by Tony Mancini, Tax Partner at KPMG Channel Islands
When it first loomed over the horizon, FATCA was viewed within the private equity industry as a major challenge to be resolved in 2014 and 2015. As most governments signed Inter- Government Agreements (“IGAs”) with the US, the challenge looked less daunting. Even then, the prospect of classifying and registering multiple entities and reporting on all US investors looked like a Herculean task. The reality was much more mundane with most managers making judicious use of the sponsoring regime, applying simple methodologies to classification and only reporting on new funds or investors in the middle of 2015.
Unfortunately, as the end of 2015 approaches, it is not the time to relax. Three new challenges lay in wait for the funds industry in 2016:
- Full reporting on all US investors is required, and not just for those new accounts;
- Reporting under the UK/Crown Dependencies and Overseas Territories IGAs (“CDOT”) starts; and
- The OECD’s Common Reporting Standard (“CRS”) starts.
Although the CDOT regime came into effect in 2014, the relatively limited scope of the regime and its lower profile in terms of consultation and debate compared to FATCA has led to a lower level of awareness of its requirements within the alternative funds community. The two main differences with FATCA are that there is an alternative reporting regime, which provides for limited reporting on UK resident non-domiciliary persons subject to various conditions being satisfied and the first reports are not due to be filed until 2016, albeit for the 2014 and 2015 tax years. So reporting in mid-2016 is a much bigger task than it was in 2015.
Then comes the implementation of CRS which will be implemented within the EU and at least 20 other jurisdictions (e.g. Bermuda, the Channel Islands and the Cayman Islands) on 1 January 2016. More follow suit in 2017.
What are the technical differences with CRS?
The CRS framework is largely based on the current IGA framework which means that managers will be familiar with many of the concepts. This article does not provide the space for a full analysis of the differences between the CRS regulations as drafted and the current frameworks. Instead, it highlights in brief only three specific differences that will be relevant to private equity.
Deemed compliant entity status for investment managers as nonreporting financial institutions under the IGAs is likely not permitted under the CRS: many entities within the private equity industry have been classified as deemed compliant, non-reporting financial institutions on the basis that their activity is only or primarily investment management and they have no reportable persons, resulting in no obligations under FATCA, the IGAs or CDOT.
CRS limits the types of such non-reporting financial institutions and that qualification criteria appears unlikely to be met by investment managers. As a result, entities which have been classified as deemed compliant under the current framework will very likely need to report under CRS.
“Look through” to controlling persons of certain investment entities which are invested in funds: under CRS, any investment entity in a jurisdiction which has not signed up to the CRS is a passive non-financial entity (PNFE). Consequently, it will be necessary to identify the tax residency of any controlling persons of that PNFE to determine whether they are reportable persons. In the PE model with high net worth individuals, family office and trust investors, this could have a significant impact on investor due diligence. It is important to note that, at present, the US appears unlikely to be considered as a participant in the CRS, which means that US feeders are likely to be PNFEs.
Sponsoring: CRS does not contain the concept of sponsoring – the practice whereby a sponsoring entity (i.e. an administrator or a management company) acts on behalf of one or more sponsored entities which could be based in different jurisdictions – for registration and reporting under the current framework. It does, however, provide for the use of third-party service providers that could essentially serve the same function albeit with slightly different qualification criteria. Businesses that have made use of sponsoring will need to address the separate registration and reporting requirements of each sponsored entity prior to implementation of the CRS.
Awareness of CRS
As could be expected, the level of awareness of CRS differs from region to region. The traditional funds centres of the Channel Islands and Cayman, along with the UK and Luxembourg, are close to finalising their regulations and guidance, with industry starting to gear up.
At the other extreme, in Asia Pacific, there are still jurisdictions which have not finalised IGAs to address US reporting requirements. As a result, while there is a general awareness of AEOI, a number of financial institutions are delaying analysis of CRS. Moreover, Hong Kong, Singapore and much of the region will not adopt CRS before 1 January 2017 which gives rise to the potential for inconsistency in data gathering, scheme disclosures and addressing compliance with FATCA and IGAs during the transition to CRS.
In Europe, although not relevant to much of the PE world, it is worth noting that with the implementation of the CRS, the EU Savings Directive is set to be repealed in order to minimise duplicate reporting. Timelines for the repeal are likely to differ within the EU, associated territories (e.g. the Cayman Islands, the Channel Islands) and third countries (e.g. Switzerland), providing another reason for managers to keep a close eye on both the introduction of new regulations and the repeal of existing ones over the next 18 months.
With very little time before January 2016, PE managers should resist the urge to turn their attention from FATCA and CRS compliance now that the first round of reporting is drawing to a close. An immediate effect of the approaching deadline is that scheme documentation for new funds or revisions to existing offering memoranda should take into account the latest developments.
Managers would be well advised to address the impact of CRS themselves and to evaluate the readiness of their service providers as soon as possible, and to allocate the appropriate resources and time in order to do so.
You can read the other articles from Ipes' Private Equity update (edition 19) at the following links: