The Foreign Account Tax Compliance Act (“FATCA”) is another step towards transparency of the global financial services industry and preventing tax evasion, enacted in the US on 18 March 2010. FATCA affects all Foreign (non-US) Financial Institutions (“FFIs”), including banks, custodians and investment entities, including hedge funds, mutual funds and private equity funds.
To comply, unless falling within a category of “deemed compliance” or other, narrowly-defined exceptions, an FFI must become a Participating FFI (“PFFI”) by executing an FFI agreement with the IRS. A PFFI will then be required to provide information on US account holders (or investors) to the IRS, including name, address, tax identification number, account balances and income into the account. Furthermore a PFFI will be required to withhold 30% of payments made to non-participating FFIs (“NPFFIs”) or individuals that do not provide the required documentation (known as “recalcitrant account holders”), effectively penalising those that do not provide or commit to providing the information that the IRS requires. Ultimately, the US Treasury would like to see recalcitrant accounts closed.
In summary FATCA requires a PFFI to:
- obtain such information about each holder of each account as is necessary to determine which (if any) of such accounts are US accounts;
- for accounts maintained by US persons, report to the IRS on an annual basis; and
- withhold and pay to the IRS 30% of all US sourced payments made to NPFFIs or recalcitrant account holders.
- A “deemed compliant” FFI must meet certain criteria and fulfil certain requirements, including self-certification. A deemed compliant FFI will be treated by other FFIs and US institutions as if it were a PFFI and therefore will not suffer withholding.
A number of countries, including the UK, Ireland, Denmark, Mexico and Switzerland have signed bilateral intergovernmental agreements (“IGA”) with the IRS and US Treasury which essentially reduce some of the burden on FFIs (including in most cases the need to withhold tax on US source income) and avoids issues arising from local data protection or secrecy laws.
Impact on private equity firms
- Many private equity funds are considered to be FFIs under FATCA, as are fund managers or general partners. Under the final regulations, the fund may delegate the reporting requirements to the manager (or other FFI) as a “sponsoring FFI” provision.
- Participating private equity firms will have to identify both pre-existing US investors and correctly capture information for the new US investors in order to ensure accurate reporting.
- For these purposes, participating private equity firms may have to undertake additional due diligence on their existing investors if there are indicia that the investor is a US person.
- Investor on-boarding procedures will need to be updated to reflect the FATCA account-holder on-boarding requirements.
- Unless located in an IGA country, a private equity firm with investors not willing to provide the required information or for that to be disclosed may have to withhold or be withheld 30% on any US sourced income after 1 January 2014 except if the FFI is confident that the beneficial owner is not a US person.
Private equity firms may wish to inform investors about FATCA and the potential impact on them and their investments.
Marketing material and offering documents may need to be updated to reflect the post-FATCA investment strategy.
If not registered as FATCA-compliant, the risk of withholding on income may impact relationships between funds and investors, limit investment opportunities for non-participating funds and reduce the marketability of these funds.
Private equity firms should assess their preparedness for FATCA internally, by reviewing their group structures, investors and distributors, and externally, communicating with their service providers to understand how they can help to make the compliance and reporting processes smoother.
The deadline for firms to register with the IRS in order to avoid the risk of being withheld upon is 25 October 2013. The online registration system is due to open by 15 July 2013. The first information reporting is due no later than 31 March 2015 in respect of known US accounts held in the 2013 and 2014 calendar years.
Kinetic Partners can assist private equity firms with their FATCA compliance in a number of ways:
- Ongoing consultancy – we can provide on call support, training, assistance with deciding on the right strategy for a firm and/or fund, project governance and input in the FATCA steering committee.
- Impact assessment and strategy – we can provide insight and training; assess specific FATCA impact on the group and determine due diligence process.
- Assistance with any part of FATCA compliance including the registration process.
- Full project management and oversight – we can implement FATCA and advice on correct systems and process that need to be in place.
- Assurance – we can review and comment on strategy in place, project plan, sit on the FATCA steering group and provide confirmations of understanding regarding reporting.
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