With the U.S. Foreign Account Tax Compliance Act (FATCA) taking effect as of July 1, 2014 and with most countries expected to sign a FATCA treaty with the US, the legislation that has occupied investment managers throughout 2013 is in its final phase before becoming reality.

FATCA requires disclosure to the U.S. Internal Revenue Service (IRS) of tax information related to offshore accounts, and foreign financial institutions (FFIs) must provide tax information on accounts maintained by specified U.S. persons, recalcitrant investors and non-participating foreign financial institutions.

The practical issues surrounding FATCA and establishing a compliance program for meeting the reporting requirements of the law were the subject of a recent webinar, Countdown to FATCA Implementation – FAQs from Latin American Fund Managers’,hosted by DMS Offshore Investment Services as part of its educational outreach on FATCA.

The webinar featured a panel of tax, legal and hedge fund industry experts, with David Nable, Prime Fund Services, Credit Suisse; Kevin Rowe, Senior Counsel with the law firm Akin Gump Strauss Hauer & Feld; Joe Riley, Partner with the law firm Wilkie Farr & Gallagher and Peter Stafford, Head of The DMS FATCA Task Force. The webinar was hosted by Francine Balbina, DMS Executive Director, who is based in Brazil.

Webinar participants, representing a wide cross-section of fund managers, were briefed on the timeline and steps to take towards FATCA registration:

  1. FFIs must first examine their legal structure to determine whether or not they are obliged to report on investors to the IRS or their local tax authority and then decide how to register.
  2. FFIs must appoint a FATCA Responsible Officer (FRO), which can be anyone who the FFIs operators authorize to act.

2b) FFIs should note that US Treasury Regulations require the FRO to be an “officer”.

2c) Corporate FFIs must pass a resolution to appoint the FRO as an officer.

  1. The FRO must apply to the IRS for a Global Intermediary Identification Number (GIIN) on behalf of the FFI. The IRS recently extended by 10 days, the initial April 25th deadline for FFIs to complete their FATCA registration and receive their GIIN. FFIs now have until May 5th to complete FATCA registration on the IRS online portal and still appear on the first list of GIINs, which will be published on June 2, 2014.

Application for a GIIN is a simple part of FATCA compliance from an administrative perspective, Peter Stafford said, but it entails important decisions, such as classification of the FFI – whether a sponsoring FFI; single FFI; or FFI within an Expanded Affiliated Group – with a common parent entity that has majority vote and economic interest in at least one other FFI that is also directly or indirectly majority owned by the common parent; or is a Member of an Expanded Affiliated Group.

“Entity classification is critically important,” concurred Joe Riley of Wilkie Farr. “Classification means that every entity must certify or satisfy the financial institutions that it deals with, whether it is a foreign entity or US entity.”

  1. The FRO must work with fund administrators and relationship managers to ensure that the FFI is ready to onboard new investors in accordance with the US/UK IGAs starting July 1, 2014.

 For Cayman funds, the following documents will be applicable to their FATCA compliance process:

  1. Obtain FATCA Agreements
  2. Board Resolutions
  3. Register of Directors and Officers
  4. Memorandum and Articles of Association
  5. Subscription Agreement
  6. Offering Memorandum new disclosures
  7. Side Letters with Investors.

In addition to US FATCA, fund managers should also be preparing for UK FATCA, webinar participants were reminded. UK FATCA also requires that a compliance program be in place by July 1, 2014, with tax information exchange with Her Majesty’s Revenue and Customs (HMRC) due to start in 2016. The Cayman Islands signed an Inter-Governmental Agreement with the UK on November 5, 2013.

Both the US and UK FATCA precede a move towards a global automatic exchange of information, with the Organisation for Economic Co-operation and Development set to implement a Global Common Reporting Standard by 2015.