A Global Perspectives White Paper                    FATCA simplified             The Good, the Bad & the Ugly            ...
Contents                                       “FATCA should be re-labeled as FATIntroduction                 2           ...
If your organization does not enter into    The Badan agreement with the IRS and agree tothe required reporting, disclosur...
landmark in the effectively end of Swiss      Of course in the case of the larger, morebank secrecy. Time will tell (the d...
•       The fact that the final FATCA           Even if foreign domestic bank secrecy rulesrules are still not finalized (...
•       The updated rules have                 This includes system analysis, identifyingredefined the definition of a “fi...
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FATCA Simplified - the Good, the Bad and the Ugly - Global Perspectives White Paper - June 2012


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With less than a year to go many Fund Managers are starting to examine their obligations under FATCA, especially regarding mandatory reporting, withholding and disclosure.

All the attention over the last couple of years has been on Dodd Frank, Form PF and the AIFM Directive. FATCA has to date not been a priority for many Fund Managers.

This is about to change.

This White Paper examines the main issues surrounding the US FATCA legislation and what financial service companies and Fund Managers need to do now to ensure they are compliant.

You can also access all our previous White Papers here-


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FATCA Simplified - the Good, the Bad and the Ugly - Global Perspectives White Paper - June 2012

  1. 1. A Global Perspectives White Paper FATCA simplified The Good, the Bad & the Ugly By Shane Brett, Managing Director Global Perspectives www.globalperspective.co.uk Date 29th June 2012 Global Perspectives www.globalperspective.co.uk Email: Shane@globalperspective.co.uk Phone: +44 20 3239 2843 Mobile: +353 (0) 87 115 2173
  2. 2. Contents “FATCA should be re-labeled as FATIntroduction 2 CAT - the attitude the US is displaying to the world community and to its ownThe Bad 3 citizens”.The Ugly 4 “Outraged Expat”, EmergingMarkets.com, May 2012The Good 5 IntroductionNext Steps 6 FATCA (the Foreign Account Tax Compliance Act) is US tax legislation enacted in 2010 and due to come into force on Jan first 2013. Put simply FATCA require all foreign financial institutions to report US account holders to the Inland Revenue Service (“IRS”). The US, unlike virtually every other country in the world taxes its citizens on their worldwide income. Its citizens are made to report their income on a global basis. FATCA is effectively the IRS extending its long reach internationally into every country on the globe and forcing its financial companies to report to it, to disclosure to it and to withhold tax on its behalf. Essentially FATCA is the IRS ordering foreign institutions to do its dirty work - by making non-US companies act as unpaid tax collectors! FATCA compels all Foreign Financial Institutions (known as FFI’s) to identify all U.S. account holders and report this information to the IRS. The FFI must then impose a 30% tax on payments/transfers to all account holders who refuse to identify themselves and their country of origin. FATCA has a very broad definition of a foreign financial institution (the “FFI”). This has been designed specifically to bring as many financial type institutions into the IRS’s reporting net (Hedge Funds, Mutual Fund Managers, Private Equity etc, as well as traditional banks and Prime Brokers).Global Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +44 20 3239 2843Mobile: +353 (0) 87 115 2173
  3. 3. If your organization does not enter into The Badan agreement with the IRS and agree tothe required reporting, disclosure and With less than a year to go many companies inwithholding of tax on your client’s the financial services industry are starting tomoney/assets, then your own examine their reporting, withholding andorganization will be subjected to a 30% disclosure obligations as required under FATCA.Withholding Tax on all your and your With all the attention on Dodd Frank, Form PFclients US sourced income. This also and the AIFM Directive over the last couple ofapplies to US Dividends and proceeds years, FATCA has to date not been a priority forfrom the sales of US assets. many Fund Managers.To avoid this 30% withholding Tax This is about to change.FATCA compels every ForeignFinancial Institution worldwide to Organizations right across the global financialenter an agreement directly with the services industry need to start planning in detailIRS. how they will address the disclosure and reporting requirements contained within FATCA.This agreement will detail the processesyour organisation must follow to identify One point we have heard repeatedly is that theall US accounts, the on-going reporting more organizations examine the amount of workrequired on those accounts and finally involved to become FATCA compliant, the morethat you agree to withhold 30% tax on management are surprised at the level of effortany payments to FFI’s & their Accounts and cost to make themselves compliant.holders worldwide, that do not also havea similar agreement with the IRS. The initial worldwide costs of complying with this legislation have been conservatively estimatedCurrently FACTA legislation is in near at $10 billion dollars, with the cost to thefinal form. The IRS issued a substantial average large Global bank (e.g. HSBC, Morganexpansion and clarification of the rules Stanley) estimated at a massive $100 million perin February (all 400 pages of them - bank. The IRS itself estimates FATCA will bringwhich we will discuss further below) and in less than a billion dollars in revenue.the final hearings in Washington tookplace in May. The legislation will be Given the huge internal cost (with no obviousfinalized during summer 2012 benefit whatsoever) for all FFI’s involved, it is very surprising that financial lobbyists inBelow we’ll examine the Good, the Bad Washington did not kill off or substantially diluteand the downright Ugly regarding this legislation at the outset. We understandFATCA. many companies and countries presumed FATCA would die off or be postponedThis will include outlining what this indefinitely. This hasn’t happened.legislation means for the wider FinancialServices Industry, Fund Managers in Instead in February this year 5 other Europeanparticular, and what your organisation countries announced they had signed anneeds to do next to comply. agreement with the US to share this taxation information (The UK, France, Germany, Italy and Spain - with Ireland and Luxembourg expected to do the same soon). This is a significant development and essentially means FATCA is here to stay. Furthermore on June 21st 2012 The IRS and US Treasury announced that Switzerland & Japan had both signed framework agreements regarding FATCA. This could be a hugely significant development and mark an importantGlobal Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +353 (0) 42 9339951Mobile: +353 (0) 87 115 2173
  4. 4. landmark in the effectively end of Swiss Of course in the case of the larger, morebank secrecy. Time will tell (the details international FFI’s this is simple not possible.have yet to emerge).Although this legislation is onerous onall companies in the financial services The Uglyindustry, it might yet prove particularlycumbersome for the Asset Management In the words of one commentator the FATCAindustry (and Hedge Funds in legislation is “breath-takingly arrogant”. To seekparticular), due to the nature of many to impose US tax legislation on a global basis isinvestors. certainly incredibly imperialist.Companies needs to execute detailed Some of the most troublesome issues withdue diligence to determine from which FATCA are as follows-country their investors originate. This isnot an easy task if many have • FATCA imposes US tax reporting andsubscribed through a nominee, withholding requirements on financial servicesintermediary or distribution platform. companies regardless of whether they areFFI’s need to drill down to the beneficial based in the US or do business there. It meansowner of the assets/account to potentially withholding tax could be applied tounderstand clearly if the investor is Non-US transactions between Non-USwholly or substantially (i.e. >10%) of US businesses. This is ridiculous.origin or not. • The legislation will be particularly toughFurthermore, organizations operating on Dual citizens worldwide. Many Americans areglobally need to come to a common now finding it difficult to open legitimate newview of what constitutes a US/Non-US banks accounts abroad, simply because of theirinvestor i.e. your UK office can’t view an nationality. America’s 5 million strong expataccount held with it as being Non-US community has launched a drive to highlight thewhile another account open by the same unfair affects on them of FATCA. Americaninvestor in your German office is viewed Citizens in Switzerland have already complainedas US (this internal reconciliation alone of having their accounts closed down and arecould be an operational nightmare for having trouble finding other local banks to takelarge, multi-national FFI’s). them on (so they can have wages paid into their accounts, write checks for day to day living etc).Fund Managers in particular may haveto overhaul the way they open new • This brings us to the central stumblingaccounts, taking longer than before to block in the FATCA legislation and why manyestablish the true country of the industry observers think it is unworkable – theinvestor. KYC processes will be more inherent conflict when FATCA compels youdetailed in the future and all transactions to release investor information - which to domade on behalf of investors will have to so is completely illegal under your ownclearly identify the country of origin. home country legislation.Software will have to be enhanced ordeveloped to reflect these FATCA This contradiction is seemingly insurmountable.requirements. Think of countries like Cayman or Switzerland (which is why the recent Swiss-US FATCAIndeed some small FFI’s have spoken agreement could be so important). In responseopenly about ridding themselves of US to this problem the IRS has now provided for a 2clients (and there have been plenty of year transition on this requirement until Jan 1stanecdotal reports in the press of US 2016. We fail to how this will help. This iscitizens been asked – or even forced – obviously a crucial issue for Fund Managers into withdraw their assets and close particular.accounts).Global Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +353 (0) 42 9339951Mobile: +353 (0) 87 115 2173
  5. 5. • The fact that the final FATCA Even if foreign domestic bank secrecy rulesrules are still not finalized (due shortly) means the US does not get all the US Accountleaves very little time for many FFI’s to information it requires, its mere existence willreview and perform the substantial serve as a warning to its citizens that theirchanges required across their options for hiding money successfully abroadorganizations .e.g. changes to internal are severely limited.processes, enhancement to technologysystems, client procedures and buildinga framework for controls and both US The Goodand non-US businesses. On a more upbeat note it is worth look at some• For FFI’s the time it takes to on- positive FATCA developments outlined in theboard a new client will likely be IRS February 2012 publication of the main draftextended in order to ensure compliance rules:-with all the regulatory requirements. Itwill slow down fund launches and do • One of the most positive changes of thelittle to make funds more attractive to February clarification was a lifting of thepotential investors. threshold for FATCA monitoring and reporting for existing clients. For individuals, accounts less• The current IRS guidelines have than $50k is deemed out of scope for FATCAnot confirmed whether FATCA should purposes. Fund managers will also only have tobe applied at Umbrella or Sub Fund manually review paper records where thelevel. This is a major concern with the accounts are in excess of $1 million USD.legislation due to come into force at the Similarly for entities, this has been raised tostart of 2013 $250k and FFI’s can use existing KYC processes to identify the FATCA status of their• FATCA will cut off US investors existing accountsfrom investment opportunitiesworldwide. Dumping them is inherently • The IRS has also now offered a newbad for globalization and business in category for FFI’s – those “Deemed Compliant”.general. It will mean a US tax abiding These FFI’s would have no need to enter anperson or entity can’t invest easily agreement with the IRS. There is a questionabroad (when it wants to be fully tax mark in the Funds industry over whether manycompliant) simply because foreign Funds will be able to avail of this exemption (thebanks refuse to allow US clients, parameters are narrowly defined). Earlybecause of the hassle it will cause them optimistic reports have given way to a moreunder the FATCA rules. skeptical assessment of whether the exemption will be of much use to Asset and Hedge Fund Managers. Traditional Pension Funds areSo why are the US forcing financial definitely included but the challenge forinstitutions worldwide to go to all this Managers is the on-going monitoring that istrouble, for legislation which is widely required to ensure a non-exempt party does notviewed as unworkable and outrageous? subscribe to their fund (e.g. A US High Net Worth Individual”).The answer is simple – to instill fear. • As mentioned above FFI’s will now beThe IRS wants its citizens to know its able to use their existing customer onboardinglong arm reaches into every corner of processes to collect the data required forthe globe and into every bank account existing investors to determine if they are of USon the planet. The fact that this origin (e.g. asking for Social Security Numbers,legislation exists at all will serve to Passports verified etc). For new investors thefrighten US citizens from depositing FFI will have to follow the guidelines set down incapital and assets abroad. their agreement with the IRS.Global Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +353 (0) 42 9339951Mobile: +353 (0) 87 115 2173
  6. 6. • The updated rules have This includes system analysis, identifyingredefined the definition of a “financial business entities in scope, advising onaccount” in clearer language. This now operational process reengineering and helpingfocuses it on an account held at a Prime to educate senior management as to theirBroker or more traditional bank. FATCA responsibilities. Contact us for more information.• Delays have been announcedregarding reporting of information A perfect storm of new regulation is gettingrelating to income (pushed back to ready to hit the Investment Fund industry2016). Reporting on gross proceeds will (AIFMD, FATCA, Dodd Frank etc). Globalnow start in 2017, giving many FFI’s and Perspectives can help your organizationsystem vendors a chance to rollout the navigate safely through these regulatory waters.required system enhancements (likely tobe substantial). Sign up for our all monthly White Papers at-• Finally it is now looking likelythat the FATCA reporting officer at the http://www.globalperspective.co.uk/#!white-FFI will simply be able to certify that papersthey comply with the legislation.External audits by a third party will not to Or email: - shane@globalperspective.co.ukbe required by the IRS to confirmFACTA compliance.Next Steps...Senior Management within yourorganisation needs to start to workclosely with the Heads of Taxation,Operations and Compliance, along withthe Board of your organisation toconduct a detailed assessment of thework required and the operational andsystem changes that need to beenacted. There is not much timeremaining before FATCA starts to bite.It is important not to underestimate thescope of changes that may be requiredand the number of departments,processes and technology systemsaffected. These systems will likelyinclude KYC & Client on-boarding,Client reporting & Custody as well asIncome, Taxation, Trading and Clearingsystems.Global Perspectives can provide yourorganization with a full FATCAassessment of the operational andtechnology changes required toensure you will be FATCA compliant.Global Perspectiveswww.globalperspective.co.ukEmail: Shane@globalperspective.co.ukPhone: +353 (0) 42 9339951Mobile: +353 (0) 87 115 2173