FATCA responsible officer function obsolete for Cayman funds
Outsourcing the responsible officer (RO) function under the Foreign Account Tax Compliance Act (FATCA) offers limited value to Cayman-Islands’ domiciled fund managers.
The Model one Intergovernmental Agreement (IGA) between the Cayman Islands and the US does not stipulate that a responsible officer is required. The responsible officer title is a feature of the Internal Revenue Service’s FATCA portal registration process.
“There are service providers pitching the outsourced RO to Cayman Islands’ domiciled fund managers but the role adds limited value given that most Cayman-domiciled funds are exempt from appointing an RO altogether,” said Joe Holman, chief executive officer at Orangefield Columbus.
“Under the IGA, the responsibility for FATCA registration is the Cayman Islands’ government rather than the financial institution so it is ultimately the Cayman government’s responsibility,” commented Holman.
FATCA compliance is proving a challenge for fund managers. A paper published in March 2014 by SEI found more than one third of respondents had yet to establish a plan on dealing with investor due diligence although 67% said they are confident they will complete this task ahead of or by the FATCA deadline.
However, this might be somewhat optimistic given that 41% of managers were undecided as to whether they could rely on existing due diligence documents or obtain new W-8 and W-9 forms from investors. Sixty-nine per-cent of managers had significantly underestimated the compliance costs associated with FATCA, according to the SEI survey.
There are concerns a global FATCA or GATCA could be implemented as a growing number of countries implement their own FATCA-esque rules. The UK is in the process of creating its own FATCA whereby there will be an automatic exchange of information about UK residents with accounts in the Crown Dependencies and Overseas Territories, and this is likely to be implemented from 2016.
Meanwhile, China is pushing ahead with its Foreign Asset Reporting Requirements (FARRs) which will force its wealthy citizens to publish details of their offshore holdings.
The Organisation for Economic Co-operation and Development (OECD) has also proposed an agreement on the automatic sharing of tax data between participating governments although the full details have yet to be hammered out.
“A lot of third countries are following the US model in terms of FATCA, and it is essential that managers put systems in place or use providers which can ensure compliance with not just FATCA but all of the global tax reporting rules coming into effect,” said Holman.
FATCA requires foreign financial institutions (FFIs) to report details directly or indirectly via their own local tax authorities on accountholders to the IRS as part of the American government’s clampdown on tax avoidance. Failure to comply is not an option. Those in breach of the rules will be subject to a 30% withholding tax on all US-source payments.