1. "There is also a Circuit split on the application of the 40% substantial overvaluation penalty in certain settings, so we are watching that." This split is as to whether, if the case is resolved by some predicate issues (such as economic substance before getting to the overvaluation), the overvaluation penalty can apply. The split is with virtually every circuit applying the penalty except the Fifth and Eleventh Circuits, both of which may be ready to join the crowd.
2. The Chief Counsel is also concerned about tax avoidance in so-called Midco transactions:
Earlier in the litigation chain, we are working to develop the law of transferee liability as it applies to intermediary or Midco transactions -- in particular transactions where a closely held C corporation sells its assets but winds up not paying the corporate tax, because a "Midco" purchaser of the shares of the cash-rich company essentially disappears without causing the correct tax to be paid. The government has had a difficult time holding the selling shareholders responsible in these cases, and we are urging different outcomes in both trial and appellate settings. There is a clear tax administration interest, both in getting the correct tax paid in old transactions and in eliminating the feasibility of future generations of dishonest Midco promoters from succeeding. We believe that current law, when correctly applied, provides the needed tools, but we will also be open to legislative solutions should the courts take different views.3. He is also concerned about FATCA implementation:
Starting with FATCA -- with the October 25 Announcement lining up starting dates for various aspects of FATCA compliance, and the November 8 announcement of countries in discussion about intergovernmental agreements, the stage is set for the beginning of FATCA information sharing, and administration of FATCA withholding and exemptions, beginning in 2014. The key structural pieces that are still in progress are the final FATCA regulations; completion of more intergovernmental agreements; and completion of processes by which foreign institutions can be identified in the payment stream as being entitled to the correct withholding exemption.
The regulations are the part getting the attention of our office. Many government speakers have emphasized that the goal of FATCA is not to collect the new Chapter 4 withholding tax. It is instead to obtain information sharing and transparency to combat illegal tax avoidance. Withholding on traditional FDAP flows is not ideal, in part because in most cases it is only withholding and not a final tax, so mechanisms must exist for handling refund claims in those cases where the beneficial owner wants to get money back. Withholding is even less ideal as applied to nontraditional amounts, specifically gross proceeds and foreign passthrough payments. Those are still scheduled to take effect, but not until 2017 -- so there will be time to review how the rest of FATCA is working before regulatory decisions are made on those rules.
So a large part of the exercise is defining the settings in which the withholding exemption is earned, relative to the goal of information sharing. As has been seen with the proposed regulations, exemption can be through compliance with a so-called FFI Agreement, or it can be earned through establishing status as a "deemed compliant," that is a low risk, kind of institution. The prospect of intergovernmental agreements provides another path to exemption, earned through achievement of information sharing goals and identification of low risk institutions.
The Proposed Regulations attracted an unusually large volume of comments, all of which have been reviewed and considered. I expect the Final Regulations to be published around the end of the year. The regulations will continue to be heavily devoted to key definitional issues, importantly including definitions of kinds of accounts and kinds of entities. For example, there are several categories of institutions that will be entitled to Chapter 4 withholding exemption, but for different reasons. An "Exempt Beneficial Owner," for example a central bank, is exempt based on what it is. Many institutions will be one flavor or another of "Deemed Compliant" due to establishing their status as a low risk institution, either directly or through an intergovernmental agreement. There will be both active and passive Non-Financial Foreign Entities that are potentially exempt, with different paths to exemption based on their active or passive status. Finally, there will be "Participating Foreign Financial Institutions" that need to enter into a so-called FFI Agreement or to be deemed to have done so by reason of an intergovernmental agreement.
Another important set of definitions establish categories of cross border payments that are not subject to FATCA withholding no matter who the recipient is -- the most prominent of which are routine commercial payment flows and payments on grandfathered obligations.
Another important set of rules involve new account opening procedures and review of pre-existing accounts by participating institutions.
The prospect of intergovernmental agreements with a large number of jurisdictions has changed the landscape for FATCA compliance and has necessitated changes in the regulations and in the systems for identifying exempt payees. One particularly valuable detail in intergovernmental agreements will be the so-called "Annex II" that identifies deemed-compliant local institutions by name. This is a great leap forward in certainty, particularly for pension programs, which come in an almost infinite variety of structures and are hard to pin down with a single definition.
The kinds of additional material to look for in the Final Regulation are first, integration of the intergovernmental agreement structure within the Regulation; and second, responses to significant comments, in particular commentary seeking greater specificity on the implications of entering into an FFI Agreement.