Editor’s Note: One of many new regulations affecting the global investment management sector, the Foreign Account Tax Compliance Act (FATCA) will have a far-reaching impact on asset managers. Firms are likely to face significantly increased administrative burdens and need to review operational processes and technology infrastructures to cope with the demands of the new legislation. Here are views from Mark Benzing, investment and compliance consultant for DST Global Solutions.
Background
FATCA is a new tax regime being introduced by the US government, requiring global participation. The goal is to prevent tax evasion by US taxpayers or foreign entities in which US taxpayers hold substantial ownership. The act will require Foreign Financial Institutions (FFIs) to report to the US government and withhold 30 per cent tax on US sourced income and gross proceeds of sale in cases of non-compliance.
This regulation is expected to be finalized by the end of summer 2012 and fully implemented by the end of 2017.
The main requirements for FATCA implementation are customer identification – for both new and existing customers – withholding tax and reporting.
Participant classification
FATCA will place onerous operational requirements on a wide range of FFIs, including hedge funds, asset managers, wealth managers and custodians. They will have to identify relevant accounts and report these to the US Internal Revenue Service.
Under FATCA, FFIs are classified into six main categories:
1. Participating Foreign Financial Institution – FFIs who agree to enter into an agreement with the US Internal Revenue Service to supply the required information to identify US Accounts;
2. Deemed Compliant Foreign Financial Institution – entities that don’t need to execute a FATCA agreement to comply with FATCA;
3. Exempt Beneficial Owner – Retirement funds may be exempt or deemed compliant depending on their structure and whether the country has a tax treaty with the US;
4. Non-Participating Foreign Financial Institutions – all foreign financial institutions that have not entered into agreement with the US IRS;
5. Recalcitrant Individual Account Holders – uncooperative account holders who refuse to provide the necessary information to become FATCA compliant;
6. Non-Financial Foreign Entities – a foreign entity that is not a financial institution.
