CC:PA:LPD:PR (REG-121647-10),
Room 5205,
Internal Revenue Service,
PO Box 7604
Ben Franklin Station,
Washington D.C. 20044
27 April 2012
Dear Sirs,
Regulations Relating to Information Reporting by Foreign Financial Institutions
and Withholding on Certain Payments to Foreign Financial Institutions and
Other Foreign Entities
1.
The Association of Financial Mutuals (‘AFM’) is a trade body that represents
mutual insurers, friendly societies and other financial mutuals right across the
UK. We represent 57 mutual organisations based in the UK and have 32
professional service firms within our associate membership. Mutual insurers
and Friendly Societies are member owned financial institutions that encourage
self help and personal responsibility. We assist the work of government by
helping individuals to take responsibility for planning and providing for their own
financial affairs. Our members typically have over 100 years of experience and
heritage in financial services.
2.
Mutual insurers bring choice and competition to both customers and to the
insurance market, which is vital to a healthy financial services sector in the UK.
Many Friendly Societies continue to specialise in providing products with very
low premiums, which means that their services are accessible to all income
levels.
3.
The AFM welcomes the opportunity to comment on the regulations relating to
information reporting by Foreign Financial Institutions and Withholding on
certain payments to Foreign Financial Institutions and Other Foreign Entities
(‘FATCA’).
Members
4.
The AFM currently has 57 member companies, all resident in the UK, who
collectively look after the savings, protection and healthcare needs of 20 million
customers and manage assets of around $134 billion (£85 billion) as at
31.12.2010. The assets under management range from under $10 million for
the smaller members (as at 31.12.2010) to $53 billion for the largest member
as at 31.12.10. Further details of our membership and consolidated assets
under management are provided in Appendix 1.
ASSOCIATION OF FINANCIAL MUTUALS, APRIL 2012 1
5.
Our members are all incorporated, or organised, in the UK with the aim of
offering financial products primarily to UK tax residents. As far as we are
aware, the only members with marketing activity outside the UK will be our
largest members who may have operational units based in Dublin, Isle of Man,
or possibly other territories within the European Union. Further, only a small
minority of our members have fixed places of business outside the UK. Our
members offer a range of insurance products including: tax favoured products
(pensions, Individual Savings Accounts (‘ISAs’), Child Trust Funds (‘CTFs’),
investment life products, and tax exempt savings plans (‘TESPs’) all of which
would fall to be financial accounts and other non tax favoured products
(protection policies, general insurance and healthcare policies) which we would
not anticipate ordinarily falling to be financial accounts.
6.
A TESP is a product which can only be written by UK Friendly Societies. It
offers the policyholder a gross of tax return, but in order to be eligible as a
TESP a number of prescriptive conditions must be satisfied, including the
amount of insurance cover and regularity of premiums. The key condition from
a FATCA perspective is that investors can only invest a maximum of £270 per
annum [around $425 per annum] across all TESPs. Investors are required to
declare their eligibility on taking out a new TESP.
The issue
7.
As drafted the entire membership of the AFM would fall within the scope of
FATCA and be considered to be Foreign Financial Institutions (‘FFIs’). This
would place a considerable compliance, financial and administrative burden on
the sector in respect of back book due diligence, identifying which products are
financial accounts and new procedures for on boarding of new policies. For
some of our smaller members the financial burden, when considered alongside
a wide range of other regulatory initiatives, could be prohibitive, forcing closure
to new business or forced merger leading to loss of value to members. The
compliance burden which would be placed on our membership is
disproportionate to the anticipated minimal volume of U.S. persons and
therefore reportable data to the IRS.
8.
Further, we can see limited benefit to the IRS of the majority of the AFM
membership being considered to be FFIs. Reporting by such members to the
IRS is likely to result in largely inconsequential information being provided to
the IRS, which could impede the IRS’s efforts to identify reports of interest to
them. This is based on the understanding that the policy objective behind
FATCA is to enable the IRS to identify U.S. tax persons to establish
compliance with the U.S. tax code.
9.
Given that the majority of our members have:
-
no overseas presence;
-
only actively market UK tax residents; and
-
have minimal non UK tax resident policyholders (purely arising on
migration);
we would anticipate a typical member to have minimal, if any, policyholders
who are U.S. persons.
2
ASSOCIATION OF FINANCIAL MUTUALS, APRIL 2012
The proposal
10.
The FATCA regulations have a concept of a Certified Deemed Compliant FFI
(‘DCFFI’). The first column of the table below shows the conditions that an FFI
needs to satisfy to be a certified DCFFI and the second column shows whether
a typical member of the AFM would satisfy the relevant condition.
Relevant condition which FFI must
meet
The AFM members
Must operate and be licensed solely as a  insurance companies and friendly
bank.
societies so would not satisfy
Must be licensed to conduct business in  for all AFM members
its
country
of
incorporation
or
organisation.
Must have no fixed place of business  for majority of AFM members
outside of such country.
Must not solicit account holders outside  for majority of AFM members
of its country of organisation1
The FFI must have no more than $175  60% of the membership have
million assets on its balance sheet.
consolidated group assets (and therefore
entity assets) below $175 million
If the FFI is a member of a consolidated  70% of the membership have
group then the group may have no more consolidated group assets below $500
than $500 million of combined assets.
million (see Appendix 1)
Must be required under local tax laws to
perform either information reporting or
withholding of tax with respect to resident
accounts. An FFI that is not subject to
such information reporting or withholding
requirements will be considered to meet
this requirement if all of the accounts
maintained by the FFI have a value of
$50,000 or less.
 Our members are largely subject to
information reporting or withholding
requirements in the UK in respect of the
majority of financial accounts see section
11. To the extent that there is no
information reporting or withholding
requirements we expect the account
value to be less than the applicable de
minimis2.
For groups, each FFI in the expanded  for the majority of members
affiliated group must be incorporated or
organised in the same country and must
meet the requirements to be a certified
DCFFI.
1
For this purpose, we understand that an FFI will not be considered to have solicited account holders
outside of its country or organisation merely because it operates a website, provided that the website
does not specifically state that non residents may hold deposit accounts with the FFI, advertise the
availability of US dollar denominated deposit accounts or other investment, or target US customers.
2
$50,000 for all financial accounts ,other than for cash value insurance products where the appropriate
limit is $250,000.
ASSOCIATION OF FINANCIAL MUTUALS, APRIL 2012 3
11.
The table below shows the relevant UK reporting and withholding requirements
for products offered by our members which are considered to be financial
accounts.
Product
Pensions (in payment)
Reporting / withholding requirement
Tax is withheld (via the Pay as you Earn
(‘PAYE’)
system)
from
retirement
benefits paid to individuals. Retirement
benefit payments are also subject to
reporting to HMRC via the PAYE regime.
Pensions (in accumulation, i.e. growth No reporting to HMRC at this stage.
phase prior to commencement of Provision of annual statement to
retirement benefits)
policyholder only. We note, however,
that benefits cannot be taken by the
investor in the accumulation phase. The
value can only be taken by purchasing
an annuity, or alternative retirement
product, from which benefits are, as
stated above, paid net of tax and are
subject to reporting. For this reason we
consider that it is reasonable to consider
pensions in the aggregate (from a
FATCA perspective) with any realisation
of benefits being subject to withholding
and reporting.
ISAs (and ISA equivalents, including Annual reporting regime to HMRC (in
Child Trust Funds (“CTF”))
addition to annual statement to
policyholder). Provider required to report
the following: specific investor details,
amount subscribed in the year and
investment value at a specified date.
Investment life policies
Tax deemed to have been paid at 20%
during the product life and all
policyholder benefits paid by the insurer
deemed to be net of 20% tax.
Reporting regime to policyholders and
HMRC for a sub category of such
policies where benefits are taken.
TESPs
4
No reporting regime or withholding of tax.
Given the nature of the product the
account value at any time is anticipated
to be below the applicable de minimis of
$250k.
ASSOCIATION OF FINANCIAL MUTUALS, APRIL 2012
12.
Of the requirements which must be satisfied in order to be a certified DCFFI the
only one which the majority of the AFM members would appear not to satisfy is
the requirement to be a bank.
13.
We propose that the types of financial institutions which can be DCFFIs be
broadened to include not just banks, but insurance companies and other
relevant financial institutions. We understand that the IRS has shown a
willingness to extend the “banking” condition to other FFIs in certain
circumstances.
To do so here, would remove over half of the AFM
membership from the reporting and withholding requirements imposed by
FATCA as they would fall to be certified DCFFIs. This would have the dual
benefit of removing the significant compliance and financial burden which
would otherwise be imposed on the sector and from the perspective of the IRS
streamline information reported to them to relevant information.
Registered DCFFIs
14.
Over half of our members would satisfy the proposed extended certified DCFFI
condition outlined above. A minority of our members would not fall within the
proposed extended definition as they would not satisfy the balance sheet asset
requirements. For these members the local FFI condition is of relevance.
15.
The first column of the table below shows the conditions that an FFI needs to
satisfy to be a local FFI and the second column shows whether a typical
member of the AFM would satisfy the relevant condition.
Condition which FFI must satisfy
The AFM members
Must be licensed and regulated under  insurance companies and friendly
the laws of its country as a bank or societies so would not satisfy
similar organisation authorised to accept
deposits in the ordinary course of
business, a securities broker or dealer, or
a financial planner or investment adviser.
Must have no fixed place of business  for majority of AFM members
outside of its country of incorporation or
organisation.
Must not solicit account holders outside  for majority of AFM members
its
country
of
incorporation
or
organisation.
Must be required under local tax laws to  would be satisfied for all financial
perform either information reporting or accounts other than TESPs, see section
withholding of tax with respect to resident 11.
accounts.
ASSOCIATION OF FINANCIAL MUTUALS, APRIL 2012 5
At least 98% of accounts must be held by  for majority of AFM members
residents of the country in which the FFI
is organised3.
Must implement policies and procedures 
to ensure that it does not open or
maintain accounts for a specified US
person who is not a resident of the
country in which the FFI is organised.
Must review all accounts held by non 
residents opened after 31.12.2011 and
prior to the date of implementation of the
above procedures, in accordance with
prescribed procedures in §1.1471-4(c) to
identify and U.S. accounts and certify to
the IRS that it did not identify any such
accounts, that it has closed any such
accounts as were identified, or agrees to
withhold and report.
In the case of an FFI that is a member of  for majority of AFM members
an expanded affiliated group, each
member of the group must be
incorporated or organised in the same
country and must meet the above
requirements.
16.
We propose that:
-
the types of financial institutions which can be local FFIs be broadened to
include insurance companies.
-
that where an FFI is not subject to reporting or withholding requirements
in respect of a certain type of financial account that it will be considered to
meet this requirement if all of the accounts maintained by the FFI are
expected to have an account value of less than the appropriate de
minimis. Without this, any insurer which offers TESPs could not be
classed as a local FFI. As noted above, TESPs are low value products
and are predominately marketed to UK tax residents so are not products
which U.S. persons are likely to invest in.
This would facilitate targeting of the IRS on high risk, high value financial
accounts and reduce the compliance burden for the majority of our members
that would not fall within the broadened certified DCFFI conditions proposed
above.
3
An FFI which is organised in a EU member state may treat account holders that are residents of other
EU member states as residents of the country in which the FFI is organised or incorporated for the
purposes of this calculation.
6
ASSOCIATION OF FINANCIAL MUTUALS, APRIL 2012
Intergovernmental agreement
17.
If an intergovernmental agreement is entered into between the UK and the US
then we request that UK entities which would otherwise be certified DCFFIs
should be able to certify to HMRC, rather than the IRS, that they have nothing
to report to HMRC.
18.
I am copying this response to the relevant UK authorities.
Yours sincerely
Martin Shaw
Chief Executive
cc
Malcolm White, HMRC
ASSOCIATION OF FINANCIAL MUTUALS, APRIL 2012 7
Appendix 1
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
8
Royal London Mutual
NFU Mutual Insurance Society
Liverpool Victoria
Equitable Life
Wesleyan Assurance Society
Royal Liver Assurance Limited
MGM Advantage
Reliance Mutual Society
Ecclesiastical Insurance Group
Family Investments
Police Mutual Friendly Society
B&C Holidays Scheme Ltd
Scottish Friendly Assurance Society
Engage Mutual Assurance
Teachers Provident Society
Foresters Life
The Children’s Mutual
Oddfellows Manchester Unity
Ancient Order of Foresters
Dentists Provident Society
National Friendly
Sunderland Marine Mutual Insurance Co.
Exeter Friendly Society
Communication Workers Friendly Society
British Friendly Society Ltd
Benenden Healthcare Society
Metropolitan Police Friendly Society Ltd
UIA Insurance Limited
Shepherds Friendly Society
Schoolteachers Friendly Society
Cirencester Friendly Society
Healthshield Friendly Society
Healthy Investment
Cornish Mutual Assurance
Kingston Unity Friendly Society
CS Healthcare
Holloway Friendly Society
Sheffield Mutual Friendly Society
Assets under
management as
at 31.12.10
(consolidated)
GDP
34,244,000,000
12,202,000,000
9,062,500,000
8,684,000,000
4,608,500,000
2,991,239,000
1,904,160,000
1,711,952,000
1,581,049,000
1,206,010,000
940,684,000
854,165,000
806,593,000
802,245,000
767,117,000
668,513,000
627,384,000
198,845,000
176,232,000
167,359,043
157,895,000
151,715,000
131,999,000
105,866,766
96,191,000
94,658,000
94,047,000
82,805,000
71,089,186
58,838,042
54,693,573
50,514,595
49,476,607
49,252,914
44,499,680
43,415,000
42,533,285
39,406,657
ASSOCIATION OF FINANCIAL MUTUALS, APRIL 2012
Assets under
management as
at 31.12.10
(consolidated)
US dollars
53,615,830,800
19,104,671,400
14,189,156,250
13,596,538,800
7,215,528,450
4,683,382,902
2,981,343,312
2,680,403,246
2,475,448,419
1,888,249,857
1,472,828,939
1,337,366,141
1,262,882,660
1,256,074,997
1,201,075,087
1,046,690,804
982,295,129
311,331,617
275,926,442
262,034,054
247,216,202
237,540,176
206,670,834
165,755,596
150,606,249
148,206,031
147,249,388
129,647,789
111,304,339
92,122,722
85,633,727
79,090,701
77,465,524
77,115,287
69,673,149
67,974,866
66,594,364
61,699,003
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
Transport Friendly Society
DG Mutual
Pharmaceutical & General Provident Society
Druids Sheffield Friendly Society
Railway Enginemen’s Assurance Society
Anglo Saxon Friendly Society
Wiltshire Friendly Society Limited
Red Rose Friendly Society
Kensington Friendly Collection Society
Paycare
Grand United Order of Oddfellows
Housing Association Mutual Insurance
Coventry Assurance
Livery Companies Mutual
Bus Employees Friendly Society
Compass Friendly Society
Newbridge Road Assurance Society
Railway Friendly Society
Royal Standard Friendly Society
Exchange rate spot rate as at 31.12.2010
38,614,000
36,080,782
31,901,382
28,897,856
28,037,019
17,822,611
16,593,000
11,161,082
6,757,954
6,568,465
5,463,309
4,160,993
3,857,308
3,388,757
1,183,198
507,857
0
0
0
85,864,438,921
60,457,940
56,491,680
49,947,994
45,245,373
43,897,561
27,904,862
25,979,660
17,474,906
10,580,929
10,284,246
8,553,903
6,514,867
6,039,387
5,305,777
1,852,533
795,152
0
0
0
134,437,952,019
1.5657
See: http://www.financialmutuals.org/advantage/key-statistics
ASSOCIATION OF FINANCIAL MUTUALS, APRIL 2012 9