There is a raft of new regulation in the financial services industry and many of the rules affecting fund administrators and, more specifically their clients, stem from overseas. One example is the US Foreign Account Tax Compliance Act (Fatca), due to come into effect in 2013.It will require investment funds domiciled outside the US, categorised as “foreign financial institutions”, to provide the country’s tax authorities with information about financial accounts held by taxpayers.
While the responsibility resides with the funds and their directors and is delegated to fund managers, the compliance work will fall to administrators. This will include an assessment to see if a fund’s investors should be treated as US taxpayers, and the establishment of systems to enable tax withholding on certain payments and to fulfill annual reporting requirements.
The deadline of June 30, 2013, by which time funds need to commit to complying with Fatca, is fast approaching and fund managers expect administrators to help them meet it.
The intergovernmental agreement between the UK and US governments in September 2012, sets out a number of exemptions from Fatca reporting for products considered to pose a low risk for tax evasion. Enacting legislation must now be passed. Several other countries, including Ireland and Luxembourg, are negotiating similar agreements with the US, aimed at reducing the compliance burden and dealing with data protection laws. Crucially, though, these types of agreement appear to only benefit entities within the respective jurisdictions.
Importantly, no such agreement is being negotiated between the US and typical offshore fund domiciles such as the Cayman Islands or British Virgin Islands, and full Fatca participation should be anticipated for funds domiciled in those jurisdictions.
Fatca preparedness will cost time and money. Administrators will need comfort that resources expended will be recouped. Engaging with fund managers and directors will enable timely agreement of roles and responsibilities that will help manage the fund manager’s expectations.
Implementing new compliance puts pressure on many administrators, exacerbated by the constantly moving targets of incomplete regulation and the deadline. If they have not yet been approached, administrators should engage with the fund managers to ensure they are preparing and have considered their strategy. There are a number of different categories of foreign financial institution and work can be done now to establish the likely category for the fund. Fund managers will want assurance that their administrator has the means to assist them with Fatca.
Fatca preparedness is likely to involve a thorough review of the existing investors through electronic and, if necessary, manual examination of records to identify those who need to be contacted to obtain further documentation to prove their citizenship.
System upgrades will often be required to meet mandatory take-on, reporting and withholding requirements on behalf of fund clients. Administrators should be planning now, co-ordinating activities across different jurisdictions to ensure the relevant systems are in place globally.
While the usefulness of any preparation may be challenged by the many unknowns in the regulations, there is a lot that is known. Administrators who discuss Fatca with their clients, agreeing responsibilities and setting expectations now, while making preparations internally to ensure resources and expertise are available, will be best placed to ensure that their clients, and they themselves, meet the challenge as painlessly as possible.
Nick Matthews is a senior member at Kinetic Partners
©2012 funds europe