• Timeline for FATCA Compliance for Asia Based Investment Managers
  • February 3, 2014
  • Law Firm: Bingham McCutchen LLP - Boston Office
  • The U.S. Internal Revenue Service (“IRS”) and U.S. Department of Treasury (“Treasury”) released a comprehensive set of final regulations and notices relating to the implementation of the Foreign Account Tax Compliance Act (“FATCA”) last winter and fall.1 While the final regulations and notices further delayed the implementation of certain FATCA provisions, Asia-based managers should now be preparing for full FATCA implementation.

    FATCA GENERALLY

    FATCA generally imposes gross-basis withholding at a 30 percent rate on payments of certain types of U.S.-source income (generally dividends, interest, royalties and other similar “passive” types of income), as well as on the gross proceeds from the sale of, or a return of capital or principal from, investments that generate U.S.-source interest and dividends (the “Withholding Tax”). The Withholding Tax applies with respect to payments to certain foreign financial institutions (“FFIs”) unless the relevant FFI enters into an agreement (an “FFI Agreement”) with the IRS pursuant to which the FFI agrees to determine which of its accounts is directly or indirectly owned by U.S. individuals or entities (“U.S. Holders”) and ultimately, to provide information on such U.S. Holders and their account balances, income and withdrawals, to the IRS.

    Where foreign law prevents an FFI from complying with the FATCA requirements, the United States may enter into an intergovernmental agreement (“IGA”) with the foreign government (the partner jurisdiction) to remove the impediments to FATCA reporting. The Treasury has developed two alternative model IGAs, Model 1 IGA and Model 2 IGA.2 Under Model 1, the partner jurisdiction agrees to direct and enable all nonexempt FFIs in the partner jurisdiction to identify U.S. accounts in accordance with due diligence rules adopted by the partner jurisdiction and report specified information about the U.S. accounts to the partner jurisdiction; the partner jurisdiction then transfers that information to the IRS on an automatic basis. Under Model 2, the partner jurisdiction agrees to direct and enable all nonexempt FFIs that are located within it to register with the IRS and report specified information about U.S. accounts directly to IRS in a manner consistent with FATCA, except as expressly modified by the Model 2 IGA.

    According to Treasury guidance, a jurisdiction will be treated as having in effect an IGA if the jurisdiction is listed on the Treasury website as a jurisdiction that is treated as having an IGA in effect. In general, Treasury and the IRS intend to include on this list jurisdictions that have signed but have not yet brought into force an IGA. The list of jurisdictions that are treated as having an IGA in effect is available at the following address: http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx.

    The definition of an FFI includes not only banks and broker dealers, but also entities whose principal business is investing in securities, commodities and partnership interests (including derivatives of such interests). Therefore, the FATCA provisions are applicable to many investment entities organized outside the U.S. (e.g., hedge funds, private equity funds, CLOs, mutual funds, trustees, custodians, investment managers, securitization vehicles and listed investment companies, among others).

    SINGAPORE, HONG KONG, JAPAN and the CAYMAN ISLANDS

    The Singapore government intends to conclude a Model 1A IGA with the Treasury, pursuant to which financial institutions in Singapore must report information on U.S. accounts to Inland Revenue Authority of Singapore who will then exchange this information with the IRS.

    Hong Kong’s Securities and Futures Commission has stated that the Hong Kong government has been in discussions with the Treasury “with the objective of concluding an IGA designed to facilitate compliance with FATCA by FFIs in Hong Kong in a manner that reduces their overall reporting burden”. However, no such IGA has been announced yet. It is envisaged that Hong Kong will enter into a Model 2 IGA.

    On June 11, 2013, the U.S. and Japanese governments concluded a Model 2 IGA on the implementation of the provisions of FATCA by Japanese financial institutions and the IGA became effective on the same date.

    On November 29, 2013, the Cayman Islands government signed a Model 1 IGA with the Treasury, which requires the Cayman Islands government to enact laws requiring the identification and reporting of information about U.S. accounts to the standards set out therein. Unless there is an available exemption, Cayman FFIs subject to the IGA will be required to identify U.S. accounts and report specified information about those US accounts to the Cayman Islands Tax Information Authority, which would then pass such information on to the IRS on an automatic basis annually. Cayman FFIs that comply with the laws implemented pursuant to the IGA will be treated as satisfying the due diligence and reporting requirements of FATCA. Such FFIs will not need to comply with the specific provisions of the FATCA Regulations and will instead be ‘deemed compliant’ with the requirements of FATCA and not be subject to withholding tax.

    WHAT NEEDS TO BE DONE NOW?

    Fund managers should begin now to prepare themselves and their funds to comply with the FATCA requirements. Actions that must be taken include:

    • Review the Requirements for Entering into an FFI Agreement with the IRS.3 The IRS has issued Form 8957, Foreign Account Tax Compliance Act (FATCA) Registration for registering with the IRS under FATCA. However, the IRS recommends that all FFIs enter into an FFI Agreement by registering through the IRS on-line website. The on-line instructions to Form 8957, however, should be reviewed before completing the registration. Registration must be completed no later than April 25, 2014 to ensure inclusion in the first list of compliant FFIs to be released on June 2, 2014 and to avoid the Withholding Tax.
      • An FFI should create an online account with the IRS and input the required information for FATCA registration in order to obtain a “Global Intermediary Identification Number” (“GIIN”).
      • Investment managers should consider whether to register as a “sponsoring entity” for multiple funds under advisement, pursuant to which they agree to manage diligence and FATCA compliance for those funds.
      • Investment managers should appoint a “responsible officer” (an “RO”) who will oversee compliance with FATCA requirements. The RO will complete the registration of the FFI, periodically certify to the IRS as to compliance with the FFI Agreement and make an initial certification to the IRS that, to the best of the RO’s knowledge, there were no formal or informal practices or procedures in place at any time from August 6, 2011 through the date of the certification to assist account holders in avoiding FATCA. An employee of the investment manager will typically act as RO for these purposes.
      • An FFI resident in a jurisdiction that is treated as having an IGA in effect will be permitted to register on the FATCA registration website as a registered deemed-compliant FFI (which would include all reporting Model 1 FFIs) or a participating FFI4 (which would include all reporting Model 2 FFIs), as applicable.
    • Prepare New “On-Boarding” Procedures. Generally, a participating FFI will be required to implement new account opening procedures by the later of July 1, 2014 or the effective date of its FFI Agreement.
      • Generally, this will require obtaining a Form W-9 or an applicable revised Form W-8 from all new investors, and, in the latter case, matching the information on that form against other information obtained pursuant to the account opening procedure, including the AML-KYC process.
      • Fund documentation, including subscription agreements, applicable partnership agreements, disclosure, etc., should be reviewed and revised as necessary and all necessary consents should be obtained from investors to allow the Fund to transfer information and personal data relating to investors to the IRS, to allow the Fund to do any required FATCA withholding, to require investors to provide any additional information required for the Fund to comply with FATCA or any applicable IGA, and to allow for mandatory redemptions or freezing of holdings if information is not provided, etc. Fund offering memoranda should be updated to include disclosures regarding FATCA.
    • Alert Pre-Existing Investors of Need for Diligence. FFIs will be required to perform due diligence with respect to their existing (i.e., pre-July 1, 2014) investors (“pre-existing investors”) in order to ascertain the FATCA status of those investors, and may need to seek additional information from them. FFIs will be required to examine their records, identify investors having certain indicia of U.S. status, and obtain additional information (Form W-8BEN, passport, etc.) as necessary to ascertain whether such investors are U.S. or non-U.S. While the deadlines are staggered depending upon the type of account, FFIs with a small number of accounts may prefer to complete the due diligence process in respect of all accounts before the first deadline of December 31, 2014. An electronic search for U.S. indicia must be undertaken, followed by a paper record search if no U.S. indicia are found during the electronic search. If U.S. indicia are found, further prescribed forms of documentation must be obtained from the investor to certify that the investor is not a U.S. person, otherwise the person must be treated as such.
      • If an account previously identified as a non-U.S. account has changes in account information which introduce U.S. indicia (e.g. a U.S. telephone number), the FFI must perform additional due diligence to determine if the person’s status as a non-U.S. person has changed.
      • Documentation for existing account holders may need to be amended by FFIs to ensure they have the power to close accounts which are non-compliant (or mandatorily redeem investors, in the case of a fund) and to allocate any associated costs to such account holders.

    Many fund administrators are offering additional services to assist funds in performing due diligence on pre-existing and new investors. Such services will need to be agreed upon and implemented well in advance of the relevant deadline, particularly since the administrator’s terms of appointment and responsibilities may need to be amended. In respect of the other FATCA obligations, fund managers will typically perform such obligations on behalf of the funds they manage

    WHAT NEEDS TO BE DONE IN 2014?

    • Registration must be finalized no later than April 25, 2014 to ensure inclusion in the first IRS FFI List to be released on June 2, 2014.
    • Implementation of new on-boarding procedures for new investors.
    • Withholding begins July 1, 2014, with respect to U.S.-source income (other than gross proceeds income), unless either the investor or the investment is “grandfathered” under the applicable rules. Essentially, for new investors, and post-June 30, 2014 investments, withholding begins unless the investor has provided the information necessary to comply with FATCA or is otherwise exempt.5
    • Diligence on pre-existing investors that are prima facie FFIs (i.e., that possess external characteristics of FFIs as prescribed by regulations) must be completed by December 31, 2014.

    WHAT IS REQUIRED POST-2014?

    • Diligence with respect to all pre-existing large individual investors (in excess of $1 million determined as of June 30, 2014) must be completed by June 30, 2015 and all other pre-existing investors by June 30, 2016.
    • Reporting on the identity of U.S. account holders for 2014 is due by March 31, 2015 for FFIs in non-IGA jurisdictions and FFIs in Model 2 IGA jurisdictions. For FFIs in Model 1 jurisdictions reporting on the identity of U.S. accounts is due by September 30, 2015. Reporting on certain types of income recognized by such persons starts in 2016 (for reportable amounts paid in 2015). Full reporting, including gross proceeds, starts in 2017 (for reportable amounts paid in 2016).  With respect to investment funds, participating FFIs will need to report directly to the IRS certain information about financial accounts held by non-U.S. funds in which U.S. taxpayers hold any equity interest. 
    • Withholding with respect to the gross proceeds of investments that generate U.S.-source income begins in 2017.

    Endnotes

    1 It should be noted that the timeline discussed in this alert may be further delayed pursuant to future Treasury and IRS guidance.

    2 Model 1 IGAs can either be reciprocal agreements (the U.S. will also report information on residents of the other jurisdiction to that jurisdiction’s tax authorities) or non-reciprocal agreements.  A reciprocal agreement is referred to as a Model 1A IGA and a non-reciprocal agreement is a Model 1B IGA.

    3 Note that with respect to funds formed in the Cayman Islands, Bermuda and other jurisdictions that an IGA in place, such funds will not have to enter into an FFI Agreement because of the IGA entered into between those governments and the United States.  These funds will still have to register for a GIIN.  FFIs formed in Hong Kong will have to enter into an FFI Agreement at least until Hong Kong enters into an IGA.

    4 A participating FFI is an FFI that enters into an FFI Agreement to (a) perform due diligence to identify accounts it maintains for U.S. persons, (b) verify compliance with the agreement, (c) report information on its U.S. accounts to IRS, (d) withhold on withholdable payments and foreign passthru payments to recalcitrant account holders and nonparticipating FFIs, (e) comply with requests from IRS for additional information on its U.S. accounts, and (f) under certain circumstances, close, block or transfer accounts of recalcitrant account holders.

    5 This deadline may be further delayed, but any such delay should not be counted on to occur.