At a recent Ipes seminar in London Tony Mancini from KPMG and Tim Andrews from Ipes discussed the scope of the Common Reporting Standard (CRS), the US Foreign Account Tax Compliance Act (FATCA) and the UK/CDOT agreements.
The crunch time for fund managers including private equity to implement their tax reporting obligations has finally arrived. "2016 is the decision year for fund managers in regards to tax reporting requirements," said Tim Andrews, Director of Development at Ipes. However, it is not going to be a straightforward process.
There are currently three tax information exchange initiatives being introduced globally. The US Foreign Account Tax Compliance Act (FATCA) is the most publicised and requires foreign financial institutions to supply information on US account holders directly or indirectly via their local tax authorities to the Internal Revenue Service (IRS).
The UK has promulgated its own variant of US FATCA ("UK FATCA"), obliging financial institutions operating in the Crown Dependencies and Overseas Territories (CDOT) to report UK account holders to HMRC and vice versa. The third initiative – the Common Reporting Standard (CRS) – is being pushed forward by the Organisation of Economic Co-operation and Development (OECD). CRS is an automatic exchange of tax information based on bilateral agreements between 96 (and counting) jurisdictions.
FATCA reporting, which will include data on account balance and gross income on US persons, will extend to include all US persons in summer 2016. Reporting information for all US persons on gross proceeds or redemption payments will commence in summer 2017. UK reporting, which is broadly modelled on the US FATCA Intergovernmental Agreement (IGA), will take effect around the same time. Meanwhile, the first tranche of CRS reporting will occur in the middle of 2017.
All of these rules are highly complex and require significant analysis by fund managers to ensure compliance. "The objective of all of these rules is broadly similar, and there is overlap but there are differences," commented Andrews.
What do firms need to do?
Gap analysis must be performed on all of these rules. "There are a lot of minor differences between the three regimes and these must be identified by fund managers," said Tony Mancini, Tax Partner at KPMG in the Channel Islands. Determining the classification of financial entities and whether they need to report is crucial under these rules. While FATCA is broadly bedded down, CRS has a number of nuances. It is essential that fund managers classify correctly all the entities in their fund structures, as these may well be different from the FATCA classification.
"Accounts held by an Active NFE are reportable if that NFE is a reportable person. Accounts held by a Passive NFE are reportable if either the NFE or its controlling person are reportable," said Mancini.
Client due diligence will have to be ramped up to determine who needs to be reported under all of these rules. "Private equity managers must conduct client due diligence in advance of these deadlines," said Mancini. This can be achieved by systematising the entire client due diligence process.
"Standardising the collection and collation of client data is critical to ensuring that fund managers report accurately and seamlessly under these incoming rules. It is an effective mechanism for reducing costs. Having systems in place – as opposed to operating off spreadsheets – and skilled personnel is very important to managing this regulation," said Andrews.
Andrews added service providers such as Ipes have centralised repositories containing all of the relevant data on investors in a single profile format, which can be shared with the managers in which they are invested in. This helps simplify the process.
One challenge is that these varying rules could result in duplication of reporting. "This may be an issue for US citizens residing in the UK. A US person is reportable automatically under US FATCA but if they are UK resident, they will be reported under the UK/CDOT agreement as well. Another challenge is that UK financial institutions must not forget to report back any relevant information about Crown Dependencies accountholders in the UK," added Mancini.
Given the sheer volume of countries involved in CRS, duplication and double reporting is almost inevitable there as well. "Take a fund with a British Virgin Island (BVI) company investor and that company is owned by a Finnish resident. Both BVI and Finland are CRS signatories. As such, information on the BVI company would need to reported to the BVI. As the BVI structure is a passive NFE, one would need to look through and identify the controlling person, who is Finnish so another report would need to be sent to Finland," said Mancini.
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The volume of regulation that fund managers must contend with is huge. "Firms are already dealing with the Alternative Investment Fund Managers Directive (AIFMD) and we have another OECD initiative – Base Erosion and Profit Shifting (BEPS) – around the corner. All of these rules cannot be dealt with in isolation. Firms need to analyse and implement their strategy around these regulatory challenges holistically," said Andrews.
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You can read more about FATCA and The Common Reporting Standard in our Technical Library.