Progress report
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13/04/2011
Comment: Monique Melis & Claire Simm
In another step towards making the global financial services industry more transparent and preventing tax evasion, the Foreign Account Tax Compliance Act (Fatca) was signed into law in the US on 18 March 2010 and will apply from 1 January 2013 to all foreign financial institutions (FFIs), including hedge funds with direct or indirect US ownership, those with US clients or those that invest in US stocks and securities on behalf of account holders or for their own account. Fatca will require all FFIs to provide comprehensive information on all US investors to the Internal Revenue Service (IRS). These reporting requirements go far beyond what is currently required.
The legislation is expected to significantly impact the systems and operations of non-US hedge fund managers and, consequently, fund administrators. Both are advised to start thinking now about what the new requirements will mean for them. Alternatively fund managers may wish to decide now to revise their investment strategy to exclude US investors.
Although the implementing guidelines from the IRS have yet to be published, it is already clear that FFIs with US income will be confronted with a major task in order to meet the new requirements. Given the title of the Act, many managers mistakenly think this is a tax issue, but in fact it is a substantial compliance project which will require significant changes to systems, controls, reporting and know-your-client (KYC) procedures currently in place. FFIs will be required to report annually with comprehensive information on all US accounts. Non-compliance with these new requirements will result in an initial 30% withholding tax penalty, or, in the case of repeat offences, enforced closure of the account.
In practice, this is likely to be a challenging task, the responsibilities of which will most likely be delegated to the fund administrators. First of all there is the issue of identifying who is qualified as a US investor, which may not be straightforward. A ‘substantial presence test’ has been proposed which will be used to establish who will fall under the new information requirements, and may include anyone who has a green card or has stayed in the US for a substantial period of time. Second, there are questions regarding the level of KYC performed.
At this stage it is not clear exactly what the final impact on firms will be. However, the first task is to ensure senior management understand the scale of the changes. Chief compliance officers, tax reporting heads and other key players within firms will need to evaluate the potential impact of these regulations and develop a plan for managing and remediating any potential risk associated with non-compliance.
Fatca is not just another tax issue that affects aspects of compliance. Instead, it affects the whole value chain and requires completely new and extended information and reporting systems. Firms therefore need to start analysing their business lines and systems in order to identify what will be impacted and how.
It is also important for managers to start informing clients how the Act will impact them, and the type of information that will be sought from them. Where investors delay in communicating their compliance, or fail to comply completely, there will be further problems for hedge fund managers, such as how to initially segregate those clients that comply and those that do not.
The impact of Fatca will be, without doubt, an intrusive process and the reporting obligations will be onerous. By performing the proper compliance risk assessment now and evaluating necessary modifications to existing systems, hedge funds will be putting themselves in the strongest position possible to deal with the necessary changes as they become clearer.
Monique Melis is a member and Claire Simm is a consultant at Kinetic Partners
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60 seconds with... Kenneth Turchin
CAN YOU DESCRIBE YOUR CURRENT ROLE?
I have worked in public accounting and hedge funds and in the past eight years have been selling middle- and back-office services to the alternate investment industry. My role is to build relationships with clients, teach them about SS&C’s products and services, and ensure seamless transactions every time the firm launches a new fund.
IF YOU WERE DOWN TO YOUR LAST £1,000, HOW WOULD YOU INVEST IT?
I would buy THREE shares in Apple and hope for a repeat 383% return in the next five years.
WHAT WOULD YOU DO IF YOU WERE IN PRESIDENT OBAMA’S SHOES?
That’s one pair of size 12 shoes I do not want to be in!
WHO WOULD PLAY YOU IF THEY MADE A MOVIE ABOUT YOUR FIRM?
Kevin Bacon. He is a versatile actor and the centre of the entertainment universe. I am in sales. Everyone in the industry would be linked to me in six steps or less. My client list would be ridiculous.
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Comments (1)
US Taxpayer Abroad 13/04/2011 5:47pm
FATCA will prove to be ineffective - all my accounts have already been moved to banks with will likely be NON-Fatca banks. Only banks that do business in the US will ever be likely to submit to this unproportional law. However the EU is upset with FATCA and it may change before Jan 1 2013.
FATCA creates busywork for FFIs and returns little revenue to the US treasury.
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