15/02/2012 Author: David Beattie

Accounting for FATCA

The publication last week of the proposed rules for the US Foreign Account Tax Compliance Act has seen many managers breath a sigh of relief at the softening of some of its more ominous requirements. HFMWeek looks at what the changes mean for the industry

An attempt by the US Treasury and Internal Revenue Service (IRS) to combat tax evasion by US citizens through offshore channels, the Foreign Account Tax Compliance Act (Fatca) has been whipping up a storm ever since its draft proposals debuted in 2009. Its sentiment was never in question of course, but the legislation’s compliance burden, scope and ambiguous details were the subject of much ire and confusion from managers and investors alike. A withholding tax of 30%, Fatca decreed, would hit any entity that fails to comply.

Such a controversial background made the unveiling last week of Fatca’s proposed rules and regulations of both great interest and significance. At 388 pages, the document is no light read. Initial reaction, however, has tended to skew towards the positive end of the spectrum.   

Among the headline revelations include: a postponement in the withholding tax implementation for the notoriously complex pass-through payments, from 2014 to 2017; expanded scope, allowing firms room to rely on the regulations of its parent company; and, via the US Treasury, the announcement of a significant joint programme with the UK, Germany, France and Spain in its implementation.

Commenting in a company statement, Nick Matthews of financial advisory firm Kinetic Partners said that “substantial work lies ahead”, but the announcement “goes some way to ameliorating the substantial burdens” placed on foreign financial institutions (FFI). KPMG’s global Fatca leader, Adrian Harkin, called the new proposals “mixed” but estimated that the new compliance concessions could save the industry $10bn.

“The industry is being listened to in relation to implementation,” says David Aldrich, managing director at Bank of New York Mellon, of the IRS’s approach. One of the problems with regulations in general at the moment, according to Aldrich, is that they seem to be being written and passed into law, before the actual rules are established. “I think the reason they [the IRS] are listening so closely right now is because it’s so all-encompassing and it’s critically important that when it comes into force everyone is able to comply.”

The CFO of an unnamed London-based hedge fund agrees. “I’ve got the feeling that the IRS is genuinely interested in what we have to say and is genuinely interested in proper solutions,” she says.

But this doesn’t mean the IRS has gone soft. “They have been very clear that they’re not interested in anyone just moaning, but if you’ve got some proper proactive ideas that wouldn’t compromise their overall objectives they do seem to be listening,” she continues.

“There are no shades of grey with it because the consequences of not being fully compliant could be catastrophic and very expensive,” continues BNY Mellon’s Aldrich, on Fatca itself. Its complexity, he notes, means that specialist advice from administrators has never been more crucial.

“We all have to make sure that our administrators can deal with this, and, if they can’t – we would have to question their ability to stay with us,” adds the London-based CFO.

“I think some of the hedge fund managers are panicking, but for most of us, smaller managers with less investors, it’s nowhere near such a big project.”

In terms of industry preparation, the CFO is not convinced the industry is ready. “But then how could you have been prepared until the regulations came out,” she notes. “As a manager, you would’ve risked spending a lot of money and heading down the wrong way, so I’ve been aware of it and have had an action plan of what I intended to do. I have my list of clients and I am aware which ones I think may be more complicated than others.”

With a scope that extends outside the US and could potentially result in financial penalties for FFIs, Fatca has definitely ruffled a few feathers. However, while the importance of compliance remains undimmed, the concessions in last week’s draft rules and, perhaps more significantly, the indications that US policy makers are prepared to listen and adapt, should give most managers cause for quiet cheer.