AIMA

The Alternative Investment Management Association

Alternative Investment Management Association Representing the global hedge fund industry

Worldwide FATCA?

Vanessa E. Tollis, Partner, and Sara Verkest, Senior Associate

Gide Loyrette Nouel LLP

Q2 2012

Q2 edition

 


On 8 February 2012, the U.S. Treasury issued a momentous announcement ("Joint Statement") while simultaneously releasing long awaited proposed regulations (the "Proposed Regulations") addressing withholding and information reporting requirements imposed under the Foreign Account Tax Compliance Act (FATCA) enacted as part of the Hiring Incentives to Restore Employment Act of 2010.

The Joint Statement revealed an unprecedented joint effort among the United States and the governments of France, Germany, Italy, Spain and the United Kingdom (the "FATCA Partners") to develop mutual compliance and reciprocity under a FATCA framework across these jurisdictions (the "Joint Approach"). There are many who believe that, taken to its logical conclusion, the Joint Approach signals the start of a global tax revolution.

 

Background

FATCA imposes a 30% U.S. withholding tax (the "FATCA Tax") on "withholdable payments" made to certain foreign financial institutions, including banks, brokers, funds of all sorts, custodians, trustees, and even certain insurers (collectively, "FFIs") that do not meet specific information collection and reporting requirements pursuant to an agreement they must execute with the U.S. Internal Revenue Service (the "IRS"). These requirements are designed to ferret out U.S. holders of "accounts," which is defined broadly to include deposit and securities accounts, as well as debt and equity interests that are not publicly traded. Withholdable payments include:

• U.S.-source income including interest, dividends, rents, royalties and compensation; and

• Gross proceeds from the sale, redemption, repurchase or other disposition of any property of a type that produces U.S. source interest or dividends (e.g., U.S. securities).

The FATCA Tax also will apply to "pass-thru payments," a complex, and controversial, concept that broadens the scope of affected payments. Even non-financial foreign entities (NFFEs) are affected by FATCA because they can be subject to the FATCA Tax if they do not provide an FFI or a U.S. payor making a payment to them with information about their substantial U.S. owners (if any), or a certification that they have no substantial U.S. owners.

FATCA is designed to prevent U.S. persons from using offshore accounts to evade U.S. federal income tax, and is not intended as a tax revenue raiser. The FATCA Tax is the tool used to compel FFIs to police their accounts on behalf of the U.S. government by collecting information about their account holders, and reporting specific information to the IRS about U.S. account holders. Any FFI that receives U.S. source income, even indirectly, or that has any U.S. investors or account holders, will be ensnared in the FATCA due diligence requirements, and will face the threat of its penalty tax.

 

Joint Approach

The Joint Statement depicts a government to government reciprocal framework for implementing FATCA. It contemplates the FATCA Partners collecting information from their FFIs about U.S. account holders and investors, and forwarding this information to the U.S., while the U.S. similarly collects and shares information with them about accounts held in U.S. financial institutions by their residents. The automatic exchange of information would be implemented based on the existing bilateral tax treaty framework, and would appear to go a long way toward resolving the secrecy and data protection law conflicts otherwise triggered by FATCA. The Joint Approach also alleviates the unease about the extra-territorial reach of this regime.

The intent under the Joint Approach is that FFIs in FATCA Partner jurisdictions would meet their FATCA obligations towards their own governments, rather than toward the IRS. Accordingly, a FATCA Partner FFI generally (a) would not be entering into a separate FFI agreement directly with the IRS, (b) would not be subject to the FATCA Tax, and (c) would have no obligation to terminate the accounts of non-compliant account holders (i.e., "recalcitrant" account holders in the language of FATCA), or to impose the FATCA Tax on pass-thru payments to such account holders or to other FATCA Partner FFIs.

Consequently, the Joint Approach could completely change the impact of FATCA on FFIs in the FATCA Partner jurisdictions. The Joint Approach arguably would even the playing field since taxpayers and FFIs across the FATCA Partner jurisdictions and the U.S. together would participate in a global effort against tax evasion. Moreover, the Joint Approach sets a precedent for U.S. cooperation with other countries. The U.S. reportedly is in active negotiations with additional countries to bring them into the FATCA fold, although several key nations, including China and Canada, have reportedly raised objections to FATCA.

As a practical matter, before the Joint Approach is a reality, each FATCA Partner must enact the enabling legislation at home, and some bilateral tax treaties may need to be modified to permit the automatic information exchange being contemplated. Both the legislative and the treaty ratification processes are normally quite time consuming, sometimes spanning years. Consequently, FFIs in FATCA Partner jurisdictions are left to wonder what they are supposed to do in the meantime. Should they carry on preparing to comply with FATCA, including entering into an agreement with the IRS by the June 30, 2013 deadline in order to avoid imposition of the FATCA Tax starting on January 1, 2014? Will they be given an interim status while their home jurisdiction puts forth best efforts to follow through on the Joint Approach? (For example, the IRS and U.S. Treasury could decide to categorize FFIs in FATCA Partner jurisdictions as "deemed compliant" under the existing FATCA rules until the Joint Approach is in full effect). Unfortunately, as of now there are no answers to these questions.

 

A Worldwide FATCA Revolution

The Joint Approach promises to remove the U.S. imposed FATCA Tax from the universe of FFIs in the FATCA Partner jurisdictions (although not the FATCA compliance burden per se which would instead be implemented via the FATCA Partner government). However, the Joint Approach raises the specter of an altogether grander, and wholly global, tax compliance program. A growing chorus of banks, funds, asset managers, custodians, and trustees are publicly discussing their concerns about the eventual, and some say inevitable, development of a global FATCA framework, based on the U.S. FATCA regime.

For example, the Joint Approach envisions each FATCA Partner implementing a system supported by their own legislation and based on the U.S. FATCA framework, requiring FFIs to collect information from their account holders, and to report the information about U.S. account holders to the FATCA Partner government, which in turn would transmit the information to the IRS. Once that system is in place, it is almost inconceivable that each FATCA Partner will limit its application to only identifying U.S. tax evaders. Rather, the system undoubtedly will be used to help identify each of the other FATCA Partners' tax evaders, and so on and so forth until each FATCA Partner effectively participates in a global due diligence and information disclosure program. Ultimately, this sort of global system conceivably could prevent anyone, anywhere, from avoiding the taxes due in their home jurisdiction by hiding assets elsewhere.

The long term implications, and costs, of a worldwide FATCA system are massive - going far beyond the much disparaged impact of the United States' lone attempt at combating U.S. tax evasion with FATCA, and sweeping U.S. financial institutions into the storm as well. The alternative to costly compliance with a worldwide FATCA system could be a return to purely domestic finance business by all but the largest financial institutions in each jurisdiction. This, of course, would have an unsettling effect across the world economy. It remains to be seen whether the Joint Approach will evolve into reality, and if so, when and how. However, many in the U.S. tax bar see the introduction of FATCA onto the global stage as nothing less than a U.S. led global tax revolution.

 

Proposed Regulations

While the storm brews around the potential impact of the Joint Approach, the Proposed Regulations reflect a concerted effort on the part of the U.S. Treasury and the IRS to simplify the FATCA regime and minimize the compliance burden on FFIs. The Proposed Regulations generally are consistent with the approach set out in the previously issued FATCA guidance, but with some important and very helpful modifications and additions.

Key highlights in the Proposed Regulations include:

 

Extended grandfathering rule

While the FATCA Tax still will apply to U.S. source payments beginning on 1 January 2014, and to gross proceeds from the sale of U.S. securities beginning on 1 January 2015, no such tax will apply to such payments made with respect to, or the gross proceeds resulting from the disposition of, any "obligations" that are outstanding on 1 January 2013 (extending the "grandfathering" from the original date of 18 March 2012). An obligation includes a debt instrument, a line of credit or revolving credit facility, and a derivatives transaction entered into between counterparties under an ISDA master agreement. Equity, and debt that is treated as equity for U.S. federal income tax purposes, are not obligations under the grandfathering rule.

 

Delayed withholding on foreign pass-thru payments

The FATCA Tax will not be applied to "pass-thru" payments until 1 January 2017, delaying the onset of this very controversial, and complex, aspect of FATCA by two years from the original date of 1 January 2015. More guidance is expected regarding the administration of the FATCA pass-thru payment regime.

 

Narrower definition of financial account

Under FATCA, a financial account includes any depository account, custodial account, and any equity or debt interest in an FFI, other than those interests that are regularly traded on an established securities market. The Proposed Regulations refine the definition to exclude most debt and equity securities issued by banks and brokerage firms, subject to an anti-abuse rule.

 

Additional deemed-compliant FFI categories

The categories of deemed compliant FFIs are expanded to include, for example, locally oriented banks and funds, in an effort to minimize the FATCA burden on genuinely local finance businesses and others for whom entering into an agreement with the IRS is not necessary to accomplish the goals of FATCA.

 

Relaxed due diligence procedures

The guidelines for identifying U.S. accounts of FFIs, reviewing pre-existing accounts, and determining the tax status of fund investors are relaxed considerably, allowing for increased reliance on information already gathered under "know your customer" and anti-money laundering rules, and any existing customer intake procedures.

 

Extended transition period for information reporting

Reporting obligations for FFIs with respect to U.S. accounts will begin in 2016 (for the 2015 calendar year) for income, and will begin in 2017 (for the 2016 calendar year) for gross proceeds. Only basic identifying information (i.e., name, address, TIN, and account number), and account balance or value information will be required to be reported in 2014 (for the 2013 calendar year). In another helpful change, FFIs now can elect to report information in the currency in which the account is maintained, or in U.S. dollars.

 

Compliance verification

Pursuant to the Proposed Regulations, responsible FFI officers are expected to certify that the FFI has complied with the terms of its FFI agreement with the IRS. However, the verification of such compliance will not be required through external audits. Furthermore, if an FFI complies with the terms of the FFI agreement, it generally will not be held strictly liable if its fails to identify a U.S. account.

 

Forms W-8 and W-9

The IRS Form W-8 and W-9 series will be updated to request additional information relevant to establishing FATCA payee status by including, for example, a new field for an FFI identification number.

 

Model FFI agreement

A draft model FFI agreement is expected to be released in the coming months, with a final model FFI agreement anticipated by the end of 2012.

 

Next steps

The Proposed Regulations are not effective until finalized. Comments on the Proposed Regulations are being accepted until 30 April 2012 and a hearing is scheduled for 15 May 2012.

 

tollis@gide.com

verkest@gide.com

www.gide.com

 


 

Back to Listing

Main Menu

  1. Home
  2. About
    1. Our Core Objectives
    2. AIMA's Policy Principles
    3. Meet the team
    4. AIMA Council
    5. Global Network
    6. Sponsoring Members
    7. Global Partners
    8. FAQs
    9. Opportunities at AIMA
  3. Join AIMA
    1. Benefits of Membership
    2. Membership Fees
    3. Application form
  4. Members
    1. AIMA DDQs
    2. AIMA Annual Reports
    3. AIMA Governance
    4. AIMA Logo
      1. Policy note
    5. AIMA Members' List
    6. AIMA Review of the Year
    7. Committees and Working Groups
    8. Weekly News
    9. Update Profile
  5. Investors
    1. AIMA Investor Services
    2. AIMA Members' List
    3. Investor Steering Committee
    4. Update Profile
  6. Regulation
    1. Asset Management Regulation
      1. EU Asset Management Regulation
        1. AIFMD
        2. European Capital Markets Regulation
        3. MiFID / MiFIR
        4. UCITS
        5. European Venture Capital Directive
        6. Shareholder Rights Directive
        7. European Long Term Investment Fund Regulation
        8. Loan Origination Funds
        9. Capital Raising
        10. AIFMD-Related Events
      2. US Hedge Fund Adviser Regulations
        1. Registration and Reporting
        2. Incentive-Based Compensation
        3. JOBS Act
      3. Asia Pacific Asset Management regulation
      4. Other Jurisdictions’ Asset Management Regulation
      5. Systemically Important Financial Institutions ('SIFIs')
      6. Remuneration
        1. UK
        2. United States
        3. CRD IV and CRR
        4. AIFMD
        5. MiFID
      7. Shadow Banking
      8. Volcker Rule
      9. Other
      10. Systemic Risk Reporting
      11. Dealing Commission
      12. Corporate Governance
    2. Markets Regulation
      1. Bank/Capital Regulation
        1. Capital Requirements Directive
        2. EU Bank Structural Reforms
      2. Derivatives/Clearing
        1. EMIR
        2. MiFID II / MiFIR - Derivatives
        3. MAD / MAR
        4. Dodd-Frank Act Title VII
        5. Hong Kong
        6. IOSCO
        7. Singapore
      3. High Frequency Trading
        1. ESMA Guidelines
        2. MiFID II / MiFIR - HFT
        3. MAD / MAR
        4. Flash Crash
        5. IOSCO
        6. Germany
        7. CFTC Automated Trading
      4. Insurance Regulation
        1. Solvency II
      5. Market Abuse
        1. MAD / MAR
        2. Indices as Benchmarks
      6. Position Limits
        1. MiFID II - Commodities
        2. CFTC Position Limits
      7. Resolution of Financial Institutions
        1. Europe
          1. EU Bank Recovery and Resolution Directive
          2. EU Non-Bank Recovery and Resolution
        2. CPSS-IOSCO
        3. Financial Stability Board
        4. UK
        5. USA
      8. Short Selling
        1. EU Short Selling Regulation
        2. Hong Kong Short Selling Regulation
        3. US Short Selling Regulation
        4. Short Selling Bans
      9. Securities Settlement
      10. Shadow Banking
        1. International Shadow Banking
        2. EU Shadow Banking
      11. Trading
        1. Dodd-Frank Act
        2. MiFID Portal
    3. Tax Affairs
      1. Automatic Exchange of Information (AEOI)
        1. FATCA
        2. EU - AEFI
        3. OECD - Global Standard on AEFI
      2. Australia - Investment Manager Regime (IMR)
      3. Base Erosion - Profit Shifting (BEPS)
      4. FAIFs and FINROFs
      5. FIN 48 and IAS 12
      6. Financial Transaction Tax (FTT)
      7. UK Investment Management Exemption (IME)
      8. UK Offshore Funds Regime
      9. Other
    4. AIMA's Policy Principles
    5. Search
    6. Resources
      1. Guidance Notes
      2. Jurisdictional Guides
      3. Noticeboard
        1. AEOI: FATCA and other regimes
        2. AIFMD
        3. BEPS
        4. CFTC Registration and Exemptions
        5. Corporate Governance
        6. Dealing Commission
        7. Derivatives
        8. FTT
        9. High Frequency Trading
        10. MiFID / MiFIR
        11. Other Hot Asset Management Topics
        12. Other Hot Markets Topics
        13. Other Hot Tax Topics
        14. Position Limits
        15. UK Partnership Tax Review
        16. Trading
        17. UCITS
        18. Volcker Rule
      4. Hedge Fund Manager Training
      5. Quarterly Regulatory Update
      6. Webinar Programme
      7. Regulatory Compliance Association
        1. About the Regulatory Compliance Association
        2. RCA Curricula and initiatives for alternative investment firms
        3. Meet the regulators and Sr. Fellows
  7. Education
    1. Research
      1. AIMA Research
      2. Industry research
      3. Search research documents
    2. "The Case for Hedge Funds"
      1. Global Hedge Fund Industry Paper: The value of our industry
      2. The Value of the Hedge Fund Industry to Investors, Markets and the Broader Economy: Research commissioned by AIMA and KPMG
      3. The Evolution of an Industry: KPMG/AIMA Global Hedge Fund Survey
      4. Contributing to Communities: A global review of charitable and philanthropic activities by the hedge fund industry
      5. Beyond 60-40: The evolving role of hedge funds in institutional investor portfolios
      6. The Cost of Compliance: Global hedge fund survey by AIMA, MFA and KPMG
      7. Capital Markets and Economic Growth: Long-term trends and policy challenges
      8. Apples and Apples: How to better understand hedge fund performance
      9. The Extra Mile: Partnerships between hedge funds and investors
      10. Key articles by AIMA on the case for hedge funds
    3. AIMA Journal
      1. Recent issues
      2. Search AIMA Journal articles
      3. AIMA Journal Archive
    4. AIMA Guides to Sound Practices
    5. AIMA guides for institutional investors
    6. CAIA Association pages
      1. Fundamentals of Alternative Investments
    7. Regulatory Compliance Association pages
      1. About the Regulatory Compliance Association
      2. RCA Curricula and initiatives for alternative investment firms
      3. Meet the regulators and Sr. Fellows
    8. Certified Investment Fund Director programme
    9. Services to Start-up Managers
    10. Useful Websites
    11. Glossary
  8. Events
    1. AIMA Events
    2. AIMA webinars
    3. Industry events
  9. Media
    1. Press Releases & Statements
    2. AIMA's blog
    3. Media Coverage
      1. Articles by AIMA
        1. Archive
      2. AIMA in the news
      3. Video interviews
      4. Industry news
    4. Media Contact
    5. Press Materials

Sub Menu

  1. Education
    1. AIMA Journal
    2. Bibliography
    3. CAIA Designation
    4. Research
    5. Roadmap to Hedge Funds
    6. AIMA's Investor Steering Committee Paper
    7. Glossary
  2. Regulatory, Tax, Policy & Government Affairs
    1. AIMA Position Papers
    2. AIMA Responses
      1. Australian Tax Office
      2. Authority for the Financial Markets
      3. Committee of European Banking Supervisors
      4. Committee of European Securities Regulators
      5. Commodity Futures Trading Commission
      6. Dubai Financial Services Authority
      7. European Commission
      8. European Securities and Markets Authority
      9. Swiss Financial Market Supervisory Authority
      10. Financial Services Authority (UK)
      11. Financial Services and the Treasury Bureau
      12. Guernsey Financial Services Commission
      13. HM Revenue & Customs
      14. HM Treasury
      15. Independent Commission on Banking
      16. IOSCO
      17. Monetary Authority of Singapore
      18. Securities and Exchange Board of India
      19. Securities and Exchange Commission (USA)
      20. Securities and Futures Commission
      21. Singapore Exchange
      22. The Takeover Panel
      23. US House of Representatives / Senate
      24. Federal Deposit Insurance Corporation
      25. Financial Stability Oversight Council
      26. Financial Stability Board
      27. US Treasury
      28. Internal Revenue Service
      29. US Federal Reserve
      30. Financial Industry Regulatory Authority (FINRA)
      31. Council of European Union
      32. Hong Kong Exchanges and Clearing
      33. House of Lords
    3. AIMA Summaries
      1. CESR
      2. European Commission
      3. Financial Services Authority (UK)
      4. HM Revenue & Customs
      5. HM Treasury
      6. IOSCO
      7. Securities and Exchanges Commission
      8. FSOC
      9. CFTC
    4. Guidance Notes
    5. Jurisdictional Resource
    6. AIMA Noticeboard
      1. EU Directive on Alternative Investment Fund Managers
      2. FSA Remuneration Code
      3. Short Selling
      4. US Dodd-Frank Wall Street Reform and Consumer Protection Act
      5. UK Stewardship Code
      6. Securities Law Directive
      7. EU Directive on Alternative Investment Fund Managers - Level II
      8. EU Directive on Markets in Financial Instruments (MiFID)
      9. International Financial Centres
      10. Bribery Act
      11. Market Abuse Directive
      12. MF Global
      13. FATCA
      14. FTT
      15. Other Tax Issues
    7. AIMA Regulatory Update
  3. Sound Practices
    1. Due Diligence Questionnaires
    2. Guides to Sound Practices
  4. Start-Up Service Providers
  5. Useful Websites