INTRODUCTION

On Tuesday 24 January 2012, the U.S. Acting AssistantSecretary for Tax Policy, Emily S. McMahon gave apresentation on "Tax Reform: What's all the NoiseAbout?". During the presentation, McMahon commentedon the core provisions of the Foreign Account TaxCompliance Act ("FATCA"). McMahon's thoughts areset out in full below. We have highlighted the key pointsin bold.

In summary, the key points are as follows:

■ The $50,000 threshold for exemption may beincreased;

■ Documentation already held or obtained for AML andKYC diligence may be relied upon;

■ Criteria for "deemed compliant" states FFIs may bebroadened;

■ Transitional relief may be extended; and

■ The passthru payment with holding will bereconsidered

"Finally, let me turn to FATCA, or more specifically,new sections 1471 through 1474 of the Internal RevenueCode -- the core provisions of the Foreign Account Tax

Compliance Act. While a significant number of newinternational provisions -- many of them Administrationbudget proposals -- have been enacted over the past threeyears, FATCA implementation has required the mostattention from our international team. And after manymonths of work and a series of three preliminary notices,I am pleased to say that our proposed regulations are inthe final stages of clearance at Treasury and IRS.

In many respects, however, our work has only just begun.We are keenly aware that FATCA imposes significantnew requirements and responsibilities on foreignfinancial institutions. We have received extensive inputfrom the financial community and from practitioners --including the Tax Section -- on the challenges posed bythese new requirements, and many useful suggestions onhow to implement them. As a result, we believe thatsignificant progress has been made over the past year,such that FATCA can in fact be implemented in a mannerthat is not overly burdensome, when compared to itsbenefits, and that it can over time serve as a complementand a catalyst to the ongoing global efforts to combatoffshore tax evasion.

It is important to recall that FATCA came about as theresult of a series of events in 2008 and 2009 involvingvery serious instances of offshore tax evasion. Earlierthis month, the IRS released statistics on its 2009 and2011 Offshore Voluntary Disclosure Programs that

FATCA UPDATE FROM DLAPIPER'S TAX SPECIALISTS

Remarks by Emily S. McMahon, Acting Assistant Secretary for Tax Policy, during

New York State Bar Association Tax Section Annual Meeting

provide some indication of the magnitude of the problem:Together, those programs have resulted in collections of$4.4 billion so far, a number that will continue to grow asthe 2011 cases are processed.

This situation arose despite a substantial overhaul duringthe late 1990s of the regulations on information reportingand nonresident withholding, and the launch of theQualified Intermediary program by the IRS in 2001.While those earlier efforts were quite successful inimproving compliance by nonresident investors, theevents of 2008 and 2009 made clear that significant gapsremained in the system -- in particular with regard to thereporting of foreign source income earned by U.S.persons from offshore accounts, and the identification ofU.S. owners of foreign entities. It also became clear thatsome U.S. investors had exploited those gaps to hideincome and assets offshore.

Across the tax system, voluntary compliance rates are thehighest where there is third-party reporting, but thisreporting was largely absent for U.S.-owned offshoreaccounts. Moreover, identifying U.S. taxpayers whoearn foreign source income through offshore accountswould require the cooperation of foreign financialinstitutions, and the existing statutory framework did notprovide the government with sufficient tools to achievethat result.

In May of 2009, therefore, the Administration proposedin its 2010 Budget a series of legislative reforms thatwould have increased the responsibilities of QualifiedIntermediaries to identify and report on U.S.accountholders, and established new incentives forforeign financial institutions to become QIs -- forexample, by imposing withholding on a broad range ofU.S. source payments made to non-QualifiedIntermediaries. As the legislative process then evolvedover the following months, those proposals formed thebasis for development of the provisions that wereultimately enacted as FATCA in March of 2010.

Broadly speaking, FATCA has three core elements --enhanced due diligence, broader information reportingand potential withholding on U.S. source payments.FATCA requires that foreign financial institutions enterinto an agreement -- which we refer to as an FFIagreement -- with the Internal Revenue Service, pursuantto which the financial institution agrees to:

■ Perform due diligence to identify financial accountsof U.S. persons and of foreign entities withsignificant U.S. ownership;

■ To report certain information about its U.S. accountsannually to the IRS;

■ To close any U.S. account if the account holderrefuses to waive foreign legal protections that wouldotherwise prevent reporting; and

■ To withhold on certain "passthru payments" that theforeign financial institution makes to "recalcitrant"account holders and to other foreign financialinstitutions that have not entered into FFI agreements.

If a foreign financial institution does not enter into an FFIagreement, or fails to comply with its terms, U.S.financial institutions are required to withhold U.S. tax at a30 per cent rate from the gross amount of a broad rangeof U.S. source payments to the financial institution andthe gross proceeds from its sales of certain U.S.securities.

Fundamentally, the purpose of FATCA is to obtaininformation reporting on U.S.-owned offshore accounts.The withholding requirements incorporated in FATCAare not intended to raise revenue. Ideally, every foreignfinancial institution would comply with the reportingrequirements, and no foreign financial institution wouldbe subject to withholding tax. But to achieve thisobjective, we must address two challenges.

The first is administrative burden.Understandably, both financial institutions andforeign governments have expressed concerns aboutthe burdens imposed by FATCA, relative to what theyperceive as the potential benefits. In response, wehave sought from the beginning to minimize burden tothe extent we can, consistent with the objective ofcombating the use of offshore accounts to evade U.S.tax. We understand that compliance with any newreporting or withholding requirements requires leadtime for financial institutions to reconfigure theircomputer systems, adjust their procedures, andinform their customers. We recognize that theindustry has much to contribute, and we welcomeideas for achieving a smooth transition.

Towards that end, the proposed regulations build uponour prior Notices in seeking to further minimize theadministrative burden of FATCA and better focus itsapplication on circumstances that present a higher risk oftax evasion. We have examined again the appropriatestandards for due diligence review of pre-existingaccounts, and we have set a higher dollar thresholdand a more limited scope for manual review ofindividual account records. For pre-existing entityaccounts, the regulations focus review on passiveinvestment entities with significant account balances andpermit substantial reliance on documentation previouslycollected during account opening procedures. Here too,we are proposing a higher threshold for furtherinvestigation into potential U.S. ownership. And for newaccounts, both individual and entity-owned, theproposed regulations seek to align, to the extent we can,the review required for FATCA purposes with theprocedures that financial institutions already follow tocomply with anti-money laundering and know-your-customer rules.

02 | FATCA Update

To further focus the FATCA implementation efforts onhigher-risk institutions, we have expanded thecategories of financial institutions that are "deemedcompliant" with FATCA, as well as the previouslyannounced exception for retirement plans. And inrecognition that global financial institutions face avariety of obstacles in bringing all of their affiliates intocompliance, the proposed regulations will providetemporary relief from the requirement that allmembers of an affiliated group be participating ordeemed compliant FFIs.

In order to provide sufficient lead time to developreporting and withholding systems, the proposedregulations will phase in the FATCA reportingrequirements, as well as the rules relating to passthrupayments, gradually, over an extended transitionperiod. We believe that these proposals willsubstantially address the many comments we havealready received regarding administrative burden, andwill do so in a manner consistent with ensuring that theunderlying objectives of FATCA are met.

However, we recognize that this is an ongoing process,and we look forward to continuing our work with all ofyou on these important administrative issues.

A second challenge presented by FATCA is that certainof its key components conflict, to varying degrees, withprivacy or other laws in many countries. In somecountries, for example, financial institutions may beunable -- under their country's existing laws -- to complywith the core requirement that they report customerinformation directly to the IRS. The requirement towithhold on passthru payments presents a similarchallenge.To address this set of issues, foreign governments couldmake changes to their own internal laws to accommodateFATCA reporting (as was done in the case of theQualified Intermediary program).Alternatively, we have indicated that we are open toexploring an intergovernmental approach to FATCAimplementation that would address legal impedimentsto direct reporting.

To that end, Treasury's international team has alreadybegun conversations with a number of our major tradingpartners about bilateral approaches to overcome legalimpediments and facilitate compliance. A key elementof these efforts has been to explore the possibility thatfinancial institutions of a particular country couldreport the information required by FATCA to theirhome country government, which would thentransmit the information to the IRS, in order toovercome legal obstacles to direct reporting. TheUnited States already has a network of agreementsproviding for tax information exchange with more than60 countries -- whether as part of an income tax treaty orin the form of a specialized Tax Information ExchangeAgreement -- and the laws of those countries already

permit the transmission of U.S. account information, likethat required by FATCA, from the foreign government tothe IRS. We believe that building on these existingarrangements for government-to-government exchange ofinformation will be mutually beneficial and will help toensure that FATCA operates in its intended manner.

At the same time, we recognize that bilateral solutionsrequire reciprocity. In that regard, Treasury and IRSissued proposed regulations last year that would requireU.S. banks to report to the IRS on bank deposit interestpaid to nonresident account holders. These proposedregulations have been an item of much discussion withinsome sectors of the financial industry, and indeed theyhave a difficult history of having been proposed, revisedand then withdrawn by prior Administrations. I wouldemphasize, however, three points: First, informationregarding bank deposit interest is already available to theIRS upon request under existing law. The proposedregulations would simply ensure that the IRS has thisinformation on hand when they need to provide it toanother government. Second, the IRS cannot provide thisinformation to another government unless the UnitedStates has an information exchange agreement already ineffect with that other government. Those agreements aredesigned specifically to ensure that proper care is taken tosafeguard confidential information and to limit its use tolegitimate tax enforcement purposes.And third, we see no principled basis on which to requirethat financial institutions based in other countries collectand provide us with information on U.S. taxpayers, if wetake the position that our own institutions should beexempt from similar requirements. To the contrary, webelieve that it will be critical to the success of our effortsto implement FATCA that we are able to reciprocate.

Implementing FATCA, however, cannot be the end of thestory. Ultimately, we believe that our efforts toimplement FATCA and to resolve the challenges it posescan and should advance the important work alreadybegun by the OECD and the European Union to developmultilateral, global approaches to the exchange offinancial account information for tax purposes. Althoughthis is clearly a longer-term goal, we would hope that theagreements we hope to reach with other governments onbilateral mechanisms for implementing FATCA can serveas precursors to a more comprehensive multilateralapproach to information exchange. For that reason, webelieve that FATCA -- if implemented appropriately --can serve as a catalyst for further advances in theglobal effort to improve transparency and combat taxevasion.

We believe that our optimism in this regard is justified inview of the very significant progress that has been madejust in the last couple of years on facilitating globalexchange of information.

First, 105 jurisdictions, the European Union and nineobservers are now participating in the Global Forum on

EVERYTHING MATTERS | 03

Transparency and Exchange of Information, which wasorganized in 2009 in response to a call by the leaders ofthe G-20 for the implementation of internationalstandards for transparency and information exchange intax matters. The Global Forum has undertaken acollaborative effort to peer review the legal rules andinformation exchange relationships of member countriesto ensure that they meet these international standards, aslaid out in the OECD Model agreements andcommentary. The United States has been an activeparticipant in the Global Forum, and Treasury's Office ofTax Policy, the Office of General Counsel and IRS ChiefCounsel have devoted substantial resources over the pasttwo years, both to the peer review of the U.S. rules andprocedures and to our role as members of the SteeringGroup and Peer Review Group of the Forum. And withthe support of the G20, this process has producedmeaningful change. Since the Global Forum wasorganized in 2009, 81 peer reviews have been launched,59 peer review reports have been completed andpublished, and more than 700 agreements that providefor the exchange of tax information in accordance withthe international standard have been signed throughoutthe world.

Second, I would draw your attention to the OECDTreaty Relief and Compliance Enhancement project.The TRACE project, which is based loosely on the U.S.Qualified Intermediary program, began five years ago asan effort to improve the ability of portfolio investorsto claim withholding relief at source. Facilitating thatrelief remains the primary focus of the project, but theparticipating countries and the financial community havealso recognized the importance of improving taxcompliance as part of that effort. Significant progresshas been made in crafting a multi-jurisdictional systemthat relies on payee-specific reporting, coupled withautomatic exchange of information. The TRACEInformation Technology group has done considerablework in that regard, and this work is proving valuablemore generally in developing information exchangesystems. The TRACE system would also help addressthe concerns of the business community by providingstandardized reporting across multiple source countries, akey objective of financial institutions. Work is ongoingin the OECD to develop and promote adoption of thesystem. And third, the OECD Multilateral Conventionon Mutual Administrative Assistance in Tax Matters -- towhich the United States is a signatory -- was recentlyamended to reflect the current international standard andto allow countries that are not members of the OECD orthe Council of Europe to join. Recent signatories includeBrazil, Argentina and Japan, and others including Chinaand India are expected to join soon. This is adevelopment that we welcome and strongly support. Inthe near term, we expect that the Multilateral Conventionwill meaningfully expand the number of countries withwhom we can work to implement government-to-government reporting under FATCA. Over the longer

term, we hope and expect that it can become a globalsystem for exchange of information. And we believe thatour work with other governments and with the financialcommunity to implement FATCA can inform andadvance that long-term goal."

HOW DOES THIS IMPACT YOU?

As soon as the draft regulations and guidance are issued,you will need to consider what they mean for you, andwhat legal advice you will need.

HOW CAN DLA PIPER HELP?

Our FATCA specialists listed below, lead a team withglobal reach and experience. We can help you tounderstand the legal and practical ramifications of theprovisions and advise on the next steps.

CONTACT US

For further information please contact:

04 | FATCA Update

Simon Airey

Head of Investigations & Compliance -London

T +44 (0)20 7153 7281

simon.airey@dlapiper.com

Aileen Barry

Tax Investigations Director - London

T +44 20 7153 7125

aileen.barry@dlapiper.com

Alan Granwell

Partner - Washington D.C.

T +1 202 799 4190

alan.granwell@dlapiper.com

Thomas Dick

Partner - New York

T +1 212 335 4740

thomas.dick@dlapiper.com

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This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not be used as, a substitute for takinglegal advice in any specific situation. DLA Piper UK LLP and DLA Piper SCOTLAND LLP will accept no responsibility for any actions taken or not taken on thebasis of this publication. If you would like further advice, please speak to Simon Airey on 08700 111 111.