Fund Forum: Managers must build holistic infrastructure to deal with GATCA

26 Jun, 2014

Fund managers must build holistic internal infrastructure to deal not just with the US Foreign Account Tax Compliance Act (FATCA) but other global tax reporting rules that will inevitably be implemented in due course, according to KPMG.

FATCA, which requires foreign financial institutions (FFIs) to report details of wealthy American clients directly or indirectly via their national regulators to the Internal Revenue Service (IRS), is fast approaching.  However, other jurisdictions are actively considering similar rules with some experts openly predicting the introduction of a global FATCA or GATCA.

“A global FATCA is imminent so fund managers must build their systems and technology to deal with multiple tax reporting requirements and not just FATCA. A lot of countries are formulating their own FATCA-esque rules and it is essential managers ensure their systems can deal with all of these rules and reporting obligations,” said Charles Muller, partner at KPMG in Luxembourg, speaking at Fund Forum in Monte Carlo.

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 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. “Fund managers at present are not prepared to deal with these global rules such as the UK FATCA and OECD proposals. Preparing for this will be a labour intensive exercise. Managers have been focusing on US FATCA but not on the other potential rules,” commented Muller.

Preparations for FATCA have been haphazard. A paper – As FATCA Deadlines Loom, What Managers Need to Know – published by SEI in spring found 48% of managers had been unaware of the then May deadline by which FFIs were required to register for a Global Intermediary Identification Number (GIIN) with the IRS. 

More than one third of respondents to the SEI study 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.  Nonetheless, the majority of managers appear to be offsetting the costs of FATCA to their funds.  

Failure to comply with FATCA is not an option as this will facilitate a 30% withholding tax on all US-source payments. Counterparties such as prime brokers will be forced to have compliance requirements in place stipulating their clients are obeying the rules.