ALFI: Luxembourg bolstering tax transparency, says finance minister

18 Mar, 2014

Luxembourg is bolstering its tax transparency and is likely to sign its intergovernmental agreement (IGA) with the US on FATCA by the end of this month, according to the country’s finance minister.

Luxembourg has faced heavy criticism from international bodies about its perceived lack of transparency and information sharing. The Global Forum on Transparency, a body created by the Organisation for Economic Cooperation and Development (OECD), said in November 2013 that Luxembourg had failed to live up to international standards on transparency. Other countries found wanting by the Global Forum on Transparency included Switzerland, Cyprus, Seychelles, the British Virgin Islands, UAE and Botswana.  

“We are tackling these problems and we hope to be fully compliant with the Global Forum on Transparency’s requirements by the end of this year. We are in the process of implementing the EU’s automatic exchange of information, and hope to have a FATCA agreement signed with the US by the end of March,” said Pierre Gramegna, minister of finance in the Grand Duchy, speaking at the Association of the Luxembourg Fund Industry (ALFI) spring conference in Luxembourg.

The EU’s exchange of information directive aims to strengthen tax cooperation among EU member states. “On the automatic exchange of information, Luxembourg will evolve and we shall improve transparency. These are good changes and will provide new opportunities to help our funds industry,” commented Gramegna.

Meanwhile, FATCA, which will be implemented from July 2013, is part of the Internal Revenue Service’s (IRS) clampdown on wealthy Americans not paying their taxes. FATCA has been mired by delays for several years now. The last postponement in July 2013 came as the IRS struggled to sign IGAs with multiple jurisdictions in good time. At present, roughly 20 IGAs have been signed with countries including the UK, Cayman Islands Switzerland, Ireland and Germany, while a further 11 are all but in the bag. Nonetheless, that still leaves 40 IGAs caught up in the negotiation process.

A number of countries have yet to codify FATCA into national law. Foreign Financial Institutions (FFIs) including fund managers operating in such jurisdictions would most likely have to consult with their own national regulators on how to proceed with their FATCA reporting requirements.

More worryingly, the IRS has yet to clarify what firms based in countries where IGA negotiations are still on-going should do. There are fears these FFIs might be forced to comply with full FATCA before reverting to another reporting system once the IGA has been signed. In December 2013, the IRS published a final agreement for FFIs reporting directly to the IRS, which lawyers have advised those FFIs adhere to if they are based in countries where IGA discussions have yet to be concluded.

FFIs operating out of multiple jurisdictions with different IGAs are also in a quagmire. The IRS has explicitly said it will not allow these firms to comply simply with a uniform IGA, instead requiring them to be compliant with all of the IGAs signed in each of the jurisdictions where they have operations. Failure to comply with FATCA is not an option as this will facilitate a 30% withholding tax on all US-source payments. Counterparties and prime brokers will be forced to have compliance requirements in place stipulating their hedge fund clients are obeying the rules. 

FATCA is fast becoming a concern for fund managers. Seventy-four per-cent of fund managers surveyed by SunGard and Aite Group said it was their biggest regulatory challenge, putting it ahead of Form PF and compliance with the EU’s Alternative Investment Fund Managers Directive (AIFMD). 

ALFILuxembourgFATCAIRSAIFMDSungardAite GroupIGAsexchange of information