s impact on credit unions and similar financial cooperative organizations. IRS Public Hearing panels are typically composed of the IRS and Treasury Department staff who have written the proposed version of the regulation and will also write the final version of the regulation.The members of the IRS Public Hearing panel were:

• Quyen Huynh, IRS Senior Counsel
• John Sweeney, IRS Technical Reviewer
• Tara Ferris, IRS Attorney-Advisor
• Kate Hwa, IRS Attorney-Advisor
• Danielle Nishida, IRS Attorney-Advisor
• Jesse Eggert, Treasury Department Associate International Tax Counsel

Each speaker was allotted up to 10 minutes to make oral comments on the official record of the hearing.Although IRS Public Hearing panelists usually ask questions, no questions were asked at the FATCA Public Hearing presumably because asking questions would have increased the length of the hearing. (Time spent on questions asked by the panel and the answers to those questions do not count towards the 10 minute time limit for each speaker, much like how “stoppage time” is added to the length of an association football match.) The hearing took a little over three and a half hours total.

Michael spoke for approximately 10 minutes and focused his comments on asking the IRS in its final FATCA regulation to:

1. Expand the "nonregistering local bank" definition to include credit unions under US$ 1 billion in assets – “Nonregistering local banks” would not have to register with the IRS and would be essentially exempt from FATCA. In the proposed rule, however, only “banks” as defined under U.S. tax law that are under US$ 175 million in assets would be eligible for this exemption; credit unions do not meet the U.S. tax law definition of “bank.”We asked the IRS to both expand this “nonregistering local bank” definition to include “credit unions . . . and similar cooperative credit organizations” expressly and to raise the maximum asset threshold allowed under the definition to US$ 1 billion from US$ 175 million.We also discussed how credit union common bond restrictions make it difficult, if not impossible, for U.S. citizens and residents who are not also residents of and/or workers in the credit union’s home country to become members.
2. Be aware of the many names used by credit unions and similar cooperatives – We cited examples of the many different names credit unions are called, depending on the country and language where the credit union is located, and emphasized that the phrase “or similar cooperative credit organization” should be added to the regulation in addition to the term “credit union” so as to avoid confusion on this issue. We also discussed the legal precedents under U.S. tax law whereby an organization claiming to be a “credit union” is presumed to be one unless its chartering authority has “grossly misused” the concept of a credit union, and cited a key U.S. Court of Appeals decision holding that a “caisse populaire” is a credit union under U.S. law even if it does not use “credit union” in its name.
3. Take into account the cooperative structures of national and provincial Federations and Centrals – We expressed concerns regarding the potential FATCA treatment of national and provincial/regional credit union Federations and Central credit unions.We said that Federations and Centrals are concerned that they could be considered non-compliant with FATCA if one or more of their member credit unions is not FATCA-compliant, and made two suggestions for addressing this issue:
   1. Expand the proposed rules for “expanded affiliated groups” to include credit union systems that have national and provincial Federations and/or Centrals – We asked the IRS panel to expand the proposed rules for “expanded affiliated groups” to give cooperative associations of the second level, such as national and provincial/regional Federations and Centrals, the option to use the proposed rule’s “expanded affiliated groups” approach in order to limit FATCA compliance burdens on their members and avoid being considered out of FATCA compliance based on a member credit union’s non-compliant FATCA status.
      1. As proposed, an “expanded affiliated group” could designate one entity within the “expanded affiliated group” to handle FATCA registration and compliance on behalf of the other organizations within the group. The proposed “expanded affiliated group” definition, however, includes strict ownership requirements that only apply to joint-stock holding company structures that are owned from the top down (unlike second-level cooperative associations, which are owned by their member organizations from the bottom up).
      2. We said that amending the “expanded affiliated group” definition to allow Federations and Centrals the option to register with IRS on behalf of their members would both help reduce regulatory burdens on retail, natural-person credit unions and would significantly limit the chances of a Federation or Central being found out of compliance with FATCA as the result of one of its members failing to comply.We noted that Federations and Centrals often provide their members with payments, clearing, and/or settlement services, meaning that they would be uniquely well positioned to handle FATCA compliance on behalf of their member credit unions if given the option to.
   2. Add a carveout for Federations and Centrals – We also asked the IRS panel to consider exempting Federations and Centrals from the FATCA rules altogether.We asked the IRS to exempt Federations and Centrals from FATCA since their common bonds limit their members to other, local credit unions and similar organization within the same country, and because Federations and Central are often not allowed under law to close their member credit unions’ accounts even if the member is not FATCA compliant.
4. Eliminate the prohibition on “nonregistering local banks” and "Local FFIs" offering US$ denominated accounts – We asked the IRS to eliminate the proposed prohibition on institutions meeting the definitions of “nonregistering local banks” and “Local FFI” from offering financial products denominated in U.S. dollars on their websites.(“Local FFIs” would be exempt from most FATCA compliance requirements but would be required to register with the IRS using an online form; most non-U.S. credit unions would fall under the “Local FFI” definition unless the IRS expands the definition of “nonregistering local bank” to include credit unions, as we strongly urged them to do.)We discussed that countries like Ecuador and El Salvador are dollarized economies – meaning that they use the U.S. dollar as their local currency, so they have no choice but to denominate their accounts in U.S. dollars – that most Canadian credit unions offer U.S. dollar denominated accounts to their members for convenience with respect to shopping or vacationing in the U.S., and that many other countries have significant numbers of U.S. dollars in circulation in part because the U.S. dollar’s low rate of inflation and high degree of liquidity can make it preferable to local currency.
5. Increase the percentage of non-home country residents allowed at Local FFIs to 95% from 98% -- We asked the IRS to change the proposed “Local FFI” definition in order to reduce the definition’s minimum percentage of account holders who are “local residents” to 95% from 98%.We mentioned Canadian credit unions with closed, ethnic common bonds as an example of credit unions that meet the other requirements of the “Local FFI” definition but have more than 2% of their members who are currently neither residents of the country where the credit union is located nor U.S. residents.
6. Clarify FATCA treatment of dual residents of the U.S. and another country – We also asked the IRS to state expressly in the final rule or the final rule’s preamble that the U.S. citizens and U.S. residents can have simultaneous “dual residency” in the U.S. and another country for FATCA purposes. We stated that we read the proposed rule’s minimum percentage of “local residents” in the definition of “Local FFI” to allow dual residency with the U.S. and the credit union’s home country, meaning that U.S. citizens and/or residents who are also residents of the credit union’s home country could be treated like other “local residents” despite their U.S. status.In addition, we noted that existing IRS policy and other U.S. law generally permit dual residency and even multi-country residency status depending on factors such as the amount of time the person spends in each country, how long they intend to remain in each country, and whether they intend to return to the country in the future when they leave it.

We also mentioned the story of a credit union person who was a U.S. citizen living in Switzerland, but who recently renounced her U.S. citizenship because her local banks in Switzerland, where she still lives, threatened to close her accounts if she did not. 

The members of the IRS panel listened attentively and took notes during our oral comments and, as noted above, World Council was the only organization that made oral comments regarding FATCA’s impact on credit unions, financial cooperatives, or small financial institutions.We believe that we made an impression with the members of the IRS panel and hope that they will take our oral and written comments seriously into account when drafting the final version of the rule.We also believe that our presence at the hearing will bring increased IRS staff attention to our comment letter, including the many important points made in the letter that we did not have time to discuss in depth during the Public Hearing.

The complete list of organizations that made oral comments at the FATCA Public Hearing is as follows (in order of appearance):

• Australian Bankers Association
• General Insurance Association of Japan
• FEBRABAN (the Brazilian banking federation)
• Democrats Abroad (an association for U.S. expatriates who are members of the Democratic Party)
• Financial Services Council (of Australia)
• Financial Information Forum (a data processors' association)
• Japanese Bankers Association
• Japanese Securities Dealers Association
• Swiss Bankers Association
• Life Insurance Association of Japan
• Investment Company Institute and ICI Global
• World Council of Credit Unions
• Securities Industry and Financial Markets Association (SIFMA)
• Institute of International Bankers
• Canadian Bankers Association
• TD Bank Group
• BlackRock
• Swedbank
• European Banking Federation
• Tax Executives Institute, Inc. (an association of business executives who are responsible for the tax affairs of their employers)
• The Bank of New York Mellon

In addition, we received on Monday a short thank you letter from La Nita Van Dyke, the IRS Associate Chief Counsel responsible for the agency’s Publications and Regulations Branch, thanking us for our comment letter.A thank you note in response to a comment letter submission is a highly unusual and gracious gesture on the part of the IRS and Associate Chief Counsel Van Dyke; many Washington, DC veterans have never heard of thank you notes being sent before by any federal agency in response to a comment letter.

For more information or if you have questions, please see our press release regarding the FATCA Public Hearing or contact me by email or phone using the below contact information.Thank you very much and have a nice day.

Michael S. Edwards
Chief Counsel and VP for Advocacy & Government Affairs
World Council of Credit Unions (WOCCU)
+1-202-508-6755 (office) | medwards@woccu.org | www.woccu.org
+1-215-668-5240 (mobile)