By Tim Andrews, Service Development Director, Ipes
Foreign Account Tax Compliance Act (FATCA) Reporting is due by mid 2015 and is here to stay. Fund Managers should beware of some pitfalls in the process and, like Alternative Investment Fund Managers Directive (AIFMD) Reporting, ensure that they minimise its impact on investors and cost.
FATCA in 2014 – Classification and Registration
FATCA, the attempt to eradicate tax evasion by US tax residents using foreign accounts through information sharing between jurisdictions and the US, rose up the agenda of Fund Managers in 2014 as it was transposed into the law of most developed countries under Inter-Governmental Agreements (IGAs). It therefore applies to all Foreign Financial Institutions (FFIs) both within and outside the United States, irrespective of whether they transact in US Dollars, have US Investors or own US portfolio companies.
In practice, FATCA is a 4 stage process whereby Managers must classify each entity in their Funds into a number of ‘buckets’ which determine whether the entity must be reported to the local tax authority. If an entity is to be reported then the manager had to obtain a Global Intermediary Identification Number (GIIN) by 31 December 2014.
FATCA has been applied in practice by multiple Regulators, each with their own guidance, systems and legislation. As with AIFMD, most European authorities have scrambled to adapt their systems to accept the required reports in XML format and have published and updated their guides – not always in English.
Recently HM Revenue and Customs (HMRC) clarified that the top holding company in an investment structure should not be classified as reportable. This has long been a discrepancy with other Model 1 IGA countries such as Guernsey and Luxembourg and now leaves some managers deregistering some holdcos that no longer have to report. Some jurisdictions, such as Luxembourg, require nil returns on the basis that if you do not report, how can the authorities ensure compliance? Other jurisdictions, like the UK, do not require nil returns, at least for now. Overall, remaining compliant is harder than it should have been.
FATCA in 2015 – Due Diligence and Reporting
Having classified their structures and obtained their GIINs, many Managers are in the midst of reviewing their CDD on existing investors against the indicia specified under FATCA. Funds must determine whether their investors are reportable under FATCA as US taxpayers or, if the Fund is domiciled in the UK or Crown Dependencies, under ‘UK FATCA’ as UK taxpayers. Getting this decision wrong exposes the board of the General Partner to risks of non compliance or to the inadvertent reporting of investors to the tax authorities.
Short term, many houses have relied on paper systems to obtain and evaluate the required information. This has led to a wide array of paper forms which can leave investors uncertain. A systemised and standardised approach is clearly necessary across the industry to reduce duplicative effort. Managers should also ensure that each investor self certifies the accuracy of the information that they provide so as to limit their own exposure.
Reporting – Another XML Submission
Once the due diligence on each investor has been reviewed, those that are reportable as US taxpayers need to be reported to the tax authority in the domicile of the fund by 30 June 2015. Under ‘UK FATCA’ reporting will be due by 31 May and will begin in 2016 on data from both 2014 and 2015. Managers therefore face a calendar of tax reporting alongside the AIFMD Reporting that many have had to begin submitting recently.
While, like AIFMD, FATCA is a prescribed reporting format, the experience of multiple user guides and interpretations suggests that significant variation will emerge in both content and submission method over time.
In a bid to set a standard for legislation and reporting, the OECD recently published the Common Reporting Standard (CRS) which will be in place by 2017. More than 90 countries have signed up to the CRS of which 58 will adopt it in 2017 and the remainder in 2018. The tax information exchange that started with FATCA is therefore here to stay and will become increasingly global over the coming years.
What to do now:
- If you have not started classifying and registering it is not too late in practice. Do it now to ensure that you remain compliant with local legislation.
- Ensure that you or your provider has an efficient, systematic process to minimise cost, investor hassle and risk of error.
- Ask questions. This process is new for tax authorities, service providers and managers alike. There is no such thing as a silly question.
- Embed the process. FATCA will apply to all new Funds and investors and should be built into Fund documents, due diligence and the reporting cycle.
- Look ahead. The CRS requirements are similar but not identical to FATCA. Ask the questions from investors now to avoid repeating the process in future.
There is a lot of confusing content out there. If you would like to discuss FATCA or AIFMD Reporting in greater detail we would be happy to talk further.
Service Development Director, Ipes
T: +44 (0)1481 735826
You can read the other articles from Ipes' Private Equity update (edition 17) at the following links: