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Overview of FATCA

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This presentation serves as study notes for the e-learning material titled: "South African Hedge funds and international developments" …

This presentation serves as study notes for the e-learning material titled: "South African Hedge funds and international developments"

These notes focus on FATCA and its Impact on the Hedge Fund Industry.

http://www.hedgefund-sa.co.za/fatca


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  • 1. Overview of FATCA Study Notes
  • 2. Brief Overview • Stands for Foreign Account Tax Compliance Act (FATCA): – Derived from the Hiring Incentives to Restore Employment (HIRE) Act – Developed to prevent tax evasion by United States persons and companies – Final revision was made in January of 2013, and the registration deadline is on October 13, 2013
  • 3. Overview of Steps to Prepare for FATCA • Determining whether to comply with FATCA • Registration with the IRS • Documentation, due diligence, withholding, and reporting requirements • Who are withholding agents and what do they do? • Expanded Affiliated Groups (EAGs)
  • 4. Determining whether to become compliant with FATCA • Compliance allows Foreign Financial Institutions (FFIs) to be exempt from the 30% withholding requirements: – This would be withheld on the sale of US securities, dividends and interest payments • Non-compliance could lead to the interest of additional investors.
  • 5. Registration with the IRS • Portal Registration: – Electronic method of registration for attaining global intermediary identification number (GIIN) – Available on the IRS webpage – Much quicker response time on processing of the application • Required Registration Information: – Properties of the approved FFI registrants list – Form 1042-S
  • 6. Documentation, Due Diligence, Withholding, and Reporting Requirements • Documentation and Due Diligence: • Classifying the Payee – Payees are those receiving the payments for withholding – Exemptions are defined, but must be analyzed carefully – Who are the entities acting as payees? • Partners • Beneficiaries • Owners • Any other flow through entities, which are not included in the exceptions list
  • 7. Documentation, Due Diligence, Withholding, and Reporting Requirements • Documentation and Due Diligence: • Documentation Requirements for Payees – Certifications will need to be attained to operate • Form W-9 • Form W-8 – Changes may be made to the certification requirements and what information is required
  • 8. Documentation, Due Diligence, Withholding, and Reporting Requirements • Documentation and Due Diligence: • Due Diligence Requirements – There are two levels of due diligence: • Individual level – Will primarily involve new accounts • Entity level – Will consist of supplying overall fund information involving clients for FATCA
  • 9. Documentation, Due Diligence, Withholding, and Reporting Requirements • Documentation and Due Diligence: • Withholding – January 1, 2014 will initiate withholdings on withholdable payments – Review of entities by USWAs is allowed to ensure the proper documentation requirements are met – Gross proceeds will be collected in January 1, 2014
  • 10. Documentation, Due Diligence, Withholding, and Reporting Requirements • Documentation and Due Diligence: • Withholding – Withholding agents are liable for collections of withholding payments • Are accountable for understanding the guidelines to follow – Withholding deposits are held to strict guidelines and will be penalized for delayed payments
  • 11. Documentation, Due Diligence, Withholding, and Reporting Requirements • Documentation and Due Diligence: • Reporting – Form 1042-S is the main source of information between USWAs and the IRS • Will be filed on an annual basis – Form 8966 reports US investors involved with FFIs on an investor relationship level, and USWAs will be required to file this for US investors who have investor relations with passive NFFEs
  • 12. Who are withholding agents and what do they do? • Two types of agents • US persons who control withholding and foreign pass- through payment activities • Those recognized as USWAs through Form W-8 certification • USWAs primarily work out of partnerships, corporations, domestic estates, and any trusts supervised by US authorities.
  • 13. Expanded Affiliated Groups • The majority of EAGs will be required to comply with FATCA • Requires related entities of FFIs, which are also FFIs to register unless qualifying for an exemption • FFIs will need to determine if the structuring of their EAG(s) will label it as an FFI
  • 14. Expanded Affiliated Groups • EAGs can be described as being similar to a feeder in how it operates 1. The parent (master in the prior illustration) to the EAG(s) would meet the set requirements of ownership for the minimum of one EAG, and 2. “Stock meeting the ownership requirement” by all associated EAGs (in addition to the parent) in possession of “one or more of the other members” of the EAG.
  • 15. Expanded Affiliated Groups • Ownership requirements are set at the minimum of 50% for voting rights, and a minimum of 50% of the total value of includable corporations stock is owned.
  • 16. Expanded Affiliated Groups • Deciding whether an entity is an EAG or not: – Those who are in position of a quantity of option contracts that could possess majority ownership in an includable corporation if executed are included. – Pass-through entities will be included if there is proof that the parent entity possesses a minimum of 50% ownership in the entity. – Entities that were funded by seed capital of the parent entity are excluded by the seed capital exception.
  • 17. Expanded Affiliated Groups • Reporting – All entities related to the FFI must be reported if under jurisdiction of an IGA – There is a difference between related entities and EAGs – IGAs are allowed to decide whether an entity is considered related, unless it is an EAG – FFIs in domiciles that prohibit the release of information about related entities will not be labeled non-compliant if all other information requested is given.
  • 18. Impact on Non-US Funds • Withholding tax of 30% on US investors will be enforced on persons receiving direct and indirect payments from non-US funds • Non-US entities can avoid this withholding tax if the strict reporting requirements are met • Other substance that will need to be observed relate to how FATCA will be implemented.
  • 19. Impact on Asset Management and Managers • Asset managers will need to perform the required tasks before withholding registration can be completed. – The registration date is October 25, 2013 • Third party service providers are allowed to assist with implementation.
  • 20. Impact on Hedge Funds • Compliance is recommended • Initial expenses in implementing FATCA may be significant • On-boarding processes may need restructuring to comply with due diligence • New standards of reporting US investor information to US authorities will be in effect • Changes may need to be made to reporting and tax withholding procedures, plus additional information about the US investors for due diligence
  • 21. Impact on Hedge Funds • US client information will be sent after one year after registration, and the second year and subsequent years will report the amount of withholding taxes paid • FATCA responsibilities will fall to fund administration and managers – Responsibilities will be dealt out by directors of the fund, and will also decide on whether to be a PFFI or not • Administrators are mainly responsible for producing reports and calculating withholding payments
  • 22. Impact on Hedge Funds • Prerequisites to implementing FATCA will need to be performed • For those who choose to comply, there are several steps that need to be taken with compliance for implementation • There will be continued compliance standards that will need to be met each year for continuing compliance with FATCA • Hiring legal, technology, compliance, and operational consultants can simplify the transitioning process for complying with FATCA
  • 23. Impact on Private Equity • Most private equity funds are labeled as FFIs and are mandated to comply with FATCA • Private equity funds are advised to inform current investors of changes that will be made, and to update marketing material • Investment strategies may need to be altered to reach greater returns based on changes from withholding taxes • Those involved with operations of the fund, including investors and third party providers, will need to be briefed on the changes made
  • 24. Impact on Multinational Corporations that are not in the Financial Services Industry The main purpose of non-financial foreign entities (NFFEs)in FATCA are for withholding purposes. Payments that NFFEs make might require the NFFE to be subject to reporting and withholding. NFFEs must minimally review how FATCA may impact operations for their entity. • Broad Span Definition of FFIs • Withholdable Payments • NFFEs
  • 25. Impact on Multinational Corporations that are not in the Financial Services Industry • Broad Span Definition of Foreign Entities: – Multinational corporations who have expanded entities that perform financial transactions are included • Includes foreign holding companies and treasuries, but are accepted for some exceptions – NFFEs that qualify are subject to withholdings up to a maximum of 25% – Exceptions will be exempt if any EAGs are found to be an AIF – Holding companies and treasuries who are associated with FFIs are exempt from exceptions
  • 26. Impact on Multinational Corporations that are not in the Financial Services Industry • Broad Span Definition of Foreign Entities – Pensions and retirement funds will desire to inspect their investment strategy to best suit its participants – IGAs and the final draft of FATCA have developed exemptions for pensions and retirement funds, but will need to be analyzed by these funds to assure that they qualify, and make sure their participants’ contributions are untouched
  • 27. Impact on Multinational Corporations that are not in the Financial Services Industry • Withholdable Payments – NFFEs will need to conclude what payments may be transacted over the border that is defined by FDAP – Most overhead and operational costs are exempt – Hedging, swaps, and futures exchanging with non-US FFIs can eliminate the exemptions – If there is belief that errors have been made with compliance implementation, an audit and correction procedures should be performed promptly
  • 28. Impact on Multinational Corporations that are not in the Financial Services Industry • Withholdable Payments – Loans and leases taken out from an FFI by a US fund could be required to withhold the interest payments on what was borrowed – NFFEs that distribute dividends or interest should document each shareholder that receives these payments – NFFEs are liable for unfulfilled responsibilities involving withholding and reporting about third party agents
  • 29. Impact on Multinational Corporations that are not in the Financial Services Industry • NFFEs – NFFEs generally do not have to sign FFI agreements, but are required to be compliant to FATCA unless they can meet the exemption qualifications – NFFEs could also be exempt by meeting certain entity or activity requirements – Non-exempt NFFEs are labeled as passive NFFEs • Must disclose US investor information and file a Form 8966 with the IRS
  • 30. US Persons • There are three types of US persons: – US citizens – Legal US residents – Persons residing in the US • Non-US persons will be impacted very lightly with FATCA – Those who refuse documentation for FATCA will have to cope with withholding taxes • US persons may be asked to file a Form W-9 – Those who do not comply would encounter withholding taxes
  • 31. US Persons • Evaluating an Investors Positions: – US persons will want to perform due diligence on FFIs they may potentially invest in – US persons with positions in FFIs will be required to report balances of foreign investments on their Form 1040 – It is advised that US persons invested in FFIs speak with a tax professional to construct a game plan
  • 32. Conclusion • The amount of money that is being prevented from “evading” the US is less than .006% of the US GDP last year – The amount that is prevented from evasion is insignificant overall • It will be burdensome to implement FATCA’s compliance requirements • FATCA is not highly esteemed among the financial industry
  • 33. Conclusion • FATCA’s implementation process is very intricate • Requirements are inconvenient, especially while trying to implement AIFMD into a fund’s operations during the same year • This is not a proper way to stimulate economic growth • Overall impact of FATCA is yet to be determined