1 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 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
2 What Is a Bearer Instrument? Plain English: transfer is effected by delivery. Tax definition: instrument is not in “registered form.” So, what is “registered form”? 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.
3 Sample Bearer Instrument
4 Sample Registered Instrument
5 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.
6 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 Define Arrangements “Reasonably Designed” Regs (c)(2)(i)(C)—TEFRA C – Issuer does not significantly engage in interstate commerce Regs (c)(2)(i)(D)—TEFRA D – Certification of non-US status coupled with restricted offers and sales
7 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))
8 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
9 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
10 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
11 Other TEFRA Avenues “Swiss” Exception: Regs (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
12 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
13 Foreign Account Tax Compliance Act of 2009 Repeals Bearer Bond Exception For Bonds Issued Under Arrangements “Reasonably Designed to Ensure Sale to Non- US Persons” If, Despite The Act, Bearer Bond Issued, Then: No interest deduction Excise tax No portfolio interest – 30% withholding tax Holder sanctions Effective For Debt Obligations Issued More Than 180 Days After Enactment
14 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
15 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 as modified by Rev. Proc ; Announcement 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 W- 8IMY) 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
16 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.
17 IRS Form W-8BEN
18 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?
19 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 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
20 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.
21 Effect on Debt Issuances The 30% withholding tax would apply to payments made after December 31, 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.
22 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
23 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