Transcript Bearer Bonds ITR Webinar - International Tax Review

Bearer Bonds
ITR Webinar
Thomas A. Humphreys
Anna T. Pinedo
Morrison & Foerster LLP
Tuesday, December 1, 2009
NY 896664
© 2009 Morrison & Foerster LLP All Rights Reserved CONFIDENTIAL
Agenda
• What is a Bearer Bond?
• Current U.S. Law
• TEFRA and TEFRA D
• Issuer and Holder Sanctions for Failure to Comply with TEFRA
• TEFRA D Requirements
• Proposed US Legislation
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Foreign Account Tax Compliance Act of 2009
US Issuers – If Enacted
Qualified Intermediary
Non-US Issuers – If Enacted
Debt Obligations in Registered/Bearer Form
Prospects for Enactment
What Is a Bearer Instrument?
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Plain English: transfer is effected by delivery.
Tax definition: instrument is not in “registered form.”
So, what is “registered form”?
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Registered with the issuer or its agent, and transfer is effected only by surrender of the
old obligation and either the reissuance of the old obligation to the new holder or the
issuance of a new obligation to the new holder; or
May only be transferred through a book-entry system maintained by the issuer or its
agent.
Practice point: “registered form” should not be confused with the concept of “SEC
Registered.”
If a debt obligation can be converted into bearer form or can be transferred by any
means other than those permitted for registered-form debt obligations, it is deemed
to be in “bearer form” even if it is nominally in registered form.
Sample Bearer Instrument
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Sample Registered Instrument
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Why Are Bearer Notes Issued, Particularly in Euro
Financings?
• Global notes are issued in bearer form, and held by a
“common depositary” for the clearing systems.
• Non-U.S. investors often prefer not to have registered notes,
which would require them to certify as to their non-U.S. status
in order to avoid U.S. withholding.
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TEFRA and TEFRA D
• Tax Equity and Fiscal Responsibility Act of 1982: Compliance initiative
from Congress: Information Reporting and Backup Withholding – Bearer
Bonds Banned Unless Issued Under Arrangements “Reasonably Designed
to Ensure Sale to Non-US Persons”
• Deficit Reduction Act of 1984: Repeal of 30% US Withholding Tax on
“Portfolio” Interest – Applies to Bearer Bonds Sold Under Arrangements
“Reasonably Designed”
• Treasury Regulations under Section 1.163-5 Define Arrangements
“Reasonably Designed”
• Regs. 1.163-5(c)(2)(i)(C)—TEFRA C – Issuer does not significantly engage in
interstate commerce
• Regs. 1.163-5(c)(2)(i)(D)—TEFRA D – Certification of non-US status coupled
with restricted offers and sales
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Issuer and Holder Sanctions for Failure to Comply
with TEFRA
• Issuer Denied Interest Deduction (Section 163(f))
• Excise Tax Equal to 1% of Principal Amount Multiplied By
Number Of Years To Maturity (Section 4701(a))
• So, for a 30 year bond, 30% of Principal Amount
• Portfolio Interest Exemption from 30% US Withholding Tax
Not Available (Sections 871(h)(2)(A) & 881(c)(2)(A))
• Holder Gain Ordinary (Section 1287); Loss Disallowed
(Section 165(j))
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TEFRA D Requirements
• Payments: No payment within US or into US account
• Legend: TEFRA legend required
• Offers and Sales: Offers and sales of notes cannot be made in
US or to US persons during “restricted period”
• Delivery: No delivery of notes within US
• Certification: Non-US person certification by holders required.
This is accomplished by issuing temporary global notes that
convert to permanent global notes/definitives after
certification. Cannot avoid certification by leaving notes in
temporary global form. Rev. Rul. 89-9
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Notes with a term more than 183 days but not more
than one year
• TEFRA Exemption? Yes
• 30% Withholding Tax Exemption? Must comply with TEFRA
D
• Backup Withholding and Information Reporting Exemptions?
Must comply with TEFRA D
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Notes with a term of 183 days or less
• TEFRA Exemption? Yes
• 30% Withholding Tax Exemption? Short-term obligation
exception
• Backup Withholding and Information Reporting Exemptions?
Must comply with “modified” TEFRA D requirements
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Other TEFRA Avenues
• “Swiss” Exception: Regs 1.163-5(c)(2)(i)(D)(3)(iii): no
certificate required for certain obligations targeted to a single
foreign country (that does not permit certification).
• Interest and principal denominated in single foreign currency
• Interest and principal payable only within that country
• Obligation offered and sold in accordance with that country’s
customary practices and documentation
• Distributor covenants to use reasonable obligations to sell in that
country
• Not listed outside that country
• IRS designates as country where certification not permitted
• Issuance subject to guidelines imposed by that country’s regulators
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Proposed US Legislation
• Foreign Account Tax Compliance Act of 2009
• Intended to clamp down on tax evasion
• Introduced October 27, 2009 by Senator Max Baucus (D-Montana) and
Representative Charles Rangel (D-New York), Chairmen of Tax Writing
Committees of US Congress
• Received Full Support From President Obama and Treasury Secretary
Geithner
• Treasury Deputy Assistant Secretary Stephen Shay (Comments on
10/28/09)
• Administration worked closely with Congress
• High likelihood of enactment
• Raises Revenue
• Estimated at $3.1 billion over 10 years when combined with new compliance
related withholding tax and reporting on owners of foreign corporations and
trusts
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Foreign Account Tax Compliance Act of 2009
• Repeals Bearer Bond Exception For Bonds Issued Under
Arrangements “Reasonably Designed to Ensure Sale to NonUS Persons”
• If, Despite The Act, Bearer Bond Issued, Then:
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No interest deduction
Excise tax
No portfolio interest – 30% withholding tax
Holder sanctions
• Effective For Debt Obligations Issued More Than 180 Days
After Enactment
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US Issuers – If Enacted
• Debt Obligations Must Be In Registered Form
• Some note programs include the flexibility to issue registered debt
• Some note programs will need to be updated
• Certification Requirements
• Beneficial owner – IRS Form W-8BEN (or equivalent)
• (Qualified) Intermediary – IRS Form W-8IMY
• Jurisdictions that do not permit certification
• No “Swiss” exception for registered debt
• If Debt Issued in Bearer Form
• No interest deduction
• Excise tax
• Portfolio interest not available
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Qualified Intermediary
• Generally a Foreign Financial Institution or Foreign Clearing Organization
• In 2005 there were over 5000 QIs
• Enters into a withholding agreement with the IRS
• Rev. Proc. 2000-12 as modified by Rev. Proc. 2003-64; Announcement 200898
• Provides IRS Form W-8IMY to Paying Agent or Clearing Organization
• Is in lieu of providing IRS Form W-8 for the persons for whom the QI receives
payment
• May Rely On “Know-Your-Customer” rules
• “QI may treat an account holder […] as a foreign beneficial owner of an
amount if the account holder provides a valid Form W-8 (other than Form W8IMY) or valid documentary evidence, as described in section 2.12 of this
Agreement, that supports the account holder’s status as a foreign person.”
Section 5.02 of QI Agreement
• “Documentary evidence” includes any documentation obtained under the
appropriate know-your-customer rules. Section 2.12 of QI Agreement
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How Are Tax Certifications Made?
• Typically, the relevant paying agency agreement includes a
form by which beneficial holders make their certifications to
Euroclear/Clearstream, which in turn make certifications to the
issuer.
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IRS Form W-8BEN
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Non-US Issuers – If Enacted
• Query Whether Debt Obligations Issued by Non-U.S. Issuers Outside the
U.S. Would Have To Be in Registered Form if Proposal Enacted?
• Programs may need to be updated
• Excise Tax?
• Foreign Platforms – Subsidiaries of US Institutions
• Interest Deduction?
• Section 312(m) – no reduction in “earnings and profits” if interest deduction is
denied
• Important for issuers treated as “controlled foreign corporations” including
50% or more subsidiaries of US parents
• Portfolio Interest?
• Certification required?
• Is interest US source?
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Debt Obligations In Registered/Bearer Form
• Obligations In Registered Form That May Be Converted Into
Bearer Form Are Treated, For US Tax Purposes, As Bearer
From The Outset
• Notice 2006-99
• Dematerialized bond that can be held and transferred only through a
book entry system
• Holder may only obtain a physical certificate in bearer form if the
clearing organization that maintains the book entry system goes out of
business without a successor
• Considered to be in registered form in the circumstances of the Notice
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Tax on Withholdable Payment
• In order to force foreign financial institutions to information report on
accounts of U.S. taxpayers FATCA would introduce a 30% withholding tax
on any “withholdable payment” made to a foreign “financial institution”
(whether or not beneficially owned by such institution), unless the foreign
financial institution agrees, pursuant to an agreement entered into with the
U.S. Treasury, to provide information (including U.S. accountholder
identification information and annual account activity information) with
respect to each “financial account” held by “specified U.S. persons” and
“U.S.-owned foreign entities.”
• The new disclosure requirements would be in addition to requirements
imposed by a “qualified intermediary” agreement.
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Effect on Debt Issuances
• The 30% withholding tax would apply to payments made after
December 31, 2010.
• A “grandfather” rule in the legislation provides that the tax
would not apply to payments made on debt obligations
outstanding on the date of “first committee action” in the U.S.
Congress if (i) such obligations are in bearer form, or (ii) the
terms of such obligations (on the issue date of the obligations)
include a gross-up provision (providing for the payment of
additional amounts in respect of taxes) that would be triggered
as a result of the enactment of the Bill.
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Effect on Current Debt Issuances
• U.S. issuers are currently concerned about application of the
grandfather, particularly with respect to obligations directed to
foreign investors
• One concern is that the grandfather is unclear in certain
respects, for example, whether current gross-ups for registered
debt would cover the tax
• Another concern is what if “first committee action” occurs
between the time an issue is priced and closed?
• Another concern is who should bear the law change risk,
issuer or investor?
• The entire market for foreign targeted issues may be in limbo
until these uncertainties are clarified
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Prospects for Enactment
• Depends On Reaction Of Market, In Part, And US Issuers
• Possible Inclusion In Legislation That Moves In US Congress
Before Year-End
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