Progress report
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12/10/2011
Comment: Dmitri Semenov
Dmitri Semenov is a partner at Ernst & Young
Additional material by:
Jun Li, partner, financial services
Maria Murphy, executive director
Ann Fisher, senior manager
Designed to prevent US taxpayers from avoiding US tax on their income by investing through foreign financial institutions (FFIs) such as offshore funds, the Foreign Account Tax Compliance Act (Fatca) has been labeled by some as “KYC on steroids” as it introduces extensive investor due diligence requirements to determine if a US investor is ultimately receiving the fund’s earnings. Fatca will have a far-reaching impact on US and foreign funds. Fund managers should start preparing for its impact now.
Under Fatca, a participating FFI will need to enter into an agreement (FFI Agreement) with the Internal Revenue Service (IRS) that will require it to do the following:
- Document investors as US or foreign and classify them into one of the specified Fatca categories
- Withhold at 30% on “withholdable payments” – US source interest, dividends and gross proceeds from US stocks and securities made to “recalcitrant” investors (i.e. those that do not comply with Fatca). FFIs must also withhold on a passthru payment – a withholdable payment or a payment that is attributable to a withholdable payment (regardless of its source). US effectively connected income is not treated as a withholdable payment
- Report annually on certain US persons (including certain US owners of non-US entities) and certain information on recalcitrant investors
Under Fatca, US-based funds are treated as US financial institutions (USFIs) and are required to perform Fatca due diligence on non-US entity investors and to withhold on payments to such investors who refuse to provide the required information and/or documentation (recalcitrant investors) and noncompliant FFIs. Treaty exemptions are not available under Fatca; however, if Fatca withholding occurs, non-US persons establishing their entitlement to treaty benefits may file a claim for refund with the IRS.
The chief compliance officer or another equivalent-level officer of the FFI must certify to the IRS that the FFI has timely completed procedures for identification of pre-existing individual accounts between 9 May 2011 and the effective date of their FFI Agreement. The IRS is considering whether an administrator of the funds, as agent, could perform the required diligence and documentation procedures on behalf of its funds (each fund would remain liable for compliance).
The Treasury Department and the IRS have issued guidance on Fatca in the form of three notices:
- Notice 2010-60, addressed certain scope issues and outlined the due diligence requirements to be performed by USFIs and FFIs on their investors
- Notice 2011-34, revised some of the due diligence requirements in the prior notice and proposed an approach to administer the passthru payment rule
- Notice 2011-53, provided that a participating FFI must apply no later than 30 June 2013 to ensure no withholding; it extends the initial withholding date to 1 January 2014, and announced that proposed regulations will be released late this year.
Fatca is not just a tax issue; it impacts capital raising and investor acceptance, investor relations, legal, risk management, operational processes and systems technology. Meeting these challenges requires significant planning. A few critical steps in the initial Fatca assessment include:
- Legal entity structure assessment and classification of fund entities as FFIs, NFFEs and USFIs
- Review of investor data to classify investors into the appropriate Fatca categories
- Review of current on-boarding processes and determine whether your know-your-customer processes are adequate
- Review of payment systems that will be impacted by Fatca withholding and reporting.
Dmitri Semenov is a partner at Ernst & Young
Additional material by:
Jun Li, partner, financial services
Maria Murphy, executive director
Ann Fisher, senior manager
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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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