Bearer Bonds ITR Webinar Thomas A Humphreys Anna

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 • • • 1 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? • • • Plain English: transfer is effected by delivery. Tax definition: instrument is not in “registered form. ” So, what is “registered form”? • • 2 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 3

Sample Registered Instrument 4

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. 5

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 6

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)) 7

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 8

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 9

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 10

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 11

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 12

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 13

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-8 BEN (or equivalent) • (Qualified) Intermediary – IRS Form W-8 IMY • 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 14

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-8 IMY 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 8 IMY) 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 15

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. 16

IRS Form W-8 BEN 17

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? 18

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 19

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. 20

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. 21

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 foreign targeted issues may be in limbo until these uncertainties are clarified 22

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 23