By Tim Andrews, Director of Development at Ipes
Fund boards may have considered the Foreign Tax Compliance Act (FATCA) all done and dusted in 2015 but 2016 sees the following significant changes:
- All US investors are now reportable under US FATCA so funds which took advantage of the exemptions in 2014 will no longer be able to do so.
- All UK investors are now reportable for funds domiciled in the UK, crown dependencies and overseas territories such as Gibraltar, Cayman and BVI under the UK/ Crown Dependancies and Overseas Territories (CDOT) IGA or "UK FATCA".
- Some entities that were exempt under US FATCA will become reportable under the Common Reporting Standard (CRS) and their classifications should be reviewed now.
- Sponsored entities under FATCA will need to register in their own right under CRS.
- Investors domiciled outside of the CRS countries will become Passive Non Financial Foreign Entities (NFFEs) and must identify their Ultimate Business Owners (UBOs).
A reminder of FATCA
FATCA required all reportable funds to identify their US investors and report them to the local tax authority by mid 2015. This broke down into four stages:
- Classification: Determine whether each entity in a fund structure is required to register with the IRS and report on their US investors.
- Registration: Register each reportable entity with the IRS and obtain a Global Intermediary Identification Number (GIIN).
- Investigation: Update Due Diligence on each investor to determine whether they have a US connection and are therefore reportable.
- Reporting: Report US investors to the local tax authority of the fund six months after the end of the calendar year.
2016 Changes and Requirements
2016 sees the expansion of FATCA to include UK FATCA and then a further expansion in 2017 to the CRS. Reportable investors will therefore include both US and UK persons for the calendar year ending 31 December 2015. In 2017/18 the countries signed up to the Common Reporting Standard effectively make almost all investors reportable.
All US Investors
In the 2014 cycle, funds domiciled in IGA countries were strictly required to report only US investors who had subscribed to the fund between 1 July and 31 December 2014. This was to allow funds to focus their due diligence reviews on a subset of investors and so meet the reporting deadline. This "introductory offer" has now ended and all US investors are reportable for the calendar year 2015.
UK FATCA (CDOT)
Funds domiciled in Gibraltar, Isle of Man, Jersey and Guernsey are required to report on UK investors for the calendar year 2015. Agreements with these crown dependencies are reciprocal so UK domiciled funds must also report on investors from the Channel Islands, Isle of Man and Gibraltar to HMRC. The UK has also signed agreements with its overseas territories (Cayman, Bermuda, Montserrat, Turks and Caicos, British Virgin Islands and Anguilla) which are non-reciprocal in that these territories must report their UK investors but UK funds do not have to report on investors from Cayman for example. A fund with English limited partnerships, a Scottish carry vehicle, Guernsey GP and a co-investment company in Cayman would therefore have to report under US FATCA in Guernsey for US investors in its partnerships, under UK FATCA in Guernsey for its UK investors and potentially under UK FATCA in Cayman. It is therefore critical to have an efficient process.
US and UK FATCA are very similar. CRS is however different. There are fewer classifications, the criteria for each classification are in many cases tighter than FATCA and some concepts from FATCA such as Sponsoring Entities do not exist in CRS. For the typical fund structure, many Investment Advisers and General Partners did not have to report under FATCA. Under CRS it is more likely that they will, although given that there are usually few direct owners of these entities, this may not make much difference.
Unlike US FATCA, each reporting Financial Institution must report to its local tax authority but is not required to obtain a separate GIIN.
Outside the OECD
Investors domiciled outside of the OECD will be automatically treated as Passive NFFEs under CRS and must disclose their UBOs. The full list of OECD countries can be found here http://www.oecd.org/tax/automatic-exchange/crs-implementation-and-assistance/crs-by-jurisdiction/#d.en.345489 and notably includes Canada in 2018 but not the United States. Funds with US investors will therefore have to report them to the IRS but will also be required to record their UBOs. In practice this may require an update of CDD earlier than normal.
What to do now
Fund managers should consider:
- Can you effectively report all reportable investors in XML format across all relevant jurisdictions?
- Have you sufficient information to determine the reporting status of each investor and UBO where needed?
- Have you reviewed the classification of each entity under CDOT and CRS?
Tax Information Exchange is now a significant addition to annual reporting and should be planned alongside the financial statement timetable. Understanding what you have to report, to whom and when is equally as important as actually producing and submitting the reporting files. In practice reporting is time consuming and it varies between jurisdictions that each have their idiosyncratic systems. Investment in knowledge and reporting systems can generate economies of scale. An efficient model is to outsource the production of this reporting, subject to review by the manager and the fund board. Tax Information Exchange is here to stay and 2016 is decision year for how managers will support it.
You can read the other articles from Ipes' Private Equity update (edition 20) at the following links: