FATCA for Asset Managers

What is it?

The Foreign Account Tax Compliance Act (FATCA) is a law intended to make it harder for U.S. citizens to avoid paying taxes on income derived from offshore accounts

How will it work?

Foreign Financial Institutions (FFI’s), which also includes offshore domiciled funds of a U.S. Based Asset Manager, are required to disclose the accounts of U.S. individuals held overseas to the IRS or face 30% withholding tax on U.S. generated income. FFI’s who agree to comply with FATCA are known as Participating FFI’s. There is a heavy incentive to participate as non-participating FFI’s will automatically be subject to withholding.

How does one become a Participating FFI?

In order to become a Participating FFI and not be subject to withholding, the FFI must attest that it has the policies and procedures in place and is ready to qualify its investors appropriately. This attestation is performed by registering on the IRS portal and receiving a unique identifier to signify successful registration. This identifier is known as a GIIN (Global Intermediary Identification Number). The GIIN will become an identifier that the FFI will have to supply to other financial institutions where they maintain accounts or act as payees. The IRS registration portal was launched on August 19, 2013.

What is the deadline for Registration?

The IRS will electronically post the first list of FFIs and GIINs by June 2, 2014, and will thereafter update the list on a monthly basis. To ensure inclusion in the June 2014 IRS FFI List, FFIs must finalize their registration by April 25, 2014.

What work is involved to Register?

The heavy lifting for an Asset Manager is to determine which Legal Entities qualify as Foreign Financial Institutions. This phase involves first assembling a reliable list of all legal entities and then removing all domestic entities, all disregarded entities and all dissolved/liquidated/struck-off entities. Every single remaining entity will then need to be evaluated to determine its detailed FATCA classification – whether it is a member of what are known as Consolidated Compliance Groups or Expanded Affiliated Groups. The Asset Manager must also decide whether to register FFI’s individually or to choose a Sponsoring Entity approach whereby a sponsoring entity registers with the IRS and assumes FATCA compliance responsibilities on behalf of its sponsored entities.

What is involved in being FATCA Compliant?

Once registration is complete, there are four major requirements to maintaining FATCA compliance:

  • Review Existing Accounts – determine potential U.S. individual account holders – using specific criteria provided by the IRS - and obtain documentation to determine if the account holder is indeed a U.S. taxpayer. If the account holder does not respond to requests for documentation, the account holder must be classified as recalcitrant, which means the FFI will have to withhold on select payments to the account holder.
  • Modify Onboarding for New accounts – onboarding new accounts in a FATCA compliant manner is required as early as January 2014 and involves collecting documentary evidence to determine if an individual is a U.S. or non-U.S. taxpayer.
  • Perform required IRS reporting – reporting is phased in over time starting in early 2015 with basic account and balance information, with reporting on U.S. sourced income added in 2016.
  • Coordinate withholding as appropriate – after all the preliminary work, actual withholding may apply in the case of non-participating FFI’s or recalcitrant account holders. A process for implementing the withholding and associated reporting needs to be implemented.

Who has Ultimate Responsibility for all this?

Taking a page from the Sarbanes-Oxley playbook, the rules require a responsible individual to sign off and certify FATCA compliance. This individual is known as the ‘Responsible Officer’. Much as the CFO sign-off on Financial Statements reverberates down the reporting chain, so too the FATCA Responsible Officer will need to have a formal compliance program in place, including associated policies, procedures and technology that will give him/her the confidence to sign off on FATCA compliance on behalf of the institution.

Is That It?

Not by a long shot. There are hundreds of pages of detail, exceptions, forms, caveats etc. for all the above including certain agreements the US has made with other countries, known as Inter-Governmental Agreements (IGA’s) that can change the nature of compliance for those countries.

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