FATCA delays no excuse for complacency, says E&Y

Fund AdministrationInvestorsLegalOperational RiskRegulation
08 Nov, 2012

Hedge funds should still ready themselves for FATCA implementation and avoid complacency despite delays to the rules, Ernst & Young (E&Y) has warned.

“There is a risk of complacency given the delays, particularly at smaller managers. Furthermore, managers are dealing with huge swathes of other regulations such as AIFMD and Form PF. Given these rules’ more pressing timeframes, FATCA might slip off the radar. Such complacency is an ill-advised approach for managers to take particularly given the amount of work FATCA entails,” said Stuart Chalcraft, associate partner at E&Y in London.

The Internal Revenue Service (IRS) announced it would postpone FATCA implementation until January 2014 to give financial institutions more time to conduct due diligence on underlying clients and establish systems and technology to enable the collection and collation of data, as well as the ability to withhold taxes from recalcitrant clients.

The US is negotiating a variety of Intergovernmental Agreements (IGAs) with a number of countries, which has also been a major factor behind the delays. So far the UK is the only country to have signed an IGA with the US on FATCA whereby in exchange for full FATCA cooperation, US financial institutions will share details with British tax authorities on recalcitrant UK taxpayers. Speaking in April 2012, Mary Burke Baker, government adviser at K&L Gates, warned IGAs could lead to delays. She said affected countries would need to run the rules through their national legislators and develop the appropriate infrastructure to handle the requirements, something that was unlikely to happen quickly. 

“One cannot rule out further delays to FATCA implementation beyond January 2014. There is a huge amount of work to do and the US is negotiating IGAs with up to 40 countries. This could be a long, drawn out process,” commented Chalcraft.

Despite these impediments, a final draft of FATCA is likely to be published later this year.

Nonetheless, the delays present the IRS with more time to prepare, as well as get a handle on the Healthcare Affordability Act, another landmark piece of legislation it is required to implement. Service providers, developing tools to help managers meet FATCA compliance requirements, will also enjoy the additional breathing space.

“The delay will give these service providers more time to enhance their products. However, it is very important for managers not to become too dependent on these providers, and outsource too much work surrounding FATCA,” said Chalcraft.

FATCA has alarmed financial institutions including hedge funds. Failure to comply with FATCA will result in a 30% withholding tax on US-source payments to non-compliant firms. Counterparties and prime brokers will be forced to have compliance requirements in place stipulating their hedge fund clients are obeying the rules. A 2011 survey by KPMG revealed just 32% of financial institutions expected to be fully compliant with FATCA come the original January 1, 2013 deadline.

The Joint Committee on Taxation in Congress predicts FATCA could raise approximately $8.5 billion for government coffers, a far cry from the earlier $100 billion estimates.

AIFMDErnst & YoungFATCAForm PFIntergovernmental agreementsInternal Revenue ServiceKPMGUKUS