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FATCA

The purpose of the Foreign Account Tax Compliance Act (FATCA) is to detect US taxpayers evading tax through offshore holdings. FATCA will require Foreign Financial Institutions (FFIs) to obtain and report information regarding US customers and beneficial owners to the Internal Revenue Service (IRS) or suffer 30% withholding tax on US sourced income. The IRS issued implementation guidance on certain issues during 2010-11 and (July 2011) introduced phased implementation of certain reporting and withholding requirements.

AIMA has made several written submissions to date and had discussions with key US Treasury and IRS officers with respect to issues facing hedge fund managers and proposals for practical approaches to implementation.

Draft regulations were issued on 8 February 2012, with a statement on the US, UK, FR, Italy, Spain and Germany having agreed to explore a common approach to FATCA implementation through domestic reporting and reciprocal automatic exchange, based on existing bilateral tax treaties (the statement then issued by the UK HM Treasury is here).

Consultation on the Draft Regulations closed on 30 April and final regulations are now expected by year end; a model FFI Agreement and reporting forms may not follow until early 2013.

On 24 October, the IRS announced further delayed implementation of reporting and withholding requirements and further guidance on grandfathered obligations - changes made in response to comments received on practical issues with the draft regulations and generally tracking changes made by the IGAs.

Implementation changes and timings are now as follow:

The effective date for many requirements, including new account opening procedures, is now 1 January 2014
FFIs must register with the IRS by 30 June 2013 and Final Regulations will provide that an FFI Agreement entered into before 1 January 2014 will be effective on that date in 2014.
Pre-existing entity account documentation for clients identified as prima facie FFFIs is now 30 June 2014 (note that, given the requirement to register by 30 June 2013, some FFIs could have an additional six months to obtain and provide their FFI numbers). For pre-existing entity account documentation for clients not identified as Prima Facie FFIs, it is now 31 December 2015
Pre-existing individual account documentation for high value clients has generally been pushed back to 31 December 2014 (to 31 December 2015, for non-high value clients)
Participating FFIs must report with respect to 2013 and 2014 calendar years no later than 31 March 2015
Withholding (at 30%) on US source payments (of interest, dividends etc – ‘FDAP’ income) to non-participating FFIs is effective from 1 January 2014
Withholding on US source gross proceeds (e.g. repayment of principal) to non-participating FFIs is effective from 1 January 2017
The ‘grandfathering’ date has been pushed back to 1 January 2013 (from 18 March 2012); this should mean that most debt securities issued, derivatives entered into and loans advanced or committed to in 201[2] will be outside FATCA throughout their life
Grandfathering rules are extended and expanded, to include, for example, any obligation that produces or could produce a foreign passthru payment and that cannot produce a withholdable payment

Intergovernmental exchange framework

A Model II, between the US, Japan and Switzerland, was announced in June: based on existing treaties with the US but FFIs would report direct to the US IRS, with reporting supplemented by information exchanged between the governments concerned, upon request.

A Model I form of intergovernmental agreement (IGA) between the US and the initial five ‘Partners’ was released in July 2012, providing for implementation through domestic reporting and reciprocal automatic exchange, based on existing bilateral tax treaties.

The IRS advised on 8 November on negotiations towards IGAs with over 50 jurisdictions, as here:

Negotiations are expected to be finalised and an IGA concluded by year-end with France, Germany, Italy, Spain, Japan, Switzerland, Canada, Denmark, Finland, Guernsey, Ireland, Isle of Man, Jersey, Mexico, the Netherlands and Norway.
There are active negotiations, expected to conclude by year-end, towards an IGA with several of these jurisdictions: Argentina, Australia, Belgium, the Cayman Islands, Cyprus, Estonia, Hungary, Israel, Korea, Liechtenstein, Malaysia, Malta, New Zealand, the Slovak Republic, Singapore and Sweden.
Options are being explored for IGAs with others, including Bermuda, Brazil, the British Virgin Islands, Chile, the Czech Republic, Gibraltar, India, Lebanon, Luxembourg, Romania, Russia, Seychelles, Sint Maarten, Slovenia and South Africa.

HMRC is consulting (until 22 November) on the UK-US bilateral agreement signed in September. The agreement carries the broadened definition of (and expanded treatment of) ‘Investment Entity’ included in the Model I IGA, so that it includes a manager or adviser as a FFI; AIMA submitted comments to the US authorities on this key issue in September. The agreement effectively postpones to January 2014 many of the due diligence requirements. Draft legislation and guidance is expected in December 2012 (possibly, effective July/August 2013).